IRM 2015.6.30-10Q
Table of Contents


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 June 30, 2015
 
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 July 24, 2015: 210,825,694

Table of Contents

IRON MOUNTAIN INCORPORATED
Index

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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, 2014
 
June 30, 2015
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
125,933

 
$
117,098

Restricted cash
33,860

 
—

Accounts receivable (less allowances of $32,141 and $35,852 as of December 31, 2014 and June 30, 2015, respectively)
604,265

 
596,252

Deferred income taxes
14,192

 
21,609

Prepaid expenses and other
139,469

 
139,768

Total Current Assets
917,719

 
874,727

Property, Plant and Equipment:
 

 
 

Property, plant and equipment
4,668,705

 
4,681,792

Less—Accumulated depreciation
(2,117,978
)
 
(2,188,779
)
Property, Plant and Equipment, net
2,550,727

 
2,493,013

Other Assets, net:
 

 
 

Goodwill
2,423,783

 
2,388,697

Customer relationships and acquisition costs
607,837

 
595,468

Deferred financing costs
47,077

 
43,827

Other
23,199

 
26,845

Total Other Assets, net
3,101,896

 
3,054,837

Total Assets
$
6,570,342

 
$
6,422,577

LIABILITIES AND EQUITY
 

 
 

Current Liabilities:
 

 
 

Current portion of long-term debt
$
52,095

 
$
70,235

Accounts payable
203,014

 
162,238

Accrued expenses
404,485

 
333,811

Deferred revenue
197,142

 
185,851

Total Current Liabilities
856,736

 
752,135

Long-term Debt, net of current portion
4,611,436

 
4,718,915

Other Long-term Liabilities
73,506

 
79,124

Deferred Rent
104,051

 
100,336

Deferred Income Taxes
54,658

 
49,842

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 209,818,812 shares and 210,798,520 shares as of December 31, 2014 and June 30, 2015, respectively)
2,098

 
2,108

Additional paid-in capital
1,588,841

 
1,603,278

(Distributions in excess of earnings) Earnings in excess of distributions
(659,553
)
 
(766,849
)
Accumulated other comprehensive items, net
(75,031
)
 
(129,750
)
Total Iron Mountain Incorporated Stockholders' Equity
856,355

 
708,787

Noncontrolling Interests
13,600

 
13,438

Total Equity
869,955

 
722,225

Total Liabilities and Equity
$
6,570,342

 
$
6,422,577

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
June 30,
 
2014
 
2015
Revenues:
 

 
 

Storage rental
$
466,889

 
$
461,209

Service
320,003

 
298,525

Total Revenues
786,892

 
759,734

Operating Expenses:
 

 
 

Cost of sales (excluding depreciation and amortization)
336,961

 
326,283

Selling, general and administrative
213,807

 
215,885

Depreciation and amortization
88,941

 
87,549

(Gain) Loss on disposal/write-down of property, plant and equipment (excluding real estate), net
(107
)
 
515

Total Operating Expenses
639,602

 
630,232

Operating Income (Loss)
147,290

 
129,502

Interest Expense, Net (includes Interest Income of $1,378 and $831 for the three months ended June 30, 2014 and 2015, respectively)
62,201

 
66,087

Other (Income) Expense, Net
(4,838
)
 
2,004

Income (Loss) from Continuing Operations Before (Benefit) Provision for Income Taxes
89,927

 
61,411

(Benefit) Provision for Income Taxes
(182,775
)
 
7,404

Income (Loss) from Continuing Operations
272,702

 
54,007

(Loss) Income from Discontinued Operations, Net of Tax
(326
)
 
—

Net Income (Loss)
272,376

 
54,007

Less: Net Income (Loss) Attributable to Noncontrolling Interests
739

 
677

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
271,637

 
$
53,330

Earnings (Losses) per Share—Basic:
 

 
 

Income (Loss) from Continuing Operations
$
1.42

 
$
0.26

Total (Loss) Income from Discontinued Operations
$
—

 
$
—

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
1.41

 
$
0.25

Earnings (Losses) per Share—Diluted:
 

 
 

Income (Loss) from Continuing Operations
$
1.41

 
$
0.25

Total (Loss) Income from Discontinued Operations
$
—

 
$
—

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
1.40

 
$
0.25

Weighted Average Common Shares Outstanding—Basic
192,381

 
210,699

Weighted Average Common Shares Outstanding—Diluted
193,526

 
212,077

Dividends Declared per Common Share
$
0.2705

 
$
0.4752

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)
 
Six Months Ended
June 30,
 
2014
 
2015
Revenues:
 

 
 

Storage rental
$
925,778

 
$
920,081

Service
631,240

 
588,939

Total Revenues
1,557,018

 
1,509,020

Operating Expenses:
 

 
 

Cost of sales (excluding depreciation and amortization)
672,106

 
647,937

Selling, general and administrative
428,587

 
412,299

Depreciation and amortization
175,374

 
173,500

Loss (Gain) on disposal/write-down of property, plant and equipment (excluding real estate), net
1,045

 
848

Total Operating Expenses
1,277,112

 
1,234,584

Operating Income (Loss)
279,906

 
274,436

Interest Expense, Net (includes Interest Income of $2,904 and $1,645 for the six months ended June 30, 2014 and 2015, respectively)
124,513

 
130,985

Other Expense (Income), Net
479

 
24,353

Income (Loss) from Continuing Operations Before (Benefit) Provision for Income Taxes and Gain on Sale of Real Estate
154,914

 
119,098

(Benefit) Provision for Income Taxes
(153,041
)
 
