Iron Mountain Incorporated (IRM)

FORM 10-Q | Quarterly Report
Apr. 25, 2019 4:27 PM
|
About: Iron Mountain Incorporated (IRM)View as PDF
IRON MOUNTAIN INC (Form: 10-Q, Received: 04/25/2019 16:30:17)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Quarterly Period Ended March 31, 2019
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Transition Period from                        to                       
 
Commission file number 1-13045
 
IRON MOUNTAIN INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or other Jurisdiction of
Incorporation or Organization)
23-2588479
(I.R.S. Employer
Identification No.)
One Federal Street, Boston, Massachusetts 02110
(Address of Principal Executive Offices, Including Zip Code)

(617) 535-4766
(Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý     No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ý     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ý
 
Accelerated filer  o
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
Emerging growth company  o
If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  ý
Number of shares of the registrant's Common Stock outstanding at April 19, 2019 : 286,880,641




IRON MOUNTAIN INCORPORATED
Index

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part I. Financial Information
Item 1.    Unaudited Condensed Consolidated Financial Statements
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except Share and Per Share Data)
(Unaudited)
 
March 31, 2019
 
December 31, 2018
 
 
 
 
ASSETS
 
 
 

Current Assets:
 
 
 

Cash and cash equivalents
$
161,475

 
$
165,485

Accounts receivable (less allowances of $42,074 and $43,584 as of March 31, 2019 and December 31, 2018, respectively)
837,521

 
846,889

Prepaid expenses and other
210,854

 
195,740

Total Current Assets
1,209,850

 
1,208,114

Property, Plant and Equipment:
 
 
 

Property, plant and equipment
7,738,705

 
7,600,949

Less—Accumulated depreciation
(3,213,122
)
 
(3,111,392
)
Property, Plant and Equipment, Net
4,525,583

 
4,489,557

Other Assets, Net:
 
 
 

Goodwill
4,465,378

 
4,441,030

Customer relationships, customer inducements and data center lease-based intangibles
1,495,338

 
1,506,522

Operating lease right-of-use assets (see Note 2.d.)
1,791,536

 

Other
201,678

 
207,024

Total Other Assets, Net
7,953,930

 
6,154,576

Total Assets
$
13,689,363

 
$
11,852,247

LIABILITIES AND EQUITY
 
 
 

Current Liabilities:
 
 
 

Current portion of long-term debt
$
125,142

 
$
126,406

Accounts payable
283,709

 
318,765

Accrued expenses and other current liabilities (includes current portion of operating lease liabilities,
see Note 2.d.)
839,968

 
752,684

Deferred revenue
266,314

 
264,823

Total Current Liabilities
1,515,133

 
1,462,678

Long-term Debt, net of current portion
8,365,737

 
8,016,417

Long-term Operating Lease Liabilities, net of current portion (see Note 2.d.)
1,656,659

 

Other Long-term Liabilities
127,127

 
111,331

Deferred Rent (see Note 2.d.)

 
121,864

Deferred Income Taxes
190,871

 
183,836

Commitments and Contingencies (see Note 7)


 


Redeemable Noncontrolling Interests
73,102

 
70,532

Equity:
 
 
 

Iron Mountain Incorporated Stockholders' Equity:
 
 
 

Preferred stock (par value $0.01; authorized 10,000,000 shares; none issued and outstanding)

 

Common stock (par value $0.01; authorized 400,000,000 shares; issued and outstanding 286,829,854 and 286,321,009 shares as of March 31, 2019 and December 31, 2018, respectively)
2,868

 
2,863

Additional paid-in capital
4,264,978

 
4,263,348

(Distributions in excess of earnings) Earnings in excess of distributions
(2,257,485
)
 
(2,116,367
)
Accumulated other comprehensive items, net
(250,960
)
 
(265,664
)
Total Iron Mountain Incorporated Stockholders' Equity
1,759,401

 
1,884,180

Noncontrolling Interests
1,333

 
1,409

Total Equity
1,760,734

 
1,885,589

Total Liabilities and Equity
$
13,689,363

 
$
11,852,247

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except Per Share Data)
(Unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Revenues:
 

 
 

Storage rental
$
662,974


$
651,149

Service
390,889


391,309

Total Revenues
1,053,863


1,042,458

Operating Expenses:
 

 
 

Cost of sales (excluding depreciation and amortization)
461,544


448,721

Selling, general and administrative
270,559

 
269,730

Depreciation and amortization
162,483

 
160,578

Loss (Gain) on disposal/write-down of property, plant and equipment, net (see Note 2.l.)
602

 
(1,130
)
Total Operating Expenses
895,188


877,899

Operating Income (Loss)
158,675


164,559

Interest Expense, Net (includes Interest Income of $1,785 and $1,386 for the three months ended March 31, 2019 and 2018, respectively)
102,436

 
97,626

Other Expense (Income), Net
15,210


20,151

Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes
41,029

 
46,782

Provision (Benefit) for Income Taxes
10,553

 
1,168

Income (Loss) from Continuing Operations
30,476


45,614

(Loss) Income from Discontinued Operations, Net of Tax
(24
)
 
(462
)
Net Income (Loss)
30,452

 
45,152

Less: Net Income (Loss) Attributable to Noncontrolling Interests
891

 
468

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
29,561


$
44,684

Earnings (Losses) per Share—Basic:
 

 
 

Income (Loss) from Continuing Operations
$
0.10

 
$
0.16

Total (Loss) Income from Discontinued Operations, Net of Tax
$

 
$

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
0.10

 
$
0.16

Earnings (Losses) per Share—Diluted:
 

 
 

Income (Loss) from Continuing Operations
$
0.10

 
$
0.16

Total (Loss) Income from Discontinued Operations, Net of Tax
$

 
$

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
0.10

 
$
0.16

Weighted Average Common Shares Outstanding—Basic
286,528

 
285,259

Weighted Average Common Shares Outstanding—Diluted
287,492

 
285,993

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
(Unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Net Income (Loss)
$
30,452

 
$
45,152

Other Comprehensive Income (Loss):
 

 
 

Foreign Currency Translation Adjustment
18,191

 
31,651

Change in Fair Value of Interest Rate Swap Agreements
(2,674
)
 
(185
)
Total Other Comprehensive Income (Loss)
15,517

 
31,466

Comprehensive Income (Loss)
45,969

 
76,618

Comprehensive Income (Loss) Attributable to Noncontrolling Interests
1,704

 
2,027

Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated
$
44,265

 
$
74,591

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In Thousands, except Share Data)
(Unaudited)
 
 
 
Iron Mountain Incorporated Stockholders' Equity
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
(Distributions in Excess of Earnings) Earnings in Excess of Distributions
 
 
 
Noncontrolling
Interests
 
 
 
 
Total
 
Shares
 
Amounts
 
 
 
Accumulated
Other
Comprehensive
Items, Net
 
 
Redeemable Noncontrolling Interests
Balance, December 31, 2017
$
2,298,842

 
283,110,183

 
$
2,831

 
$
4,164,562

 
$
(1,765,966
)
 
$
(103,989
)
 
$
1,404

 
 
