Iron Mountain: Fiscal 4Q09 Financial Results

Iron Mountain Incorporated reported its financial results for the fourth quarter ended December 31, 2009.

The Company announced reported operating income and adjusted operating income before depreciation and amortization (Adjusted OIBDA) growth of 16% and 14%, respectively, compared to the fourth quarter of 2008. These results were driven by sustainable operating improvements and supported by storage revenue internal growth of 5%, which more than offset forecasted weakness in service internal revenue growth. Backed by increased cash flows from operations and controlled capital expenditures, Iron Mountain generated a record $336 million of free cash flow before acquisitions and discretionary investments (FCF) in 2009. The Company raised its 2010 full year outlook to reflect solid performance and its recent acquisition of Mimosa Systems, Inc.

Separately, the Company announced that its board of directors has authorized a $150 million share repurchase program and initiated its first ever quarterly dividend. The new dividend has a $0.25 per share annual rate to be paid quarterly. The first quarterly payment will be made on April 15, 2010 for shareholders of record on March 25, 2010.

“Iron Mountain is a resilient business with a strong foundation,” said Bob Brennan, president and CEO. “We are delivering solid financial results in a challenging economy and we intend to build on this performance in 2010. We are committed to advancing our strategic agenda for long-term growth, as evidenced by the continued expansion of our technology-based services with the acquisition of Mimosa. Today’s announcement of a share repurchase program and new quarterly dividend is further evidence of our confidence in the Company’s long-term growth prospects and our commitment to delivering long-term shareholder value.”

Key Financial Highlights – Q4 2009
Iron Mountain reported total internal revenue growth of 3% in the fourth quarter. Storage revenue internal growth moderated, as expected, to 5% for the quarter reflecting the impact of higher destruction rates in the physical businesses and longer sales cycles across segments. Core service revenue growth was impacted by lower activity levels, related to the handling and transportation of items in storage, and secure shredding.

As expected, complementary service revenues decreased year-over-year, due primarily to softness in the more discretionary revenues, such as project revenues and fulfillment services. These decreases were partially offset by gains in eDiscovery services and recycled paper revenues.

The year-over-year strengthening of major foreign currencies against the U.S. dollar increased the revenue growth rate by 1% compared to the fourth quarter of 2008. As a result, Iron Mountain reported total consolidated revenues of $779 million for the quarter compared to $753 million for the prior year period.

The Company reported gross profits (excluding depreciation and amortization) of $459 million with its gross profit margin improving from 55.5% in the fourth quarter of 2008 to 58.9% in the fourth quarter of 2009. Gross margins were supported by improved storage gross margin and productivity gains in North America, as continued progress on transportation and record center optimization initiatives drove higher service gross margins. Gross margins also benefited from improved performance in the International Physical segment and from the recharacterization of certain vehicle leases. These leases previously met the requirements to be considered operating leases.

Adjusted OIBDA for the quarter was $230 million, up 14% on a reported basis compared to the fourth quarter of 2008. Excluding the impacts of the foreign currency exchange rate changes, fourth quarter Adjusted OIBDA grew 12%. Approximately 2% of this growth is attributable to the recharacterization of certain vehicle leases from operating leases to capital leases. Selling, general and administrative costs in the fourth quarter were up 7% compared to the prior year period on a reported basis. Excluding the impacts of the foreign currency exchange rate changes, these overhead costs increased 6%, as the Company continued to make investments in growth and productivity initiatives. See the appendices at the end of this press release for Selected Financial Data, a discussion of non-GAAP measures and additional information regarding the Company’s results.

Operating income for the fourth quarter of 2009 was $147 million, up 16% on a reported basis compared to the same period in 2008 reflecting the flow through of Adjusted OIBDA gains.

Net income attributable to Iron Mountain Incorporated for the quarter was $61 million, or $0.30 per diluted share, compared to $1 million, or $0.01 per diluted share, for the fourth quarter of 2008. The increased earnings were driven by higher operating income and a lower effective tax rate in the fourth quarter of 2009 compared to the same prior year period. Net income for the fourth quarter of 2009 included $2 million of other income, net compared to $18 million of other expense, net included in net income for the fourth quarter of 2008. The structural tax rate for the fourth quarter was 38%. The effective tax rate of 29% included nine percentage points of net benefit from discrete tax items. Adjusted EPS for the quarter was $0.27 per diluted share, an increase of 23% compared to the same prior year period. (See Appendix B)

Capital spending incurred in 2009 totaled $285 million, or 9.4% of revenues, excluding $36 million for the purchase of real estate. The Company’s capital efficiency continued to improve in part due to ongoing tight control over capital spending and in part due to moderating growth rates.

The Company’s FCF for the year ended December 31, 2009 was $336 million, an improvement of $154 million, or 85%, compared to 2008. Higher cash flows from operating activities compared to the prior year and controlled capital expenditures drove this improvement. As a result of the increase in FCF in the quarter, the Company further improved its liquidity position. As of December 31, 2009, the Company had more than $1 billion of liquidity including cash of $447 million and availability under its revolving credit facility of $700 million. The Company’s consolidated leverage ratio of net debt to EBITDA (as defined by its senior credit facility) was 3.3 times at December 31, 2009, driven by strong operating cash flow performance and limited acquisition activity during the last two years. This ratio is well below the covenant limitation of 5.5 times included in its senior credit facility.

Acquisitions
In February 2010, the Company acquired Mimosa for approximately $112 million in cash, subject to customary closing adjustments. Mimosa is an industry leading provider of enterprise-class content archiving. The acquisition provides Iron Mountain with an all-in-one archive for enterprise e-mail, SharePoint data and files, and gives the Company an on-premise storage option to complement its existing cloud-based content archive offerings. It also allows the Company a new vehicle for delivering its services for back-up, compliance and eDiscovery, bringing greater value to the data stored. 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.

Financial Performance Outlook
For 2010, the Company is targeting improved revenue growth and strong, sustainable underlying operating performance supported by continued progress in strengthening returns in the North American Physical business segment and improved profit trajectory in the International Physical segment. The Company’s full year revenue guidance range is being increased to $3,185 million to $3,255 million, reflecting recent performance and the impact of the Mimosa acquisition. This outlook incorporates revised expectations for full year internal revenue growth of 4% to 6%. The Company is also raising its 2010 Adjusted OIBDA guidance range primarily to reflect continued strong performance and higher recycled paper prices. These gains will be partially offset by the dilutive impact of the Mimosa acquisition in part due to integration costs in 2010. The Company now expects Adjusted OIBDA in the range of $930 million to $975 million. The year-over-year weakening of the U.S. dollar against the major currencies is expected to increase 2010 full year reported results by approximately 1%. The calculation of Adjusted EPS assumes a 40% structural tax rate and 205 million shares outstanding. This guidance is based on current expectations and does not include the potential impact of any future acquisitions (dollars in millions):