23,352

Gain on Sale of Real Estate, Net of Tax
(7,468
)
 
—

Income (Loss) from Continuing Operations
315,423

 
95,746

(Loss) Income from Discontinued Operations, Net of Tax
(938
)
 
—

Net Income (Loss)
314,485

 
95,746

Less: Net Income (Loss) Attributable to Noncontrolling Interests
1,181

 
1,320

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
313,304

 
$
94,426

Earnings (Losses) per Share—Basic:
 

 
 

Income (Loss) from Continuing Operations
$
1.64

 
$
0.45

Total (Loss) Income from Discontinued Operations
$
—

 
$
—

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
1.63

 
$
0.45

Earnings (Losses) per Share—Diluted:
 

 
 

Income (Loss) from Continuing Operations
$
1.63

 
$
0.45

Total (Loss) Income from Discontinued Operations
$
—

 
$
—

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
1.62

 
$
0.45

Weighted Average Common Shares Outstanding—Basic
192,130

 
210,468

Weighted Average Common Shares Outstanding—Diluted
193,298

 
212,163

Dividends Declared per Common Share
$
0.5405

 
$
0.9499

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
June 30,
 
2014
 
2015
Net Income (Loss)
$
272,376

 
$
54,007

Other Comprehensive Income (Loss):
 

 
 

Foreign Currency Translation Adjustments
4,526

 
1,000

Market Value Adjustments for Securities
548

 
—

Total Other Comprehensive Income (Loss)
5,074

 
1,000

Comprehensive Income (Loss)
277,450

 
55,007

Comprehensive Income (Loss) Attributable to Noncontrolling Interests
1,165

 
345

Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated
$
276,285

 
$
54,662



 
Six Months Ended
June 30,
 
2014
 
2015
Net Income (Loss)
$
314,485

 
$
95,746

Other Comprehensive Income (Loss):
 

 
 

Foreign Currency Translation Adjustments
6,314

 
(55,175
)
Market Value Adjustments for Securities
548

 
23

Total Other Comprehensive Income (Loss)
6,862

 
(55,152
)
Comprehensive Income (Loss)
321,347

 
40,594

Comprehensive Income (Loss) Attributable to Noncontrolling Interests
1,718

 
887

Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated
$
319,629

 
$
39,707












 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
 
 
 
 
 
 
 
 
 
 
 
(Distributions
in Excess
of Earnings)
Earnings
in Excess of
Distributions

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
Items, Net
 
 
 
 
 
Common Stock
 
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 charge of $66
32,849

 
1,565,924

 
16

 
32,833

 
—

 
—

 
—

Parent cash dividends declared
(104,776
)
 
—

 
—

 
—

 
(104,776
)
 
—

 
—

Currency translation adjustment
6,314

 
—

 
—

 
—

 
—

 
5,777

 
537

Market value adjustments for securities
548

 
—

 
—

 
—

 
—

 
548

 
—

Net income (loss)
314,485

 
—

 
—

 
—

 
313,304

 
—

 
1,181

Noncontrolling interests dividends
(699
)
 
—

 
—

 
—

 
—

 
—

 
(699
)
Purchase of noncontrolling interests
(3,305
)
 
—

 
—

 
(805
)
 
—

 
—

 
(2,500
)
Balance, June 30, 2014
$
1,297,150

 
192,992,844

 
$
1,930

 
$
1,012,192

 
$
276,348

 
$
(2,335
)
 
$
9,015

 
 
 
Iron Mountain Incorporated Stockholders' Equity
 
 
 
 
 
 
 
 
 
(Distributions
in Excess
of Earnings)
Earnings
in Excess of
Distributions
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
Items, Net
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
 
 
Noncontrolling
Interests
 
Total
 
Shares
 
Amounts
 
 
 
Balance, December 31, 2014
$
869,955

 
209,818,812

 
$
2,098

 
$
1,588,841

 
$
(659,553
)
 
$
(75,031
)
 
$
13,600

Issuance of shares under employee stock purchase plan and option plans and stock-based compensation, including tax benefit of $260
14,447

 
979,708

 
10

 
14,437

 
—

 
—

 
—

Parent cash dividends declared
(201,722
)
 
—

 
—

 
—

 
(201,722
)
 
—

 
—

Currency translation adjustment
(55,175
)
 
—

 
—

 
—

 
—

 
(54,742
)
 
(433
)
Market value adjustments for securities
23

 
—

 
—

 
—

 
—

 
23

 
—

Net income (loss)
95,746

 
—

 
—

 
—

 
94,426

 
—

 
1,320

Noncontrolling interests dividends
(1,049
)
 
—

 
—

 
—

 
—

 
—

 
(1,049
)
Balance, June 30, 2015
$
722,225

 
210,798,520

 
$
2,108

 
$
1,603,278

 
$
(766,849
)
 
$
(129,750
)
 
$
13,438








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)


 
Six Months Ended
June 30,
 
2014
 
2015
Cash Flows from Operating Activities:
 

 
 

Net income (loss)
$
314,485

 
$
95,746

Loss (income) from discontinued operations
938

 
—

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

 
 

Depreciation
151,117

 
151,015

Amortization (includes deferred financing costs and bond discount of $3,701 and $4,360, for the six months ended June 30, 2014 and 2015, respectively)
27,958

 
26,845

Stock-based compensation expense
14,458

 
14,777

(Benefit) Provision for deferred income taxes
(242,113
)
 
(9,088
)
(Gain) Loss on disposal/write-down of property, plant and equipment, net (including real estate)
(8,414
)
 
848

Foreign currency transactions and other, net
(8,577
)
 