$
91,418

Cumulative-effect adjustment for adoption of ASU 2014-09 (see Note 2.c.)
(29,461
)
 

 

 

 
(29,461
)
 

 

 
 

Issuance of shares under employee stock purchase plan and option plans and stock-based compensation
1,432

 
364,736

 
4

 
1,428

 

 

 

 
 

Issuance of shares associated with the Over-Allotment Option, net of underwriting discounts and offering expenses (see Note 12 to Notes to Consolidated Financial Statements included in our Annual Report)
76,192

 
2,175,000

 
22

 
76,170

 

 

 

 
 

Issuance of shares through the At the Market (ATM) Equity Program, net of underwriting discounts and offering expenses (see Note 8)
8,716

 
273,486

 
2

 
8,714

 

 

 

 
 

Change in value of redeemable noncontrolling interests
(117
)
 

 

 
(117
)
 

 

 

 
 
117

Parent cash dividends declared (see Note 8)
(169,044
)
 

 

 

 
(169,044
)
 

 

 
 

Foreign currency translation adjustment
30,246

 

 

 

 

 
30,092

 
154

 
 
1,405

Change in fair value of interest rate swap agreements
(185
)
 

 

 

 

 
(185
)
 

 
 

Net income (loss)
44,654

 

 

 

 
44,684

 

 
(30
)
 
 
498

Noncontrolling interests dividends

 

 

 

 

 

 

 
 
(561
)
Balance, March 31, 2018
$
2,261,275

 
285,923,405

 
$
2,859

 
$
4,250,757

 
$
(1,919,787
)
 
$
(74,082
)
 
$
1,528

 
 
$
92,877

 
 
 
Iron Mountain Incorporated Stockholders' Equity
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
(Distributions in Excess of Earnings) Earnings in Excess of Distributions
 
 
 
Noncontrolling
Interests
 
 
 
 
Total
 
Shares
 
Amounts
 
 
 
Accumulated
Other
Comprehensive
Items, Net
 
 
Redeemable Noncontrolling Interests
Balance, December 31, 2018
$
1,885,589

 
286,321,009

 
$
2,863

 
$
4,263,348

 
$
(2,116,367
)
 
$
(265,664
)
 
$
1,409

 
 
$
70,532

Cumulative-effect adjustment for adoption of ASU 2016-02 (see Note 2.d.)
5,781

 

 

 

 
5,781

 

 

 
 

Issuance of shares under employee stock purchase plan and option plans and stock-based compensation
2,923

 
508,845

 
5

 
2,918

 

 

 

 
 

Change in equity related to redeemable noncontrolling interests
(1,288
)
 

 

 
(1,288
)
 

 

 

 
 
1,288

Parent cash dividends declared (see Note 8)
(176,460
)
 

 

 

 
(176,460
)
 

 

 
 

Foreign currency translation adjustment
17,378

 

 

 

 

 
17,378

 

 
 
813

Change in fair value of interest rate swap agreements
(2,674
)
 

 

 

 

 
(2,674
)
 

 
 


Net income (loss)
29,485

 

 

 

 
29,561

 

 
(76
)
 
 
967

Noncontrolling interests dividends

 

 

 

 

 

 

 
 
(498
)
Balance, March 31, 2019
$
1,760,734

 
286,829,854

 
$
2,868

 
$
4,264,978

 
$
(2,257,485
)
 
$
(250,960
)
 
$
1,333

 
 
$
73,102


The accompanying notes are an integral part of these condensed consolidated financial statements.

6


IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Cash Flows from Operating Activities:
 
 
 

Net income (loss)
$
30,452

 
$
45,152

Loss (income) from discontinued operations
24

 
462

Adjustments to reconcile net income (loss) to cash flows from operating activities:
 

 
 

Depreciation
114,611

 
113,432

Amortization (includes amortization of deferred financing costs and discounts of $4,108 and $3,553 for the three months ended March 31, 2019 and 2018, respectively)
51,980

 
50,699

Revenue reduction associated with amortization of customer inducements and above- and below-market leases
3,645

 
3,664

Stock-based compensation expense
8,519

 
7,384

Provision (benefit) for deferred income taxes
1,423

 
(387
)
Loss (gain) on disposal/write-down of property, plant and equipment, net (see Note 2.l.)
602

 
(1,130
)
Foreign currency transactions and other, net
11,707

 
23,530

(Increase) decrease in assets
(33,138
)
 
(74,884
)
(Decrease) increase in liabilities
(72,758
)
 
(76,354
)
Cash Flows from Operating Activities - Continuing Operations
117,067

 
91,568

Cash Flows from Operating Activities - Discontinued Operations

 

Cash Flows from Operating Activities
117,067

 
91,568

Cash Flows from Investing Activities:
 

 
 

Capital expenditures (see Liquidity and Capital Resources section of Management's Discussion & Analysis of Financial Condition and Results of Operations)
(184,765
)
 
(95,605
)
Cash paid for acquisitions, net of cash acquired
(39,423
)
 
(1,428,974
)
Acquisition of customer relationships
(23,934
)
 
(12,602
)
Customer inducements
(2,817
)
 
(130
)
Contract fulfillment costs and third-party commissions
(41,161
)
 
(5,314
)
Investments in joint ventures (see Note 9)
(19,222
)
 

Proceeds from sales of property and equipment and other, net
105

 
(19,387
)
Cash Flows from Investing Activities - Continuing Operations
(311,217
)
 
(1,562,012
)
Cash Flows from Investing Activities - Discontinued Operations

 

Cash Flows from Investing Activities
(311,217
)
 
(1,562,012
)
Cash Flows from Financing Activities:
 

 
 

Repayment of revolving credit facility, term loan facilities and other debt
(1,351,242
)
 
(4,410,656
)
Proceeds from revolving credit facility, term loan facilities and other debt
1,723,462

 
5,496,491

Debt repayment and equity distribution to noncontrolling interests
(498
)
 
(561
)
Parent cash dividends
(178,023
)
 
(169,006
)
Net proceeds associated with the Over-Allotment Option

 
76,192

Net proceeds associated with the At the Market (ATM) Program

 
8,716

Net (payments) proceeds associated with employee stock-based awards
(5,963
)
 
(5,950
)
Payment of debt financing and stock issuance costs

 
(9,974
)
Cash Flows from Financing Activities - Continuing Operations
187,736

 
985,252

Cash Flows from Financing Activities - Discontinued Operations

 

Cash Flows from Financing Activities
187,736

 
985,252

Effect of Exchange Rates on Cash and Cash Equivalents
2,404

 
1,984

(Decrease) Increase in Cash and Cash Equivalents
(4,010
)
 
(483,208
)
Cash and Cash Equivalents, including Restricted Cash, Beginning of Period
165,485

 
925,699

Cash and Cash Equivalents, including Restricted Cash, End of Period
$
161,475

 
$
442,491

 
 
 
 
Supplemental Information:
 

 
 

Cash Paid for Interest
$
136,667

 
$
122,027

Cash Paid for Income Taxes, Net
$
15,141

 
$
22,292

Non-Cash Investing and Financing Activities:
 

 
 

