Edgar Filing: IRON MOUNTAIN INC

Document

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, 2018

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, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer ý	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o	Emerging growth company o

If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Number of shares of the registrant's Common Stock outstanding at October 19, 2018: 286,219,594

Table of Contents

IRON MOUNTAIN INCORPORATED

Index



	Page
PART I—FINANCIAL INFORMATION
Item 1—Unaudited Condensed Consolidated Financial Statements	3

Condensed Consolidated Balance Sheets at December 31, 2017 and September 30, 2018 (Unaudited)	3

Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2017 and 2018 (Unaudited)	4

Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2017 and 2018 (Unaudited)	5

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2018 (Unaudited)	6

Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2017 and 2018 (Unaudited)	7

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2018 (Unaudited)	8

Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations	53

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

Table of Contents

Part I. Financial Information

Item 1. Unaudited Condensed Consolidated Financial Statements

IRON MOUNTAIN INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, except Share and Per Share Data)

(Unaudited)



	December 31, 2017			September 30, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	925,699		$	197,676
Accounts receivable (less allowances of $46,648 and $51,271 as of December 31, 2017 and September 30, 2018, respectively)	835,742			847,452
Prepaid expenses and other	188,874			170,847
Total Current Assets	1,950,315			1,215,975
Property, Plant and Equipment:
Property, plant and equipment	6,251,100			7,469,651
Less—Accumulated depreciation	(2,833,421		)	(3,044,958		)
Property, Plant and Equipment, Net	3,417,679			4,424,693
Other Assets, Net:
Goodwill	4,070,267			4,478,757
Customer relationships, customer inducements and data center lease-based intangibles	1,400,547			1,516,851
Other	133,594			169,693
Total Other Assets, Net	5,604,408			6,165,301
Total Assets	$	10,972,402		$	11,805,969
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of long-term debt	$	146,300		$	121,695
Accounts payable	289,137			285,810
Accrued expenses	653,146			602,273
Deferred revenue	241,590			237,574
Total Current Liabilities	1,330,173			1,247,352
Long-term Debt, net of current portion	6,896,971			8,109,179
Other Long-term Liabilities	73,039			116,757
Deferred Rent	126,231			117,330
Deferred Income Taxes	155,728			181,730
Commitments and Contingencies (see Note 8)
Redeemable Noncontrolling Interests	91,418			94,745
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 283,110,183 shares and 286,221,058 shares as of December 31, 2017 and September 30, 2018, respectively)	2,831			2,862
Additional paid-in capital	4,164,562			4,261,187
(Distributions in excess of earnings) Earnings in excess of distributions	(1,765,966		)	(2,098,403		)
Accumulated other comprehensive items, net	(103,989		)	(228,260		)
Total Iron Mountain Incorporated Stockholders' Equity	2,297,438			1,937,386
Noncontrolling Interests	1,404			1,490
Total Equity	2,298,842			1,938,876
Total Liabilities and Equity	$	10,972,402		$	11,805,969

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

Table of Contents

IRON MOUNTAIN INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except Per Share Data)

(Unaudited)



	Three Months Ended September 30,
	2017			2018
Revenues:
Storage rental	$	601,091		$	656,973
Service	364,570			404,018
Total Revenues	965,661			1,060,991
Operating Expenses:
Cost of sales (excluding depreciation and amortization)	418,327			448,018
Selling, general and administrative	242,357			258,470
Depreciation and amortization	128,513			157,797
(Gain) Loss on disposal/write-down of property, plant and equipment (excluding real estate), net	(292		)	960
Total Operating Expenses	788,905			865,245
Operating Income (Loss)	176,756			195,746
Interest Expense, Net (includes Interest Income of $2,526 and $1,382 for the three months ended September 30, 2017 and 2018, respectively)	88,989			103,841
Other Expense (Income), Net	59,479			325
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes and Gain on Sale of Real Estate	28,288			91,580
Provision (Benefit) for Income Taxes	2,268			14,300
Gain on Sale of Real Estate, Net of Tax	638			(1,348		)
Income (Loss) from Continuing Operations	25,382			78,628
(Loss) Income from Discontinued Operations, Net of Tax	(1,058		)	(11,605		)
Net Income (Loss)	24,324			67,023
Less: Net (Loss) Income Attributable to Noncontrolling Interests	(21		)	(125		)
Net Income (Loss) Attributable to Iron Mountain Incorporated	$	24,345		$	67,148
Earnings (Losses) per Share—Basic:
Income (Loss) from Continuing Operations	$	0.10		$	0.28
Total (Loss) Income from Discontinued Operations, Net of Tax	$	—		$	(0.04	)
Net Income (Loss) Attributable to Iron Mountain Incorporated	$	0.09		$	0.23
Earnings (Losses) per Share—Diluted:
Income (Loss) from Continuing Operations	$	0.10		$	0.27
Total (Loss) Income from Discontinued Operations, Net of Tax	$	—		$	(0.04	)
Net Income (Loss) Attributable to Iron Mountain Incorporated	$	0.09		$	0.23
Weighted Average Common Shares Outstanding—Basic	265,198			286,159
Weighted Average Common Shares Outstanding—Diluted	266,139			286,982
Dividends Declared per Common Share	$	0.5534		$	0.5876

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

IRON MOUNTAIN INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, except Per Share Data)

(Unaudited)



	Nine Months Ended September 30,
	2017			2018
Revenues:
Storage rental	$	1,763,609		$	1,963,561
Service	1,090,734			1,200,711
Total Revenues	2,854,343			3,164,272
Operating Expenses:
Cost of sales (excluding depreciation and amortization)	1,259,318			1,348,203
Selling, general and administrative	719,968			778,526
Depreciation and amortization	381,319			474,595
(Gain) Loss on disposal/write-down of property, plant and equipment (excluding real estate), net	(967		)	(716		)
Total Operating Expenses	2,359,638			2,600,608
Operating Income (Loss)	494,705			563,664
Interest Expense, Net (includes Interest Income of $5,719 and $5,048 for the nine months ended September 30, 2017 and 2018, respectively)	265,010			303,574
Other Expense (Income), Net	33,749			1,420
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes and Gain on Sale of Real Estate	195,946			258,670
Provision (Benefit) for Income Taxes	29,497			41,873
Gain on Sale of Real Estate, Net of Tax	(925		)	(1,348		)
Income (Loss) from Continuing Operations	167,374			218,145
(Loss) Income from Discontinued Operations, Net of Tax	(3,421		)	(12,427		)
Net Income (Loss)	163,953			205,718
Less: Net Income (Loss) Attributable to Noncontrolling Interests	2,853			485
Net Income (Loss) Attributable to Iron Mountain Incorporated	$	161,100		$	205,233
Earnings (Losses) per Share—Basic:
Income (Loss) from Continuing Operations	$	0.62		$	0.76
Total (Loss) Income from Discontinued Operations, Net of Tax	$	(0.01	)	$	(0.04	)
Net Income (Loss) Attributable to Iron Mountain Incorporated	$	0.61		$	0.72
Earnings (Losses) per Share—Diluted:
Income (Loss) from Continuing Operations	$	0.62		$	0.76
Total (Loss) Income from Discontinued Operations, Net of Tax	$	(0.01	)	$	(0.04	)
Net Income (Loss) Attributable to Iron Mountain Incorporated	$	0.61		$	0.72
Weighted Average Common Shares Outstanding—Basic	264,423			285,801
Weighted Average Common Shares Outstanding—Diluted	265,293			286,515
Dividends Declared per Common Share	$	1.6543		$	1.7641

