Iron Mountain: Fiscal 4Q11 Financial Results

Iron Mountain Incorporated reported its financial results for the fourth quarter and year ended December 31, 2011.

The company reported operating results for the quarter in line with expectations, including total revenues of $742 million and Adjusted OIBDA of $237 million, 32.0% of revenues. Adjusted EPS for the quarter was $0.33 per share compared to reported EPS of $0.26 per share.

These quarterly results completed a year of strong financial performance highlighted by reported storage growth of 5% and a 24% increase in Free Cash Flows (FCF) for 2011 compared to 2010. Adjusted OIBDA margin performance was in line with expectations (including planned investments in North American sales and marketing and higher incentive compensation expense compared to low 2010 levels). The company paid $1.1 billion towards its commitment to return $1.2 billion to stockholders by May 2012 and expects to complete this phase of its stockholder payout plan with its next quarterly dividend payment in April 2012.

"Our business continues to perform well and our fourth quarter results complete a year of strong financial performance. Storage revenue constant currency growth was solid at 4% for the year and our FCF grew 24% in 2011 compared to 2010," said Richard Reese, Iron Mountain’s Chairman and Chief Executive Officer. "We also achieved several key milestones in our three-year strategic plan in 2011. The North American Business segment hit its growth and margin targets. The International Business segment drove 9% constant dollar storage revenue growth while improving its Adjusted OIBDA margin by 220 basis points. We are on track for 700 basis points of margin improvement and 11% return on invested capital by 2013 in that business. And, through year-end, we returned $1.1 billion to our stockholders against our commitment to return $1.2 billion by May 2012. We expect this commitment will be satisfied with our next quarterly dividend which we anticipate paying in April 2012."

Three-year Strategic Plan Update
In April 2011, the company announced a new three-year strategic plan.

The plan contained three areas of operating focus:

• sustain cash flows and leadership in the North American business,
• drive substantial improvements in our attractive, growing international portfolio and
• focus on our core physical business.

The three-year plan also included a commitment to make significant stockholder payouts of $2.2 billion by the end of 2013 with $1.2 billion being paid out by May 2012.

In 2011, North American Business segment posted 2% reported revenue growth compared to the prior year and achieved its planned Adjusted OIBDA margin goals while absorbing approximately $20 million of incremental sales and marketing investment to sustain the revenue annuity. The decrease in reported margins for this segment was due primarily to the increase in incentive compensation in 2011 compared to low 2010 levels. The International Business segment reported strong revenue growth rates posting 7% total revenue and 9% storage revenue growth for 2011 on a constant dollar basis compared to 2010. Adjusted OIBDA increased 25% in this segment keeping us on track to achieve our goal of 700 basis points of Adjusted OIBDA margin expansion by the end of 2013. The company completed a portfolio review of its international business and, as a result, sold its New Zealand business and has decided to sell its Italian business. The financial position, operating results and cash flows of these businesses have been reported as discontinued operations.

A key element of our three-year strategic plan was exploring strategic alternatives for the company’s Worldwide Digital Business segment in order to increase the focus on its core physical businesses. That strategic review resulted in the sale in June 2011 of the company’s software businesses to Autonomy Corporation plc for approximately $390 million. As a result of the sale, the financial position, operating results and cash flows of the Digital business that was sold have been reported as discontinued operations.

An important component of its three-year strategic plan is the commitment to return $2.2 billion to stockholders by the end of 2013 including $1.2 billion by May 2012. The first phase of those commitments is nearly complete. Through year-end, the company, through stock repurchases and dividend payments, returned $1.1 billion to its stockholders towards its initial $1.2 billion commitment. We expect this commitment will be satisfied with our next quarterly dividend payment which we anticipate paying in April 2012. Since it initiated its share repurchase plan in March 2010, the company has repurchased 38 million shares representing more than 18% of the total shares outstanding. As planned, leverage was increased to support our stockholder payout program. At year-end, the consolidated leverage ratio of net debt to EBITDA was 3.4x, near the midpoint of our target 3x to 4x leverage range.

Key Financial Highlights
Iron Mountain reported revenues of $3.0 billion in 2011, a 4% increase over 2010. Internal growth was 2% with favorable foreign currency rate changes and acquisitions each adding approximately 1% to revenue growth. Storage revenue internal growth, a key driver of revenue performance throughout the year, was at 3% for both the fourth quarter and full year driven by sustained 2% and 6% storage internal growth in North American and International Business segments, respectively. Global records management net volumes increased approximately 2% over prior year levels, consistent with recent quarterly performance. Service revenue internal growth was flat year-over-year as pressure on core service activities, particularly in North America, offset gains in hybrid services and benefits from higher recycled paper prices. During Q4 2011, unfavorable foreign currency exchange rate changes and lower service revenue partially offset solid 3% storage internal growth and resulted in a lower revenue growth rate of 2% on a reported basis in the fourth quarter of 2011.

