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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 September 30, 2014

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company 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 October 24, 2014: 193,704,227

   


Table of Contents

IRON MOUNTAIN INCORPORATED

Index

 
  Page  

PART I—FINANCIAL INFORMATION

       

Item 1—Unaudited Consolidated Financial Statements

   
3
 

Consolidated Balance Sheets at December 31, 2013 and September 30, 2014 (Unaudited)

   
3
 

Consolidated Statements of Operations for the Three Months Ended September 30, 2013 and 2014 (Unaudited)

   
4
 

Consolidated Statements of Operations for the Nine Months Ended September 30, 2013 and 2014 (Unaudited)

   
5
 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2013 and 2014 (Unaudited)

   
6
 

Consolidated Statements of Equity for the Nine Months Ended September 30, 2013 and 2014 (Unaudited)

   
7
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2014 (Unaudited)

   
8
 

Notes to Consolidated Financial Statements (Unaudited)

   
9
 

Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations

   
58
 

Item 4—Controls and Procedures

   
84
 

PART II—OTHER INFORMATION

   
 
 

Item 2—Unregistered Sales of Equity Securities and Use of Proceeds

   
85
 

Item 6—Exhibits

   
86
 

Signatures

   
87
 

2


Table of Contents

Part I. Financial Information

Item 1.    Unaudited Consolidated Financial Statements

        


IRON MOUNTAIN INCORPORATED

CONSOLIDATED BALANCE SHEETS

(In Thousands, except Share and Per Share Data)

(Unaudited)

 
  December 31,
2013
  September 30,
2014
 

ASSETS

             

Current Assets:

             

Cash and cash equivalents

  $ 120,526   $ 183,988  

Restricted cash

    33,860     33,860  

Accounts receivable (less allowances of $34,645 and $34,353 as of December 31, 2013 and September 30, 2014, respectively)

    616,797     618,996  

Deferred income taxes

    17,623     10,636  

Prepaid expenses and other

    144,801     128,906  
           

Total Current Assets

    933,607     976,386  

Property, Plant and Equipment:

             

Property, plant and equipment

    4,631,067     4,665,309  

Less—Accumulated depreciation

    (2,052,807 )   (2,104,605 )
           

Property, Plant and Equipment, net

    2,578,260     2,560,704  

Other Assets, net:

             

Goodwill

    2,463,352     2,421,065  

Customer relationships and acquisition costs

    605,484     601,295  

Deferred financing costs

    45,607     50,962  

Other

    26,695     25,927  
           

Total Other Assets, net

    3,141,138     3,099,249  
           

Total Assets

  $ 6,653,005   $ 6,636,339  
           
           

LIABILITIES AND EQUITY

             

Current Liabilities:

             

Current portion of long-term debt

  $ 52,583   $ 60,799  

Accounts payable

    216,456     141,645  

Accrued expenses

    461,338     1,163,236  

Deferred revenue

    238,724     232,628  
           

Total Current Liabilities

    969,101     1,598,308  

Long-term Debt, net of current portion

    4,119,139     4,331,686  

Other Long-term Liabilities

    68,219     72,354  

Deferred Rent

    104,244     105,369  

Deferred Income Taxes

    340,568     60,960  

Commitments and Contingencies (see Note 8)

             

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 191,426,920 shares and 193,678,594 shares as of December 31, 2013 and September 30, 2014, respectively)

    1,914     1,937  

Additional paid-in capital

    980,164     1,017,428  

Earnings in excess of distributions (Distributions in excess of earnings)

    67,820     (516,361 )

Accumulated other comprehensive items, net

    (8,660 )   (47,232 )
           

Total Iron Mountain Incorporated Stockholders' Equity

    1,041,238     455,772  
           

Noncontrolling Interests

    10,496     11,890  
           

Total Equity

    1,051,734     467,662  
           

Total Liabilities and Equity

  $ 6,653,005   $ 6,636,339  
           
           

   

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

3


Table of Contents


IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except Per Share Data)

(Unaudited)

 
  Three Months Ended
September 30,
 
 
  2013   2014  

Revenues:

             

Storage rental

  $ 445,317   $ 469,064  

Service

    309,997     313,633  
           

Total Revenues

    755,314     782,697  

Operating Expenses:

             

Cost of sales (excluding depreciation and amortization)

    310,665     335,506  

Selling, general and administrative

    225,205     216,337  

Depreciation and amortization

    79,659     89,194  

(Gain) Loss on disposal/write-down of property, plant and equipment (excluding real estate), net

    (173 )   184  
           

Total Operating Expenses

    615,356     641,221  

Operating Income (Loss)

    139,958     141,476  

Interest Expense, Net (includes Interest Income of $1,075 and $1,158 for the three months ended September 30, 2013 and 2014, respectively)

    64,485     63,220  

Other Expense (Income), Net

    45,953     22,508  
           

Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes and (Gain) Loss on Sale of Real Estate

    29,520     55,748  

Provision (Benefit) for Income Taxes

    24,190     54,890  

(Gain) Loss from Sale of Real Estate, Net of Tax

         
           

Income (Loss) from Continuing Operations

    5,330     858  

(Loss) Income from Discontinued Operations, Net of Tax

    (571 )    
           

Net Income (Loss)

    4,759     858  

Less: Net Income (Loss) Attributable to Noncontrolling Interests

    910     792  
           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 3,849   $ 66  
           
           

Earnings (Losses) per Share—Basic:

             

Income (Loss) from Continuing Operations

  $ 0.03   $ 0.00  
           
           

Total (Loss) Income from Discontinued Operations

  $ (0.00 ) $ 0.00  
           
           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 0.02   $ 0.00  
           
           

Earnings (Losses) per Share—Diluted:

             

Income (Loss) from Continuing Operations

  $ 0.03   $ 0.00  
           
           

Total (Loss) Income from Discontinued Operations

  $ (0.00 ) $ 0.00  
           
           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 0.02   $ 0.00  
           
           

Weighted Average Common Shares Outstanding—Basic

    191,332     193,360  
           
           

Weighted Average Common Shares Outstanding—Diluted

    192,268     194,905  
           
           

Dividends Declared per Common Share

  $ 0.2700   $ 4.0960  
           
           

   

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

4


Table of Contents


IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(In Thousands, except Per Share Data)

(Unaudited)

 
  Nine Months Ended
September 30,
 
 
  2013   2014  

Revenues:

             

Storage rental

  $ 1,329,357   $ 1,394,842  

Service

    927,059     944,873  
           

Total Revenues

    2,256,416     2,339,715  

Operating Expenses:

             

Cost of sales (excluding depreciation and amortization)

    952,797     1,007,612  

Selling, general and administrative

    673,187     644,924  

Depreciation and amortization

    238,788     264,568  

(Gain) Loss on disposal/write-down of property, plant and equipment (excluding real estate), net

    (528 )   1,229  
           

Total Operating Expenses

    1,864,244     1,918,333  

Operating Income (Loss)

    392,172     421,382  

Interest Expense, Net (includes Interest Income of $2,118 and $4,062 for the nine months ended September 30, 2013 and 2014, respectively)

    190,656     187,733  

Other Expense (Income), Net

    63,967     22,987  
           

Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes and (Gain) Loss on Sale of Real Estate

    137,549     210,662  

Provision (Benefit) for Income Taxes

    88,144     (98,151 )

(Gain) Loss from Sale of Real Estate, Net of Tax

    (1,417 )   (7,468 )
           

Income (Loss) from Continuing Operations

    50,822     316,281  

Income (Loss) from Discontinued Operations, Net of Tax

    1,515     (938 )
           

Net Income (Loss)

    52,337     315,343  

Less: Net Income (Loss) Attributable to Noncontrolling Interests

    2,934     1,973  
           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 49,403   $ 313,370  
           
           

Earnings (Losses) per Share—Basic:

             

Income (Loss) from Continuing Operations

  $ 0.27   $ 1.64  
           
           

Total Income (Loss) from Discontinued Operations

  $ 0.01   $ (0.00 )
           
           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 0.26   $ 1.63  
           
           

Earnings (Losses) per Share—Diluted:

             

Income (Loss) from Continuing Operations

  $ 0.26   $ 1.63  
           
           

Total Income (Loss) from Discontinued Operations

  $ 0.01   $ (0.00 )
           
           

Net Income (Loss) Attributable to Iron Mountain Incorporated

  $ 0.26   $ 1.62  
           
           

Weighted Average Common Shares Outstanding—Basic

    190,789     192,540  
           
           

Weighted Average Common Shares Outstanding—Diluted

    192,315     193,833  
           
           

Dividends Declared per Common Share

  $ 0.8100   $ 4.6527  
           
           

   

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

5


Table of Contents


IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

(Unaudited)

 
  Three Months Ended
September 30,
 
 
  2013   2014  

Net Income (Loss)

  $ 4,759   $ 858  

Other Comprehensive Income (Loss):

             

Foreign Currency Translation Adjustments

    17,023     (45,423 )

Market Value Adjustments for Securities

        (291 )
           

Total Other Comprehensive Income (Loss)

    17,023     (45,714 )
           

Comprehensive Income (Loss)

    21,782     (44,856 )

Comprehensive Income (Loss) Attributable to Noncontrolling Interests

    733     (25 )
           

Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated

  $ 21,049   $ (44,831 )
           
           

 