Financing Leases (see Note 2.d.)
$
7,523

 
$
13,877

Accrued Capital Expenditures
$
75,824

 
$
36,760

Accrued Purchase Price and Other Holdbacks
$
1,042

 
$
149

Dividends Payable
$
180,422

 
$
172,140

 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

7


IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(1) General
The interim condensed consolidated financial statements are presented herein and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation. Interim results are not necessarily indicative of results for a full year. Iron Mountain Incorporated, a Delaware corporation ("IMI"), and its subsidiaries ("we" or "us") provide storage of physical records and data backup media, information management solutions and enterprise-class colocation and wholesale data center space that help organizations in various locations throughout North America, Europe, Latin America, Asia and Africa. We offer comprehensive records and information management services and data management services, along with the expertise and experience to address complex storage and information management challenges such as rising storage rental costs, legal and regulatory compliance and disaster recovery requirements. We provide secure and reliable data center facilities to protect digital information and ensure the continued operation of our customers’ information technology infrastructure, with flexible deployment options, including both colocation and wholesale space.
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to those rules and regulations, but we believe that the disclosures included herein are adequate to make the information presented not misleading. The Condensed Consolidated Financial Statements and Notes thereto, which are included herein, should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC on February 14, 2019 (our "Annual Report").
We have been organized and have operated as a real estate investment trust for United States federal income tax purposes ("REIT") beginning with our taxable year ended December 31, 2014.

On January 10, 2018, we completed the acquisition of IO Data Centers, LLC ("IODC") (the "IODC Transaction"). See Note 3.
On January 1, 2019, we adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), as amended ("ASU 2016-02"). See Note 2.d.
(2) Summary of Significant Accounting Policies
This Note 2 to Notes to Condensed Consolidated Financial Statements provides information and disclosure regarding certain of our significant accounting policies and should be read in conjunction with Note 2 to Notes to Consolidated Financial Statements included in our Annual Report, which may provide additional information with regard to the accounting policies set forth herein and other of our significant accounting policies.
a.    Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on hand and cash invested in highly liquid short-term securities, which have remaining maturities at the date of purchase of less than 90 days . Cash and cash equivalents are carried at cost, which approximates fair value.
At March 31, 2019 and December 31, 2018, we had approximately $15,250 and $15,141 , respectively, of restricted cash held by certain financial institutions related to bank guarantees.

8

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

b.    Goodwill and Other Intangible Assets and Liabilities
Goodwill
Since December 31, 2018, there have been no changes to our accounting polices related to the accounting for goodwill. As of March 31, 2019 and December 31, 2018 , no factors were identified that would alter our October 1, 2018 goodwill impairment analysis.
Our reporting units as of December 31, 2018 are described in detail in Note 2.h. to Notes to Consolidated Financial Statements included in our Annual Report. On March 19, 2019, we divested the business included in our former Consumer Storage reporting unit, which had no goodwill associated with it at December 31, 2018 or at the date of the divestment. See Note 9 for additional information.
The goodwill associated with acquisitions completed during the first three months of 2019 (which are described in Note 3) has been incorporated into our reporting units as they existed as of December 31, 2018.
The changes in the carrying value of goodwill attributable to each reportable operating segment for the three months ended March 31, 2019 are as follows:
 
North American
Records and Information
Management
Business
 
North American
Data
Management
Business
 
Western
European Business
 
Other International Business
 
Global Data Center Business
 
Corporate and Other Business
 
Total
Consolidated
Goodwill balance, net of accumulated amortization as of December 31, 2018
$
2,251,795

 
$
493,491

 
$
381,806

 
$
818,223

 
$
425,956

 
$
69,759

 
$
4,441,030

Deductible goodwill acquired during the year
5,501

 

 

 

 

 

 
5,501

Non-deductible goodwill acquired during the year

 

 
4,991

 
3,767

 

 
1,874

 
10,632

Fair value and other adjustments(1)
31

 

 
92

 
3,350

 
(871
)
 
(468
)
 
2,134

Currency effects
3,921

 
1,067

 
1,393

 
1,126

 
(1,566
)
 
140

 
6,081

Goodwill balance, net accumulated amortization as of March 31, 2019
$
2,261,248

 
$
494,558

 
$
388,282

 
$
826,466

 
$
423,519

 
$
71,305

 
$
4,465,378

Accumulated Goodwill Impairment Balance as of December 31, 2018
$
85,909

 
$

 
$
46,500

 
$

 
$

 
$
3,011

 
$
135,420

Accumulated Goodwill Impairment Balance as of March 31, 2019
$
85,909

 
$

 
$
46,500

 
$

 
$

 
$
3,011

 
$
135,420

_______________________________________________________________________________
(1)
Total fair value and other adjustments primarily include $2,565 in net adjustments related to property, plant and equipment, customer relationships and data center lease-based intangible assets and deferred income taxes and other liabilities offset by $431 of cash received related to certain acquisitions completed in 2018.


9

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

Finite-lived Intangible Assets and Liabilities

Finite-lived intangible assets and liabilities are primarily comprised of customer relationship intangible assets, customer inducements and data center intangible assets and liabilities (which include data center in-place lease intangible assets, data center tenant relationship intangible assets, data center above-market in-place lease intangible assets and data center below-market in-place lease intangible assets). Since December 31, 2018, there have been no changes to our accounting policies related to the accounting for any of our finite-lived intangible assets and liabilities as disclosed in Note 2.i. to Notes to Consolidated Financial Statements included in our Annual Report.
The gross carrying amount and accumulated amortization of our finite-lived intangible assets as of March 31, 2019 and December 31, 2018 are as follows:
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Assets:
 
 
 
 
 
 
 
 
 
 
 
Customer relationship intangible assets
$
1,754,794

 
$
(482,971
)
 
$
1,271,823

 
$
1,718,919

 
$
(455,705
)
 
$
1,263,214

Customer inducements
51,405

 
(28,711
)
 
22,694

 
56,478

 
(34,181
)
 
22,297

Data center lease-based intangible assets(1)
265,834

 
(65,013
)
 
200,821

 
271,818

 
(50,807
)
 
221,011

Third-party commissions asset(2)
30,861

 
(737
)
 
30,124

 
30,071

 
(1,089
)
 
28,982

 
$
2,102,894

 
$
(577,432
)
 
$
1,525,462

 
$
2,077,286

 
$
(541,782
)
 
$
1,535,504

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Data center below-market leases
$
12,715

 
$
(2,451
)
 
$
10,264

 
$
12,318

 
$
(1,642
)
 
$
10,676

_______________________________________________________________________________
 
(1)
Includes data center in-place lease intangible assets, data center tenant relationship intangible assets and data center above-market in-place lease intangible assets.

(2)
Third-party commissions asset is included in Other, a component of Other assets, net in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018. The third-party commissions asset is primarily comprised of additional payments associated with the execution of future customer contracts through the one-year anniversary of the acquisition of IODC, as described in Note 3.