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

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IRON MOUNTAIN INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

(Unaudited)



	Three Months Ended September 30,
	2017			2018
Net Income (Loss)	$	24,324		$	67,023
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments	37,541			(24,769		)
Change in Fair Value of Interest Rate Swap Agreements	—			1,980
Total Other Comprehensive Income (Loss)	37,541			(22,789		)
Comprehensive Income (Loss)	61,865			44,234
Comprehensive (Loss) Income Attributable to Noncontrolling Interests	(727		)	(2,104		)
Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated	$	62,592		$	46,338



	Nine Months Ended September 30,
	2017		2018
Net Income (Loss)	$	163,953	$	205,718
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments	95,863		(132,290		)
Change in Fair Value of Interest Rate Swap Agreements	—		4,183
Total Other Comprehensive Income (Loss)	95,863		(128,107		)
Comprehensive Income (Loss)	259,816		77,611
Comprehensive Income (Loss) Attributable to Noncontrolling Interests	1,486		(3,351		)
Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated	$	258,330	$	80,962

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

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IRON MOUNTAIN INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In Thousands, except Share Data)

(Unaudited)



				Iron Mountain Incorporated Stockholders' Equity
				Common Stock			Additional Paid-in Capital			(Distributions in Excess of Earnings) Earnings in Excess of Distributions						Noncontrolling Interests
	Total			Shares	Amounts		Additional Paid-in Capital						Accumulated Other Comprehensive Items, Net			Noncontrolling Interests			Redeemable Noncontrolling Interests
Balance, December 31, 2016	$	1,936,671		263,682,670	$	2,636	$	3,489,795		$	(1,343,311	)	$	(212,573	)	$	124		$	54,697
Issuance of shares under employee stock purchase plan and option plans and stock-based compensation	29,929			1,005,975	10		29,919			—			—			—			—
Issuance of shares in connection with Fortrust Transaction (as defined in Note 6 to Notes to Consolidated Financial Statements included in our Annual Report)	83,014			2,193,637	22		82,992			—			—			—			—
Change in value of redeemable noncontrolling interests	(1,505		)	—	—		(1,505		)	—			—			—			1,505
Parent cash dividends declared	(439,327		)	—	—		—			(439,327		)	—			—			—
Foreign currency translation adjustment	97,123			—	—		—			—			97,230			(107		)	(1,260		)
Net income (loss)	163,200			—	—		—			161,100			—			2,100			753
Noncontrolling interests equity contributions	—			—	—		—			—			—			—			13,230
Noncontrolling interests dividends	(1,956		)	—	—		—			—			—			(1,956		)	(1,501		)
Purchase of noncontrolling interests	1,497			—	—		—			—			—			1,497			—
Balance, September 30, 2017	$	1,868,646		266,882,282	$	2,668	$	3,601,201		$	(1,621,538	)	$	(115,343	)	$	1,658		$	67,424



				Iron Mountain Incorporated Stockholders' Equity
				Common Stock			Additional Paid-in Capital			(Distributions in Excess of Earnings) Earnings in Excess of Distributions						Noncontrolling Interests
	Total			Shares	Amounts		Additional Paid-in Capital						Accumulated Other Comprehensive Items, Net			Noncontrolling Interests			Redeemable Noncontrolling Interests
Balance, December 31, 2017	$	2,298,842		283,110,183	$	2,831	$	4,164,562		$	(1,765,966	)	$	(103,989	)	$	1,404		$	91,418
Cumulative-effect adjustment for adoption of ASU 2014-09 (see Note 2.c.)	(30,233		)	—	—		—			(30,233		)	—			—			—
Issuance of shares under employee stock purchase plan and option plans and stock-based compensation	20,547			662,389	7		20,540			—			—			—			—
Issuance of shares associated with the Over-Allotment Option, net of underwriting discounts and offering expenses (see Note 9)	76,192			2,175,000	22		76,170			—			—			—			—
Issuance of shares through the At the Market (ATM) Equity Program, net of underwriting discounts and offering expenses (see Note 9)	8,716			273,486	2		8,714			—			—			—			—
Change in value of redeemable noncontrolling interests	(8,799		)	—	—		(8,799		)	—			—			—			8,799
Parent cash dividends declared	(507,437		)	—	—		—			(507,437		)	—			—			—
Foreign currency translation adjustment	(128,303		)	—	—		—			—			(128,454		)	151			(3,987		)
Change in fair value of interest rate swap agreements	4,183			—	—		—			—			4,183			—
Net income (loss)	205,168			—	—		—			205,233			—			(65		)	550
Noncontrolling interests dividends	—			—	—		—			—			—			—			(2,035		)
Balance, September 30, 2018	$	1,938,876		286,221,058	$	2,862	$	4,261,187		$	(2,098,403	)	$	(228,260	)	$	1,490		$	94,745

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

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IRON MOUNTAIN INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)