 
  Nine Months Ended
September 30,
 
 
  2013   2014  

Net Income (Loss)

  $ 52,337   $ 315,343  

Other Comprehensive (Loss) Income:

             

Foreign Currency Translation Adjustments

    (25,811 )   (39,109 )

Market Value Adjustments for Securities

        257  
           

Total Other Comprehensive (Loss) Income

    (25,811 )   (38,852 )
           

Comprehensive Income (Loss)

    26,526     276,491  

Comprehensive Income (Loss) Attributable to Noncontrolling Interests

    1,934     1,693  
           

Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated

  $ 24,592   $ 274,798  
           
           

   

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

6


Table of Contents


IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF EQUITY

(In Thousands, except Share Data)

(Unaudited)

 
   
  Iron Mountain Incorporated Stockholders' Equity    
 
 
   
   
   
   
  Earnings in
in Excess of
Distributions
(Distributions
in Excess
of Earnings)
   
   
 
 
   
  Common Stock    
  Accumulated
Other
Comprehensive
Items, Net
   
 
 
   
  Additional
Paid-in Capital
  Noncontrolling
Interests
 
 
  Total   Shares   Amounts  

Balance, December 31, 2012

  $ 1,157,148     190,005,788   $ 1,900   $ 942,199   $ 180,258   $ 20,314   $ 12,477  

Issuance of shares under employee stock purchase plan and option plans and stock-based compensation, including tax benefit of $2,499

    40,256     1,207,072     12     40,244              

Parent cash dividends declared

    (156,693 )               (156,693 )        

Currency translation adjustment

    (25,811 )                   (24,811 )   (1,000 )

Net income (loss)

    52,337                 49,403         2,934  

Noncontrolling interests equity contributions

    743                         743  

Noncontrolling interests dividends

    (1,708 )                       (1,708 )
                               

Balance, September 30, 2013

  $ 1,066,272     191,212,860   $ 1,912   $ 982,443   $ 72,968   $ (4,497 ) $ 13,446  
                               
                               

 

 
   
  Iron Mountain Incorporated Stockholders' Equity    
 
 
   
   
   
   
  Earnings in
in Excess of
Distributions
(Distributions
in Excess
of Earnings)
   
   
 
 
   
  Common Stock    
  Accumulated
Other
Comprehensive
Items, Net
   
 
 
   
  Additional
Paid-in Capital
  Noncontrolling
Interests
 
 
  Total   Shares   Amounts  

Balance, December 31, 2013

  $ 1,051,734     191,426,920   $ 1,914   $ 980,164   $ 67,820   $ (8,660 ) $ 10,496  

Issuance of shares under employee stock purchase plan and option plans and stock-based compensation, including tax benefit of $40

    52,838     2,251,674     23     52,815              

Parent cash dividends declared

    (197,551 )               (197,551 )        

Special distribution in connection with conversion to REIT (see Note 9)

    (700,000 )               (700,000 )        

Currency translation adjustment

    (39,109 )                   (38,829 )   (280 )

Market value adjustments for securities

    257                     257      

Net income (loss)

    315,343                 313,370         1,973  

Noncontrolling interests dividends

    (1,032 )                       (1,032 )

Purchase of noncontrolling interests

    (20,376 )           (17,653 )           (2,723 )

Divestiture of noncontrolling interests

    5,558             2,102             3,456  
                               

Balance, September 30, 2014

  $ 467,662     193,678,594   $ 1,937   $ 1,017,428   $ (516,361 ) $ (47,232 ) $ 11,890  
                               
                               

   

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

7


Table of Contents


IRON MOUNTAIN INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
  Nine Months Ended
September 30,
 
 
  2013   2014  

Cash Flows from Operating Activities:

             

Net income (loss)

  $ 52,337   $ 315,343  

(Income) loss from discontinued operations

    (1,515 )   938  

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

             

Depreciation

    210,678     227,876  

Amortization (includes deferred financing costs and bond discount of $5,283 and $5,535, for the nine months ended September 30, 2013 and 2014, respectively)

    33,393     42,227  

Stock-based compensation expense

    23,016     23,129  

Provision (Benefit) for deferred income taxes

    61,327     (258,411 )

Loss on early extinguishment of debt, net

    43,318      

(Gain) Loss on disposal/write-down of property, plant and equipment, net (including real estate)

    (2,375 )   (8,218 )

Foreign currency transactions and other, net

    43,763     37,292  

Changes in Assets and Liabilities (exclusive of acquisitions):

             

Accounts receivable

    (37,867 )   (9,361 )

Prepaid expenses and other

    (60,601 )   25,309  

Accounts payable

    19,172     (27,307 )

Accrued expenses and deferred revenue

    (54,914 )   (77,102 )

Other assets and long-term liabilities

    3,897     10,137  
           

Cash Flows from Operating Activities—Continuing Operations

    333,629     301,852  

Cash Flows from Operating Activities—Discontinued Operations

    953      
           

Cash Flows from Operating Activities

    334,582     301,852  

Cash Flows from Investing Activities:

   
 
   
 
 

Capital expenditures

    (204,872 )   (277,386 )

Cash paid for acquisitions, net of cash acquired

    (122,681 )   (46,366 )

Investment in restricted cash

    (1 )    

Additions to customer relationship and acquisition costs

    (16,573 )   (25,847 )

Proceeds from sales of property and equipment and other, net (including real estate)

    2,402     18,307  
           

Cash Flows from Investing Activities—Continuing Operations

    (341,725 )   (331,292 )

Cash Flows from Investing Activities—Discontinued Operations

    (4,937 )    
           

Cash Flows from Investing Activities

    (346,662 )   (331,292 )

Cash Flows from Financing Activities:

   
 
   
 
 

Repayment of revolving credit and term loan facilities and other debt

    (3,447,542 )   (8,225,563 )

Proceeds from revolving credit and term loan facilities and other debt

    3,445,387     8,061,747  

Early retirement of senior subordinated notes

    (685,134 )   (247,275 )

Net proceeds from sales of senior notes

    782,307     642,417  

Debt financing (repayment to) and equity contribution from (distribution to) noncontrolling interests, net

    1,066     (14,715 )

Parent cash dividends

    (155,027 )   (157,018 )

Proceeds from exercise of stock options and employee stock purchase plan

    14,726     37,356  

Excess tax benefits from stock-based compensation

    2,499     40  

Payment of debt financing and stock issuance costs

    (8,087 )   (2,156 )
           

Cash Flows from Financing Activities—Continuing Operations

    (49,805 )   94,833  

Cash Flows from Financing Activities—Discontinued Operations

         
           

Cash Flows from Financing Activities

    (49,805 )   94,833  

Effect of Exchange Rates on Cash and Cash Equivalents

    (9,499 )   (1,931 )
           

(Decrease) Increase in Cash and Cash Equivalents

    (71,384 )   63,462  

Cash and Cash Equivalents, Beginning of Period

    243,415     120,526  
           

Cash and Cash Equivalents, End of Period

  $ 172,031   $ 183,988  
           
           

Supplemental Information:

             

Cash Paid for Interest

  $ 196,811   $ 210,770  
           
           

Cash Paid for Income Taxes

  $ 88,154   $ 124,251  
           
           

Non-Cash Investing and Financing Activities:

             

Capital Leases

  $ 48,909   $ 18,903  
           
           

Accrued Capital Expenditures

  $ 30,419   $ 30,484  
           
           

Dividends Payable

  $ 54,705   $ 795,671  
           
           

   

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

8


Table of Contents


IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(1) General

        The interim 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") store records, primarily paper documents and data backup media, and provide information management services in various locations throughout North America, Europe, Latin America and Asia Pacific. We have a diversified customer base consisting of commercial, legal, banking, health care, accounting, insurance, entertainment and government organizations.

        The unaudited 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 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, 2013 included in our Current Report on Form 8-K filed with the SEC on May 5, 2014.

        We previously disclosed that, as part of our plan to convert to a real estate investment trust ("REIT") for federal income tax purposes and elect REIT status effective January 1, 2014 (the "Conversion Plan"), we sought private letter rulings ("PLRs") from the U.S. Internal Revenue Service (the "IRS") relating to numerous technical tax issues, including classification of our steel racking structures as qualified real estate assets. We submitted the PLR requests in the third quarter of 2012, and on June 25, 2014, we announced that we received the favorable PLRs from the IRS necessary for our conversion to a REIT. After receipt of the PLRs, our board of directors unanimously approved our conversion to a REIT for our taxable year beginning January 1, 2014. As such, we intend to elect REIT status effective January 1, 2014.

        On June 2, 2011, we sold (the "Digital Sale") our online backup and recovery, digital archiving and eDiscovery solutions businesses of our digital business (the "Digital Business") to Autonomy Corporation plc, a corporation formed under the laws of England and Wales ("Autonomy"), pursuant to a purchase and sale agreement dated as of May 15, 2011 among IMI, certain subsidiaries of IMI and Autonomy (the "Digital Sale Agreement"). Additionally, on April 27, 2012, we sold our records management operations in Italy. The financial position, operating results and cash flows of the Digital Business and our Italian operations, including the gain on the sale of the Digital Business and the loss on the sale of our Italian operations, for all periods presented, have been reported as discontinued operations for financial reporting purposes. See Note 10 for a further discussion of these events.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies

        The accompanying financial statements reflect our financial position, results of operations, comprehensive income (loss), equity and cash flows on a consolidated basis. All intercompany transactions and account balances have been eliminated.