(2,763
)
Changes in Assets and Liabilities (exclusive of acquisitions):
 

 
 

Accounts receivable
(12,586
)
 
4,943

Prepaid expenses and other
10,901

 
3,992

Accounts payable
(16,625
)
 
(22,819
)
Accrued expenses and deferred revenue
(44,444
)
 
(81,091
)
Other assets and long-term liabilities
8,503

 
(2,667
)
Cash Flows from Operating Activities
195,601

 
179,738

Cash Flows from Investing Activities:
 

 
 

Capital expenditures
(188,745
)
 
(139,356
)
Cash paid for acquisitions, net of cash acquired
(46,366
)
 
(21,714
)
Decrease (increase) in restricted cash
—

 
33,860

Additions to customer relationship and acquisition costs
(17,210
)
 
(24,207
)
Proceeds from sales of property and equipment and other, net (including real estate)
17,608

 
805

Cash Flows from Investing Activities
(234,713
)
 
(150,612
)
Cash Flows from Financing Activities:
 

 
 

Repayment of revolving credit and term loan facilities and other debt
(5,307,846
)
 
(4,915,045
)
Proceeds from revolving credit and term loan facilities and other debt
5,704,569

 
5,075,035

Early retirement of senior subordinated notes
(247,275
)
 
—

Debt (repayment to) financing from and equity (distribution to) contribution from noncontrolling interests, net
(2,083
)
 
(830
)
Parent cash dividends
(104,861
)
 
(203,229
)
Proceeds from exercise of stock options and employee stock purchase plan
17,818

 
9,454

Excess tax (deficiency) benefit from stock-based compensation
(66
)
 
260

Payment of debt financing and stock issuance costs
(429
)
 
(1,114
)
Cash Flows from Financing Activities
59,827

 
(35,469
)
Effect of Exchange Rates on Cash and Cash Equivalents
4,102

 
(2,492
)
Increase (Decrease) in Cash and Cash Equivalents
24,817

 
(8,835
)
Cash and Cash Equivalents, Beginning of Period
120,526

 
125,933

Cash and Cash Equivalents, End of Period
$
145,343

 
$
117,098

Supplemental Information:
 

 
 

Cash Paid for Interest
$
126,929

 
$
129,518

Cash Paid for Income Taxes
$
77,894

 
$
23,151

Non-Cash Investing and Financing Activities:
 

 
 

Capital Leases
$
9,138

 
$
21,481

Accrued Capital Expenditures
$
36,642

 
$
31,116

Dividends Payable
$
55,057

 
$
4,675



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, healthcare, 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, 2014 included in our Current Report on Form 8-K filed with the SEC on May 7, 2015.
We have been organized and operating as a real estate investment trust for federal income tax purposes ("REIT") effective for our taxable year beginning January 1, 2014.
(2) Summary of Significant Accounting Policies
a.    Principles of Consolidation
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.
b.    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, 2014, we had $33,860 of restricted cash associated with a collateral trust agreement with our insurance carrier related to our workers' compensation self-insurance program included in current assets on our Consolidated Balance Sheet. The restricted cash consisted primarily of United States Treasuries. We had no restricted cash at June 30, 2015.
c.    Foreign Currency
Local currencies are the functional currencies for our operations outside the United States, with the exception of certain foreign holding companies and our financing centers in Switzerland, whose functional currency is the United States 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) 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.

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Table of Contents
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)

Total (gain) loss on foreign currency transactions for the three and six months ended June 30, 2014 and 2015 is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2015
 
2014
 
2015
 
Total (gain) loss on foreign currency transactions
$
(4,347
)
 
$
1,656

 
$
2,091

 
$
23,922

 
d.    Goodwill and Other Intangible Assets
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 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, 2014 and concluded there was no impairment of goodwill at such date. As of December 31, 2014 and June 30, 2015, no factors were identified that would alter our October 1, 2014 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, 2014 were as follows: (1) North American Records and Information Management; (2) technology escrow services that protect and manage source code (“Intellectual Property Management”); (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”); (4) North American Data Management; (5) Emerging Businesses (which primarily relates to our data center business in the United States and which is a component of our Corporate and Other Business segment); (6) the United Kingdom, Ireland, Norway, Austria, Belgium, France, Germany, Netherlands, Spain and Switzerland (“New Western Europe”); (7) the remaining countries in Europe in which we operate, excluding Russia, Ukraine and Denmark (“Emerging Markets - Eastern Europe” (formerly referred to as the "New Emerging Markets" reporting unit)); (8) Latin America; (9) Australia and Singapore; (10) China and Hong Kong (“Greater China”); (11) India; and (12) Russia, Ukraine and Denmark.

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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 carrying value of goodwill, net for each of our reporting units as of December 31, 2014 was as follows:
 
Carrying Value
as of
December 31, 2014
North American Records and Information Management(1)
$
1,397,484