	Nine Months Ended September 30,
	2017			2018
Cash Flows from Operating Activities:
Net income (loss)	$	163,953		$	205,718
Loss (Income) from discontinued operations	3,421			12,427
Adjustments to reconcile net income (loss) to cash flows from operating activities:
Depreciation	302,480			337,923
Amortization (includes amortization of deferred financing costs and discounts of $11,904 and $11,537 for the nine months ended September 30, 2017 and 2018, respectively)	90,743			148,209
Revenue reduction associated with amortization of permanent withdrawal fees and above- and below-market leases (see Note 2.b.)	8,627			12,430
Stock-based compensation expense	22,853			23,352
(Benefit) provision for deferred income taxes	(28,219		)	(783		)
Loss on early extinguishment of debt	48,298			—
(Gain) loss on disposal/write-down of property, plant and equipment, net (including real estate)	(2,532		)	(2,064		)
Gain on Russia and Ukraine Divestment (see Note 10)	(38,869		)	—
Foreign currency transactions and other, net	35,621			(1,271		)
(Increase) decrease in assets	(52,725		)	(24,247		)
(Decrease) increase in liabilities	(31,361		)	(86,156		)
Cash Flows from Operating Activities - Continuing Operations	522,290			625,538
Cash Flows from Operating Activities - Discontinued Operations	(3,421		)	(995		)
Cash Flows from Operating Activities	518,869			624,543
Cash Flows from Investing Activities:
Capital expenditures (see Liquidity and Capital Resources section of Management's Discussion & Analysis of Financial Condition and Results of Operations)	(243,746		)	(329,953		)
Cash paid for acquisitions, net of cash acquired	(194,128		)	(1,711,011		)
Acquisition of customer relationships	(43,556		)	(38,829		)
Customer inducements (see Note 2.b.)	(13,331		)	(6,212		)
Contract fulfillment costs (see Note 2.c.)	—			(18,520		)
Net proceeds from divestments	2,423			1,019
Proceeds from sales of property and equipment and other, net (including real estate)	8,937			713
Cash Flows from Investing Activities - Continuing Operations	(483,401		)	(2,102,793		)
Cash Flows from Investing Activities - Discontinued Operations	—			—
Cash Flows from Investing Activities	(483,401		)	(2,102,793		)
Cash Flows from Financing Activities:
Repayment of revolving credit facilities, term loan facilities and other debt	(9,662,160		)	(11,226,171		)
Proceeds from revolving credit facilities, term loan facilities and other debt	9,866,760			12,437,017
Early retirement of senior notes	(1,193,882		)	—
Net proceeds from sales of senior notes	1,320,183			—
Debt financing and equity contribution from noncontrolling interests	13,230			—
Debt repayment and equity distribution to noncontrolling interests	(3,601		)	(2,035		)
Parent cash dividends	(292,980		)	(505,403		)
Net proceeds associated with the Over-Allotment Option (see Note 9)	—			76,192
Net proceeds associated with the At the Market (ATM) Program	—			8,716
Net proceeds (payments) associated with employee stock-based awards	6,615			(2,800		)
Payment of debt financing and stock issuance costs	(12,685		)	(15,957		)
Cash Flows from Financing Activities - Continuing Operations	41,480			769,559
Cash Flows from Financing Activities - Discontinued Operations	—			—
Cash Flows from Financing Activities	41,480			769,559
Effect of Exchange Rates on Cash and Cash Equivalents	24,454			(19,332		)
Increase (Decrease) in Cash and Cash Equivalents	101,402			(728,023		)
Cash and Cash Equivalents, including Restricted Cash, Beginning of Period	236,484			925,699
Cash and Cash Equivalents, including Restricted Cash, End of Period	$	337,886		$	197,676
Supplemental Information:
Cash Paid for Interest	$	309,357		$	322,986
Cash Paid for Income Taxes, Net	$	67,716		$	49,061
Non-Cash Investing and Financing Activities:
Capital Leases	$	123,116		$	56,493
Accrued Capital Expenditures	$	50,085		$	60,062
Accrued Purchase Price and Other Holdbacks	$	—		$	27,919
Fair Value of Initial OSG Investment (see Note 10)	$	18,000		$	—
(Decrease) increase in Fair Value of OSG Investment (see Note 10)	$	(27	)	$	(25	)
Fair Value of Stock Issued for Fortrust Transaction (as defined in Note 6 to Notes to Consolidated Financial Statements included in our Annual Report)	$	83,014		$	—
Dividends Payable	$	151,972		$	174,136

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

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IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(1) General

The interim condensed consolidated financial statements are presented herein and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation. Interim results are not necessarily indicative of results for a full year. Iron Mountain Incorporated, a Delaware corporation ("IMI"), and its subsidiaries ("we" or "us") store records, primarily physical records and data backup media, provide colocation and wholesale data center spaces and provide information management and data center solutions that help organizations in various locations throughout North America, Europe, Latin America, Asia and Africa protect their information, lower storage rental costs, comply with regulations, facilitate corporate disaster recovery, and better use their information and information technology ("IT") infrastructure for business advantages, regardless of its format, location or life cycle stage. We currently serve customers across an array of market verticals - commercial, legal, financial, healthcare, insurance, life sciences, energy, business services, entertainment and government organizations.

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to those rules and regulations, but we believe that the disclosures included herein are adequate to make the information presented not misleading. The Condensed Consolidated Financial Statements and Notes thereto, which are included herein, should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2017 included in our Annual Report on Form 10-K filed with the SEC on February 16, 2018 (our "Annual Report").

We have been organized and have operated as a real estate investment trust for United States federal income tax purposes ("REIT") beginning with our taxable year ended December 31, 2014.

On January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). See Note 2.c.

On January 10, 2018, we completed the acquisition of IO Data Centers, LLC ("IODC"). See Note 4.

(2) Summary of Significant Accounting Policies

This Note 2 to Notes to Condensed Consolidated Financial Statements provides information and disclosure regarding certain of our significant accounting policies and should be read in conjunction with Note 2 to Notes to Consolidated Financial Statements included in our Annual Report, which may provide additional information with regard to the accounting policies set forth herein and other of our significant accounting policies.

a. Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash on hand and cash invested in highly liquid short-term securities, which have remaining maturities at the date of purchase of less than 90 days. Cash and cash equivalents are carried at cost, which approximates fair value.

At December 31, 2017 and September 30, 2018, we had approximately $22,167 and $17,941, respectively, of restricted cash held by certain financial institutions related to bank guarantees.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

b. Goodwill and Other Intangible Assets and Liabilities

Goodwill

Since December 31, 2017, there have been no changes to our accounting polices related to the accounting for goodwill. As of December 31, 2017 and September 30, 2018, no factors were identified that would alter our October 1, 2017 goodwill impairment analysis. 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 as of December 31, 2017 are described in detail in Note 2.h. to Notes to Consolidated Financial Statements included in our Annual Report. The goodwill associated with acquisitions completed during the first nine months of 2018 (which are described in Note 4) has been incorporated into our reporting units as they existed as of December 31, 2017.

During the first quarter of 2018, as a result of changes in the management of our businesses included in our Other International Business segment, we reassessed the composition of our reporting units. As a result of this reassessment, we determined that our business in South Africa, which was previously being managed in conjunction with our businesses in Northern and Eastern Europe and Middle East and India as a part of our former Northern and Eastern Europe and Middle East, Africa and India (“NEE and MEAI”) reporting unit, was now being managed in conjunction with our businesses included in our Australia and New Zealand reporting unit. This newly formed reporting unit, which consists of (i) the businesses included in our former Australia and New Zealand reporting unit and (ii) our business in South Africa is referred to as the Australia, New Zealand and South Africa (“ANZ-SA”) reporting unit. The former NEE and MEAI reporting unit is now referred to as the Northern and Eastern Europe and Middle East and India ("NEE and MEI") reporting unit.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

The changes in the carrying value of goodwill attributable to each reportable operating segment for the nine months ended September 30, 2018 are as follows:



	North American Records and Information Management Business			North American Data Management Business			Western European Business			Other International Business			Global Data Center Business			Corporate and Other Business			Total Consolidated
Gross Balance as of December 31, 2017	$	2,474,829		$	551,726		$	453,537		$	846,721		$	—		$	60,048		$	4,386,861
Deductible goodwill acquired during the year	—			—			—			—			—			7,345			7,345
Non-deductible goodwill acquired during the year	—			—			—			19,340			455,434			—			474,774
Goodwill allocated to IMFS Divestment (see Note 10)	(1,202		)	—			—			—			—			—			(1,202		)
Fair value and other adjustments(1)	(373		)	—			—			4,180			—			3,324			7,131
Currency effects	(5,611		)	(1,545		)	(13,175		)	(57,979		)	(1,105		)	(740		)	(80,155		)
Gross Balance as of September 30, 2018	$	2,467,643		$	550,181		$	440,362		$	812,262		$	454,329		$	69,977		$	4,794,754
Accumulated Amortization Balance as of December 31, 2017	$	205,383		$	53,875		$	57,048		$	288		$	—		$	—		$	316,594
Currency effects	(200		)	(50		)	(354		)	7			—			—			(597		)
Accumulated Amortization Balance as of September 30, 2018	$	205,183		$	53,825		$	56,694		$	295		$	—		$	—		$	315,997
Net Balance as of December 31, 2017	$	2,269,446		$	497,851		$	396,489		$	846,433		$	—		$	60,048		$	4,070,267
Net Balance as of September 30, 2018	$	2,262,460		$	496,356		$	383,668		$	811,967		$	454,329		$	69,977		$	4,478,757
Accumulated Goodwill Impairment Balance as of December 31, 2017	$	85,909		$	—		$	46,500		$	—		$	—		$	3,011		$	135,420
Accumulated Goodwill Impairment Balance as of September 30, 2018	$	85,909		$	—		$	46,500		$	—		$	—		$	3,011		$	135,420

_______________________________________________________________________________


(1)	Total fair value and other adjustments include $7,131 in net adjustments primarily related to property, plant and equipment, customer relationship intangible assets and deferred income taxes and other liabilities.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

Finite-lived intangible assets and liabilities

i. Customer Relationship Intangible Assets

Customer relationship intangible assets, which are acquired through either business combinations or acquisitions of customer relationships, are amortized over periods ranging from 10 to 30 years and are included in depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations. The value of customer relationship intangible assets is calculated based upon estimates of their fair value.

ii. Customer Inducements

Prior to the adoption of ASU 2014-09, free intake costs to transport boxes to one of our facilities, which include labor and transportation costs ("Free Move Costs"), were capitalized and amortized over periods ranging from 10 to 30 years. The amortization of Free Move Costs is included in depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017. Subsequent to the adoption of ASU 2014-09, Free Move Costs are considered a Contract Fulfillment Cost (as defined in Note 2.c.) and, therefore, are now deferred and amortized and included in amortization expense over three years, consistent with the transfer of the performance obligation to the customer to which the asset relates. See Note 2.c. for information regarding the accounting for Free Move Costs, which are now a component of Intake Costs (as defined in Note 2.c.), following the adoption of ASU 2014-09.

Payments that are made to a customer's current records management vendor in order to terminate the customer's existing contract with that vendor, or direct payments to a customer ("Permanent Withdrawal Fees"), are amortized over periods ranging from 5 to 15 years and are included in storage and service revenue in the accompanying Condensed Consolidated Statements of Operations. Our accounting for Permanent Withdrawal Fees did not change as a result of the adoption of ASU 2014-09.

Free Move Costs (prior to the adoption of ASU 2014-09) and Permanent Withdrawal Fees are collectively referred to as "Customer Inducements". If the customer terminates its relationship with us, the unamortized carrying value of the Customer Inducement intangible asset is charged to expense or revenue. However, in the event of such termination, we generally collect, and record as income, permanent removal fees that generally equal or exceed the amount of the unamortized Customer Inducement intangible asset.

Table of Contents

IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

iii. Data Center Intangible Assets and Liabilities

Finite-lived intangible assets associated with our data center business consist of the following:

Data Center In-Place Lease Intangible Assets and Data Center Tenant Relationship Intangible Assets

Data Center In-Place Lease Intangible Assets (“Data Center In-Place Leases”) and Data Center Tenant Relationship Intangible Assets (“Data Center Tenant Relationships") are acquired through either business combinations or asset acquisitions in our data center business. These intangible assets reflect the value associated with acquiring a data center operation with active tenants as of the date of acquisition. The value of Data Center In-Place Leases is determined based upon an estimate of the economic costs (such as lost revenues and unreimbursed operating expenses during the lease-up period, tenant improvement costs, commissions, legal expenses and other costs to acquire new data center leases) avoided by acquiring a data center operation with active tenants that would have otherwise been incurred if the data center operation was purchased vacant. Data Center In-Place Leases are amortized over the weighted average remaining term of the acquired data center leases and are included in depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations. The value of Data Center Tenant Relationships is determined based upon an estimate of the economic costs avoided upon lease renewal of the acquired tenants, based upon expectations of lease renewal. Data Center Tenant Relationships are amortized over the weighted average remaining anticipated life of the relationship with the acquired tenant and are included in depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations. Data Center In-Place Leases and Data Center Tenant Relationships are included in Customer relationships, customer inducements and data center lease-based intangibles in the accompanying Condensed Consolidated Balance Sheets.

Data Center Above-Market and Below-Market In-Place Lease Intangible Assets

Data Center Above-Market In-Place Lease Intangible Assets (“Data Center Above-Market Leases”) and Data Center Below-Market In-Place Lease Intangible Assets (“Data Center Below-Market Leases”) are acquired through either business combinations or asset acquisitions in our data center business. We record Data Center Above-Market Leases and Data Center Below-Market Leases at the net present value of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of the fair market lease rates for each corresponding in-place lease. Data Center Above-Market Leases and Data Center Below-Market Leases are amortized over the remaining non-cancellable term of the acquired in-place lease to storage revenue in the accompanying Condensed Consolidated Statements of Operations. Data Center Above-Market Leases are included in Customer relationships, customer inducements and data center lease-based intangibles in the accompanying Condensed Consolidated Balance Sheets. Data Center Below-Market Leases are included in Other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets.

Table of Contents

IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

The components of our finite-lived intangible assets related to customer relationship value, customer inducements and data center lease-based intangible assets and liabilities as of December 31, 2017 and September 30, 2018 are as follows:



	December 31, 2017							September 30, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Assets:
Customer relationship intangible assets	$	1,704,105	$	(395,278	)	$	1,308,827	$	1,693,426	$	(439,048	)	$	1,254,378
Customer inducements(1)	140,030		(66,981		)	73,049		56,288		(34,374		)	21,914
Data center lease-based intangible assets(2)	19,314		(643		)	18,671		276,565		(36,006		)	240,559
	$	1,863,449	$	(462,902	)	$	1,400,547	$	2,026,279	$	(509,428	)	$	1,516,851
Liabilities:
Data center below-market leases	$	—	$	—		$	—	$	12,355	$	(1,231	)	$	11,124

_______________________________________________________________________________

(1)

The gross carrying amount, accumulated amortization and net carrying amount of customer inducements as of December 31, 2017 includes Free Move Costs, which were capitalized as Customer Inducements prior to the adoption of ASU 2014-09. Subsequent to the adoption of ASU 2014-09, Free Move Costs are considered Contract Fulfillment Costs and Customer Inducements consist exclusively of Permanent Withdrawal Fees. Contract Fulfillment Costs are included in Other, a component of Other Assets, Net, in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2018. See Note 2.c. for information regarding Contract Fulfillment Costs included in our Condensed Consolidated Balance Sheet as of September 30, 2018.


(2)	Includes Data Center In-Place Leases, Data Center Tenant Relationships and Data Center Above-Market Leases.