        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.

        We have restricted cash associated with a collateral trust agreement with our insurance carrier related to our workers' compensation self-insurance program. The restricted cash subject to this agreement was $33,860 as of both December 31, 2013 and September 30, 2014, and is included in current assets on our Consolidated Balance Sheets. Restricted cash consists primarily of U.S. Treasuries.

        Local currencies are the functional currencies for our operations outside the U.S., with the exception of certain foreign holding companies and our financing centers in Switzerland, whose functional currency is the U.S. dollar. In those instances where the local currency is the functional currency, assets and liabilities are translated at period-end exchange rates, and revenues and expenses are translated at average exchange rates for the applicable period. Resulting translation adjustments are reflected in the accumulated other comprehensive items, net component of Iron Mountain Incorporated Stockholders' Equity and Noncontrolling Interests in the accompanying Consolidated Balance Sheets. 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, including those related to (1) our previously outstanding 71/4% GBP Senior Subordinated Notes due 2014 (the "71/4% Notes"), (2) our 63/4% Euro Senior Subordinated Notes due 2018 (the "63/4% Notes"), (3) the borrowings in certain foreign currencies under our revolving credit facility and (4) certain foreign currency denominated intercompany obligations of our foreign subsidiaries to us and between our foreign subsidiaries, which are not considered permanently invested, are included in other expense (income), net, in the accompanying Consolidated Statements of Operations. The total gain or loss on foreign currency transactions amounted to a net loss of $2,612 and $22,543 for the three and nine months ended September 30, 2013, respectively. The total gain or loss on foreign currency transactions amounted to a net loss of $23,500 and $25,591 for the three and nine months ended September 30, 2014, respectively.

        Goodwill and intangible assets with indefinite lives are not amortized but are reviewed annually for impairment or more frequently if impairment indicators arise. Other than goodwill, we currently have no intangible assets that have indefinite lives and which are not amortized. Separable intangible assets

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

that are not deemed to have indefinite lives are amortized over their useful lives. We annually, or more frequently if events or circumstances warrant, assess whether a change in the lives over which our intangible assets are amortized is necessary.

        We have selected October 1 as our annual goodwill impairment review date. We performed our most recent annual goodwill impairment review as of October 1, 2013 and concluded there was no impairment of goodwill at such date. As of December 31, 2013 and September 30, 2014, no factors were identified that would alter our October 1, 2013 goodwill assessment. In making this assessment, we relied on a number of factors including operating results, business plans, anticipated future cash flows, transactions and marketplace data. There are inherent uncertainties related to these factors and our judgment in applying them to the analysis of goodwill impairment. When changes occur in the composition of one or more reporting units, the goodwill is reassigned to the reporting units affected based on their relative fair values.

        Our reporting units at which level we performed our goodwill impairment analysis as of October 1, 2013 were as follows: (1) North America; (2) United Kingdom, Ireland, Norway, Belgium, France, Germany, Luxembourg, Netherlands and Spain ("Western Europe"); (3) the remaining countries in Europe in which we operate, excluding Russia and the Ukraine ("Emerging Markets"); (4) Latin America; (5) Australia, China, Hong Kong and Singapore ("Asia Pacific"); and (6) India, Russia and the Ukraine ("Emerging Market Joint Ventures"). Based on our goodwill impairment assessment, all of our reporting units with goodwill had estimated fair values as of October 1, 2013 that exceeded their carrying values by greater than 15%. As of December 31, 2013, the carrying value of goodwill, net amounted to $1,849,440, $375,954, $88,599, $93,149 and $56,210 for North America, Western Europe, Emerging Markets, Latin America and Asia Pacific, respectively. Our Emerging Market Joint Ventures reporting unit had no goodwill as of December 31, 2013.

        Beginning January 1, 2014, as a result of the changes in our reportable segments associated with our reorganization (see Note 7 for a description of our reportable operating segments), we now have 12 reporting units. Our North American Records and Information Management Business segment includes the following three reporting units: (1) North American Records and Information Management; (2) technology escrow services that protect and manage source code ("Intellectual Property Management") and (3) the storage, assembly and detailed reporting of customer marketing literature and delivery to sales offices, trade shows and prospective customers' sites based on current and prospective customer orders ("Fulfillment Services"). The North American Data Management Business segment is a separate reporting unit. The Emerging Businesses reporting unit (which primarily relates to our data center business in the United States and which is a component of Corporate and Other) is also a reporting unit. Additionally, the International Business segment consists of the following seven reporting units: (1) United Kingdom, Ireland, Norway, Austria, Belgium, France, Germany, Luxembourg, Netherlands, Spain and Switzerland ("New Western Europe"); (2) the remaining countries in Europe in which we operate, excluding Russia, the Ukraine and Denmark ("New Emerging Markets"); (3) Latin America; (4) Australia and Singapore; (5) China and Hong Kong ("Greater China"); (6) India; and (7) Russia, the Ukraine and Denmark. We have reassigned goodwill associated with the reporting units impacted by the reorganization among the new reporting units on a relative fair value basis. The fair value of each of our new reporting units was determined

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

based on the application of preliminary fair value multiples of revenue and earnings, which is our best estimate and preliminary assessment of the goodwill allocations to each of the new reporting units on a relative fair value basis.

        The carrying value of goodwill, net for each of our reporting units as of September 30, 2014 is as follows:

 
  Carrying Value
as of
September 30, 2014
 

North American Records and Information Management(1)

  $ 1,385,908  

Intellectual Property Management(1)

    50,439  

Fulfillment Services(1)

    8,407  

North American Data Management(1)

    361,190  

Emerging Businesses

     

New Western Europe

    371,049  

New Emerging Markets

    90,393  

Latin America

    86,463  

Australia and Singapore

    63,234  

Greater China

    2,853  

India

     

Russia, Ukraine and Denmark

    1,129  
       

Total

  $ 2,421,065  
       
       

(1)
We will finalize our preliminary estimates of fair value for these new reporting units once we finalize multi-year cash flow forecasts of such reporting units and conclude on fair value of each new reporting unit based on the combined weighting of both fair value multiples and discounted cash flow valuation techniques. To the extent final fair values of our new reporting units differ from our preliminary estimates, we will reassign goodwill amongst the new reporting units in a future period in which final information as of January 1, 2014 is available to complete the fair values and the corresponding allocation of goodwill amongst the new reporting units.

        We concluded that we had an interim triggering event and, therefore, we performed an interim goodwill impairment test as of January 1, 2014 on the basis of these new reporting units during the first quarter of 2014. We concluded that the goodwill for each of our new reporting units was not impaired as of such date. While we continue to refine our preliminary estimates of fair value of certain of our new reporting units for purposes of reallocating goodwill, we do not believe that any such changes to preliminary fair value estimates will result in a change in our conclusion that there was no goodwill impairment as of January 1, 2014.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        The changes in the carrying value of goodwill attributable to each reportable operating segment for the nine months ended September 30, 2014 are as follows:

 
  North American
Records and Information
Management
Business
  North American
Data
Management
Business
  International
Business
  Total
Consolidated
 

Gross Balance as of December 31, 2013

  $ 1,688,280   $ 422,070   $ 673,335   $ 2,783,685  

Non-deductible goodwill acquired during the year

            33,292     33,292  

Fair value and other adjustments(1)

    (26,898 )   (6,724 )   (1,829 )   (35,451 )

Currency effects

    (8,311 )   (2,078 )   (30,744 )   (41,133 )
                   

Gross Balance as of September 30, 2014

  $ 1,653,071   $ 413,268   $ 674,054   $ 2,740,393  
                   
                   

Accumulated Amortization Balance as of December 31, 2013

  $ 208,729   $ 52,181   $ 59,423   $ 320,333  

Currency effects

    (412 )   (103 )   (490 )   (1,005 )
                   

Accumulated Amortization Balance as of September 30, 2014

  $ 208,317   $ 52,078   $ 58,933   $ 319,328  
                   
                   

Net Balance as of December 31, 2013

  $ 1,479,551   $ 369,889   $ 613,912   $ 2,463,352  
                   
                   

Net Balance as of September 30, 2014

  $ 1,444,754   $ 361,190   $ 615,121   $ 2,421,065  
                   
                   

Accumulated Goodwill Impairment Balance as of December 31, 2013

  $ 85,909   $   $ 46,500   $ 132,409  
                   
                   

Accumulated Goodwill Impairment Balance as of September 30, 2014

  $ 85,909   $   $ 46,500   $ 132,409  
                   
                   

(1)
Total fair value and other adjustments primarily include $(32,752) in net adjustments to deferred income taxes and $(1,399) related to property, plant and equipment and other assumed liabilities, as well as $(1,300) of cash received related to certain 2013 acquisitions.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        The components of our amortizable intangible assets as of September 30, 2014 are as follows:

 
  Gross Carrying
Amount
  Accumulated
Amortization
  Net Carrying
Amount
 

Customer Relationships and Acquisition Costs

  $ 902,893   $ (301,598 ) $ 601,295  

Core Technology(1)

    3,649     (3,514 )   135  

Trademarks and Non-Compete Agreements(1)

    6,254     (4,819 )   1,435  

Deferred Financing Costs

    66,960     (15,998 )   50,962  
               

Total

  $ 979,756   $ (325,929 ) $ 653,827  
               
               

(1)
Included in Other Assets, net in the accompanying Consolidated Balance Sheets.