Intellectual Property Management(1)
38,491

Fulfillment Services(1)
3,247

North American Data Management(2)
375,957

Emerging Businesses(3)
—

New Western Europe(4)
354,049

Emerging Markets - Eastern Europe(5)
87,408

Latin America(5)
107,240

Australia and Singapore(5)
55,779

Greater China(5)
3,500

India(5)
—

Russia, Ukraine and Denmark(5)
628

Total
$
2,423,783

_______________________________________________________________________________
(1)
This reporting unit is included in the North American Records and Information Management Business segment.
(2)
This reporting unit is included in the North American Data Management Business segment.
(3)
This reporting unit is included in the Corporate and Other Business segment.
(4)
This reporting unit is included in the Western European Business segment.
(5)
This reporting unit is included in the Other International Business segment.
Beginning January 1, 2015, as a result of the changes in our reportable operating segments associated with our reorganization (see Note 7 for a description of our reportable operating segments), we reassessed the composition of our reporting units. Our North American Records and Information Management Business segment now consists of two reporting units: (1) North American Records and Information Management (which includes Intellectual Property Management and Fulfillment Services) and (2) North American Secure Shredding. Our Western European Business segment now consists of two reporting units: (1) the United Kingdom, Ireland and Norway (“UKI”) and (2) Austria, Belgium, France, Germany, Netherlands, Spain and Switzerland (“Continental Western Europe”). 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 based on the application of a combined weighted average approach of preliminary fair value multiples of revenue and earnings and discounted cash flow techniques. These fair values represent our best estimate and preliminary assessment of goodwill allocations to each of the new reporting units on a relative fair value basis.

11
Table of Contents
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 carrying value of goodwill, net for each of our reporting units as of June 30, 2015 is as follows:
 
Carrying Value
as of
June 30, 2015
North American Records and Information Management(1)(2)
$
1,389,683

North American Secure Shredding(1)(2)
40,884

North American Data Management(3)
373,698

Emerging Businesses(4)
3,036

UKI(1)(5)
272,226

Continental Western Europe(1)(5)
75,015

Emerging Markets - Eastern Europe(6)
81,772

Latin America(6)
95,445

Australia and Singapore(6)
52,836

Greater China(6)
3,525

India(6)
—

Russia, Ukraine and Denmark(6)
577

Total
$
2,388,697

_______________________________________________________________________________
(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 the fair value of each new reporting unit based on the combined weighting of both fair value multiples and discounted cash flow 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 the final information is available to complete the fair values and the corresponding allocation of goodwill amongst the new reporting units.
(2)
This reporting unit is included in the North American Records and Information Management Business segment.
(3)
This reporting unit is included in the North American Data Management Business segment.
(4)
This reporting unit is included in the Corporate and Other Business segment.
(5)
This reporting unit is included in the Western European Business segment.
(6)
This reporting unit is included in the Other International Business segment.

As a result of the change in the composition of our reporting units noted above, we concluded that we had an interim triggering event, and, therefore, during the first quarter of 2015, we performed an interim goodwill impairment test, as of January 1, 2015, for the North American Records and Information Management, North American Secure Shredding, UKI and Continental Western Europe reporting units. 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 is no goodwill impairment as of January 1, 2015.

12
Table of Contents
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 six months ended June 30, 2015 are as follows:
 
North American
Records and Information
Management
Business
 
North American
Data
Management
Business
 
Western
European Business
 
Other International Business
 
Corporate and Other Business
 
Total
Consolidated
Gross Balance as of December 31, 2014
$
1,645,209

 
$
429,982

 
$
412,322

 
$
254,706

 
$
—

 
$
2,742,219

Deductible goodwill acquired during the year
1,638

 
409

 
—

 
—

 
3,036

 
5,083

Non-deductible goodwill acquired during the year
239

 
24

 
1,241

 
1,764

 
—

 
3,268

Fair value and other adjustments(1)
99

 
(25
)
 
(365
)
 
(1,111
)
 
—

 
(1,402
)
Currency effects
(11,163
)
 
(2,800
)
 
(9,155
)
 
(21,062
)
 
—

 
(44,180
)
Gross Balance as of June 30, 2015
$
1,636,022

 
$
427,590

 
$
404,043

 
$
234,297

 
$
3,036

 
$
2,704,988

Accumulated Amortization Balance as of December 31, 2014
$
205,987

 
$
54,025

 
$
58,273

 
$
151

 
$
—

 
$
318,436

Currency effects
(532
)
 
(133
)
 
(1,471
)
 
(9
)
 
—

 
(2,145
)
Accumulated Amortization Balance as of June 30, 2015
$
205,455

 
$
53,892

 
$
56,802

 
$
142

 
$
—

 
$
316,291

Net Balance as of December 31, 2014
$
1,439,222

 
$
375,957

 
$
354,049

 
$
254,555

 
$
—

 
$
2,423,783

Net Balance as of June 30, 2015
$
1,430,567

 
$
373,698

 
$
347,241

 
$
234,155

 
$
3,036

 
$
2,388,697

Accumulated Goodwill Impairment Balance as of December 31, 2014
$
85,909

 
$
—

 
$
46,500

 
$
—

 
$
—

 
$
132,409

Accumulated Goodwill Impairment Balance as of June 30, 2015
$
85,909

 
$
—

 
$
46,500

 
$
—

 
$
—

 
$
132,409

_______________________________________________________________________________
(1)
Total fair value and other adjustments primarily include $672 in net adjustments to deferred income taxes and $(5,680) related to customer relationships and acquisition costs and other assumed liabilities, as well as $3,606 of cash paid related to certain 2014 acquisitions.


