Iron Mountain Inc.
(IRM) announced its first quarter 2010 adjusted earnings (excluding the impact from foreign currency rate changes and other discrete tax items) of 23 cents per share, beating the Zacks Consensus Estimate of 22 cents per share by a penny. EPS of 23 cents was up 21% from 19 cents reported in the year-ago quarter. The increase in earnings was driven by increased revenues, higher operating income and improved margins, partially offset by a higher effective tax rate.
Total revenue in the quarter was $776.5 million, an increase of 7.3% from the $723.3 million reported in the year-ago quarter. This was in line with the company’s guidance range of $770 million to $790 million. Growth in internal revenue (excluding the effects of foreign currency fluctuations and acquisitions) was 4% year over year. Currency had a 3% favorable impact on revenue due to the strengthening of major foreign currencies against the U.S. dollar, while the impact of acquisitions was 0%.
By segment, Storage represented $435.2 million in sales, up 6.2% year over year. Service sales were $341.3 million, up 8.9% year over year. The internal growth rate in Storage was 4%, Core Service remained flat and Complementary Service increased 17%. Moderate internal growth rate of Storage revenue reflected the impact of economic recession, which has guarded storage volume growth in recent quarters.
Total Service revenue grew mainly due to strong growth in Complementary Service revenues, supported by gains in recycled paper pricing. Core Service revenue growth was deterred by lower activity levels, driven by the weak economy and severe weather conditions in several North American markets, partially mitigated by the strengthening of major foreign currencies against the U.S. dollar.
 Operating Results
Gross margin was 58.1% versus 56.2% in the year-ago quarter, driven primarily by operating improvements and higher internal revenue growth at the Storage segment, which more than offset weakness in Service internal revenue growth. Benefits from productivity improvements and pricing gains, particularly in North American Physical Business segment, drove higher storage and service gross margins.
Adjusted OIBDA (operating income before depreciation and amortization) in the quarter was $217 million, or 28.0% of revenue versus $196 million, or 27.1% of revenue in the year-ago period. OIBDA grew 11%, or 8% excluding the impact of exchange rate fluctuations, compared with the year-ago quarter.
SG&A costs in the first quarter were up 11%, or 9% excluding foreign currency exchange rate changes, compared with the prior-year period, as the company continued to invest in growth and productivity initiatives. Despite this increase, operating margin in the first quarter increased to 17.1% from 16.8% in the year-ago quarter due to adjusted OIBDA gains, partially offset by increased depreciation. Excluding the impact of gains and losses from the sale of assets, operating income increased 9% (7% on a constant currency basis).
Balance Sheet
Iron Mountain exited the quarter with $360.5 million in cash and cash equivalents versus $446.7 million in the previous quarter. Long-term debt (including the current portion) was $3.22 billion versus $3.25 billion in the previous quarter. Net debt to EBITDA was 3.3 times to that on March 31, 2010, driven by a strong operating cash flow ($131 million) and limited acquisition activity during the last two years. This ratio is well below the covenant limitation of 5.5 times.
Capital spending totaled $55 million, or 7% of revenues. Iron Mountain generated $54 million of free cash flow in the quarter. As of March 31, 2010, the company had $743 million availability under its revolving credit facility.
Share Repurchase and Dividend
Management had authorized a $150 million share repurchase program and initiated its first ever quarterly dividend in February 2010. The annual dividend is 25 cents per share to be paid quarterly. The first quarterly payment was made on April 15, 2010, to shareholders of record on March 25, 2010.
Iron Mountain updated its 2010 outlook to reflect the impact of Chilean earthquakes on its business. For 2010, revenue expectation remained unchanged. The company expects revenue in the range of $3.18 billion to $3.25 billion (a 6% to 8% growth from 2009 on a reported basis, and a 5% to 7% growth excluding favorable foreign currency impact). Internal revenue growth is expected to be 4% to 6%.
EPS expectation also remained unchanged and the company expects earnings to be in the $1.07 to $1.18 per share range (10% to 22% growth from the 2009 level). These gains will be partially offset by the dilutive impact of the Mimosa acquisition due to integration costs to be recorded in 2010.
The company lowered its operating income expectation to $583 million to $623 million (a 6% to 14% growth from 2009) versus its previous expectation of a growth of $591 million to $636 million (an 8% to 16% growth from 2009). Excluding a favorable foreign currency impact, operating income is expected to grow 5% to 13%.
Depreciation and amortization is expected to be approximately $342 million. Adjusted OIBDA is expected to be in the range of $925 million to $965 million (a growth of 7% to 11% from 2009), primarily reflecting continued strong performance and higher recycled paper prices. The company lowered its adjusted OIBDA guidance range by $5 million to $10 million to reflect the expected impacts of the recent earthquakes in Chile. Excluding a favorable foreign currency impact, adjusted OIBDA is expected to grow 6% to 10%.
The company lowered its capital expenditure expectation to $290 million from its previous projection of $320 million, reflecting refined capital plans and lower expectations for real estate spending.

For the second quarter of 2010, Iron Mountain expects revenues in the range of $785 million to $805 million, operating income in the range of $132 million to $142 million, and depreciation and amortization of approximately $86 million. Adjusted OIBDA is expected to be in the range of $218 million to $228 million.
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