        Amortization expense associated with amortizable intangible assets (including deferred financing costs) was $10,404 and $33,393 for the three and nine months ended September 30, 2013, respectively. Amortization expense associated with amortizable intangible assets (including deferred financing costs) was $14,269 and $42,227 for the three and nine months ended September 30, 2014, respectively.

        We record stock-based compensation expense, utilizing the straight-line method, for the cost of stock options, restricted stock, restricted stock units ("RSUs"), performance units ("PUs") and shares of stock issued under our employee stock purchase plan ("ESPP") (together, "Employee Stock-Based Awards").

        Stock-based compensation expense for Employee Stock-Based Awards included in the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2013 was $9,423 ($6,590 after tax, or $0.03 per basic and diluted share) and $23,016 ($17,576 after tax, or $0.09 per basic and diluted share), respectively. Stock-based compensation expense for Employee Stock-Based Awards for the three and nine months ended September 30, 2014 was $8,671 ($6,132 after tax, or $0.03 per basic and diluted share) and $23,129 ($16,683 after tax, or $0.09 per basic and diluted share), respectively.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        Stock-based compensation expense for Employee Stock-Based Awards included in the accompanying Consolidated Statements of Operations related to continuing operations is as follows:

 
  Three Months
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2013   2014   2013   2014  

Cost of sales (excluding depreciation and amortization)

  $ 115   $ 177   $ 257   $ 556  

Selling, general and administrative expenses

    9,308     8,494     22,759     22,573  
                   

Total stock-based compensation

  $ 9,423   $ 8,671   $ 23,016   $ 23,129  
                   
                   

        The benefits associated with the tax deductions in excess of recognized compensation cost are required to be reported as financing activities in the accompanying Consolidated Statements of Cash Flows. This requirement reduces reported operating cash flows and increases reported financing cash flows. As a result, net financing cash flows from continuing operations included $2,499 and $40 for the nine months ended September 30, 2013 and 2014, respectively, from the benefits (deficiency) of tax deductions compared to recognized compensation cost. The tax benefit of any resulting excess tax deduction increases the Additional Paid-in Capital ("APIC") pool. Any resulting tax deficiency is deducted from the APIC pool.

Stock Options

        Under our various stock option plans, options were generally granted with exercise prices equal to the market price of the stock on the date of grant; however, in certain limited instances, options were granted at prices greater than the market price of the stock on the date of grant. The majority of our options become exercisable ratably over a period of five years from the date of grant and generally have a contractual life of ten years from the date of grant, unless the holder's employment is terminated sooner. Certain of the options we issue become exercisable ratably over a period of ten years from the date of grant and have a contractual life of 12 years from the date of grant, unless the holder's employment is terminated sooner. As of September 30, 2014, ten-year vesting options represented 7.5% of total outstanding options. As of September 30, 2014, three-year vesting options represented 31.5% of total outstanding options. Our non-employee directors are considered employees for purposes of our stock option plans and stock option reporting. Options granted to our non-employee directors generally become exercisable one year from the date of grant.

        The weighted average fair value of options granted for the nine months ended September 30, 2013 and 2014 was $7.69 and $5.60 per share, respectively. These values were estimated on the date of grant

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

using the Black-Scholes option pricing model. The following table summarizes the weighted average assumptions used for grants in the respective period:

 
  Nine Months Ended
September 30,
 
Weighted Average Assumptions
  2013   2014  

Expected volatility

    33.8 %   33.9 %

Risk-free interest rate

    1.13 %   2.06 %

Expected dividend yield

    3 %   4 %

Expected life

    6.3 years     6.8 years  

        Expected volatility is calculated utilizing daily historical volatility over a period that equates to the expected life of the option. The risk-free interest rate was based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. Expected dividend yield is considered in the option pricing model and represents our current annualized expected per share dividends over the current trade price of our common stock. The expected life (estimated period of time outstanding) of the stock options granted is estimated using the historical exercise behavior of employees.

        A summary of option activity for the nine months ended September 30, 2014 is as follows:

 
  Options   Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term (Years)
  Average
Intrinsic
Value
 

Outstanding at December 31, 2013

    5,145,739   $ 24.09              

Granted

    525,268     30.56              

Adjustment associated with special dividends

    360,814     N/A              

Exercised

    (1,928,507 )   23.32              

Forfeited

    (171,925 )   24.37              

Expired

    (1,131 )   30.15              
                         

Outstanding at September 30, 2014

    3,930,258   $ 23.10     5.28   $ 37,529  
                   
                   

Options exercisable at September 30, 2014

    2,872,682   $ 22.00     4.28   $ 30,599  
                   
                   

Options expected to vest

    1,001,076   $ 26.07     7.97   $ 6,589  
                   
                   

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        The following table provides the aggregate intrinsic value of stock options exercised for the three and nine months ended September 30, 2013 and 2014:

 
  Three Months
Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2013   2014   2013   2014  

Aggregate intrinsic value of stock options exercised

  $ 318   $ 10,194   $ 10,414   $ 18,727  

Restricted Stock and Restricted Stock Units

        Under our various equity compensation plans, we may also grant restricted stock or RSUs. Our restricted stock and RSUs generally have a vesting period of between three and five years from the date of grant. All RSUs accrue dividend equivalents associated with the underlying stock as we declare dividends. Dividends will generally be paid to holders of RSUs in cash upon the vesting date of the associated RSU and will be forfeited if the RSU does not vest. We accrued approximately $378 and $1,476 of cash dividends on RSUs for the three and nine months ended September 30, 2013, respectively. We accrued approximately $680 and $1,530 of cash dividends on RSUs for the three and nine months ended September 30, 2014, respectively. We paid approximately $121 and $674 of cash dividends on RSUs for the three and nine months ended September 30, 2013, respectively. We paid approximately $124 and $1,178 of cash dividends on RSUs for the three and nine months ended September 30, 2014, respectively. The fair value of restricted stock and RSUs is the excess of the market price of our common stock at the date of grant over the purchase price (which is typically zero).

        A summary of restricted stock and RSU activity for the nine months ended September 30, 2014 is as follows:

 
  Restricted
Stock and RSUs
  Weighted-
Average
Grant-Date
Fair Value
 

Non-vested at December 31, 2013

    1,435,230   $ 29.76  

Granted

    692,167     27.91  

Vested

    (606,358 )   31.53  

Forfeited

    (176,184 )   31.41  
             

Non-vested at September 30, 2014

    1,344,855   $ 27.79  
             
             

        The total fair value of restricted stock vested during the three and nine months ended September 30, 2013 was $0 and $1, respectively. The total fair value of restricted stock vested during the three and nine months ended September 30, 2014 was $0 and $1, respectively. The total fair value of RSUs vested during the three and nine months ended September 30, 2013 was $2,145 and $14,221, respectively. The total fair value of RSUs vested during the three and nine months ended September 30, 2014 was $1,566 and $19,114 respectively.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

Performance Units

        Under our various equity compensation plans, we may also make awards of PUs. For the majority of PUs, the number of PUs earned is determined based on our performance against predefined targets of revenue or revenue growth and return on invested capital ("ROIC"). The number of PUs earned may range from 0% to 150% (for PUs granted prior to 2014) and 0% to 200% (for PUs granted in 2014) of the initial award. The number of PUs earned is determined based on our actual performance as compared to the targets at the end of either the one-year performance period (for PUs granted prior to 2014) or the three-year performance period (for PUs granted in 2014). Certain PUs granted in 2013 and 2014 will be earned based on a market condition associated with the total return on our common stock in relation to a subset of the S&P 500 rather than the revenue growth and ROIC targets noted above. The number of PUs earned based on this market condition may range from 0% to 200% of the initial award. All of our PUs will be settled in shares of our common stock and are subject to cliff vesting three years from the date of the original PU grant. For those PUs subject to a one-year performance period, employees who subsequently terminate their employment after the end of the one-year performance period and on or after attaining age 55 and completing 10 years of qualifying service (the "retirement criteria") shall immediately and completely vest in any PUs earned based on the actual achievement against the predefined targets as discussed above (but delivery of the shares remains deferred). As a result, PUs subject to a one-year performance period are generally expensed over the shorter of (1) the vesting period, (2) achievement of the retirement criteria, which may occur as early as January 1 of the year following the year of grant or (3) a maximum of three years. Outstanding PUs accrue dividend equivalents associated with the underlying stock as we declare dividends. Dividends will generally be paid to holders of PUs in cash upon the settlement date of the associated PU and will be forfeited if the PU does not vest. We accrued approximately $146 and $535 of cash dividends on PUs for the three and nine months ended September 30, 2013, respectively. We accrued approximately $240 and $532 of cash dividends on PUs for the three and nine months ended September 30, 2014, respectively. There were no cash dividends paid on PUs for the three and nine months ended September 30, 2013. We paid approximately $0 and $312 of cash dividends on PUs for the three and nine months ended September 30, 2014, respectively.