Adjusted OIBDA was $935 million for 2011, or 31.0% of revenues. Strong profit growth in our International Business segment was a key driver of overall Adjusted OIBDA margin performance for the year. Adjusted OIBDA in the International Business segment grew 25% for the year (19% on a constant dollar basis), resulting in an Adjusted OIBDA margin increase of 220 basis points over 2010, keeping us on track to achieve our three-year target of 700 basis points of Adjusted OIBDA margin improvement by the end of 2013 in that segment. Adjusted OIBDA for the fourth quarter of 2011 was $237 million, or 32.0% of revenues. In addition to the strong profit performance in our International Business segment, overhead cost control was a contributing factor to improved Adjusted OIBDA margins in the fourth quarter. During the fourth quarter of 2011, it recorded a $12 million reclassification from selling, general and administrative expenses to cost of sales to align certain costs, primarily related to our scanning operations, across the enterprise. This reclassification represents the full year impact and does not change Adjusted OIBDA, Adjusted EPS or FCF.

The company reported FCF for the year of $458 million, an increase of 24% compared to $370 million for 2010, primarily reflecting continued capital efficiency improvements and lower cash interest payments in 2011. Capital expenditures excluding real estate were 6.6% of revenues in 2011, down 130 basis points from 2010 levels. This is the fifth consecutive year that it has reduced our capital spending excluding real estate as a percentage of revenues. Our FCF also benefited from prepaid estimated tax payments made in 2010, other tax items and incentives and the timing of capital projects in the fourth quarter that resulted in unusually high capital expenditure accruals.

Financial Review – Q4/2011
Iron Mountain reported total consolidated revenues of $742 million for the fourth quarter, a 2% increase over the prior year period. Internal growth was 1% with net acquisitions and foreign currency exchange impacts contributing an additional 1% to the growth rate. Storage revenue internal growth was sustained at 3% in the quarter, driven by continued strong performance in the International Business segment and sustained growth in North America. Global records management net volumes increased approximately 2% over prior year levels, consistent with recent quarterly performance. Service revenue internal growth was (1)%, driven by continued pressure on North American core service activities, which offset strong hybrid core service revenue growth and higher fuel surcharges. Lower revenues from shredding services and projects related to other complementary services, such as fulfillment and film & sound, also contributed to the lower growth rates in the fourth quarter of 2011.

Gross profit was $427 million, or 57.5% of revenues, for the fourth quarter of 2011 compared to $433 million, or 59.4% of revenues, for the same prior year period. Included in gross profit in the fourth quarter of 2011 is a $12 million reclassification from selling, general and administrative expenses to cost of sales to align certain costs, primarily related to our scanning operations, across the enterprise. This reclassification represents the full year impact and does not change Adjusted OIBDA, Adjusted EPS or FCF. Storage gross margins were consistent year-over-year while service gross margins (excluding the $12 million reclassification) were down slightly primarily due to higher incentive compensation expense and a shift in business mix towards hybrid services. Adjusted OIBDA for the quarter increased 2% on a year-over-year basis to $237 million, or 32.0% of revenues. Strong performance in our International Business segment and overhead cost controls more than offset planned increases in North American sales and marketing expense and higher incentive compensation expense compared to lower levels in 2010. Adjusted OIBDA margin in the International Business segment was 21.3% for the fourth quarter of 2011 compared to 19.2% in the same prior year period keeping us on track to achieve our target of 700 basis points of Adjusted OIBDA margin improvement by the end of 2013 in that business.

Income from Continuing Operations was $47 million for the quarter, or $0.26 per diluted share, compared to $58 million, or $0.29 per diluted share, for the fourth quarter of 2010. The dollar decrease was primarily due to higher interest expense related to the $400 million of 7-3/4% senior subordinated notes we issued in September 2011 in support of our stockholder payout program.

The structural tax rate for the fourth quarter was 38% down from an expected rate of 39%, due primarily to the reclassification of our Italian business to discontinued operations. Including the impact of discrete tax items, primarily related to adjustments to deferred taxes, foreign exchange rate changes and impairment charges, the effective tax rate for the quarter was approximately 47%. Adjusted EPS for the fourth quarter of 2011 was $0.33 per diluted share, unchanged from the 2010 prior year period. Increased interest expense in support of our stockholder payout program offset the per share benefits of the lower shares outstanding in the fourth quarter of 2011 compared to the prior year period.