Other finite-lived intangible assets, including trade names, noncompetition agreements and trademarks, are capitalized and amortized and are included in depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2018. The other finite-lived intangible assets as of December 31, 2017 and September 30, 2018 are as follows:



	December 31, 2017							September 30, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Other finite-lived intangible assets (included in other assets, net)	$	20,929	$	(10,728	)	$	10,201	$	20,284	$	(13,680	)	$	6,604

Table of Contents

IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

Amortization expense associated with finite-lived intangible assets, revenue reduction associated with the amortization of Permanent Withdrawal Fees and net revenue reduction associated with the amortization of Data Center Above-Market Leases and Data Center Below-Market Leases for the three and nine months ended September 30, 2017 and 2018 are as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2018		2017		2018
Amortization expense included in depreciation and amortization associated with:
Customer relationship and customer inducement intangible assets	$	26,889	$	26,782	$	74,299	$	84,401
Data center in-place leases and tenant relationships	—		12,036		—		30,437
Other finite-lived intangible assets	1,051		642		4,540		3,486
Revenue reduction associated with amortization of:
Permanent withdrawal fees	$	2,721	$	3,229	$	8,627	$	8,782
Data center above-market leases and data center below-market leases	—		1,276		—		3,648

c. Revenues

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09. ASU 2014-09 provides 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, (4) licenses, (5) time value of money, and (6) contract costs. We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective method for all of our customer contracts, whereby the cumulative effect of applying ASU 2014-09 is recognized at the date of initial application. At January 1, 2018, we recognized the cumulative effect of initially applying ASU 2014-09 as an adjustment to the opening balance of (distributions in excess of earnings) earnings in excess of distributions, resulting in a decrease of $30,233 to stockholders' equity. The reduction of (distribution in excess of earnings) earnings in excess of distributions represents the net effect of (i) the write-off of Free Move Costs, net (which were capitalized and amortized prior to the adoption of ASU 2014-09) based upon the net book value of the Free Move Costs as of December 31, 2017, (ii) the recognition of certain Contract Fulfillment Costs, specifically Intake Costs (each as defined below) and commission assets, (iii) the recognition of deferred revenue associated with Intake Costs billed to our customers (as discussed below), and (iv) the deferred income tax impact of the aforementioned items. As we adopted ASU 2014-09 on a modified retrospective basis, the comparative Condensed Consolidated Balance Sheet as of December 31, 2017, the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017 and the Condensed Consolidated Statement of Equity and the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 have not been restated to reflect the adoption of ASU 2014-09 and reflect our revenue policies in place at that time, as disclosed in Note 2.l. to Notes to Consolidated Financial Statements included in our Annual Report.

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. The performance obligation is a series of distinct services (as determined for purposes of ASU 2014-09, a “series”) that have the same pattern of transfer to the customer that is satisfied over time. For those contracts that qualify as a series, we have a right to consideration from the customer in an amount that corresponds directly with the value of the underlying performance obligation transferred to the customer to date. This concept is known as "right to invoice" and we are applying the "right to invoice" practical expedient to all revenues, with the exception of storage revenues in our data center business.

Table of Contents

IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

For all of our businesses, with the exception of the storage component of our data center business, each purchasing decision is fully in the control of the customer and, therefore, consideration beyond the current reporting period is variable and allocated to the specific period, which is consistent with the practical expedient above. Our data center business features storage rental provided to the customer at contractually specified rates over a fixed contractual period. The storage rental revenue related to the storage component of our data center business is recognized on a straight-line basis over the contract term. The revenue related to the service component of our data center business is recognized in the period the data center access or related services are provided. Total data center revenues represent approximately 5% of our total consolidated revenues for the nine months ended September 30, 2018.

The costs associated with the initial movement of customer records into physical storage and certain commissions are considered costs to obtain or fulfill customer contracts (“Contract Fulfillment Costs”). The following describes each of these Contract Fulfillment Costs recognized under ASU 2014-09:

Intake Costs (and associated deferred revenue)

Prior to the adoption of ASU 2014-09, intake costs incurred but not charged to a customer to transport records to our facilities (or Free Move Costs, as described in Note 2.b.), which include labor and transportation costs, were capitalized and amortized as a component of depreciation and amortization in our Consolidated Statements of Operations. The initial movement of customer records into physical storage must take place prior to initiation of the storage of records and is not considered a separate performance obligation and, therefore, the costs of the initial intake of customer records into physical storage (“Intake Costs”) represent a contract fulfillment cost for the storage of records as the earnings process does not commence until a customer’s records or other assets are in our possession. Accordingly, upon the adoption of ASU 2014-09, all Intake Costs, regardless of whether or not the services associated with such initial moves are billed to the customer or are provided to the customer at no charge, will be deferred and amortized as a component of depreciation and amortization in our Consolidated Statements of Operations over three years, consistent with the transfer of the performance obligation to the customer to which the asset relates. Similarly, in instances where such Intake Costs are billed to the customer, the associated revenue will be deferred and recognized over the same three year period.

Commissions

Prior to the adoption of ASU 2014-09, commissions we paid related to our long-term storage contracts were expensed as incurred. Upon the adoption of ASU 2014-09, certain commission payments that are directly associated with the fulfillment of long-term storage contracts are capitalized and amortized as a component of depreciation and amortization in our Consolidated Statements of Operations over three years, consistent with the transfer of the performance obligation to the customer to which the asset relates. Certain direct commission payments associated with contracts with a duration of one year or less are expensed as incurred under the practical expedient which allows an entity to expense as incurred an incremental cost of obtaining a contract if the amortization period of the asset that the entity otherwise would have recognized is one year or less.

The Contract Fulfillment Costs recorded as a result of the adoption of ASU 2014-09 as of January 1, 2018 and September 30, 2018 are as follows:



		January 1, 2018 (Date of Adoption of ASU 2014-09)							September 30, 2018
Description	Location in Balance Sheet	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intake Costs asset	Other (within Other Assets, Net)	$	31,604	$	(14,954	)	$	16,650	$	37,605	$	(22,185	)	$	15,420
Commissions asset	Other (within Other Assets, Net)	42,072		(21,173		)	20,899		53,877		(31,386		)	22,491

Table of Contents

IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

Amortization expense associated with the Intake Costs asset and commissions asset for the three and nine months ended September 30, 2018 are as follows:



	Three Month Ended September 30, 2018		Nine Months Ended September 30, 2018
Intake Costs asset	$	2,294	$	7,915
Commissions asset	3,053		10,433

Deferred revenue liabilities associated with billed Intake Costs recorded as a result of the adoption of ASU 2014-09 as of January 1, 2018 and September 30, 2018 are as follows:



Description	Location in Balance Sheet	January 1, 2018 (Date of Adoption of ASU 2014-09)		September 30, 2018
Deferred revenue - Current	Deferred revenue	$	9,671	$	9,510
Deferred revenue - Long-term	Other Long-term Liabilities	9,877		7,590

The following table presents certain components of our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 as reported and as if we had not adopted ASU 2014-09 on January 1, 2018:



	Three Months Ended September 30, 2018				Nine Months Ended September 30, 2018
	As Reported		If ASU 2014-09 was not adopted		As Reported		If ASU 2014-09 was not adopted
Revenues	$	1,060,991	$	1,059,319	$	3,164,272	$	3,158,191
Operating Income	$	195,746	$	193,578	$	563,664	$	560,561
Income from Continuing Operations	$	78,628	$	76,462	$	218,145	$	215,044

Per Share Income from Continuing Operations - Basic	$	0.28	$	0.27	$	0.76	$	0.75
Per Share Income from Continuing Operations - Diluted	$	0.27	$	0.27	$	0.76	$	0.75

d. Stock-Based Compensation

We record stock-based compensation expense, utilizing the straight-line method, for the cost of stock options, restricted stock units ("RSUs"), performance units ("PUs") and shares of stock issued under our employee stock purchase plan ("ESPP") (together, "Employee Stock-Based Awards"). There have been no significant changes to our accounting policies, assumptions and valuation methodologies related to the accounting for our Employee Stock-Based Awards as disclosed in Note 2.n. to Notes to Consolidated Financial Statements included in our Annual Report.