13
Table of Contents
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 December 31, 2014 and June 30, 2015 are as follows:
 
December 31, 2014
 
June 30, 2015
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Customer Relationships and Acquisition Costs
$
904,866

 
$
(297,029
)
 
$
607,837

 
$
913,523

 
$
(318,055
)
 
$
595,468

Core Technology(1)
3,568

 
(3,540
)
 
28

 
3,414

 
(3,414
)
 
—

Trademarks and Non-Compete Agreements(1)
7,062

 
(5,068
)
 
1,994

 
6,908

 
(5,086
)
 
1,822

Deferred Financing Costs
63,033

 
(15,956
)
 
47,077

 
63,805

 
(19,978
)
 
43,827

Total
$
978,529

 
$
(321,593
)
 
$
656,936

 
$
987,650

 
$
(346,533
)
 
$
641,117

_______________________________________________________________________________
(1)
Included in Other, a component of Other Assets, net in the accompanying Consolidated Balance Sheets.
Amortization expense associated with amortizable intangible assets (including deferred financing costs) for the three and six months ended June 30, 2014 and 2015 is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2015
 
2014
 
2015
 
Amortization expense associated with amortizable intangible assets (including deferred financing costs)
$
14,332

 
$
13,593

 
$
27,958

 
$
26,845

 
e.    Stock-Based Compensation
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 six months ended June 30, 2014 was $7,317 ($5,417 after tax or $0.03 per basic and diluted share) and $14,458 ($10,551 after tax or $0.05 per basic and diluted share), respectively. Stock-based compensation expense for Employee Stock-Based Awards for the three and six months ended June 30, 2015 was $7,921 ($5,467 after tax or $0.03 per basic and diluted share) and $14,777 ($10,413 after tax or $0.05 per basic and diluted share), respectively.
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
June 30,
 
Six Months Ended
June 30,
 
2014
 
2015
 
2014
 
2015
Cost of sales (excluding depreciation and amortization)
$
189

 
$
46

 
$
379

 
$
91

Selling, general and administrative expenses
7,128

 
7,875

 
14,079

 
14,686

Total stock-based compensation
$
7,317

 
$
7,921

 
$
14,458

 
$
14,777


14
Table of Contents
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 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 $(66) and $260 for the six months ended June 30, 2014 and 2015, respectively, from the (deficiency) benefit 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 are generally granted with exercise prices equal to the market price of the stock on the date of grant; however, in certain instances, options are granted at prices greater than the market price of the stock on the date of grant. 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 June 30, 2015, ten-year vesting options represented 7.4% of total outstanding options. Certain of the options we issue become exercisable ratably over a period of five years from the date of grant and have a contractual life of ten years from the date of grant, unless the holder's employment is terminated sooner. As of June 30, 2015, five-year vesting options represented 46.1% of total outstanding options. The remainder of options we issue become exercisable ratably over a period of three years from the date of grant and have a contractual life of ten years from the date of grant, unless the holder's employment is terminated sooner. As of June 30, 2015, three-year vesting options represented 46.5% 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 become exercisable immediately upon grant.
The weighted average fair value of options granted for the six months ended June 30, 2014 and 2015 was $5.60 and $4.99 per share, respectively. These values were estimated on the date of grant using the Black-Scholes option pricing model. The weighted average assumptions used for grants in the respective period are as follows:
 
 
Six Months Ended
June 30,
Weighted Average Assumptions
 
2014
 
2015
Expected volatility
 
33.9
%
 
28.6
%
Risk-free interest rate
 
2.06
%
 
1.70
%
Expected dividend yield
 
4
%
 
5
%
Expected life
 
6.8 years

 
5.5 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 United States 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.

15
Table of Contents
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)

A summary of option activity for the six months ended June 30, 2015 is as follows:
 
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Average
Intrinsic
Value
Outstanding at December 31, 2014
3,678,246

 
$
23.37

 
 
 
 

Granted
696,722

 
43.64

 
 
 
 

Exercised
(350,910
)
 
21.03

 
 
 
 

Forfeited
(20,729
)
 
23.63

 
 
 
 

Expired
(11,045
)
 
22.15

 
 
 
 

Outstanding at June 30, 2015
3,992,284

 
$
27.11

 
5.74
 
$
24,551

Options exercisable at June 30, 2015
2,728,453

 
$
22.67

 
4.30
 
$
22,715

Options expected to vest
1,178,890

 
$
36.57

 
8.85
 
$
1,743

The aggregate intrinsic value of stock options exercised for the three and six months ended June 30, 2014 and 2015 is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2015
 
2014
 
2015
 
Aggregate intrinsic value of stock options exercised
$
7,556

 
$
1,716

 
$
8,533

 
$
5,883

 
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. However, beginning in 2015, RSUs granted to our non-employee directors now vest immediately upon 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. 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).
Cash dividends accrued and paid on RSUs for the three and six months ended June 30, 2014 and 2015 are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2015
 
2014
 
2015
Cash dividends on RSUs accrued
$
416

 
$
631

 
$
850

 
$
1,301

Cash dividends on RSUs paid
223

 
571

 
1,054

 
2,300

The fair value of restricted stock and RSUs vested during the three and six months ended June 30, 2014 and 2015 are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2015
 
2014
 
2015
Fair value of restricted stock vested
$
1

 
$
—

 
$
1

 
$
—

Fair value of RSUs vested
3,704

 
3,600

 
17,548

 
19,184


16
Table of Contents
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)

A summary of restricted stock and RSU activity for the six months ended June 30, 2015 is as follows:
 
Restricted
Stock and RSUs
 
Weighted-
Average
Grant-Date
Fair Value
Non-vested at December 31, 2014
1,405,569

 
$
28.78

Granted
524,896

 
38.59

Vested
(536,988
)
 
30.94

Forfeited
(50,678
)
 
32.14

Non-vested at June 30, 2015
1,342,799

 
$
33.68

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 and thereafter) 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 and thereafter). Certain PUs granted in 2013, 2014 and 2015 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. For those PUs subject to a three-year performance period, employees who terminate their employment during the performance period and on or after meeting the Retirement Criteria are eligible for pro rated vesting, subject to the actual achievement against the predefined targets as discussed above, based on the number of full years of service completed following the grant date (but delivery of the shares remains deferred). As a result, PUs subject to a three-year performance period are generally expensed over the three-year performance period. 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.
Cash dividends accrued and paid on PUs for the three and six months ended June 30, 2014 and 2015 are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2015
 