Capital expenditures excluding real estate in 2011 totaled $198 million, or 6.6% of revenues, down from 7.9% in 2010. The company is achieving capital efficiency gains through ongoing control of spending levels and reductions due to moderated growth rates. An additional $20 million was spent on real estate during 2011.

The company’s FCF for the year ended December 31, 2011 was a record $458 million compared to $370 million for the year ended December 31, 2010, primarily reflecting continued capital efficiency and lower cash interest payments in 2011. Lower cash paid for capital spending in 2011, in part, reflects the timing of capital projects in the fourth quarter, resulting in higher year-end accruals. Low cash tax payments of $96 million in 2011 benefited from, among other things, prepayments in 2010 and other tax items and incentives. New regulations and changes to certain rules and incentives are expected to increase our cash tax payments in 2012. As of December 31, 2011, the company had approximately $800 million of liquidity, including cash of $180 million and availability under its revolving credit facility of $623 million.

The company’s consolidated leverage ratio of net debt to EBITDA (as defined by its senior credit facility) was 3.4x at December 31, 2011, near the midpoint of our target 3x to 4x leverage range. This ratio is below the covenant limitation of 5.5x included in its senior credit facility. In September 2011, the company issued $400 million of its 7-3/4% senior subordinated notes due 2019 as part of our plan to increase leverage in support of our stockholder payout program.

Dividends and Share Repurchases
On December 1, 2011, Iron Mountain’s board of directors declared a quarterly dividend of $0.25 per share for stockholders of record as of December 23, 2011, which was paid on January 13, 2012. During the fourth quarter of 2011, the company repurchased 14.7 million shares of its common stock for an aggregate purchase price of $440 million under its existing share repurchase program. Between January 1, 2012 and February 17, 2012, the company repurchased 1.1 million shares for an aggregate purchase price of $35 million. As of February 17, 2012, the company had repurchased a total of 37.7 million shares for a total cost of approximately $1.1 billion since it began its share repurchase program in March 2010. As of February 17, 2012, there was approximately $66 million remaining under the existing Board of Directors authorization for future share repurchases.

As part of its three-year strategic plan, the company announced its intention to return $2.2 billion in cash to stockholders by the end of 2013, with $1.2 billion being paid out by May 2012. Through February 17, 2012, the company has returned $1.1 billion to stockholders against these commitments, including $0.1 billion in ordinary dividends and $1.0 billion in share repurchases. The company expects to complete the first $1.2 billion phase of its payout commitment with its next regular quarterly dividend anticipated to be paid in April 2012.

Financial Performance Outlook
As previously disclosed, the company is planning for consistent revenue growth trends, excluding impacts from recent declines in recycled paper prices. Supported by consistent storage internal growth of approximately 3%, we are expecting underlying internal growth to be between 1% and 3%, consistent with 2011 internal growth of 2%. A 32% decline in paper prices compared to the average for 2011 is projected to reduce total revenues by approximately $45 million and reduce its internal growth rates by approximately 2% to a range of (1)% to 2%. Continued pressure on North American core service activities and lower paper prices will constrain service revenue growth and partially offset the strong storage revenue performance. At recent rates, foreign currency exchange rates are expected to decrease reported revenue growth by approximately 1%. The company updated our preliminary revenue and Adjusted OIBDA guidance to reflect the decrease in paper prices since we issued our initial 2012 outlook in October 2011. Our revised outlook for constant currency Adjusted OIBDA growth (excluding the impact of lower paper prices) is between 1% and 5%. Lower paper prices are expected to have a (5)% impact on Adjusted OIBDA growth. This decline will be partially offset by continued Adjusted OIBDA margin expansion in its International Business segment and sustained high returns in North America. Adjusted EPS for 2012 is expected to be in the range of $1.20 to $1.36. The per share benefit of fewer shares outstanding in 2012 will be offset by lower Adjusted OIBDA as described above and higher interest expense due to increased leverage in support of our stockholder payout program. The calculation of Adjusted EPS assumes a 39% structural tax rate and 172 million shares outstanding. The company expects capital expenditures for the year to be approximately $215 million, including an estimated $25 million for real estate. As a percent of revenues, capital expenditures excluding real estate are expected to be slightly lower than 2011. Our outlook is for FCF to be in the range of $320 million to $360 million. Lower Adjusted OIBDA, higher interest and tax payments and the impact of high year-end capital accruals will constrain FCF in 2012. The increase in cash tax payments is due primarily to changes in the tax law.

This guidance is based on current expectations and does not include the potential impact of any future acquisitions or divestitures, other than our planned divestiture of the Italian business (dollars in millions):
Revenues between $2,965 million and $3,045 million for year ending December 31, 2012.