CTAS Cintas Corporation

Iron Mountain Inc.’s (IRM) second quarter earnings per share (EPS) were in line with the Zacks Consensus Estimate of 29 cents per share, but declined 9.4% year over year owing to the net effect of certain discrete tax items of 3 cents per share.

EPS, excluding the discrete tax item, was 32 cents, up 33.3% from the previous-year quarter.  This was primarily attributable to lower interest expense and effective tax rate in the quarter, which offset an increase in total operating expenses.

Operating Performance

Gross profit increased 5.0% year over year to $452.0 million in the second quarter, while gross margin was 59.2% compared with 59.3% in the year-ago quarter. Service gross margin was aided by gains from higher recycled paper revenues, partly offset by the business mix impacts related to softness in core service activity, which ultimately left this margin flat on an annual basis. Also, the storage gross margin remained flat year over year.

Adjusted operating income, before depreciation and amortization (OIBDA), was down 3.0% year over year to $227.0 million. Adjusted OIBDA margin dropped 250 basis points (bps) to 29.7%, due to $10.0 million of advisory fees and other costs related to Iron Mountain’s recent proxy contest.

The quarter’s operating income was down 7.0% year over year to $147.0 million. Operating margin declined 250 bps to 19.3%, primarily due to an increase in selling, general and administrative costs (SG&A). Higher costs were primarily driven by planned increases in sales expense and higher incentive compensations.

Revenues

Revenues increased 5.0% year over year to $763.0 million, but were way behind the Zacks Consensus Estimate of $806.0 million.

Segment wise, Storage revenue (55.2% of revenues) increased 5.8% year over year to $421.0 million. Storage revenue’s internal growth increased to 3% in the quarter, driven by continued strong performance in the International Physical segment and sustained growth in the North America business.

Global records management net volumes increased 2% year over year, buoyed by higher sales and lower destruction rates compared with the prior-year quarter.

Service revenue (44.8% of revenues) increased 4.6% on a yearly basis to $342.0 million. Core service revenue internal growth was flat compared with the prior-year quarter and was attributable to strong hybrid service revenue growth and increased fuel surcharges, offset the softness in core service activity levels.

Complementary service revenue internal growth was 4% in the quarter driven primarily by higher recycled paper prices.

Balance Sheet

As of June 30, 2011, cash and cash equivalents were $258.7 million, compared with $225.0 million at the end of March 31, 2010. Long-term debt was $3.01 billion versus $2.96 billion in the prior quarter.

In the second quarter of 2011, Iron Mountain generated free cash flow of $54.0 million, compared with $58.0 million in the year-ago period. Cash flow from continuing operations was $270.0 million

The company did not purchase any shares in the second quarter 2011.

On June 13, 2011, Iron Mountain announced that its board of directors declared a quarterly dividend of 25 cents 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.

Outlook

Iron Mountain projects revenue growth in the range of 4.0% to 6.0% for fiscal 2011, primarily based on internal revenue growth of 1.0% to 3.0%.

The company forecasts adjusted OIBDA guidance in the range of a negative 2.0% to a positive 1.0% for fiscal 2011. Iron Mountain expects earnings per share in the range of $1.19 to $1.27. The Zacks Consensus Estimate projects earnings for the fiscal 2011 at $1.22 per share.

The company expects capital expenditure of $230.0 million and free cash flow in the range of $370 million to $405 million for fiscal 2011.

Management has revised its outlook to reflect the recent sale of digital businesses and the expected divestiture of New Zealand operations.

We believe higher expense growth will likely be a headwind going forward.

We maintain our Neutral recommendation on a long-term basis (6-12 months) due to weak internal growth and volatile foreign exchange rates, partially offset by Iron Mountain’s promising product portfolio and strong market share.

Iron Mountain faces stiff competition from Anacomp Inc., Cintas Corporation (CTAS) and privately held SOURCECORP, Inc.

Iron Mountain has a Zacks #3 Rank, which implies a short-term 'Hold' rating (for the next 1-3 months).

 
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