2014
 
2015
Cash dividends on PUs accrued
$
142

 
$
214

 
$
292

 
$
425

Cash dividends on PUs paid
91

 
—

 
312

 
1,015



17
Table of Contents
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)

During the six months ended June 30, 2015, we issued 139,446 PUs. The majority of 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, 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 and thereafter) over the vesting period for each of the awards. For PUs 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 is expensed over the three-year performance period. As of June 30, 2015, we expected 25% and 100% achievement of the predefined revenue, revenue growth and ROIC targets associated with the awards of PUs made in 2014 and 2015, respectively.
The fair value of earned PUs that vested during the three and six months ended June 30, 2014 and 2015 is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2015
 
2014
 
2015
Fair value of earned PUs that vested
$
2,266

 
$
44

 
$
6,296

 
$
2,107

A summary of PU activity for the six months ended June 30, 2015 is as follows:
 
Original
PU Awards
 
PU Adjustment(1)
 
Total
PU Awards
 
Weighted-
Average
Grant-Date
Fair Value
Non-vested at December 31, 2014
461,666

 
(82,609
)
 
379,057

 
$
30.80

Granted
139,446

 
—

 
139,446

 
40.38

Vested
(80,035
)
 
(4,350
)
 
(84,385
)
 
29.62

Forfeited
(19,038
)
 
—

 
(19,038
)
 
30.96

Non-vested at June 30, 2015
502,039

 
(86,959
)
 
415,080

 
$
34.25

_______________________________________________________________________________

(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 United States 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 six months ended June 30, 2014 and 2015, there were 69,567 shares and 59,569 shares, respectively, purchased under the ESPP. As of June 30, 2015, we have 901,069 shares available under the ESPP.
_______________________________________________________________________________

18
Table of Contents
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)

As of June 30, 2015, unrecognized compensation cost related to the unvested portion of our Employee Stock-Based Awards was $46,910 and is expected to be recognized over a weighted-average period of 2.2 years.
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.
f.    Income (Loss) Per Share—Basic and Diluted
Basic income (loss) per common share is calculated by dividing income (loss) by the weighted average number of common shares outstanding. The calculation of diluted income (loss) per share is consistent with that of basic income (loss) per share but gives effect to all potential common shares (that is, securities such as options, warrants or convertible securities) 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 six months ended June 30, 2014 and 2015 is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2015
 
2014
 
2015
Income (loss) from continuing operations
$
272,702

 
$
54,007

 
$
315,423

 
$
95,746

Total (loss) income from discontinued operations
$
(326
)
 
$
—

 
$
(938
)
 
$
—

Net income (loss) attributable to Iron Mountain Incorporated
$
271,637

 
$
53,330

 
$
313,304

 
$
94,426

 
 
 
 
 
 
 
 
Weighted-average shares—basic
192,381,000

 
210,699,000

 
192,130,000

 
210,468,000

Effect of dilutive potential stock options
762,416

 
958,714

 
722,609

 
1,091,022

Effect of dilutive potential restricted stock, RSUs and PUs
382,317

 
419,002

 
444,968

 
603,880

Weighted-average shares—diluted
193,525,733

 
212,076,716

 
193,297,577

 
212,162,902

 
 
 
 
 
 
 
 
Earnings (losses) per share—basic:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
1.42

 
$
0.26

 
$
1.64

 
$
0.45

Total (loss) income from discontinued operations
$
—

 
$
—

 
$
—

 
$
—

Net income (loss) attributable to Iron Mountain Incorporated—basic
$
1.41

 
$
0.25

 
$
1.63

 
$
0.45

 
 
 
 
 
 
 
 
Earnings (losses) per share—diluted:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
1.41

 
$
0.25

 
$
1.63

 
$
0.45

Total (loss) income from discontinued operations
$
—

 
$
—

 
$
—

 
$
—

Net income (loss) attributable to Iron Mountain Incorporated—diluted
$
1.40

 
$
0.25

 
$
1.62

 
$
0.45

 
 
 
 
 
 
 
 
Antidilutive stock options, RSUs and PUs, excluded from the calculation
1,457,975

 
1,335,373

 
1,419,469

 
846,803


19
Table of Contents
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)

g.    Revenues
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) Intellectual Property Management and other 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.
h.    Allowance for Doubtful Accounts and Credit Memo Reserves
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 charge-off uncollectible balances as circumstances warrant, generally, no later than one year past due.
i.    Income Taxes
As noted previously, we have been organized and operating as a REIT effective for our taxable year beginning 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 may be taxed at the stockholder level. The income of our domestic taxable REIT subsidiaries (“TRSs”), 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 we have business operations or a taxable presence, regardless of whether assets are held or operations are conducted through subsidiaries disregarded for federal tax purposes or as TRSs. 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 has been imposed on our depreciation recapture recognized into income in 2014 and generally will be imposed in subsequent years as a result of accounting method changes commenced in our pre‑REIT period. If we fail to remain qualified for taxation as a REIT, we will be subject to federal income tax at regular corporate tax rates. Even if we remain qualified 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.