Other finite-lived intangible assets, including trade names, noncompetition agreements and trademarks, are capitalized and amortized and are included in depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018. The other finite-lived intangible assets as of March 31, 2019 and December 31, 2018 are as follows:
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Other finite-lived intangible assets (included in Other, a component of other assets, net)
$
20,290

 
$
(15,794
)
 
$
4,496

 
$
20,310

 
$
(14,798
)
 
$
5,512


10

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

Amortization expense associated with finite-lived intangible assets, revenue reduction associated with the amortization of customer inducements and net revenue reduction associated with the amortization of data center above-market leases and data center below-market leases for the three months ended March 31, 2019 and 2018 are as follows:
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Amortization expense included in depreciation and amortization associated with:
 
 
 
 
Customer relationship and customer inducement intangible assets
 
$
27,881

 
$
28,806

Data center in-place leases and tenant relationships
 
12,609

 
10,838

Third-party commissions asset and other finite-lived intangible assets
 
757

 
1,185

Revenue reduction associated with amortization of:
 
 
 
 
Customer inducements
 
$
2,740

 
$
2,585

Data center above-market leases and data center below-market leases
 
905

 
1,079

c.    Revenues

Since December 31, 2018, there have been no changes to our accounting policies related to the accounting for revenues as disclosed in Note 2.l. to Notes to Consolidated Financial Statements included in our Annual Report.

The costs of the initial intake of customer records into physical storage ("Intake Costs") and capitalized commissions asset (collectively, "Contract Fulfillment Costs") as of March 31, 2019 and December 31, 2018 are as follows:
 
 
 
 
March 31, 2019
 
December 31, 2018
Description
 
Location in Balance Sheet
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intake Costs asset
 
Other (within Other Assets, Net)
 
$
36,155

 
$
(21,041
)
 
$
15,114

 
$
39,748

 
$
(24,504
)
 
$
15,244

Capitalized commissions asset
 
Other (within Other Assets, Net)
 
52,485

 
(24,923
)
 
27,562

 
58,424

 
(34,637
)
 
23,787


Amortization expense associated with the Intake Costs asset and capitalized commissions asset for the three months ended March 31, 2019 and 2018 are as follows:
 
Three Months Ended
March 31,
 
2019
 
2018
Intake Costs asset
$
2,679

 
$
2,730

Capitalized commissions asset
3,946

 
3,587



11

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

Deferred revenue liabilities are reflected as follows in our Condensed Consolidated Balance Sheets:
Description
 
Location in Balance Sheet
 
March 31, 2019
 
December 31, 2018
Deferred revenue - Current
 
Deferred revenue
 
$
266,314

 
$
264,823

Deferred revenue - Long-term
 
Other Long-term Liabilities
 
25,625

 
26,401


Data Center Lessor Considerations

Our data center business features storage rental provided to customers at contractually specified rates over a fixed contractual period. Prior to January 1, 2019, our data center revenue contracts were accounted for in accordance with Accounting Standards Codification (“ASC”) No. 840, Leases ("ASC 840"). On January 1, 2019, we adopted ASU 2016-02, as described in more detail in Note 2.d. Beginning on January 1, 2019, our data center revenue contracts will be accounted for in accordance with ASU 2016-02. ASU 2016-02 provides a practical expedient which allows lessors to account for nonlease components (such as power and connectivity, in the case of our data center business) with the related lease component if both the timing and pattern of transfer are the same for nonlease components and the lease component, and the lease component would be classified as an operating lease. The single combined component is accounted for under ASU 2016-02 if the lease component is the predominant component and is accounted for under ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), if the nonlease components are the predominant components. We have elected to take this practical expedient. Storage rental revenue associated with our data center business was $59,718 for the three months ended March 31, 2019, which includes approximately $9,100 of revenue associated with power and connectivity. The revenue related to the service component of our data center business remains unchanged from the adoption of ASU 2016-02 and is recognized in the period the related services are provided. Our accounting treatment for data center revenue was not significantly impacted by the adoption of ASU 2016-02.

d. Leases
We lease facilities for certain warehouses, data centers and office space. We also have land leases, including those on which certain facilities are located. The majority of our leased facilities are classified as operating leases that, on average, have initial lease terms of five to 10 years, with one or more lease renewal options to extend the lease term. Our lease renewal option terms generally range from one to five years. The exercise of the lease renewal option is at our sole discretion and may contain fixed rent, fair market value based rent or Consumer Price Index rent escalation clauses. We include option periods in the lease term when our failure to renew the lease would result in an economic disincentive, thereby making it reasonably certain that we will renew the lease. We recognize straight line rental expense over the life of the lease and any fair market value or Consumer Price Index rent escalations are recognized as variable lease expense in the period in which the obligation is incurred. In addition, we lease certain vehicles and equipment. Vehicle and equipment leases have lease terms ranging from one to seven years.
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842) which requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases, both operating and financing (formerly referred to as capital leases under ASC 840). ASU 2016-02 requires certain qualitative and quantitative disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases.

12

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

We adopted ASU 2016-02 on January 1, 2019 on a modified retrospective basis under which we recognized and measured leases existing at, or entered into after, the beginning of the period of adoption. Therefore, we applied ASC 840 to all earlier comparative periods (prior to the adoption of ASU 2016-02), including disclosures, and recognized the effects of applying ASU 2016-02 as a cumulative-effect adjustment to retained earnings as of January 1, 2019, the effective date of the standard. As such, the comparative Condensed Consolidated Balance Sheet as of December 31, 2018 has not been restated to reflect the adoption of ASU 2016-02. Accordingly, the majority of the amount presented as deferred rent liabilities on our Consolidated Balance Sheet as of December 31, 2018 is now included in the calculation of operating lease right-of-use assets and any remaining amounts are now classified within other liability line items on our Condensed Consolidated Balance Sheet as of March 31, 2019. The transition guidance associated with ASU 2016-02 also permitted certain practical expedients. We elected the "package of 3" practical expedients permitted under the transition guidance which, among other things, allowed us to carryforward our historical lease classifications. We also adopted an accounting policy which provides that leases with an initial term of 12 months or less will not be included within the lease right-of-use assets and lease liabilities recognized on our Condensed Consolidated Balance Sheets after the adoption of ASU 2016-02. We will continue to recognize the lease payments for those leases with an initial term of 12 months or less in the Consolidated Statements of Operations on a straight-line basis over the lease term.
The lease right-of-use assets and related lease liabilities are classified as either operating or financing. Lease right-of-use assets are calculated as the net present value of future payments plus any capitalized initial direct costs less any tenant improvements or lease incentives. Lease liabilities are calculated as the net present value of future payments. In calculating the present value of the lease payments, we will utilize the rate stated within the lease (in the limited circumstances when such rate is available) or, if no rate is explicitly stated, we have elected to utilize a rate that reflects our securitized incremental borrowing rate by geography for the lease term. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements ("ASU 2018-11"). ASU 2018-11 provides a practical expedient which allows lessees to account for nonlease components (which include common area maintenance, taxes, and insurance) with the related lease component. Any variable nonlease components are not included within the lease right-of-use asset and lease liability on the Condensed Consolidated Balance Sheets, and instead, are reflected as an expense in the period incurred. We have elected to take this practical expedient upon adoption of ASU 2016-02.
At January 1, 2019, we recognized the cumulative effect of initially applying ASU 2016-02 as an adjustment to the opening balance of (distributions in excess of earnings) earnings in excess of distributions, resulting in an increase of approximately $5,800 to stockholders' equity due to certain build to suit leases that were accounted for as financing leases under ASC 840, Leases , but are accounted for as operating leases under ASU 2016-02 at January 1, 2019.

