Iron Mountain: Fiscal 2Q11 Financial Results

Iron Mountain Incorporated reported its financial results for the second quarter ended June 30, 2011.

The company reported total revenues of $763 million, an increase of 5% compared to the second quarter of 2010.

Revenue growth was supported by solid 3% storage revenue internal growth. Adjusted OIBDA was $227 million for the quarter and Adjusted Earnings Per Share was $0.29 per share. Profit results were supported by strong gains in the International Physical Business, with Adjusted OIBDA for that segment up 26% compared to the second quarter of 2010. Reported EPS for the quarter was $0.32 per share. The company revised its FY 2011 outlook primarily to reflect the recent sale of its digital businesses and the expected divestiture of its New Zealand operations, as well as to incorporate refinements related to relatively higher commodity price levels.

"Our business continues to perform well. We posted solid storage revenue growth this quarter while driving operational efficiencies and strong profitability, particularly in our International segment. We remain on track to meet our goals for 2011," said Richard Reese, Iron Mountain’s Chairman and Chief Executive Officer. "We are moving forward with our comprehensive strategic plan, which will result in payouts of approximately $2.2 billion to stockholders through 2013. By sustaining our leadership in North America and further optimizing our international portfolio, we are confident we can enhance value for our stockholders."

Financial Highlights – Q2/2011
Iron Mountain reported total consolidated revenues of $763 million for the second quarter, a 5% increase over the prior year period, as business trends remained consistent with recent quarters. Storage revenue internal growth was 3% in the quarter driven by continued strong performance in the International Physical segment and sustained growth in North America. Global records management net volumes increased approximately 2% in the quarter over prior year levels, consistent with first quarter performance. Core service revenue internal growth was flat compared to the prior year period as strong hybrid service revenue growth and increased fuel surcharges offset continued softness in core service activity levels. Total core revenue internal growth was 2% in the quarter.

Complementary service revenue internal growth was 4% in the quarter driven primarily by higher recycled paper prices. Reported revenue for the quarter was reduced by $6 million for the estimated cumulative impact of complex retroactive pricing adjustments involving a unique five-year customer agreement. Internal growth calculations exclude this adjustment.

The company reported gross profits (excluding depreciation and amortization) of $452 million yielding a gross profit margin of 59.2% compared to 59.3% in the second quarter of 2010. Both storage and service gross margins were flat compared to the prior year. Within service gross margins, gains from higher recycled paper revenues were offset by the business mix impacts related to softness in core service activity. The revenue adjustment described above reduced the gross margin for the quarter by 30 basis points.

Adjusted operating income before depreciation, amortization and goodwill impairment (Adjusted OIBDA) for the quarter was $227 million, down 3% compared to the second quarter of 2010. Included in Adjusted OIBDA for the quarter was $10 million of advisory fees and other costs related to our recent proxy contest. These costs reduced year-over-year growth by four percentage points. Selling, general and administrative expenses (excluding costs related to our recent proxy contest) were up 9% compared to the prior year period driven by planned increases in sales expense and higher incentive compensation accruals compared to low prior year levels. Operating income for the second quarter of 2011 was $147 million compared to $158 million for the second quarter of 2010 reflecting the revenue adjustment and increased overhead as described above.

Income from Continuing Operations was $66 million for the quarter, or $0.32 per diluted share, compared to $49 million, or $0.24 per diluted share, for the second quarter of 2010. The increase was primarily due to lower interest expense driven by previously announced debt redemptions and a lower effective tax rate in the second quarter of 2011 compared to the prior year period. The structural tax rate for the second quarter was 39%. Including the impact of discrete tax items, the effective tax rate for the quarter was 32%. The effective tax rate for the second quarter of 2010 was 52%. Adjusted EPS for the quarter was $0.29 per diluted share, including the $0.03 per share impact of the proxy costs described above, compared to $0.32 for the same prior year period.