Stock-based compensation expense for Employee Stock-Based Awards for the three and nine months ended September 30, 2017 was $7,761 ($6,851 after tax or $0.03 per basic and diluted share) and $22,853 ($20,174 after tax or $0.08 per basic and diluted share), respectively. Stock-based compensation expense for Employee Stock-Based Awards for the three and nine months ended September 30, 2018 was $7,279 ($6,734 after tax or $0.02 per basic and diluted share) and $23,352 ($21,599 after tax or $0.08 per basic and diluted share), respectively. As of September 30, 2018, unrecognized compensation cost related to the unvested portion of our Employee Stock-Based Awards was $50,089 and is expected to be recognized over a weighted-average period of 2.0 years.

Table of Contents

IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2018		2017		2018
Cost of sales (excluding depreciation and amortization)	$	25	$	29	$	80	$	87
Selling, general and administrative expenses	7,736		7,250		22,773		23,265
Total stock-based compensation	$	7,761	$	7,279	$	22,853	$	23,352

Stock Options

A summary of stock option activity for the nine months ended September 30, 2018 is as follows:



	Stock Options
Outstanding at December 31, 2017	3,671,740
Granted	846,517
Exercised	(163,418	)
Forfeited	(38,533	)
Expired	(16,062	)
Outstanding at September 30, 2018	4,300,244
Options exercisable at September 30, 2018	2,388,037
Options expected to vest	1,817,579

Restricted Stock Units

The fair value of RSUs vested during the three and nine months ended September 30, 2017 and 2018 is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2018		2017		2018
Fair value of RSUs vested	$	1,933	$	3,189	$	18,006	$	19,195

A summary of RSU activity for the nine months ended September 30, 2018 is as follows:



	RSUs
Non-vested at December 31, 2017	1,071,469
Granted	746,704
Vested	(546,299	)
Forfeited	(79,140	)
Non-vested at September 30, 2018	1,192,734

Table of Contents

IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

Performance Units

Under our various equity compensation plans, we may also make awards of PUs. For the majority of outstanding PUs, the number of PUs earned is determined based on our performance against predefined targets of revenue and return on invested capital ("ROIC") and, beginning with PUs granted in 2018, Adjusted EBITDA (as defined in Note 7). The number of PUs earned may range from 0% to 200% 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 a three-year performance period. Certain PUs that we grant will be earned based on a market condition associated with the total return on our common stock in relation to either (i) a subset of the Standard & Poor's 500 Index (for certain PUs granted prior to 2017), or (ii) the MSCI United States REIT Index (for certain PUs granted in 2017 and thereafter), rather than the revenue, ROIC and Adjusted EBITDA targets noted above. The number of PUs earned based on the applicable market condition may range from 0% to 200% of the initial award.

We forecast the likelihood of achieving the predefined revenue, ROIC and Adjusted EBITDA targets for our PUs 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 performance period) or the actual PUs earned (at the three-year anniversary of the grant date) over the vesting period for each of the awards. The fair value of PUs based on our performance against revenue, ROIC and Adjusted EBITDA targets is the excess of the market price of our common stock at the date of grant over the purchase price (which is typically zero). For PUs earned based on a market condition, we utilize a Monte Carlo simulation to fair value these awards at the date of grant, and such fair value is expensed over the three-year performance period. As of September 30, 2018, we expected 65%, 110% and 100% achievement of the predefined revenue, ROIC and Adjusted EBITDA targets associated with the awards of PUs made in 2016, 2017 and 2018, respectively.

The fair value of earned PUs that vested during the three and nine months ended September 30, 2017 and 2018 is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2018		2017		2018
Fair value of earned PUs that vested	$	52	$	84	$	957	$	3,117

A summary of PU activity for the nine months ended September 30, 2018 is as follows:



	Original PU Awards		PU Adjustment(1)		Total PU Awards
Non-vested at December 31, 2017	717,878		(250,067	)	467,811
Granted	353,507		—		353,507
Vested	(81,305	)	—		(81,305	)
Forfeited/Performance or Market Conditions Not Achieved	(16,513	)	(49,881	)	(66,394	)
Non-vested at September 30, 2018	973,567		(299,948	)	673,619

_______________________________________________________________________________


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

Table of Contents

IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

e. Income (Loss) Per Share—Basic and Diluted

Basic income (loss) per common share is calculated by dividing income (loss) by the weighted average number of common shares outstanding. The calculation of diluted income (loss) per share is consistent with that of basic income (loss) per share but gives effect to all potential common shares (that is, securities such as stock options, RSUs or PUs) that were outstanding during the period, unless the effect is antidilutive.

The calculation of basic and diluted income (loss) per share for the three and nine months ended September 30, 2017 and 2018 is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2018			2017			2018
Income (loss) from continuing operations	$	25,382		$	78,628		$	167,374		$	218,145
Less: Net income (loss) attributable to noncontrolling interests	(21		)	(125		)	2,853			485
Income (loss) from continuing operations (utilized in numerator of Earnings Per Share calculation)	$	25,403		$	78,753		$	164,521		$	217,660
(Loss) income from discontinued operations, net of tax	$	(1,058	)	$	(11,605	)	$	(3,421	)	$	(12,427	)
Net income (loss) attributable to Iron Mountain Incorporated	$	24,345		$	67,148		$	161,100		$	205,233

Weighted-average shares—basic	265,198,000			286,159,000			264,423,000			285,801,000
Effect of dilutive potential stock options	414,258			264,451			423,688			250,574
Effect of dilutive potential RSUs and PUs	526,725			558,891			446,002			463,583
Weighted-average shares—diluted	266,138,983			286,982,342			265,292,690			286,515,157

Earnings (losses) per share—basic:
Income (loss) from continuing operations	$	0.10		$	0.28		$	0.62		$	0.76
(Loss) income from discontinued operations, net of tax	—			(0.04		)	(0.01		)	(0.04		)
Net income (loss) attributable to Iron Mountain Incorporated(1)	$	0.09		$	0.23		$	0.61		$	0.72