13

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

Operating and financing lease right-of-use assets and lease liabilities as of March 31, 2019 and January 1, 2019 (date of adoption of ASU 2016-02) are as follows:
Description
 
Location in Balance Sheet
 
March 31, 2019
 
January 1, 2019
(Date of Adoption of ASU 2016-02)
Assets:
 
 
 
 
 
 
Operating lease right-of-use assets(1)
 
Operating lease right-of-use assets
 
$
1,791,536

 
$
1,825,721

Financing lease right-of-use assets, net of accumulated depreciation(2)
 
Property, plant and equipment, net
 
351,750

 
361,078

Total
 
 
 
$
2,143,286

 
$
2,186,799

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Current
 
 
 
 
 
 
   Operating lease liabilities
 
Accrued expenses and other current liabilities
 
$
206,286

 
$
209,911

   Financing lease liabilities
 
Current portion of long-term debt
 
51,222

 
50,437

      Total current lease liabilities
 
 
 
257,508

 
260,348

Long-term
 
 
 
 
 
 
   Operating lease liabilities
 
Long-term operating lease liabilities, net of current portion
 
1,656,659

 
1,685,771

   Financing lease liabilities
 
Long-term Debt, net of current portion
 
338,728

 
350,263

      Total long-term lease liabilities
 
 
 
1,995,387

 
2,036,034

Total
 
 
 
$
2,252,895

 
$
2,296,382

______________________________________________________________
(1) At March 31, 2019, these assets are comprised of approximately 98% real estate related assets (which include land, buildings and racking) and 2% non-real estate related assets (which include warehouse equipment, vehicles, furniture and fixtures and computer hardware and software).
(2) At March 31, 2019, these assets are comprised of approximately 66% real estate related assets and 34% non-real estate related assets.

The components of the lease expense for the three months ended March 31, 2019 is as follows:
Description
 
Location in Statement of Operations
 
Amount
Operating lease cost(1)
 
Cost of sales and Selling, general and administrative
 
$
111,906

Financing lease cost:
 
 
 
 
Depreciation of financing lease right-of-use assets
 
Depreciation and amortization
 
$
16,329

Interest expense for financing lease liabilities
 
Interest expense, net
 
6,142

Total financing lease cost
 
 
 
$
22,471

______________________________________________________________
(1) Of the $111,906 of operating lease cost incurred for the three months ended March 31, 2019, $108,601 is included within Cost of sales and $3,305 is included within Selling, general and administrative expenses. Operating lease cost includes variable lease costs of $25,489 .


14

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

We sublease certain real estate to third parties. The sublease income recognized for the three months ended March 31, 2019 is $3,047 .
Weighted average remaining lease terms and discount rates as of March 31, 2019 are as follows:
Remaining Lease Term:
 
 
Operating leases
 
11.1 Years
Financing leases
 
11.0 Years
 Discount Rate:
 
 
Operating leases
 
7.1%
Financing leases
 
5.7%

The estimated minimum future lease payments as of December 31, 2018, are as follows:
Year
 
Operating Leases(1)
 
Sublease
Income
 
Capital Leases(1)(2)
2019
 
$
323,454

 
$
(7,525
)
 
$
80,513

2020
 
293,276

 
(7,200
)
 
71,335

2021
 
267,379

 
(7,063
)
 
61,269

2022
 
246,128

 
(6,694
)
 
52,832

2023
 
221,808

 
(6,409
)
 
44,722

Thereafter
 
1,287,807

 
(6,279
)
 
377,750

Total minimum lease payments
 
2,639,852

 
$
(41,170
)
 
688,421

Less amounts representing interest
 
 
 
 

 
(241,248
)
Present value of finance lease obligations
 
 
 
 

 
$
447,173


The estimated minimum future lease payments as of March 31, 2019, are as follows:
Year
 
Operating Leases(1)
 
Sublease
Income
 
Financing Leases(1)
2019 (excluding the three months ended March 31, 2019)
 
$
251,699

 
$
(6,039
)
 
$
59,411

2020
 
308,267

 
(7,337
)
 
68,333

2021
 
280,931

 
(7,228
)
 
59,710

2022
 
257,598

 
(6,851
)
 
49,997

2023
 
234,035

 
(6,548
)
 
39,643

Thereafter
 
1,409,241

 
(6,922
)
 
287,609

Total minimum lease payments
 
2,741,771

 
$
(40,925
)
 
564,703

Less amounts representing interest or imputed interest
 
(878,826
)
 
 

 
(174,753
)
Present value of lease obligations
 
1,862,945

 
 

 
$
389,950

_______________________________________________________________________________
(1)
Estimated minimum future lease payments exclude variable common area maintenance charges, insurance and taxes. Differences in estimated lease payments between December 31, 2018 and March 31, 2019 are primarily related to adjustments to account for certain build to suit leases that were accounted for as financing obligations under ASC 840 but are accounted for as operating leases under ASU 2016-02 and foreign currency exchange rate impacts.
(2)
Includes capital lease and financing obligations associated with build to suit lease transactions at December 31, 2018.

15

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

As of March 31, 2019, we do not have any material operating or financing leases that are signed but have not yet commenced and we have certain leases with related parties which are not material to our consolidated financial statements.
Other information: Supplemental cash flow information relating to our leases for the three months ended March 31, 2019 is as follows:
Cash paid for amounts included in measurement of lease liabilities:
 
Three Months Ended
March 31, 2019
Operating cash flows used in operating leases
 
$
83,676

Financing cash flows used in financing leases
 
$
16,675

Non-cash items:
 
 
Operating lease modifications and reassessments
 
$
1,842

New operating leases (including acquisitions)
 