20
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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 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) changes in the mix of income between our qualified REIT subsidiaries and our TRSs, as well as between 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. We are subject to income taxes in the United States 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 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.
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 a decrease of $631 and an increase of $335 for gross interest and penalties for the three and six months ended June 30, 2014, respectively. We recorded an increase of $637 and $1,579 for gross interest and penalties for the three and six months ended June 30, 2015, respectively. We had $5,884 and $6,756 accrued for the payment of interest and penalties as of December 31, 2014 and June 30, 2015, respectively.
As a result of our REIT conversion, we recorded a net tax benefit of $230,051 and $212,151 during the three and six months ended June 30, 2014, respectively, for the revaluation of certain deferred tax assets and liabilities and other income taxes associated with the REIT conversion. The other primary reconciling items between the federal statutory rate of 35% and our overall effective tax rate in the three and six months ended June 30, 2014 were a $36,084 increase in our tax provision recognized in the second quarter of 2014 associated with incremental federal and state income taxes and foreign withholding taxes on earnings of our foreign subsidiaries no longer considered permanently invested and other net tax benefit related to the REIT conversion of $18,763 and $33,835, respectively, primarily related to the dividends paid deduction.
Our effective tax rates for the three and six months ended June 30, 2015 were 12.1% and 19.6%, respectively. The primary reconciling items between the federal statutory rate of 35% and our overall effective tax rate in the three and six months ended June 30, 2015 were the benefit derived from the dividends paid deduction, 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).
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 domestic TRSs.

21
Table of Contents
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)

j.    Concentrations of Credit Risk
Financial instruments that potentially subject us to credit risk consist principally of cash and cash equivalents (including money market funds and time deposits), restricted cash (primarily United States Treasuries) and accounts receivable. The only significant concentrations of liquid investments as of December 31, 2014 relate to cash and cash equivalents and restricted cash held on deposit and as of June 30, 2015 relate to cash and cash equivalents. At December 31, 2014, we had money market funds with two "Triple A" rated money market funds and time deposits with three global banks. At June 30, 2015, we had time deposits with three global banks and no money market funds. We consider the "Triple A" rated money market funds and the global banks 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, 2014 and June 30, 2015, our cash and cash equivalents and restricted cash balance was $159,793 and $117,098, respectively, including money market funds and time deposits amounting to $53,032 and $20,802, respectively. The money market funds were invested substantially in United States Treasuries.
k.    Fair Value Measurements
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 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.

22
Table of Contents
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 assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2014 and June 30, 2015, respectively, are as follows:
 
 
 
 
Fair Value Measurements at
December 31, 2014 Using
Description
 
Total Carrying
Value at
December 31,
2014
 
Quoted prices
in active
markets
(Level 1)
 
 
 
Significant other
observable
inputs
(Level 2)
 
 
 
Significant
unobservable
inputs
(Level 3)
Money Market Funds(1)
 
$
36,828

 
$
—

 
 
 
$
36,828

 
 
 
$
—

Time Deposits(1)
 
16,204

 
—

 
 
 
16,204

 
 
 
—

Trading Securities
 
13,172

 
12,428

 
(2)
 
744

 
(1)
 
—

Derivative Liabilities(3)
 
2,411

 
—

 
 
 
2,411

 
 
 
—

 
 
 
 
Fair Value Measurements at
June 30, 2015 Using
Description
 
Total Carrying
Value at
June 30,
2015
 
Quoted prices
in active
markets
(Level 1)
 
 
 
Significant other
observable
inputs
(Level 2)
 
 
 
Significant
unobservable
inputs
(Level 3)
Time Deposits(1)
 
$
20,802

 
$
—

 
 
 
$
20,802

 
 
 
$
—

Trading Securities
 
10,960

 
10,086

 
(2)
 
874

 
(1)
 
—

Derivative Assets(3)
 
6,362

 
—

 
 
 
6,362

 
 
 
—

_______________________________________________________________________________

(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 relate to short-term (six months or less) foreign currency contracts that we have entered into to hedge certain of our intercompany exposures, as more fully disclosed at 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.
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 six months ended June 30, 2014 and 2015.
l.    Use of Estimates
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.

23
Table of Contents
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)

m.    Accumulated Other Comprehensive Items, Net
The changes in accumulated other comprehensive items, net for the three months ended June 30, 2014 and 2015, respectively, are as follows:
 
Foreign
Currency
Translation
Adjustments
 
Market Value
Adjustments for
Securities
 
Total
Balance as of March 31, 2014
$
(7,909
)
 
$
926

 
$
(6,983
)
Other comprehensive income (loss):
 

 
 

 


Foreign currency translation adjustments
4,100

 
—

 
4,100

Market value adjustments for securities
—

 
548

 
548

Total other comprehensive income (loss)
4,100

 
548

 
4,648

Balance as of June 30, 2014
$
(3,809
)
 
$
1,474

 
$
(2,335
)

 
Foreign
Currency
Translation
Adjustments
 
Market Value
Adjustments for
Securities
 
Total
Balance as of March 31, 2015
$
(132,084
)
 
$
1,002

 
$
(131,082
)
Other comprehensive income (loss):


 


 


Foreign currency translation adjustments
1,332

 
—

 
1,332

Total other comprehensive income (loss)
1,332

 
—

 
1,332

Balance as of June 30, 2015
$
(130,752
)
 
$
1,002

 
$
(129,750
)
The changes in accumulated other comprehensive items, net for the six months ended June 30, 2014 and 2015, respectively, are as follows:
 
Foreign
Currency
Translation
Adjustments
 
Market Value
Adjustments for
Securities
 
Total
Balance as of December 31, 2013
$
(9,586
)
 
$
926

 
$
(8,660
)
Other comprehensive income (loss):
 
 
 
 


