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Iron Mountain Inc. (IRM - Analyst Report) reported fourth quarter 2012 adjusted earnings per share from continuing operations of 20 cents, which fell shy of the Zacks Consensus Estimate of 25 cents. Earnings in the quarter slumped 39.4% from the year-ago quarter due to higher interest expense and higher operational costs.

Quarter Details

Revenues for the quarter increased a modest 2.3% from the year-ago quarter to $758.5 million and surpassed the Zacks Consensus Estimate of $751.0 million. The better-than-expected result was aided by higher storage rental revenues (up 4.5% year over year), which fully offset the 0.7% dip in service revenues.

During the quarter, Iron Mountain witnessed robust growth in Document Management Solutions segment and storage-related services in Latin America. Moreover, increase in international storage rental volumes (up 9% year over year) helped Global storage volume growth of 1.8% from the year-ago period. However, decrease in activity-based service revenues and lower recycled paper revenues were primarily responsible for the decline in service revenues.

Adjusted OIBDA was down 13.1% year over year to $207 million. Adjusted OIBDA margin declined 480 basis points on a year-over-year basis to 27.2%, due to lower service revenue and shut down costs related to facilities in the United Kingdom and the southeast United States. Moreover, higher-than-expected selling, general and administrative (SG&A) expenses and acquisition costs also led to the decline.

Operating income in the quarter decreased 31.4% from the year-ago quarter to $102 million, due to higher operating expenses (up 10.7% year over year). Interest expense increased 10.7% on a year-over-year basis on borrowings related to stockholder payout programs and costs related to Iron Mountain’s proposed conversion to real estate investment trust (“REIT”).

Net income from continuing operations was $27 million versus $47 million earned in the previous-year quarter.

Iron Mountain exited the quarter with cash and cash equivalents of $243.4 million compared with $334.6 million at the end of the previous quarter. Long-term debt (including the current portion) was $3.35 billion compared with $3.74 billion in the previous quarter.

Guidance

For fiscal 2013, Iron Mountain expects revenues in the range of $3.02 billion to $3.10 billion. The company forecasts adjusted OIBDA between $905.0 million and $935.0 million. Iron Mountain expects earnings per share in the range of $1.13 to $1.24.

The company expects to spend approximately $290 million on capital assets. Free cash flow is expected in the range of $320 million to $360 million for fiscal 2013.

Our Take

We believe that Iron Mountain’s strong product portfolio, increasing market share and promising international business are the primary growth catalysts for the company. The company’s decision to convert to REIT to reduce tax burden and increase share holders value are the other positives.

However, costs related to the conversion and decline in recycled paper prices are the near-term headwinds for the company. Additionally, volatile foreign exchange rates and competition from Hertz Global Holdings (HTZ - Snapshot Report), National Research and Guidance Software Inc (GUID - Snapshot Report) are the other headwinds.

Currently, Iron Mountain has a Zacks Rank #3 (Hold).

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