$
21,535

Financing lease modifications and reassessments
 
$

New financing leases
 
$
7,523

e.    Stock-Based Compensation
We record stock-based compensation expense, utilizing the straight-line method, for the cost of stock options, restricted stock units ("RSUs"), performance units ("PUs") and shares of stock issued under our employee stock purchase plan (together, "Employee Stock-Based Awards"). There have been no significant changes to our accounting policies, assumptions and valuation methodologies related to the accounting for our Employee Stock-Based Awards as disclosed in Note 2.n. to Notes to Consolidated Financial Statements included in our Annual Report.
For our Employee Stock-Based Awards made on or after February 20, 2019, we have included the following retirement provision: Upon an employee’s retirement on or after attaining age 58, if the sum of (i) the award recipient’s age at retirement and (ii) the award recipient’s years of service with the company totals at least 70, the award recipient is entitled to continued vesting of any outstanding Employee Stock-Based Awards which include the 2019 Retirement Criteria subsequent to their retirement, provided that, for awards granted in the year of retirement, their retirement occurs on or after July 1st (the “2019 Retirement Criteria”). Accordingly, (i) grants of Employee Stock-Based Awards to an employee who has met the 2019 Retirement Criteria on or before the date of grant, or will meet the Retirement Criteria before July 1 st of the year of the grant, will be expensed between the date of grant and July 1 st of the grant year and (ii) grants of Employee Stock-Based Awards to employees who will meet the 2019 Retirement Criteria during the award’s normal vesting period will be expensed between the date of grant and the date upon which the award recipient meets the 2019 Retirement Criteria. Stock options and RSUs granted to recipients who meet the 2019 Retirement Criteria will continue vesting on the original vesting schedule, and the stock options will remain exercisable up to three years after retirement, or the original expiration date of the stock options, if earlier. PUs granted to recipients who meet the 2019 Retirement Criteria will continue to vest and be delivered in accordance with the original vesting schedule of the applicable PU award and remain subject to the same performance conditions.
Stock-based compensation expense for Employee Stock-Based Awards for the three months ended March 31, 2019 and 2018 was $8,519 ( $7,935 after tax or $0.03 per basic and diluted share) and $7,384 ( $6,833 after tax or $0.02 per basic and diluted share), respectively, the substantial majority of which is included in Selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. As of March 31, 2019 , unrecognized compensation cost related to the unvested portion of our Employee Stock-Based Awards was $72,353 and is expected to be recognized over a weighted-average period of 2.2 years.

16

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

Stock Options
A summary of stock option activity for the three months ended March 31, 2019 is as follows:
 
Stock Options
Outstanding at December 31, 2018
4,271,834

Granted
920,706

Exercised
(99,334
)
Forfeited
(6,007
)
Expired
(9,629
)
Outstanding at March 31, 2019
5,077,570

Options exercisable at March 31, 2019
3,258,982

Options expected to vest
1,691,146

Restricted Stock Units
The fair value of RSUs vested during the three months ended March 31, 2019 and 2018 is as follows:
 
Three Months Ended
March 31,
 
2019
 
2018
Fair value of RSUs vested
$
15,333

 
$
15,330

A summary of RSU activity for the three months ended March 31, 2019 is as follows:
 
RSUs
Non-vested at December 31, 2018
1,196,566

Granted
621,281

Vested
(453,167
)
Forfeited
(18,075
)
Non-vested at March 31, 2019
1,346,605

Performance Units
The fair value of earned PUs that vested during the three months ended March 31, 2019 and 2018 is as follows:
 
Three Months Ended
March 31,
 
2019
 
2018
Fair value of earned PUs that vested
$
6,503

 
$
3,033


17

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

A summary of PU activity for the three months ended March 31, 2019 is as follows:
 
Original
PU Awards
 
PU Adjustment(1)
 
Total
PU Awards
Non-vested at December 31, 2018
967,049

 
(299,948
)
 
667,101

Granted
380,856

 

 
380,856

Vested
(169,523
)
 

 
(169,523
)
Forfeited/Performance or Market Conditions Not Achieved
(4,816
)
 
(14,850
)
 
(19,666
)
Non-vested at March 31, 2019
1,173,566

 
(314,798
)
 
858,768

_______________________________________________________________________________

(1)
Represents an increase or decrease in the number of original PUs awarded based on either the final performance criteria or market condition achievement at the end of the performance period of such PUs or a change in estimated awards based on the forecasted performance against the predefined targets.

As of March 31, 2019 , we expected 100% achievement of the predefined revenue, return on invested capital and Adjusted EBITDA (as defined in Note 6) targets associated with the awards of PUs made in 2019 , 2018 and 2017 .

18

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

f.    Income (Loss) Per Share—Basic and Diluted
Basic income (loss) per common share is calculated by dividing income (loss) by the weighted average number of common shares outstanding. The calculation of diluted income (loss) per share is consistent with that of basic income (loss) per share, but gives effect to all potential common shares (that is, securities such as stock options, RSUs or PUs) that were outstanding during the period, unless the effect is antidilutive.
The calculation of basic and diluted income (loss) per share for the three months ended March 31, 2019 and 2018 is as follows:
 
Three Months Ended
March 31,
 
2019
 
2018
Income (loss) from continuing operations
$
30,476

 
$
45,614

Less: Net income (loss) attributable to noncontrolling interests
891

 
468

Income (loss) from continuing operations (utilized in numerator of Earnings Per Share calculation)
$
29,585

 
$
45,146

(Loss) income from discontinued operations, net of tax
$
(24
)
 
$
(462
)
Net income (loss) attributable to Iron Mountain Incorporated
$
29,561

 
$
44,684

 
 
 
 
Weighted-average shares—basic
286,528,000

 
285,259,000

Effect of dilutive potential stock options
231,402

 
249,564

Effect of dilutive potential RSUs and PUs
732,421

 
484,314

Weighted-average shares—diluted
287,491,823

 
285,992,878

 
 
 
 
Earnings (losses) per share—basic:
 

 
 

Income (loss) from continuing operations
$
0.10

 
$
0.16

(Loss) income from discontinued operations, net of tax

 

Net income (loss) attributable to Iron Mountain Incorporated(1)
$
0.10

 
$
0.16

 
 
 
 
Earnings (losses) per share—diluted:
 

 
 

Income (loss) from continuing operations
$
0.10

 
$
0.16

(Loss) income from discontinued operations, net of tax

 

Net income (loss) attributable to Iron Mountain Incorporated(1)
$
0.10

 
$
0.16

 


 
 
Antidilutive stock options, RSUs and PUs, excluded from the calculation
3,985,161

 
3,242,141

_______________________________________________________________________________

(1) Columns may not foot due to rounding.

19

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

g.    Income Taxes
We provide for income taxes during interim periods based on our estimate of the effective tax rate for the year. Our estimate of the effective tax rates for the years ending December 31, 2019 and 2018 reflect the impact of the U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Legislation”). See Note 7 to Notes to Consolidated Financial Statements included in our Annual Report for additional information regarding the impact the Tax Reform Legislation had on us. Discrete items and changes in our estimate of the annual effective tax rate are recorded in the period they occur. Our effective tax rate is subject to variability in the future due to, among other items: (1) changes in the mix of income between our qualified REIT subsidiaries ("QRSs") and our domestic taxable REIT subsidiaries ("TRSs"), as well as among the jurisdictions in which we operate; (2) tax law changes; (3) volatility in foreign exchange gains and losses; (4) the timing of the establishment and reversal of tax reserves; and (5) our ability to utilize net operating losses that we generate.
Our effective tax rates for the three months ended March 31, 2019 and 2018 is as follows:
 
Three Months Ended
March 31,
 
2019(1)
 
2018(2)
Effective Tax Rate
25.7
%
 
2.5
%
_______________________________________________________________________________

(1)
The primary reconciling items between the federal statutory tax rate of 21.0% and our overall effective tax rate for the three months ended March 31, 2019 were the benefit derived from the dividends paid deduction and the impact of differences in the tax rates at which our foreign earnings are subject, including foreign exchange gains and losses in different jurisdictions with different tax rates.  
(2)
The primary reconciling items between the federal statutory tax rate of 21.0% and our overall effective tax rate for the three months ended March 31, 2018 were the benefit derived from the dividends paid deduction, a discrete tax benefit of approximately $14,000 associated with the resolution of a tax matter and the impact of differences in the tax rates at which our foreign earnings are subject, including foreign exchange gains and losses in different jurisdictions with different tax rates.
h.    Fair Value Measurements
Our financial assets or liabilities that are carried at fair value are required to be measured using inputs from the three levels of the fair value hierarchy. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The three levels of the fair value hierarchy are as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