        During the nine months ended September 30, 2014, we issued 173,260 PUs. Our PUs are earned based on our performance against revenue or revenue growth and ROIC targets during their applicable performance period; therefore, we forecast the likelihood of achieving the predefined revenue or revenue growth and ROIC targets in order to calculate the expected PUs to be earned. We record a compensation charge based on either the forecasted PUs to be earned (during the applicable performance period) or the actual PUs earned (at the one-year anniversary date for PUs granted prior to 2014, and at the three-year anniversary date for PUs granted in 2014) over the vesting period for each of the awards. For the 2013 and 2014 PUs that will be earned based on a market condition, we utilized a Monte Carlo simulation to fair value these awards at the date of grant, and such fair value will be expensed over the three-year performance period. The total fair value of earned PUs that vested during the three and nine months ended September 30, 2013 was $88 and $996, respectively. The total fair value of earned PUs that vested during the three and nine months ended September 30,

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

2014 was $0 and $6,296, respectively. As of September 30, 2014, we expected 100% achievement of the predefined revenue and ROIC targets associated with the awards of PUs made in 2014.

        A summary of PU activity for the nine months ended September 30, 2014 is as follows:

 
  Original
PU Awards
  PU Adjustment(1)   Total
PU Awards
  Weighted-
Average
Grant-Date
Fair Value
 

Non-vested at December 31, 2013

    334,548     (23,732 )   310,816   $ 33.18  

Granted

    173,260     (49,776 )   123,484     23.13  

Vested

    (194,389 )   (24,269 )   (218,658 )   28.80  

Forfeited

    (29,922 )       (29,922 )   29.44  
                     

Non-vested at September 30, 2014

    283,497     (97,777 )   185,720   $ 32.26  
                     
                     

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

Employee Stock Purchase Plan

        We offer an ESPP in which participation is available to substantially all U.S. and Canadian employees who meet certain service eligibility requirements. The ESPP provides a way for our eligible employees to become stockholders on favorable terms. The ESPP provides for the purchase of our common stock by eligible employees through successive offering periods. We have historically had two six-month offering periods per year, the first of which generally runs from June 1 through November 30 and the second of which generally runs from December 1 through May 31. During each offering period, participating employees accumulate after-tax payroll contributions, up to a maximum of 15% of their compensation, to pay the purchase price at the end of the offering. Participating employees may withdraw from an offering before the purchase date and obtain a refund of the amounts withheld as payroll deductions. At the end of the offering period, outstanding options under the ESPP are exercised, and each employee's accumulated contributions are used to purchase our common stock. The price for shares purchased under the ESPP is 95% of the fair market price at the end of the offering period, without a look-back feature. As a result, we do not recognize compensation expense for the ESPP shares purchased. For the nine months ended September 30, 2013 and 2014, there were 74,732 shares and 69,567 shares, respectively, purchased under the ESPP. As of September 30, 2014, we have 930,433 shares available under the ESPP.



        As of September 30, 2014, unrecognized compensation cost related to the unvested portion of our Employee Stock-Based Awards was $40,654 and is expected to be recognized over a weighted-average period of 2.0 years.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        We generally issue shares of our common stock for the exercises of stock options, restricted stock, RSUs, PUs and shares of our common stock under our ESPP from unissued reserved shares.

        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 options, warrants or convertible securities) that were outstanding during the period, unless the effect is antidilutive.

        The following table presents the calculation of basic and diluted income (loss) per share:

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2013   2014   2013   2014  

Income (Loss) from continuing operations

  $ 5,330   $ 858   $ 50,822   $ 316,281  
                   
                   

Total (loss) income from discontinued operations (see Note 10)

  $ (571 ) $   $ 1,515   $ (938 )
                   
                   

Net income (loss) attributable to Iron Mountain Incorporated

  $ 3,849   $ 66   $ 49,403   $ 313,370  
                   
                   

Weighted-average shares—basic

    191,332,000     193,360,000     190,789,000     192,540,000  

Effect of dilutive potential stock options

    597,275     1,023,890     1,109,935     823,036  

Effect of dilutive potential restricted stock, RSUs and PUs

    338,617     520,644     416,231     470,060  
                   

Weighted-average shares—diluted

    192,267,892     194,904,534     192,315,166     193,833,096  
                   
                   

Earnings (Losses) per share—basic:

                         

Income (Loss) from continuing operations

  $ 0.03   $ 0.00   $ 0.27   $ 1.64  
                   
                   

Total (loss) income from discontinued operations (see Note 10)

  $ (0.00 ) $ 0.00   $ 0.01   $ (0.00 )
                   
                   

Net income (loss) attributable to Iron Mountain Incorporated—basic

  $ 0.02   $ 0.00   $ 0.26   $ 1.63  
                   
                   

Earnings (Losses) per share—diluted:

                         

Income (Loss) from continuing operations

  $ 0.03   $ 0.00   $ 0.26   $ 1.63  
                   
                   

Total (loss) income from discontinued operations (see Note 10)

  $ (0.00 ) $ 0.00   $ 0.01   $ (0.00 )
                   
                   

Net income (loss) attributable to Iron Mountain Incorporated—diluted

  $ 0.02   $ 0.00   $ 0.26   $ 1.62  
                   
                   

Antidilutive stock options, RSUs and PUs, excluded from the calculation

    2,014,108     609,385     864,521     1,149,441  
                   
                   

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        Our revenues consist of storage rental revenues as well as service revenues and are reflected net of sales and value added taxes. Storage rental revenues, which are considered a key driver of financial performance for the storage and information management services industry, consist primarily of recurring periodic rental charges related to the storage of materials or data (generally on a per unit basis). Service revenues include charges for related service activities, which include: (1) the handling of records, including the addition of new records, temporary removal of records from storage, refiling of removed records and the destruction of records; (2) courier operations, consisting primarily of the pickup and delivery of records upon customer request; (3) secure shredding of sensitive documents and the related sale of recycled paper, the price of which can fluctuate from period to period; (4) other services, including the scanning, imaging and document conversion services of active and inactive records, or Document Management Solutions ("DMS"), which relate to physical and digital records, and project revenues; (5) customer termination and permanent withdrawal fees; (6) data restoration projects; (7) special project work; (8) Fulfillment Services; (9) consulting services; and (10) technology services and product sales (including specially designed storage containers and related supplies).

        We recognize revenue when the following criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable and collectability of the resulting receivable is reasonably assured. Storage rental and service revenues are recognized in the month the respective storage rental or service is provided, and customers are generally billed on a monthly basis on contractually agreed-upon terms. Amounts related to future storage rental or prepaid service contracts for customers where storage rental fees or services are billed in advance are accounted for as deferred revenue and recognized ratably over the period the applicable storage rental or service is provided or performed. Revenues from the sales of products, which are included as a component of service revenues, are recognized when products are shipped and title has passed to the customer. Revenues from the sales of products have historically not been significant.

        We maintain an allowance for doubtful accounts and credit memos for estimated losses resulting from the potential inability of our customers to make required payments and potential disputes regarding billing and service issues. When calculating the allowance, we consider our past loss experience, current and prior trends in our aged receivables and credit memo activity, current economic conditions and specific circumstances of individual receivable balances. If the financial condition of our customers were to significantly change, resulting in a significant improvement or impairment of their ability to make payments, an adjustment of the allowance may be required. We consider accounts receivable to be delinquent after such time as reasonable means of collection have been exhausted. We charge-off uncollectible balances as circumstances warrant, generally, no later than one year past due.

        As noted previously, on June 25, 2014, we announced that we received the favorable PLRs from the IRS necessary for our conversion to a REIT. In the PLRs, the IRS addressed and favorably ruled on our assets and revenue model, including regarding our steel racking structures as real estate for

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

REIT purposes under the Internal Revenue Code of 1986, as amended (the "Code"), our global operations and our transition plans from a C-corporation to a REIT. The PLRs are subject to certain qualifications and are based upon certain representations and statements made by us. If such representations and statements are untrue or incomplete in any material respect (including as a result of a material change in relevant facts), we may not be able to rely on the PLRs.

        After receipt of the PLRs, our board of directors unanimously approved our conversion to a REIT for our taxable year beginning January 1, 2014. As such, we intend to elect REIT status effective January 1, 2014.

        As a REIT, we are generally permitted to deduct from our federal taxable income the dividends we pay to our stockholders. The income represented by such dividends is not subject to federal taxation at the entity level but is taxed, if at all, at the stockholder level. Nevertheless, the income of our domestic taxable REIT subsidiaries ("TRS"), which hold our domestic operations that may not be REIT-compliant as currently operated and structured, is subject, as applicable, to federal and state corporate income tax. In addition, we and our subsidiaries continue to be subject to foreign income taxes in jurisdictions in which they hold assets or conduct operations, regardless of whether held or conducted through subsidiaries disregarded for federal tax purposes or TRS. We will also be subject to a separate corporate income tax on any gains recognized during a specified period (generally ten years) following the REIT conversion that are attributable to "built-in" gains with respect to the assets that we owned on January 1, 2014; this built-in gains tax will also be imposed on our depreciation recapture recognized into income in 2014 and subsequent taxable years as a result of accounting method changes commenced in our pre-REIT period. If we fail to maintain qualification for taxation as a REIT, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state, local and foreign taxes on our income and property in addition to taxes owed with respect to our TRS operations. In particular, while state income tax regimes often parallel the federal income tax regime for REITs, many states do not completely follow federal rules and some do not follow them at all.

        We provide for income taxes during interim periods based on our estimate of the effective tax rate for the year. 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) our conversion to a REIT; (2) changes in the mix of income from foreign jurisdictions; (3) tax law changes; (4) volatility in foreign exchange gains (losses); (5) the timing of the establishment and reversal of tax reserves; and (6) our ability to utilize foreign tax credits and net operating losses that we generate. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We are subject to examination by various tax authorities in jurisdictions in which we have business operations or a taxable presence. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in changes in our estimates.

