Iron Mountain: Fiscal 4Q08 Financial Results

Iron Mountain Incorporated reported its financial results for the quarter and full year ended December 31, 2008, announcing a solid finish to a strong year of performance. The Company exceeded $3 billion in total revenues for the first time in its history and achieved its full year financial objectives by posting 8% internal revenue growth, 13% operating income before depreciation and amortization (OIBDA) growth (excluding asset gains and losses) and making significant progress in improving its capital efficiency. Importantly, the Company ended the year with excellent liquidity comprised of cash and availability under its revolving credit facility of more than $775 million.

Highlights

• Company reports solid finish to 2008; exceeds $3 billion in revenues
  for the first time in its history and achieves its full year financial
  objectives
• Fourth quarter OIBDA (excluding asset gains and losses) increases 11%
  year-over-year on 9% total core revenue internal growth, gross margin
  gains and disciplined cost management; operating income increases 10%
  over prior year quarter to $126 million
• Liquidity position strengthened as cash and available credit exceed $775 million
• 2009 guidance reflects continued solid operating performance;
  includes impacts of recent foreign currency fluctuations and declines
  in recycled paper prices

"We are pleased with our fourth quarter operating results and continued solid business performance especially in such difficult economic conditions. These results reflect the fundamental resiliency of our business model and our team’s focus on disciplined execution, particularly in our North American Physical segment," said Bob Brennan, President and CEO. "We intend to build on this progress in 2009, with goals for solid underlying operating performance. We continue to exercise financial discipline in the current environment, maintaining strong liquidity and financing capacity."

Iron Mountain reported year-over-year revenue growth of 4% in the fourth quarter. Internal revenue growth of 7% was supported by strong total core revenue internal growth of 9%. Acquisitions completed in 2007 and earlier in 2008 added 1% to reported revenues and foreign currency rate changes reduced reported revenues by approximately 4%, respectively in the quarter. The Company drove solid total core revenue gains across its North American Physical, International Physical and Worldwide Digital business segments. Total revenue growth was highlighted by continued strength in storage revenue growth, and by strong core service revenue performance in the North American Physical business. As expected, internal revenue gains were constrained by pressures on complementary service revenues. OIBDA of $199 million for the quarter was at the top of the Company’s forecasted range driven by higher gross profit margins and continued focus on overhead cost controls. See Appendix A at the end of this press release for a presentation of Selected Financial Data.

Net income for the quarter of $1 million, or $0.01 per diluted share, was impacted by the significant strengthening of the U.S. dollar since the end of the third quarter of 2008. Declines of 15% to 20% in currencies such as the Canadian dollar and British pound versus the U.S. dollar during the quarter resulted in a net $16 million charge in other expense as the Company marked its foreign currency forward contracts and non-U.S. dollar denominated third party and intercompany debt to market. The net $16 million expense includes both foreign currency gains and losses, which are incurred in different tax jurisdictions. As a result, the Company recorded an additional $24 million tax provision. For the quarter, these charges impacted earnings by $0.20 per diluted share. See Appendix B at the end of this press release for a discussion of OIBDA and the required reconciliation to the appropriate GAAP measures.

Key Financial Highlights – Q4 2008
Iron Mountain’s total consolidated revenues for the quarter grew 4% over the prior year period to $753 million driven by solid internal growth of 7% and augmented by the acquisition of Stratify, Inc., completed in December 2007, and several smaller acquisitions completed earlier in 2008. Storage internal growth of 8% over the prior year period was as expected. Core service internal revenue growth of 11% was supported by strong performance in the physical records management and data protection businesses, double-digit growth in the secure shredding business and increased fuel surcharges. As expected, complementary service revenues decreased modestly year-over-year, due primarily to the completion of large special projects in Europe, lower recycled paper prices and some softness in the more discretionary revenues such as fulfillment services and software license sales.

The Company reported gross profits of $418 million representing a 6% year-over-year increase with gross profit margin improving from 54.0% in the fourth quarter of 2007 to 55.5% in the fourth quarter of 2008. Gross margins were up 150 basis points for the quarter compared to the same prior year period, supported by productivity gains and improved storage gross margins in North America. Gross margins also benefited from the sale of the low margin data product sales business in June 2008. These benefits more than offset the impact of expenses associated with the planned real estate moves in the U.K. and a shift in revenue mix, as labor and transportation intensive services such as secure shredding and Document Management Solutions (DMS) grew faster than storage.

OIBDA for the quarter grew 9% over the prior year period to $199 million, reflecting the Company’s gross margin gains and overhead cost controls. Selling, general and administrative costs increased 3% in the quarter, slightly below the rate of revenue growth, reflecting disciplined management and the year-over-year comparisons to increased investments in security, new products and infrastructure enhancements initiated in 2007. The impact of these investments and the cost growth related to 2007 acquisitions moderated in the fourth quarter.