Earnings (losses) per share—diluted:
Income (loss) from continuing operations	$	0.10		$	0.27		$	0.62		$	0.76
(Loss) income from discontinued operations, net of tax	—			(0.04		)	(0.01		)	(0.04		)
Net income (loss) attributable to Iron Mountain Incorporated(1)	$	0.09		$	0.23		$	0.61		$	0.72

Antidilutive stock options, RSUs and PUs, excluded from the calculation	2,620,225			3,253,975			2,605,203			3,256,206

_______________________________________________________________________________

(1) Columns may not foot due to rounding.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

f. Income Taxes

We provide for income taxes during interim periods based on our estimate of the effective tax rate for the year. Our estimate of the effective tax rate for the year ending December 31, 2018 reflects the impact of the Tax Reform Legislation (as defined below). Discrete items and changes in our estimate of the annual effective tax rate are recorded in the period they occur. Our effective tax rate is subject to variability in the future due to, among other items: (1) changes in the mix of income between our qualified REIT subsidiaries ("QRSs") and our domestic taxable REIT subsidiaries ("TRSs"), as well as among the jurisdictions in which we operate; (2) tax law changes; (3) volatility in foreign exchange gains and losses; (4) the timing of the establishment and reversal of tax reserves; and (5) our ability to utilize net operating losses that we generate.

Our effective tax rates for the three and nine months ended September 30, 2017 were 8.0% and 15.1%, respectively. The primary reconciling items between the then current federal statutory tax rate of 35.0% and our overall effective tax rate for the three months ended September 30, 2017 were the benefit derived from the dividends paid deduction, differences in the rates of tax at which our foreign earnings are subject and a release of valuation allowances on certain of our foreign net operating losses of $18,457 as a result of the merger of certain of our foreign subsidiaries. The primary reconciling items between the then current federal statutory tax rate of 35.0% and our overall effective tax rate for the nine months ended September 30, 2017 were the benefit derived from the dividends paid deduction, differences in the rates of tax at which our foreign earnings are subject and a release of valuation allowances on certain of our foreign net operating losses of $25,968 as a result of the merger of certain of our foreign subsidiaries. Our effective tax rates for the three and nine months ended September 30, 2018 were 15.6% and 16.2%, respectively. The primary reconciling items between the current federal statutory tax rate of 21.0% and our overall effective tax rate for the three months ended September 30, 2018 were the benefit derived from the dividends paid deduction and the impact of differences in the tax rates at which our foreign earnings are subject, including foreign exchange gains and losses in different jurisdictions with different tax rates. The primary reconciling items between the current federal statutory tax rate of 21.0% and our overall effective tax rate for the nine months ended September 30, 2018 were the benefit derived from the dividends paid deduction, a discrete tax benefit of approximately $14,000 associated with the resolution of a tax matter (as disclosed in Note 7 to Notes to Consolidated Financial Statements included in our Annual Report), and the impact of differences in the tax rates at which our foreign earnings are subject, including foreign exchange gains and losses in different jurisdictions with different tax rates.

On December 22, 2017, legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Legislation”) was enacted into law in the United States. The Tax Reform Legislation amended the Internal Revenue Code of 1986, as amended (the “Code”), to reduce tax rates and modify policies, credits and deductions for businesses and individuals. The components of the Tax Reform Legislation are described in detail in Note 7 to Notes to Consolidated Financial Statements included in our Annual Report. One of the primary components of the Tax Reform Legislation was a reduction in the United States corporate federal income tax rate from 35.0% to 21.0% for taxable years beginning after December 31, 2017.

The Tax Reform Legislation also imposes a transition tax (the “Deemed Repatriation Transition Tax”) on a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits not previously subject to United States tax as of November 2, 2017 or December 31, 2017, whichever is greater (the “Undistributed E&P”), as of the last taxable year beginning before January 1, 2018. The Deemed Repatriation Transition Tax varies depending on whether the Undistributed E&P is held in liquid (as defined in the Tax Reform Legislation) or non-liquid assets. A participation deduction against the deemed repatriation will result in a Deemed Repatriation Transition Tax on Undistributed E&P of 15.5% if held in cash and liquid assets and 8.0% if held in non-liquid assets. The Deemed Repatriation Transition Tax applies regardless of whether or not an entity has cash in its foreign subsidiaries and regardless of whether the entity actually repatriates the Undistributed E&P back to the United States.

We have completed our analysis and determined that the amount of Undistributed E&P deemed repatriated under the Tax Reform Legislation in our taxable year ending December 31, 2017 was $160,000 (the “Undistributed E&P”). We opted to include the full amount of Undistributed E&P in our 2017 taxable income, rather than spread it over eight years (as permitted by the Tax Reform Legislation). Accordingly, included in our REIT taxable income for 2017 was approximately $70,900 related to the deemed repatriation of Undistributed E&P. This final determination will not affect our shareholder dividend reporting for 2017.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

g. Fair Value Measurements

Our financial assets or liabilities that are carried at fair value are required to be measured using inputs from the three levels of the fair value hierarchy. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The three levels of the fair value hierarchy are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3—Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

The assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2017 and September 30, 2018, respectively, are as follows:



			Fair Value Measurements at December 31, 2017 Using
Description	Total Carrying Value at December 31, 2017		Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
Money Market Funds(1)	$	585,000	$	—		$	585,000		$	—
Time Deposits(1)	24,482		—			24,482			—
Trading Securities	11,784		11,279		(2)	505		(3)	—
Derivative Assets(4)	1,579		—			1,579			—
Derivative Liabilities(4)	2,329		—			2,329			—



			Fair Value Measurements at September 30, 2018 Using
Description	Total Carrying Value at September 30, 2018		Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
Time Deposits(1)	$	5,661	$	—		$	5,661		$	—
Trading Securities	11,268		10,583		(2)	685		(3)	—
Derivative Liabilities(4)	365		—			365			—
Interest Rate Swap Agreements Assets(5)	4,183		—			4,183			—

_______________________________________________________________________________


(1)	Money market funds and time deposits are measured based on quoted prices for similar assets and/or subsequent transactions. At December 31, 2017, we had money market funds with 12 "Triple A" rated money market funds and time deposits with seven global banks. At September 30, 2018, we had no money market funds and time deposits with seven global banks.


(2)	Certain trading securities are measured at fair value using quoted market prices.


(3)	Certain trading securities are measured based on inputs other than quoted market prices that are observable.

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IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

(4)

Derivative assets and liabilities relate to short-term (six months or less) foreign currency contracts that we have entered into to hedge certain of our foreign exchange intercompany exposures, as more fully disclosed in Note 3. We calculate the value of such forward contracts by adjusting the spot rate utilized at the balance sheet date for translation purposes by an estimate of the forward points observed in active markets.


(5)	We have entered into interest rate swap agreements to hedge certain of our interest rate exposures, as more fully disclosed in Note 3. The interest rate swap agreements are designated as cash flow hedges and are measured based on inputs other than quoted market prices that are observable.

Disclosures are required in the financial statements for items measured at fair value on a non-recurring basis. There were no material items that are measured at fair value on a non-recurring basis at December 31, 2017 and September 30, 2018, other than those disclosed in Note 2.s. to Notes to Consolidated Financial Statements included in our Annual Report and the acquisitions that occurred during the nine months ended September 30, 2018.