        Accounting for income taxes requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting bases of

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

assets and liabilities and for loss and credit carryforwards. Valuation allowances are provided when recovery of deferred tax assets does not meet the more likely than not standard as defined in GAAP.

        On September 13, 2013, the U.S. Department of the Treasury and the IRS released final tangible property regulations under Sections 162(a) and 263(a) of the Code regarding the deduction and capitalization of expenditures related to tangible property. In addition, proposed regulations under Section 168 of the Code regarding dispositions of tangible property have also been released. These final and proposed regulations are generally effective for our tax year beginning on January 1, 2014. Early adoption was available, and we adopted the regulations in 2013. The impact from these regulations will not have a material impact on our consolidated results of operations, cash flows and financial position.

        We have elected to recognize interest and penalties associated with uncertain tax positions as a component of the provision (benefit) for income taxes in the accompanying Consolidated Statements of Operations. We recorded an increase of $1,014 and $1,735 for gross interest and penalties for the three and nine months ended September 30, 2013, respectively. We recorded an increase of $246 and $581 for gross interest and penalties for the three and nine months ended September 30, 2014, respectively. We had $4,874 and $5,453 accrued for the payment of interest and penalties as of December 31, 2013 and September 30, 2014, respectively.

        Our effective tax rate for each of the three and nine months ended September 30, 2013 was 81.9% and 64.1%, respectively. The primary reconciling items between the federal statutory rate of 35% and our overall effective tax rate in the three and nine months ended September 30, 2013 were differences in the rates of tax at which our foreign earnings are subject, including foreign exchange gains and losses in different jurisdictions with different tax rates and state income taxes (net of federal tax benefit), and the repatriation in the fourth quarter of 2013, as discussed below. During the three months ended September 30, 2013, foreign currency gains were recorded in lower tax jurisdictions associated with our marking-to-market of intercompany loans while foreign currency losses were recorded in higher tax jurisdictions associated with our marking-to-market of debt and derivative instruments, which decreased our 2013 effective tax rate by 47.0%. During the three and nine months ended September 30, 2013, the repatriation discussed below increased our 2013 effective tax rate by 87.1% and 18.5%, respectively. On January 2, 2013, the American Taxpayer Relief Act of 2012 (the "ATRA") was signed into law. In part, the ATRA retroactively reinstated and extended the controlled foreign corporation look-through rule, which provides for the exception from January 1, 2012 to December 31, 2013 of certain foreign earnings from U.S. federal taxation as Subpart F income. As a result, our income tax provision for the first quarter of 2013 included a discrete tax benefit of $4,025 relating to the previously expired period from January 1, 2012 to December 31, 2012. Also, during the three and nine months ended September 30, 2013, we incurred nondeductible transaction costs related to our conversion to a REIT, which increased our 2013 effective tax rate by 10.1% and 4.7%, respectively.

        During the three months ended September 30, 2013, we developed a plan to utilize both current and carryforward foreign tax credits by repatriating approximately $253,000 (approximately $53,000 of which was previously subject to U.S. taxes) from our foreign earnings. Due to uncertainty in our ability to fully utilize foreign tax credit carryforwards, we previously did not recognize a full benefit for such foreign tax credit carryforwards in our tax provision. We completed this plan in the fourth quarter of 2013. As a result, we recorded an increase in our tax provision from continuing operations in the

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

amount of approximately $71,400 in the three months ended September 30, 2013. This increase was offset by decreases of approximately $23,500 from 2013 foreign tax credits and approximately $21,900 from the reversal of valuation allowances related to foreign tax credit carryforwards, resulting in a net increase of approximately $26,000 in our tax provision from continuing operations.

        As a result of our REIT conversion, we recorded a net tax benefit of $212,151 during the nine months ended September 30, 2014 for the revaluation of certain deferred tax assets and liabilities associated with the REIT conversion. Also, in the third quarter of 2014, we recorded an increase to the tax provision of $26,390 related to certain amended tax returns filed principally to reflect tax accounting method changes consistent with our REIT conversion. The primary other reconciling items between the federal statutory rate of 35% and our overall effective tax rate in the three and nine months ended September 30, 2014 was an increase of $13,226 and $49,310, respectively, in our tax provision from the repatriation discussed below and other net tax adjustments related to the REIT conversion including a tax benefit of $7,993 and $41,828, respectively, primarily related to the dividends paid deduction. Our effective tax rate will be significantly lower in 2014 as a result of the REIT conversion. As a REIT, we are entitled to a deduction for dividends paid, resulting in a substantial reduction of federal income tax expense. As a REIT, substantially all of our income tax expense will be incurred based on the earnings generated by our foreign subsidiaries and our U.S. TRSs.

        The following table presents a reconciliation of significant components of deferred tax assets and liabilities from December 31, 2013 to September 30, 2014:

 
  December 31,
2013
  Revaluation
Associated with
REIT Conversion
  Current Year
Activity(1)
  September 30,
2014
 

Deferred Tax Assets:

                         

Accrued liabilities

  $ 75,731   $ (48,087 ) $ 3,701   $ 31,345  

Deferred rent

    25,624     (25,749 )   1,976     1,851  

Net operating loss carryforwards

    81,124     (34,912 )   14,050     60,262  

Foreign tax credits

    10,229     (9,207 )   (1,022 )    

Stock compensation

    16,745     (17,942 )   1,197      

Federal benefit of unrecognized tax benefits

    20,263         (4,813 )   15,450  

Foreign currency and other adjustments

    23,938     (34,552 )   20,837     10,223  

Valuation allowance

    (40,278 )       (2,732 )   (43,010 )
                   

    213,376     (170,449 )   33,194     76,121  
                   

Deferred Tax Liabilities:

                         

Other assets, principally due to differences in amortization

    (367,936 )   273,268     3,668     (91,000 )

Plant and equipment, principally due to differences in depreciation

    (168,385 )   109,332     23,608     (35,445 )
                   

    (536,321 )   382,600     27,276     (126,445 )
                   

Net Deferred Tax Asset/(Liability)

  $ (322,945 ) $ 212,151   $ 60,470   $ (50,324 )
                   
                   

(1)
Current year activity primarily consists of additional deferred tax assets and liabilities recognized due to changes in current year taxable temporary differences, purchase accounting and return to accrual adjustments related to the 2013 tax return.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        We had not previously provided incremental federal and certain state income taxes on net tax over book outside basis differences related to the earnings of our foreign subsidiaries because our intent, prior to our conversion to a REIT, was to reinvest our current and future undistributed earnings of certain foreign subsidiaries indefinitely outside the U.S. As a result of our conversion to a REIT, it is no longer our intent to indefinitely reinvest our current and future undistributed foreign earnings outside the U.S., and, therefore, in the second and third quarters of 2014, we recognized an increase in our tax provision from continuing operations in the amount of $36,084 and $13,226, respectively, representing incremental federal and state income taxes and foreign withholding taxes on such foreign earnings of $49,310 in total. As a REIT, future repatriation of incremental undistributed earnings of our foreign subsidiaries should not be subject to federal or state income tax, with the exception of foreign withholding taxes in limited instances; however, such future repatriations will require distribution as per REIT distribution rules which are then taxable, as appropriate, at the stockholder level.

        Financial instruments that potentially subject us to market risk consist principally of cash and cash equivalents (including money market funds and time deposits), restricted cash (primarily U.S. Treasuries) and accounts receivable. The only significant concentrations of liquid investments as of both December 31, 2013 and September 30, 2014 relate to cash and cash equivalents and restricted cash held on deposit with one global bank and one "Triple A" rated money market fund, and three global banks and three "Triple A" rated money market funds, respectively, all of which we consider to be large, highly-rated investment-grade institutions. As per our risk management investment policy, we limit exposure to concentration of credit risk by limiting the amount invested in any one mutual fund to a maximum of $50,000 or in any one financial institution to a maximum of $75,000. As of December 31, 2013 and September 30, 2014, our cash and cash equivalents and restricted cash balance was $154,386 and $217,848, respectively, including money market funds and time deposits amounting to $36,613 and $97,608, respectively. The money market funds are invested substantially in U.S. Treasuries, repurchase agreements and certificates of deposit.

        Entities are permitted under GAAP to elect to measure many financial instruments and certain other items at either fair value or cost. We did not elect the fair value measurement option.

        Our financial assets or liabilities 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:

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2013 and September 30, 2014, respectively:

 
   
  Fair Value Measurements at
December 31, 2013 Using
 
Description
  Total Carrying
Value at
December 31,
2013
  Quoted prices
in active
markets
(Level 1)
  Significant other
observable
inputs
(Level 2)
  Significant
unobservable
inputs
(Level 3)
 

Money Market Funds(1)

  $ 33,860   $   $ 33,860   $  

Time Deposits(1)

    2,753         2,753      

Trading Securities

    13,386     12,785 (2)   601 (1)    

Derivative Assets(3)

    72         72      

Derivative Liabilities(3)

    5,592         5,592      

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

 
   
  Fair Value Measurements at
September 30, 2014 Using
 
Description
  Total Carrying
Value at
September 30,
2014
  Quoted prices
in active
markets
(Level 1)
  Significant other
observable
inputs
(Level 2)
  Significant
unobservable
inputs
(Level 3)
 

Money Market Funds(1)

  $ 79,795   $   $ 79,795   $  

Time Deposits(1)

    17,813         17,813      

Trading Securities

    12,798     12,068 (2)   730 (1)    

Derivative Assets(3)

    3         3      

Derivative Liabilities(3)

    11,293         11,293      

(1)
Money market funds and time deposits (including certain trading securities) are measured based on quoted prices for similar assets and/or subsequent transactions.