20

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

The assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2019 and December 31, 2018 , respectively, are as follows:
 
 
 
 
Fair Value Measurements at
March 31, 2019 Using
Description
 
Total Carrying
Value at
March 31, 2019
 
Quoted prices
in active
markets
(Level 1)
 
 
 
Significant other
observable
inputs
(Level 2)
 
 
 
Significant
unobservable
inputs
(Level 3)
Money Market Funds(1)
 
$
1,739

 
$

 
 
 
$
1,739

 
 
 
$

Trading Securities
 
10,160

 
9,490

 
(2)
 
670

 
(3)
 

Derivative Assets (4)
 
23

 

 
 
 
23

 
 
 

Derivative Liabilities(4)
 
109

 

 
 
 
109

 
 
 

Interest Rate Swap Agreements Liabilities(5)
 
3,647

 

 
 
 
3,647

 
 
 

 
 
 
 
Fair Value Measurements at
December 31, 2018 Using
Description
 
Total Carrying
Value at
December 31, 2018
 
Quoted prices
in active
markets
(Level 1)
 
 
 
Significant other
observable
inputs
(Level 2)
 
 
 
Significant
unobservable
inputs
(Level 3)
Time Deposits(1)
 
$
956

 
$

 
 
 
$
956

 
 
 
$

Trading Securities
 
10,753

 
10,248

 
(2)
 
505

 
(3)
 

Derivative Assets(4)
 
93

 

 
 
 
93

 
 
 

Interest Rate Swap Agreements Liabilities(5)
 
973

 

 
 
 
973

 
 
 

_______________________________________________________________________________

(1)
Money market funds and time deposits are measured based on quoted prices for similar assets and/or subsequent transactions.
(2)
Certain trading securities are measured at fair value using quoted market prices.
(3)
Certain trading securities are measured based on inputs other than quoted market prices that are observable.
(4)
Derivative assets and liabilities relate to short-term (six months or less) foreign currency contracts that we have entered into to hedge certain of our foreign exchange intercompany exposures. We calculate the value of such forward contracts by adjusting the spot rate utilized at the balance sheet date for translation purposes by an estimate of the forward points observed in active markets. As of March 31, 2019, we had outstanding forward contracts to (i) purchase 4,000 Euros and sell $4,610 United States dollars and (ii) purchase $4,515 United States dollars and sell 4,000 Euros. As of December 31, 2018, we had outstanding forward contracts to purchase 29,000 Euros and sell $33,374 United States dollars. We have not designated any of the forward contracts we have entered into as hedges.
(5)
We have entered into interest rate swap agreements to limit our exposure to changes in interest rates on a portion of our floating rate indebtedness. As of March 31, 2019 and December 31, 2018 , we have $350,000 in notional value of interest rate swap agreements outstanding, which expire in March 2022. Under the interest rate swap agreements, we receive variable rate interest payments associated with the notional amount of each interest rate swap, based upon one-month LIBOR, in exchange for the payment of fixed interest rate payments (at the fixed rate interest specified in the interest rate swap agreements). We have designated these interest rate swaps as cash flow hedges. Unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The fair value of the interest rate swaps are estimated using industry standard valuation models using market-based observable inputs, including interest rate curves.

21

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

Disclosures are required in the financial statements for items measured at fair value on a non-recurring basis. There were no material items that are measured at fair value on a non-recurring basis at March 31, 2019 and December 31, 2018, other than those disclosed in Note 2.s. to Notes to Consolidated Financial Statements included in our Annual Report, those acquired in acquisitions that occurred during the three months ended March 31, 2019 and our investment in Makespace LLC (as disclosed in Note 9), all of which are based on Level 3 inputs.
The fair value of our long-term debt, which was determined based on either Level 1 inputs or Level 3 inputs, is disclosed in Note 4. Long-term debt is measured at cost in our Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 .
i.    Accumulated Other Comprehensive Items, Net
The changes in accumulated other comprehensive items, net for the three months ended March 31, 2019 and 2018 are as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
Foreign
Currency
Translation
Adjustments
 
Fair Value Adjustments for Interest Rate Swap Agreements
 
Total
 
Foreign
Currency
Translation
Adjustments
 
Fair Value Adjustments for Interest Rate Swap Agreements
 
Total
Beginning of Period
$
(264,691
)
 
$
(973
)
 
$
(265,664
)
 
$
(103,989
)
 
$

 
$
(103,989
)
Other comprehensive income (loss):


 


 


 
 
 
 
 
 
Foreign currency translation adjustments(1)
17,378

 

 
17,378

 
30,092

 

 
30,092

Fair value adjustments for interest rate swap agreements

 
(2,674
)
 
(2,674
)
 

 
(185
)
 
(185
)
Total other comprehensive income (loss)
17,378

 
(2,674
)
 
14,704

 
30,092

 
(185
)
 
29,907

End of Period
$
(247,313
)
 
$
(3,647
)
 
$
(250,960
)
 
$
(73,897
)
 
$
(185
)
 
$
(74,082
)
______________________________________________________________
(1) This amount includes foreign exchange (gains) losses of $(6,141) and $5,635 for the three months ended March 31, 2019 and 2018, respectively, related to the change in fair value of the portion of our Euro Notes (as defined and discussed more fully in Note 4) designated as a hedge of net investment of certain of our Euro denominated subsidiaries. For the three months ended March 31, 2019, we designated, on average, 271,146 Euros of our Euro Notes as a hedge of net investment of certain of our Euro denominated subsidiaries. For the three months ended March 31, 2018, we designated, on average, 164,244 Euros of our Euro Notes as a hedge of net investment of certain of our Euro denominated subsidiaries. As of March 31, 2019, cumulative net gains of $20,399 net of tax, are recorded in accumulated other comprehensive items, net associated with this net investment hedge.





22

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(2) Summary of Significant Accounting Policies (Continued)

j.    Other Expense (Income), Net
Other expense (income), net for the three months ended March 31, 2019 and 2018 consists of the following:
 
Three Months Ended
March 31,
 
2019
 
2018
Foreign currency transaction losses (gains), net
$
17,697

 
$
21,785

Other, net
(2,487
)
 
(1,634
)
 
$
15,210

 
$
20,151


The gain or loss on foreign currency transactions, calculated as the difference between the historical exchange rate and the exchange rate at the applicable measurement date, include gains or losses related to (i) borrowings in certain foreign currencies under our Revolving Credit Facility (as defined and discussed more fully in Note 4), (ii) our Euro Notes, (iii) certain foreign currency denominated intercompany obligations of our foreign subsidiaries to us and between our foreign subsidiaries, which are not considered permanently invested, and (iv) amounts that are paid or received on the net settlement amount from forward contracts (as more fully discussed in Note 2.h.).

