A leading information management company, Iron Mountain Inc. (IRM) reported strong fourth quarter 2010 results. Earnings, excluding one-time items, increased 11.0% year over year to 30 cents, in line with the Zacks Consensus Estimate. The year-over-year growth was driven by higher gross margin in the quarter.
However, on a GAAP basis, earnings declined 46.7% year over year to 16 cents in the quarter, due to higher goodwill impairment (14 cents per share).
Operating Performance
Gross profit rose 4.6% year over year to $480.0 million in the fourth quarter and margin increased to 60.8% from 58.9% in the year-ago quarter The gross margin improvement was witnessed across both storage and service segments, driven by production efficiencies and pricing gains.
Adjusted operating income, before depreciation and amortization (OIBDA), grew 3.9% year over year to $239.0 million. Adjusted OIBDA margin improved 80 basis points (bps) to 30.3%.
Operating income was down 15.6% year over year to $124.0 million in the quarter. Operating margin declined 320 bps to 15.7%, primarily due to higher operating expenses, which increased 4.7% year over year to $327.0 million in the quarter.
Revenues increased 1.3% year over year to $788.7 million. However, this was lower than the Zacks Consensus Estimate of $791.0 million as strong hybrid revenue growth and narrowing gains from higher paper prices were partially offset by lower project revenues and eDiscovery sales.
Revenues were primarily driven by an internal growth rate of 1.0%. Acquisitions and foreign currency fluctuations did not have any material contribution in the quarter.
Storage revenues (55.7% of revenue) increased 2.1% year over year to $439.7 million. Service revenues (44.2% of revenue) were flat year over year to $349.0 million.
Balance Sheet
As of December 31, 2010, cash and cash equivalents were $293.8 million compared with $219.3 million at the end of September 30, 2010. Long-term debt was $2.91 billion compared with $2.97 billion at the end of September 30, 2010.
In the fourth quarter of 2010, Iron Mountain generated free cash flow of $373.0 million versus $336.0 million in the year-ago period.
Iron Mountain repurchased 0.8 million shares worth $17.0 million under its existing share repurchase program in the quarter. As of December 31, 2010, the Company has repurchased 4.8 million shares for approximately $111 million.
2010 Results
Revenue in fiscal 2010 was $3.1 billion, up 4.0% and was supported by 2% internal growth and benefits from acquisitions and favorable foreign currency impact, which added another 2% to total growth.
The year-over-year growth was also driven by strong storage revenue growth and solid international expansion.
Gross profit increased 8% year over year to $1.9 billion driven by continued benefits from productivity initiatives, solid operating performance in international operations and higher recycled paper prices.
Adjusted OIBDA was $945.0 million, up 9% year over year due to higher gross profit, coupled with strict cost control.
Adjusted earnings per share (EPS) increased 17% in fiscal 2010 to $1.15 per share compared with 2009, driven by strong operating performance and lower interest expense. This was in line with Zacks Consensus Estimate.
Outlook
Iron Mountain projects revenue growth in the range of 2.0% to 4.0% for full year 2010, primarily based on internal revenue growth of 0.0% to 2.0%. Iron Mountain expects growth from new sales and higher market share in the overseas market.
For 2011, Iron Mountain expects acquisitions and foreign currency rate to add 1% to 2% to the total revenue growth based on recent exchange rates.
The company forecasts adjusted OIBDA guidance in the band of 0.0% to 3.0% for full year 2011. Iron Mountain expects EPS to be between $1.21 and $1.30.
The company expects capital expenditure of 245.0 million and free cash flow to be in the range of $375 million to $410 million for fiscal 2011.
Our Take
We maintain a Neutral rating on a long-term basis (6-12 months) due to weak internal growth and volatile foreign exchange, partly offset by Iron Mountain’s promising product portfolio and strong market share. We believe these positives will drive the company’s profitability over the long term.
Iron Mountain faces intense competition from Anacomp Inc., Cintas Corporation (CTAS) and privately held SOURCECORP, Inc.
Iron Mountain holds a Zacks #2 Rank, which implies a short-term Buy rating (for the next 1-3 months).
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