(2)
Securities are measured at fair value using quoted market prices.

(3)
Our derivative assets and liabilities primarily relate to short- term (six months or less) foreign currency contracts that we have entered into to hedge our intercompany exposures denominated in British pounds sterling, Euro and Australian dollars. We calculate the fair 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.

        Disclosures are required in the financial statements for items measured at fair value on a non-recurring basis. We did not have any material items that are measured at fair value on a non-recurring basis for the three and nine months ended September 30, 2013 and 2014.

        The preparation of financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended. On an ongoing basis, we evaluate the estimates used. We base our estimates on historical experience, actuarial estimates, current conditions and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities and are not readily apparent from other sources. Actual results may differ from these estimates.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        The changes in accumulated other comprehensive items, net for the three months ended September 30, 2013 and 2014, respectively, are as follows:

 
  Foreign
Currency
Translation
Adjustments
  Market Value
Adjustments for
Securities
  Total  

Balance as of June 30, 2013

  $ (21,697 ) $   $ (21,697 )

Other comprehensive income:

                   

Foreign currency translation adjustments

    17,200         17,200  
               

Total other comprehensive income

    17,200         17,200  
               

Balance as of September 30, 2013

  $ (4,497 ) $   $ (4,497 )
               
               

 

 
  Foreign
Currency
Translation
Adjustments
  Market Value
Adjustments for
Securities
  Total  

Balance as of June 30, 2014

  $ (3,809 ) $ 1,474   $ (2,335 )

Other comprehensive loss:

                   

Foreign currency translation adjustments

    (44,606 )       (44,606 )

Market value adjustments for securities

        (291 )   (291 )
               

Total other comprehensive loss

    (44,606 )   (291 )   (44,897 )
               

Balance as of September 30, 2014

  $ (48,415 ) $ 1,183   $ (47,232 )
               
               

        The changes in accumulated other comprehensive items, net for the nine months ended September 30, 2013 and 2014, respectively, are as follows:

 
  Foreign
Currency
Translation
Adjustments
  Market Value
Adjustments for
Securities
  Total  

Balance as of December 31, 2012

  $ 20,314   $   $ 20,314  

Other comprehensive loss:

                   

Foreign currency translation adjustments

    (24,811 )       (24,811 )
               

Total other comprehensive loss

    (24,811 )       (24,811 )
               

Balance as of September 30, 2013

  $ (4,497 ) $   $ (4,497 )
               
               

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)


 
  Foreign
Currency
Translation
Adjustments
  Market Value
Adjustments for
Securities
  Total  

Balance as of December 31, 2013

  $ (9,586 ) $ 926   $ (8,660 )

Other comprehensive (loss) income:

                   

Foreign currency translation adjustments

    (38,829 )       (38,829 )

Market value adjustments for securities

        257     257  
               

Total other comprehensive (loss) income

    (38,829 )   257     (38,572 )
               

Balance as of September 30, 2014

  $ (48,415 ) $ 1,183   $ (47,232 )
               
               

        Other expense (income), net consists of the following:

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2013   2014   2013   2014  

Foreign currency transaction losses (gains), net

  $ 2,612   $ 23,500   $ 22,543   $ 25,591  

Debt extinguishment expense, net

    43,662         43,662      

Other, net

    (321 )   (992 )   (2,238 )   (2,604 )
                   

  $ 45,953   $ 22,508   $ 63,967   $ 22,987  
                   
                   

        We develop various software applications for internal use. Computer software costs associated with internal use software are expensed as incurred until certain capitalization criteria are met. Payroll and related costs for employees directly associated with, and devoting time to, the development of internal use computer software projects (to the extent time is spent directly on the project) are capitalized. During the three and nine months ended September 30, 2013, we capitalized $9,326 and $32,073, respectively, of costs associated with the development of internal use computer software projects. During the three and nine months ended September 30, 2014, we capitalized $4,769 and $14,527, respectively, of costs associated with the development of internal use computer software projects. Capitalization begins when the design stage of the application has been completed and it is probable that the project will be completed and used to perform the function intended. Capitalization ends when the asset is ready for its intended use. Depreciation begins when the software is placed in service. Computer software costs that are capitalized are periodically evaluated for impairment.

        We review long-lived assets and all amortizable intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to their carrying amount. The operations are generally

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

distinguished by the business segment and geographic region in which they operate. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets.

        As a result of our conversion to a REIT and in accordance with SEC rules applicable to REITs, we no longer report (gain) loss from the sale of real estate as a component of operating income, but we will continue to report it as a component of income (loss) from continuing operations. We will continue to report the (gain) loss of property, plant and equipment (excluding real estate), along with any impairment, write-downs or involuntary conversions related to real estate, as a component of operating income. Previously reported amounts have been reclassified to conform to this presentation.

        Consolidated gain on disposal/write-down of property, plant and equipment, net (excluding real estate) was $528 for the nine months ended September 30, 2013 and consisted primarily of gains associated with the retirement of leased vehicles accounted for as capital lease assets associated primarily with our North American Records and Information Management Business. Consolidated loss on disposal/write-down of property, plant and equipment, net (excluding real estate) was $1,229 for the nine months ended September 30, 2014 and consisted primarily of losses associated with the disposal of certain equipment associated with our North American Records and Information Management Business and International Business.

        Consolidated gain on sale of real estate was $1,417, net of tax of $430, for the nine months ended September 30, 2013 associated with the sale of a building in the United Kingdom. Consolidated gain on sale of real estate was $7,468, net of tax of $1,991, for the nine months ended September 30, 2014 associated with the sale of two buildings in the United Kingdom.

        In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) ("ASU 2014-08"). ASU 2014-08 changes the criteria for a disposal to qualify as a discontinued operation and requires additional disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals that have not been reported in the financial statements previously issued. We adopted ASU 2014-08 effective April 1, 2014.

        In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 provides additional guidance for management to reassess revenue recognition as it relates to: (1) transfer of control, (2) variable consideration, (3) allocation of transaction price based on relative standalone selling price, (3) licenses, (4) time value of money and (5) contract costs. Further disclosures will be required to provide a better understanding of revenue that has been recognized and revenue that is expected to be recognized in the future from existing

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

contracts. ASU 2014-09 is effective for us on January 1, 2017, with no early adoption permitted. We are currently evaluating the impact ASU 2014-09 will have on our consolidated financial statements.

        In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) ("ASU 2014-15"). ASU 2014-15 requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles of current U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term "substantial doubt", (2) require an evaluation every reporting period, including interim periods, (3) provide principles for considering the mitigating effect of management's plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, (5) require an express statement and other disclosures when substantial doubt is still present, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for us on January 1, 2017, with early adoption permitted. We do not believe that this pronouncement will have an impact on our consolidated financial statements.

        During the second quarter of 2014, we identified contract billing inaccuracies arising from a single location which occurred over numerous years that resulted in an overstatement of our prior years' reported revenue by $10,000 in the aggregate. Of this amount, $1,300 relates to the year ended December 31, 2013, $1,300 relates to the year ended December 31, 2012 and the remaining $7,400 relates to the periods prior to December 31, 2011. We have determined that no prior period financial statement was materially misstated as a result of these billing inaccuracies. As a result, we have restated beginning retained earnings as of December 31, 2012 for the cumulative impact of these billing inaccuracies, net of tax, prior to December 31, 2012 in the amount of $5,300. Additionally, we have restated our 2012 and 2013 Consolidated Statements of Equity, our 2013 Consolidated Balance Sheet and each of our Consolidated Statements of Operations and our Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 to reflect the impact of these billing inaccuracies in those particular periods. There was no change to the following lines of the Consolidated Statement of Cash Flows for the nine months ended September 30, 2013: (1) cash flows from operating activities, (2) cash flows from investing activities and (3) cash flows from financing activities.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        The following table sets forth the effect of the immaterial restatement to certain line items of our Consolidated Statement of Operations for the three and nine months ended September 30, 2013:

 
  Three Months
Ended
September 30,
2013
  Nine Months
Ended
September 30,
2013
 

Storage Rental

  $   $  

Service

    (325 )   (975 )
           

Total Revenues

  $ (325 ) $ (975 )
           
           

Operating (Loss) Income

  $ (325 ) $ (975 )
           
           

(Loss) Income from Continuing Operations before Provision (Benefit) for Income Taxes and (Loss) Gain on Sale of Real Estate

  $ (325 ) $ (975 )
           
           

(Benefit) Provision for Income Taxes

  $ (127 ) $ (381 )
           
           

(Loss) Income from Continuing Operations

  $ (198 ) $ (594 )
           
           

Net (Loss) Income

  $ (198 ) $ (594 )
           
           

Net (Loss) Income Attributable to Iron Mountain Incorporated

  $ (198 ) $ (594 )
           
           

Earnings (Losses) per Share—Basic:

             