The fair value of our long-term debt, which was determined based on either Level 1 inputs or Level 3 inputs, is disclosed in Note 5. Long-term debt is measured at cost in our Condensed Consolidated Balance Sheets as of December 31, 2017 and September 30, 2018.

h. Accumulated Other Comprehensive Items, Net

The changes in accumulated other comprehensive items, net for the three and nine months ended September 30, 2017, respectively, are as follows:



	Three Months Ended September 30, 2017						Nine Months Ended September 30, 2017
	Foreign Currency Translation Adjustments			Total			Foreign Currency Translation Adjustments			Total
Beginning of Period	$	(153,590	)	$	(153,590	)	$	(212,573	)	$	(212,573	)
Other comprehensive income (loss):
Foreign currency translation adjustments(1)	38,247			38,247			97,230			97,230
Total other comprehensive income (loss)	38,247			38,247			97,230			97,230
Balance as of September 30, 2017	$	(115,343	)	$	(115,343	)	$	(115,343	)	$	(115,343	)

______________________________________________________________


(1)	During the nine months ended September 30, 2017, approximately $29,100 of cumulative translation adjustments associated with our businesses in Russia and Ukraine was reclassified from accumulated other comprehensive items, net and was included in the gain on sale associated with the Russia and Ukraine Divestment (as defined and discussed more fully in Note 10).

Table of Contents

IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

The changes in accumulated other comprehensive items, net for the three and nine months ended September 30, 2018, respectively, are as follows:



	Three Months Ended September 30, 2018								Nine Months Ended September 30, 2018
	Foreign Currency Translation Adjustments			Fair Value Adjustments for Interest Rate Swap Agreements		Total			Foreign Currency Translation Adjustments			Fair Value Adjustments for Interest Rate Swap Agreements		Total
Beginning of Period	$	(209,653	)	$	2,203	$	(207,450	)	$	(103,989	)	$	—	$	(103,989	)
Other comprehensive (loss) income:
Foreign currency translation adjustments	(22,790		)	—		(22,790		)	(128,454		)	—		(128,454		)
Fair value adjustments for interest rate swap agreements	—			1,980		1,980			—			4,183		4,183
Total other comprehensive (loss) income	(22,790		)	1,980		(20,810		)	(128,454		)	4,183		(124,271		)
Balance as of September 30, 2018	$	(232,443	)	$	4,183	$	(228,260	)	$	(232,443	)	$	4,183	$	(228,260	)

i. Other Expense (Income), Net (including Foreign Currency)

Other expense (income), net for the three and nine months ended September 30, 2017 and 2018 consists of the following:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2018			2017			2018
Foreign currency transaction losses (gains), net	$	11,865		$	664		$	27,900		$	3,825
Debt extinguishment expense	48,298			—			48,298			—
Other, net	(684		)	(339		)	(42,449		)	(2,405		)
	$	59,479		$	325		$	33,749		$	1,420

The gain or loss on foreign currency transactions, calculated as the difference between the historical exchange rate and the exchange rate at the applicable measurement date include gains or losses related to (i) borrowings in certain foreign currencies under our Former Revolving Credit Facility (as defined and discussed in Note 4 to Notes to Consolidated Financial Statements included in our Annual Report) and the Revolving Credit Facility (as defined and discussed more fully in Note 5), (ii) our Euro Notes (as defined and discussed more fully in Note 5), (iii) certain foreign currency denominated intercompany obligations of our foreign subsidiaries to us and between our foreign subsidiaries, which are not considered permanently invested, and (iv) amounts that are paid or received on the net settlement amount from forward contracts (as more fully discussed in Note 3).

We recorded a debt extinguishment charge of $48,298 in the three and nine months ended September 30, 2017, primarily related to the early extinguishment of (i) the 6% Senior Notes due 2020 and (ii) the 6¹/₈% CAD Senior Notes due 2021 ("CAD Notes due 2021"), consisting of the write-off of unamortized deferred financing costs and call premiums.

Other, net for the nine months ended September 30, 2017 includes a gain of $38,869 associated with the Russia and Ukraine Divestment (see Note 10).

Table of Contents

IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(2) Summary of Significant Accounting Policies (Continued)

j. New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09. We adopted ASU 2014-09 on January 1, 2018 using the modified retrospective method. See Note 2.c. for information regarding the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income, while eliminating the available-for-sale classification for equity securities with readily determinable fair values and the cost method for equity investments without readily determinable fair values. ASU 2016-01 also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. We adopted ASU 2016-01 on January 1, 2018. ASU 2016-01 did not have an impact on our consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). ASU 2017-12 amends the hedge accounting recognition and presentation requirements as outlined in Accounting Standards Codification Topic 815 with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and enhance the transparency and understandability of hedge transactions. In addition, ASU 2017-12 simplifies the application of the hedge accounting guidance. We adopted ASU 2017-12 on January 1, 2018. ASU 2017-12 did not have a material impact on our consolidated financial statements.

Other As Yet Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU 2016-02 also will require certain qualitative and quantitative disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 will be effective for us on January 1, 2019. We have established a cross functional project team responsible for the assessment and implementation of ASU 2016-02. We have also entered into an agreement for the use of a lease accounting software solution that will support us in meeting the accounting and reporting requirements specific to ASU 2016-02, and are in the process of implementing this solution. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”) and ASU No. 2018-11, Leases (Topic 842) Targeted Improvements (“ASU 2018-11”). ASU 2018-10 amends certain aspects of the guidance issued in ASU 2016-02. ASU 2018-11 provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02; specifically, (1) entities may elect not to recast the comparative periods presented when transitioning to ASU 2016-02, and (2) lessors may elect not to separate lease and nonlease components when certain conditions are met. We are currently evaluating the impact ASU 2016-02, including ASU 2018-10 and ASU 2018-11, will have on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) ("ASU 2018-15"). ASU 2018-15 aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. ASU 2018-15 is effective for us on January 1, 2020, with early adoption permitted. We do not expect ASU 2018-15 will have a material impact on our consolidated financial statements.

Table of Contents

IRON MOUNTAIN INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In Thousands, Except Share and Per Share Data)

(Unaudited)

(3) Derivative Instruments and Hedging Activities

Historically, we have entered into forward contracts to hedge our exposures associated with certain foreign currencies. As of December 31, 2017, we had outstanding forward contracts to (i) purchase 138,823 United States dollars and sell 176,000 Canadian dollars, (ii) purchase 135,000 Euros and sell 160,757 United States dollars and (iii) purchase 114,390 United States dollars and sell 96,150 Euros to hedge our foreign exchange exposures. As of September 30, 2018, we had outstanding forward contracts to purchase 30,000 Euros and sell 35,436 United States dollars. We have not designated any of the forward contracts we have entered into as hedges.

Net cash receipts (payments) included in cash from operating activities related to settlements associated with foreign currency forward contracts for the three and nine months ended September 30, 2017 and 2018 are as follows:

Three Months Ended
September 30,