Other, net for the three months ended March 31, 2019 is primarily comprised of a gain on sale resulting from the Consumer Storage Transaction (as defined and discussed more fully in Note 9) of approximately $4,200 . Other, net for the three months ended March 31, 2019 also includes the change in estimated fair value of the noncontrolling interests associated with our business in India, which are accounted for as mandatorily redeemable noncontrolling interests.
k.    New Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) ("ASU 2018-15"). ASU 2018-15 aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. We adopted ASU 2018-15 on January 1, 2019. ASU 2018-15 did not have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02. We adopted ASU 2016-02 on January 1, 2019 on a modified retrospective basis. See Note 2.d. for information regarding the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
l. Change in Presentation

Subsequent to our conversion to a REIT, we have historically classified gains on sale of real estate, net of tax, as a separate line on our consolidated statements of operations and excluded such amounts from our reported operating income. We presented such amounts net of tax as these gains were presented below the provision (benefit) for income taxes on our consolidated statements of operations. Commencing with the first quarter of 2019, we will present gains on sale of real estate as a component of operating income in the line item loss (gain) on disposal/write down of property, plant and equipment, net. Such amounts will be presented gross of tax with any tax impact presented within provision (benefit) for income taxes. All prior periods will be conformed to this presentation going forward. No gains on the sale of real estate were recognized during the three months ended March 31, 2019 or 2018.

23

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(3) Acquisitions

We account for acquisitions using the acquisition method of accounting, and, accordingly, the assets and liabilities acquired are recorded at their estimated fair values and the results of operations for each acquisition have been included in our consolidated results from their respective acquisition dates.
Acquisitions Completed During the Three Months Ended March 31, 201 9

In order to enhance our existing operations in the United States, the United Kingdom and Switzerland and to expand our operations into Bulgaria, we completed the acquisition of four storage and records management companies and one art storage company for total cash consideration of approximately $31,900 .

Purchase Price Allocation

A summary of the cumulative consideration paid and the preliminary allocation of the purchase price paid for all of our 2019 acquisitions through March 31, 2019 is as follows:
 
 
Three Months Ended
March 31, 2019
Cash Paid (gross of cash acquired)(1)
 
$
34,198

Purchase Price Holdbacks and Other
 
1,042

Total Consideration
 
35,240

Fair Value of Identifiable Assets Acquired:
 
 
Cash
 
2,273

Accounts Receivable, Prepaid Expenses and Other Assets
 
2,845

Property, Plant and Equipment(2)
 
4,039

Customer Relationship Intangible Assets
 
13,589

Operating Lease Right-of-Use Assets
 
10,541

Accounts Payable, Accrued Expenses and Other
Liabilities
 
(2,065
)
Operating Lease Liabilities
 
(10,541
)
Deferred Income Taxes
 
(1,574
)
Total Fair Value of Identifiable Net Assets Acquired
 
19,107

Goodwill Initially Recorded(3)
 
$
16,133

_______________________________________________________________________________

(1)
Included in cash paid for acquisitions in the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2019 is net cash acquired of $2,273 and contingent and other payments, net of $7,498 related to acquisitions made in previous years.
(2)
Consists primarily of leasehold improvements, racking structures and warehouse equipment. These assets are depreciated using the straight-line method with the useful lives as noted in Note 2.f. to Notes to Consolidated Financial Statements included in our Annual Report.
(3) The goodwill associated with acquisitions is primarily attributable to the assembled workforce, expanded market opportunities and costs and other operating synergies anticipated upon the integration of the operations of us and the acquired businesses.


24

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(3) Acquisitions (Continued)

See Note 6 to Notes to Consolidated Financial Statements included in our Annual Report for additional information regarding our allocations of the purchase price for acquisitions. The preliminary purchase price allocations that are not finalized as of March 31, 2019 primarily relate to the final assessment of the fair values of intangible assets and liabilities (primarily customer relationship intangible assets and data center lease-based intangible assets), property, plant and equipment (primarily building, building improvements, data center infrastructure and racking structures), right-of-use assets and liabilities associated with acquired operating leases, contingencies and income taxes (primarily deferred income taxes), primarily associated with the EvoSwitch Transaction (as defined in Note 6 to Notes to Consolidated Financial Statements included in our Annual Report), as well as other acquisitions we closed in 2019.
 
As the valuation of certain assets and liabilities for purposes of purchase price allocations are preliminary in nature, they are subject to adjustment as additional information is obtained about the facts and circumstances regarding these assets and liabilities that existed at the acquisition date. Any adjustments to our estimates of purchase price allocation will be made in the periods in which the adjustments are determined and the cumulative effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition dates. Adjustments recorded during the three months ended March 31, 2019 were not material to our results from operations.

Acquisition of IO Data Centers in 2018

On January 10, 2018, we completed the IODC Transaction. At the closing of the IODC Transaction, we paid approximately $1,347,000 . In February 2019, we paid approximately $31,000 in additional purchase price associated with the execution of customer contracts from the closing through the one-year anniversary of the IODC Transaction, which was accrued at December 31, 2018. This amount, net of amortization, is reported as a third-party commissions asset as a component of Other within Other assets, net, in our Condensed Consolidated Balance Sheets at March 31, 2019 and December 31, 2018.

The unaudited consolidated pro forma financial information (the "Pro Forma Financial Information") below summarizes the combined results of us and IODC on a pro forma basis as if the IODC Transaction had occurred on January 1, 2017. The Pro Forma Financial Information is presented for informational purposes and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2017. The Pro Forma Financial Information, for the period presented, includes purchase accounting adjustments (including amortization expenses from acquired intangible assets and depreciation of acquired property, plant and equipment). We and IODC collectively incurred $28,064 of operating expenditures to complete the IODC Transaction (including advisory and professional fees). These operating expenditures have been reflected within the results of operations in the Pro Forma Financial Information as if they were incurred on January 1, 2017.
 
Three Months Ended
March 31, 2018
Total Revenues
$
1,045,948

Income from Continuing Operations
$
55,566

Per Share Income from Continuing Operations - Basic
$
0.20

Per Share Income from Continuing Operations - Diluted
$
0.19

In addition to our acquisition of IODC, we completed certain other acquisitions during the first three months of 2019 and in fiscal year 2018. The Pro Forma Financial Information does not reflect these acquisitions due to the insignificant impact of these acquisitions on our consolidated results of operations.



25

IRON MOUNTAIN INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(4) Debt

Long-term debt is as follows:
 
 
March 31, 2019
 
 
December 31, 2018
 
 
Debt (inclusive of discount)
 
Unamortized Deferred Financing Costs
 
Carrying Amount
 
Fair
Value
 
 
Debt (inclusive of discount)
 
Unamortized Deferred Financing Costs
 
Carrying Amount
 
Fair
Value
Revolving Credit Facility(1)
 
$
1,139,566

 
$
(13,332
)

$
1,126,234

 
$
1,139,566

 
 
$
793,832



$
(14,117
)

$
779,715

 
$
793,832

Term Loan A(1)
 
237,500

 

 
237,500

 
237,500

 
 
240,625





240,625

 
240,625

Term Loan B(2)
 
691,476

 
(8,430
)
 
683,046