(Loss) Income from Continuing Operations

  $ (0.00 ) $ (0.00 )
           
           

Net (Loss) Income Attributable to Iron Mountain Incorporated

  $ (0.00 ) $ (0.00 )
           
           

Earnings (Losses) per Share—Diluted:

             

(Loss) Income from Continuing Operations

  $ (0.00 ) $ (0.00 )
           
           

Net (Loss) Income Attributable to Iron Mountain Incorporated

  $ (0.00 ) $ (0.00 )
           
           

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

        The following table sets forth the effect of the immaterial restatement to certain line items of our Consolidated Balance Sheet as of December 31, 2013:

 
  December 31,
2013
 

Deferred Revenue

  $ 10,000  
       
       

Total Current Liabilities

  $ 10,000  
       
       

Deferred Income Tax Liabilities

  $ (3,900 )
       
       

Retained Earnings

  $ (6,100 )
       
       

Total Iron Mountain Incorporated Stockholders' Equity

  $ (6,100 )
       
       

Total Equity

  $ (6,100 )
       
       

        Prospectively, we will process an immaterial restatement of our Consolidated Statements of Operations for the annual periods ended December 31, 2013 and 2012 when those statements are reproduced on a comparative basis in our Annual Report on Form 10-K for the year ending December 31, 2014. The effects of such restatement on previously reported annual amounts for the years ended December 31, 2013 and 2012 will be to reduce service revenues by $1,300 and $1,300, respectively and reduce net income from continuing operations by $800 and $786, respectively.

        Accrued expenses with items greater than 5% of total current liabilities are shown separately and consist of the following:

 
  December 31,
2013
  September 30,
2014
 

Interest

  $ 71,971   $ 47,462  

Payroll and vacation

    91,519     69,638  

Incentive compensation

    58,562     50,648  

Dividend (Note 9)

    55,142     795,671  

Self-insured liabilities

    32,850     32,674  

Other

    151,294     167,143  
           

Accrued expenses

  $ 461,338   $ 1,163,236  
           
           

(3) Derivative Instruments and Hedging Activities

        Every derivative instrument is required to be recorded in the balance sheet as either an asset or a liability measured at its fair value. Periodically, we acquire derivative instruments that are intended to hedge either cash flows or values that are subject to foreign exchange or other market price risk and not for trading purposes. We have formally documented our hedging relationships, including identification of the hedging instruments and the hedged items, as well as our risk management

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(3) Derivative Instruments and Hedging Activities (Continued)

objectives and strategies for undertaking each hedge transaction. Given the recurring nature of our revenues and the long-term nature of our asset base, we have the ability and the preference to use long-term, fixed interest rate debt to finance our business, thereby preserving our long-term returns on invested capital. We target approximately 75% of our debt portfolio to be fixed with respect to interest rates. Occasionally, we may use interest rate swaps as a tool to maintain our targeted level of fixed rate debt. In addition, we may use borrowings in foreign currencies, either obtained in the U.S. or by our foreign subsidiaries, to hedge foreign currency risk associated with our international investments. Sometimes we enter into currency swaps to temporarily hedge an overseas investment, such as a major acquisition, while we arrange permanent financing or to hedge our exposure due to foreign currency exchange movements related to our intercompany accounts with and between our foreign subsidiaries. As of December 31, 2013 and September 30, 2014, none of our derivative instruments contained credit-risk related contingent features.

        We have entered into a number of separate forward contracts to hedge our exposures in Euros and Australian dollars. As of September 30, 2014, we had (1) outstanding forward contracts to purchase 194,500 Euros and sell $257,479 U.S. dollars to hedge our intercompany exposures with our European operations and (2) an outstanding forward contract to purchase $59,201 U.S. dollars and sell 68,000 Australian dollars to hedge our intercompany exposures with our Australian operations. At the maturity of the forward contracts, we may enter into new forward contracts to hedge movements in the underlying currencies. At the time of settlement, we either pay or receive the net settlement amount from the forward contract and recognize this amount in other (income) expense, net in the Consolidated Statements of Operations as a realized foreign exchange gain or loss. At the end of each month, we mark the outstanding forward contracts to market and record an unrealized foreign exchange gain or loss for the mark-to-market valuation. We have not designated the forward contracts as hedges. During the three and nine months ended September 30, 2013, there was $4,764 in net cash disbursements and $11,511 in net cash receipts, respectively, included in cash from operating activities from continuing operations related to settlements associated with foreign currency forward contracts. During the three and nine months ended September 30, 2014, there was $9,536 in net cash receipts and $4,993 in net cash payments, respectively, included in cash from operating activities from continuing operations related to settlements associated with foreign currency forward contracts.

        Our policy is to record the fair value of each derivative instrument on a gross basis. The following table provides the fair value of our derivative instruments as of December 31, 2013 and September 30, 2014 and their gains and losses for the three and nine months ended September 30, 2013 and 2014:

 
  Asset Derivatives  
 
  December 31, 2013   September 30, 2014  
Derivatives Not Designated as
Hedging Instruments
  Balance Sheet
Location
  Fair
Value
  Balance Sheet
Location
  Fair
Value
 

Foreign exchange contracts

  Prepaid expenses and other   $ 72   Prepaid expenses and other   $ 3  
                   

Total

      $ 72       $ 3  
                   
                   

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(3) Derivative Instruments and Hedging Activities (Continued)


 
  Liability Derivatives  
 
  December 31, 2013   September 30, 2014  
Derivatives Not Designated as
Hedging Instruments
  Balance Sheet
Location
  Fair
Value
  Balance Sheet
Location
  Fair
Value
 

Foreign exchange contracts

  Accrued expenses   $ 5,592   Accrued expenses   $ 11,293  
                   

Total

      $ 5,592       $ 11,293  
                   
                   

 

 
   
  Amount of (Gain)
Loss
Recognized in
Income
on Derivatives
 
 
   
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  Location of (Gain) Loss
Recognized in Income
on Derivative
 
Derivatives Not Designated as
Hedging Instruments
  2013   2014   2013   2014  

Foreign exchange contracts

  Other expense (income), net   $ 14,164   $ (4,025 ) $ (6,059 ) $ 10,625  
                       

Total

      $ 14,164   $ (4,025 ) $ (6,059 ) $ 10,625  
                       
                       

        We have designated a portion of the 63/4% Notes as a hedge of net investment of certain of our Euro denominated subsidiaries. For the nine months ended September 30, 2013 and 2014, we designated on average 107,667 and 51,481 Euros, respectively, of the 63/4% Notes as a hedge of net investment of certain of our Euro denominated subsidiaries. As a result, we recorded foreign exchange losses of $5,467 ($3,333, net of tax) and foreign exchange losses of $3,374 ($2,057, net of tax) related to the change in fair value of such debt due to currency translation adjustments, which is a component of accumulated other comprehensive items, net included in Iron Mountain Incorporated Stockholders' Equity for the three and nine months ended September 30, 2013, respectively. We recorded foreign exchange gains of $3,729 ($3,729, net of tax) and foreign exchange gains of $4,537 ($4,480, net of tax) related to the change in fair value of such debt due to currency translation adjustments, which is a component of accumulated other comprehensive items, net included in Iron Mountain Incorporated Stockholders' Equity for the three and nine months ended September 30, 2014, respectively. As of September 30, 2014, cumulative net gains of $11,964, net of tax are recorded in accumulated other comprehensive items, net associated with this net investment hedge.

(4) Acquisitions

        We account for acquisitions using the acquisition method of accounting, and, accordingly, the assets and liabilities acquired were 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. Cash consideration for our various acquisitions was primarily provided through borrowings under our credit facilities and cash equivalents on-hand. The unaudited pro forma results of operations (including revenue and earnings) for the current and prior periods are not presented due to the insignificant impact of the 2013 and 2014 acquisitions on our consolidated results of operations. Noteworthy 2014 acquisitions include the following:

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IRON MOUNTAIN INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(4) Acquisitions (Continued)

        In January 2014, in order to enhance our international operations, we acquired Tape Management Services Pty Ltd, a storage and data management company with operations in Australia, for approximately $15,300.

        In February 2014, in order to enhance our international operations, we acquired RM Arsiv Yönetim Hizmetleri Ticaret Anonim Sirketi, a storage rental and records management business with operations in Turkey, for approximately $21,200, of which $16,750 was paid in the first quarter of 2014, with the remainder to be paid out based upon a customary working capital adjustment and whether we make claims for indemnification against the former owners of the business.

        In April 2014, in order to enhance our international operations, we acquired the stock of OSG Polska sp. z.o.o., a storage rental and records management business with operations in Poland, for approximately $13,700.

        A summary of the cumulative consideration paid and the preliminary allocation of the purchase price paid for acquisitions in the first nine months of 2014 is as follows:

Cash Paid (gross of cash acquired)

  $ 48,667 (1)

Fair Value of Previously Held Equity Interest

    794  
       

Total Consideration

    49,461  

Fair Value of Identifiable Assets Acquired:

       

Cash, Accounts Receivable, Prepaid Expenses, Deferred Income Taxes and Other

    5,847  

Property, Plant and Equipment(2)

    14,009  

Customer Relationship Assets(3)

    26,315  

Other Assets

    858  

Liabilities Assumed and Deferred Income Taxes(4)

    (30,860 )
       

Total Fair Value of Identifiable Net Assets Acquired

    16,169  
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