Foreign currency translation adjustments
5,777

 
—

 
5,777

Market value adjustment for securities
—

 
548

 
548

Total other comprehensive income (loss)
5,777

 
548

 
6,325

Balance as of June 30, 2014
$
(3,809
)
 
$
1,474

 
$
(2,335
)

24
Table of Contents
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, 2014
$
(76,010
)
 
$
979

 
$
(75,031
)
Other comprehensive (loss) income:


 


 


Foreign currency translation adjustments
(54,742
)
 
—

 
(54,742
)
Market value adjustments for securities
—

 
23

 
23

Total other comprehensive (loss) income
(54,742
)
 
23

 
(54,719
)
Balance as of June 30, 2015
$
(130,752
)
 
$
1,002

 
$
(129,750
)
n.    Other (Income) Expense, Net
Other (income) expense, net is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2015
 
2014
2015
Foreign currency transaction (gains) losses, net
$
(4,347
)
 
$
1,656

 
$
2,091

$
23,922

Other, net
(491
)
 
348

 
(1,612
)
431

 
$
(4,838
)
 
$
2,004

 
$
479

$
24,353

o.    Property, Plant and Equipment and Long-Lived Assets
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 six months ended June 30, 2014, we capitalized $4,861 and $9,758 of costs, respectively, associated with the development of internal use computer software projects. During the three and six months ended June 30, 2015, we capitalized $6,395 and $12,435 of costs, respectively, 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 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, the long-lived assets are written down, on a pro rata basis, 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 on the sale of real estate as a component of operating income, but we report it as a component of income (loss) from continuing operations. We report the (gain) loss on sale 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.

25
Table of Contents
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)

Consolidated (gain) loss on disposal/write-down of property, plant and equipment (excluding real estate), net was $(107) and $1,045 for the three and six months ended June 30, 2014, respectively. Losses in the six months ended June 30, 2014 were primarily associated with the write-off of certain software associated with our North American Records and Information Management Business segment. Consolidated loss on disposal/write-down of property, plant and equipment (excluding real estate), net was $515 and $848 for the three and six months ended June 30, 2015, respectively, and consisted primarily of the write-off of certain property associated with our North American Records and Information Management Business segment.
Consolidated gain on sale of real estate was $7,468, net of tax of $1,991, for the six months ended June 30, 2014 associated with the sale of two buildings in the United Kingdom.
p.    New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 contracts. In July 2015, the FASB deferred the effective date of ASU 2014-09 for one year, making it effective for our year beginning January 1, 2018, with early adoption permitted as of January 1, 2017. 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 United States 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.
In February 2015, the FASB issued ASU No. 2015‑02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015‑02”). ASU 2015‑02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015‑02 is effective for us on January 1, 2016, with early adoption permitted. We do not believe that this pronouncement will have an impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”).  The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03.  ASU 2015‑03 is effective for us on January 1, 2016, with early adoption permitted.  We do not believe that this pronouncement will have a material impact on our consolidated financial statements.

 

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Table of Contents
IRON MOUNTAIN INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In Thousands, Except Share and Per Share Data)
(Unaudited)
(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 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 United States 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, 2014 and June 30, 2015, 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, British pounds sterling and Australian dollars. As of June 30, 2015, we had outstanding forward contracts to purchase 212,500 Euros and sell $231,385 United States dollars to hedge our intercompany exposures with our European 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 expense (income), 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 forward contracts as hedges.
Net cash payments (receipts) included in cash from operating activities related to settlements associated with foreign currency forward contracts for the three and six months ended June 30, 2014 and 2015, respectively, are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2015
 
2014
 
2015
Net cash payments (receipts)
$
7,330

 
$
12,368

 
$
14,529

 
$
29,188



27
Table of Contents
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)

Our policy is to record the fair value of each derivative instrument on a gross basis. The fair value of our derivative instruments as of December 31, 2014 and June 30, 2015 and their gains and losses for the three and six months ended June 30, 2014 and 2015 are as follows:
 
 
Asset Derivatives
 
 
December 31, 2014
 
June 30, 2015
Derivatives Not Designated as
Hedging Instruments
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Foreign exchange contracts
 
Prepaid expenses and other
 
$
—

 
Prepaid expenses and other
 
$
6,362

Total
 
 
 
$
—

 
 
 
$
6,362

 
 
Liability Derivatives
 
 
December 31, 2014
 
June 30, 2015
Derivatives Not Designated as
Hedging Instruments
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Foreign exchange contracts
 
Accrued expenses
 
$
2,411

 
Accrued expenses
 
$
—

Total
 
 
 
$
2,411

 
 
 
$
—

 
 
 
 
 
Amount of (Gain)
Loss
Recognized in
Income
on Derivatives
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Derivatives Not Designated as
Hedging Instruments
 
Location of (Gain) Loss
Recognized in Income
on Derivative
 
2014
 
2015
 
2014
 
2015
Foreign exchange contracts
 
Other expense (income), net
 
$
11,748

 
$
(8,119
)
 
$
14,670

 
$
20,414

Total
 
 
 
 
$
11,748

 
$
(8,119
)
 
$
14,670

 
$
20,414

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 six months ended June 30, 2014 and 2015, we designated on average 58,735 and 35,786 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 the following foreign exchange gains (losses), 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:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2015
 
2014
 
2015
Foreign exchange gains (losses)
 
$
663

 
$
(1,464
)
 
$
808

 
$
3,466

Tax expense (benefit) on foreign exchange gains (losses)
 
—

 
—

 
57

 
—

Foreign exchange gains (losses), net of tax
 
$
663

 
$
(1,464
)
 
$
751

 
$
3,466