Capital expenditures excluding real estate totaled $73 million, or 4.8% of revenues, in the first six months of 2011. The company is sustaining capital efficiency gains reflecting ongoing control over spending levels and reductions due to moderated growth rates.

The company’s FCF for the six months ended June 30, 2011 was $140 million compared to $150 million for the six months ended June 30, 2010 reflecting a higher use of working capital in 2011, which more than offset higher income from continuing operations and lower capital spending. As of June 30, 2011, the company had approximately $1 billion of liquidity, including cash of $271 million and availability under its revolving credit facility of $718 million.

The company’s consolidated leverage ratio of net debt to EBITDA (as defined by its senior credit facility) was 2.8 times at June 30, 2011. This ratio is well below the covenant limitation of 5.5 times included in its senior credit facility. In June 2011, the company refinanced its senior credit securing a $725 million revolving credit facility and $500 million in term loans. These facilities mature in June 2016.

Dividends and Share Repurchases
On June 13, 2011, Iron Mountain announced that its board of directors declared a quarterly dividend of $0.25 per share, an increase of 33% over the dividend previously paid. The dividend was paid on July 15, 2011 to shareholders of record as of June 24, 2011. In May 2011, the company announced that its board of directors approved an increase in the amount authorized under its existing share repurchase program of up to an additional $850 million for a total of $1.2 billion. At the same time, the company announced that it entered into prepaid variable share repurchase agreements with affiliates of each of J.P. Morgan Securities LLC and Morgan Stanley & Co. Incorporated to repurchase an aggregate of $250 million of its common stock, which is expected to be completed in August 2011.

The company did not repurchase any shares in the second quarter of 2011. It expects the $250 million prepaid variable repurchase program initiated in Q2 will result in the retirement of approximately 7-8 million shares when completed in August 2011. During the first six months of 2011, the company repurchased 0.4 million shares of its common stock for a total aggregate purchase price of approximately $11 million under its existing share repurchase program. As of June 30, 2011, the company had repurchased an aggregate of 5.1 million shares for a total cost of approximately $122 million over the life of its repurchase program, which began in the first quarter of 2010. Including the $250 million committed to the prepaid variable share repurchase program, there is approximately $1.1 billion remaining under the existing authorization for future share repurchases as of the end of the second quarter of 2011.

Divestitures
In June 2011, the company completed the sale of its online backup & recovery, digital archiving and eDiscovery solutions businesses to Autonomy Corporation plc for $396 million in cash, consisting of the $380 million purchase price and a $16 million preliminary working capital adjustment that remains subject to customary post-closing adjustments. In connection with the strategic portfolio review of certain of its international operations, the company has decided to divest its New Zealand operations. As a result, each of these businesses will be treated as discontinued operations for all periods presented.

Financial Performance Outlook
The company is revising its FY 2011 guidance to reflect the recent sale of its digital businesses and the expected divestiture of its New Zealand operations. The company also refined its revenue outlook modestly to incorporate current commodity price levels.

We expect reported revenue growth to be in the 4% to 6% range for the full year supported by internal growth in the range of 1% to 3%. Our outlook is for Adjusted OIBDA growth in 2011 to be in the (2)% to 1% range and includes planned incremental sales & marketing investments and a return to normal incentive compensation levels compared to relatively lower levels in 2010.

Included in the Adjusted OIBDA outlook is $15 million of costs related to our recent proxy contest, which will lower full year growth by 2%. Compared to our prior outlook for Adjusted OIBDA, the modest positive impact of higher commodity prices on revenue was offset by stranded costs in connection with the sale of the digital business and higher fuel costs. Adjusted EPS is expected to be in the range of $1.19 to $1.27 including accretive impacts from the digital divestiture. The calculation of Adjusted EPS assumes a 39% structural tax rate and 202 million shares outstanding. The impact of the $250 million prepaid variable share repurchase program is not included in these estimates as it will not be completed until early August 2011. The company expects capital expenditures for the year to be approximately $230 million. Our 2011 outlook is for FCF to be in the range of $370 million to $405 million.