Operating income for the fourth quarter of 2008 was $126 million, up 10% compared to the same period in 2007, as OIBDA gains were augmented by a modest increase in depreciation and amortization expense, driven primarily by lower levels of capital expenditures and acquisitions in 2008. Net income for the quarter was $1 million, or $0.01 per diluted share, including other expense of $18 million, driven primarily by foreign currency rate fluctuations.

The net tax impact of the foreign currency rate fluctuations described above added nearly 60% and discrete items added another 5% to the effective tax rate in the quarter. The Company’s effective tax rate before the impact of foreign currency rate changes and other discrete items for 2008 was approximately 38%.

Key Financial Highlights – Full Year 2008
Iron Mountain posted strong financial results for 2008 as it delivered against all of its stated financial goals for the year of 10% to 13% revenue growth, 10% to 14% OIBDA growth (excluding asset gains and losses) and improved capital efficiency. Total revenues grew 12% over the prior year to $3,055 million, exceeding the $3 billion mark for the first time in the Company’s history. Internal revenue growth was solid at 8% supported by strong 9% core revenue internal growth that was partially offset by the expected weakness in complementary revenue growth. Acquisitions completed in 2007 and 2008 and favorable foreign currency rate changes added 3% and 1%, respectively to revenue growth. 2008 marked the 20th consecutive year of increased storage revenues for the Company. Gross profits increased 14% driven by revenue performance and productivity gains, in areas such as transportation and workflow, particularly in the North American Physical business segment. As a result, OIBDA (excluding asset gains and losses) grew 13% on a year-over-year basis.

Net income for the year was $82 million, or $0.40 per diluted share. As previously discussed, the significant strengthening of the U.S. dollar during the year resulted in a net $29 million charge in other expense and an additional $41 million of tax provision. For the year, these charges impacted earnings by $0.34 per diluted share and raised the effective tax rate to 64%. In 2008, the Company paid $44 million in cash taxes, which represents less than 20% of pre-tax income. The Company expects its tax rate before the impact of any foreign currency rate fluctuations and other discrete items for 2009 to be approximately 39%.

Capital expenditures incurred in 2008 totaled $373 million, or 10.8% of revenues, excluding $44 million for the purchase of real estate. This represents a 270 basis point improvement over the same measure for 2007. Tighter control over capital spending and increased asset utilization rates were the key drivers of the improved capital efficiency in 2008.

The Company’s Free Cash Flow before Acquisitions and Discretionary Investments (FCF) for the year ended December 31, 2008 was $182 million. Higher cash flows from operating activities compared to the comparable prior year period, including a $24 million cash gain on the settlement of a foreign currency forward contract and controlled capital expenditures drove this improvement. As a result of the increase in FCF and significantly lower level of acquisition activity in 2008, the Company improved its liquidity position. As of December 31, 2008, the Company had more than $775 million of cash and availability under its revolving credit facility. Further, the Company’s consolidated leverage ratio of total debt to EBITDA (as defined by its senior credit facility) decreased from 4.5 times at December 31, 2007 to 3.8 times at December 31, 2008, well below the covenant limitation of 5.5 times. The decrease illustrates the Company’s ability to naturally de-lever in the absence of significant acquisition activity.

Acquisitions
Iron Mountain’s acquisition strategy focuses on acquiring attractive businesses that provide a strong platform for future growth by expanding the Company’s geographic footprint and service offerings while enhancing its existing operations. The Company has not completed any acquisitions since the end of the third quarter of 2008.

Financial Performance Outlook
For 2009, the Company is targeting solid underlying operating performance supported by solid core revenue growth and continued progress in the North American Physical business segment through sustained focus on execution. The Company is now targeting 5%-7% internal revenue growth and 8%-13% OIBDA growth (excluding asset gains and losses) before the impact of foreign currency rate fluctuations. The Company’s internal growth goals are consistent with the preliminary guidance issued in October 2008 updated for an expected 2% reduction from the impact of lower commodity prices, most notably recycled paper. The significant strengthening of the U.S. dollar against the major currencies is expected to lower results reported in US dollars by more than 7% in 2009. The Company’s outlook for the first quarter of 2009 set forth below includes a reduction of about 8% in both revenue and OIBDA driven by the strengthening U.S. dollar. In 2008, primarily due to a softening vehicle resale market, certain vehicle leases that previously met the requirements to be considered operating leases are now classified as capital leases upon renewal. As a result, 2009 rent expense is expected to decrease by approximately $21 million with an offsetting increase to depreciation expense and interest expense. This guidance is based on current expectations and does not include the potential impact of any future acquisitions (dollars in millions):

Revenues in $ millions

Quarter Ending March 31, 2009

• Low: $710
• High: $730

Full Year Ending December 31, 2009

• Low: $2,975
• High: $3,050