0001020569-18-000082.txt : 20180727 0001020569-18-000082.hdr.sgml : 20180727 20180727160409 ACCESSION NUMBER: 0001020569-18-000082 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 87 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180727 DATE AS OF CHANGE: 20180727 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IRON MOUNTAIN INC CENTRAL INDEX KEY: 0001020569 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 232588479 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13045 FILM NUMBER: 18974875 BUSINESS ADDRESS: STREET 1: ONE FEDERAL STREET CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 617-535-4781 MAIL ADDRESS: STREET 1: ONE FEDERAL STREET CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: IRON MOUNTAIN INC/PA DATE OF NAME CHANGE: 20000201 FORMER COMPANY: FORMER CONFORMED NAME: PIERCE LEAHY CORP DATE OF NAME CHANGE: 19960807 10-Q 1 irm2018630-10q.htm 10-Q 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 June 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 July 20, 2018: 286,145,783




IRON MOUNTAIN INCORPORATED
Index

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part I. Financial Information
Item 1.    Unaudited Condensed Consolidated Financial Statements
IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, except Share and Per Share Data)
(Unaudited)
 
December 31, 2017
 
June 30, 2018
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
925,699

 
$
188,192

Accounts receivable (less allowances of $46,648 and $48,727 as of December 31, 2017 and June 30, 2018, respectively)
835,742

 
867,041

Prepaid expenses and other
188,874

 
189,101

Total Current Assets
1,950,315

 
1,244,334

Property, Plant and Equipment:
 

 
 

Property, plant and equipment
6,251,100

 
7,383,554

Less—Accumulated depreciation
(2,833,421
)
 
(2,977,067
)
Property, Plant and Equipment, Net
3,417,679

 
4,406,487

Other Assets, Net:
 

 
 

Goodwill
4,070,267

 
4,466,634

Customer relationships, customer inducements and data center lease-based intangibles
1,400,547

 
1,530,549

Other
133,594

 
164,530

Total Other Assets, Net
5,604,408

 
6,161,713

Total Assets
$
10,972,402

 
$
11,812,534

LIABILITIES AND EQUITY
 

 
 

Current Liabilities:
 

 
 

Current portion of long-term debt
$
146,300

 
$
123,818

Accounts payable
289,137

 
293,293

Accrued expenses
653,146

 
599,811

Deferred revenue
241,590

 
256,181

Total Current Liabilities
1,330,173

 
1,273,103

Long-term Debt, net of current portion
6,896,971

 
7,961,761

Other Long-term Liabilities
73,039

 
119,095

Deferred Rent
126,231

 
120,952

Deferred Income Taxes
155,728

 
184,836

Commitments and Contingencies (see Note 8)


 


Redeemable Noncontrolling Interests
91,418

 
95,340

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 286,099,227 shares as of December 31, 2017 and June 30, 2018, respectively)
2,831

 
2,861

Additional paid-in capital
4,164,562

 
4,256,894

(Distributions in excess of earnings) Earnings in excess of distributions
(1,765,966
)
 
(1,996,365
)
Accumulated other comprehensive items, net
(103,989
)
 
(207,450
)
Total Iron Mountain Incorporated Stockholders' Equity
2,297,438

 
2,055,940

Noncontrolling Interests
1,404

 
1,507

Total Equity
2,298,842

 
2,057,447

Total Liabilities and Equity
$
10,972,402

 
$
11,812,534

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

3


IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except Per Share Data)
(Unaudited)
 
Three Months Ended
June 30,
 
2017
 
2018
Revenues:
 

 
 

Storage rental
$
590,239

 
$
655,439

Service
359,567

 
405,384

Total Revenues
949,806

 
1,060,823

Operating Expenses:
 

 
 

Cost of sales (excluding depreciation and amortization)
414,284

 
451,464

Selling, general and administrative
237,445

 
250,326

Depreciation and amortization
128,099

 
156,220

(Gain) Loss on disposal/write-down of property, plant and equipment (excluding real estate), net
(216
)
 
(546
)
Total Operating Expenses
779,612

 
857,464

Operating Income (Loss)
170,194

 
203,359

Interest Expense, Net (includes Interest Income of $5,797 and $2,280 for the three months ended June 30, 2017 and 2018, respectively)
89,966

 
102,107

Other (Income) Expense, Net
(19,366
)
 
(19,056
)
Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes and Gain on Sale of Real Estate
99,594

 
120,308

Provision (Benefit) for Income Taxes
18,009

 
26,405

Gain on Sale of Real Estate, Net of Tax
(1,563
)
 

Income (Loss) from Continuing Operations
83,148

 
93,903

(Loss) Income from Discontinued Operations, Net of Tax
(2,026
)
 
(360
)
Net Income (Loss)
81,122

 
93,543

Less: Net Income (Loss) Attributable to Noncontrolling Interests
2,492

 
142

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
78,630

 
$
93,401

Earnings (Losses) per Share—Basic:
 

 
 

Income (Loss) from Continuing Operations
$
0.31

 
$
0.33

Total (Loss) Income from Discontinued Operations, Net of Tax
$
(0.01
)
 
$

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
0.30

 
$
0.33

Earnings (Losses) per Share—Diluted:
 

 
 

Income (Loss) from Continuing Operations
$
0.30

 
$
0.33

Total (Loss) Income from Discontinued Operations, Net of Tax
$
(0.01
)
 
$

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
0.30

 
$
0.33

Weighted Average Common Shares Outstanding—Basic
264,217

 
285,984

Weighted Average Common Shares Outstanding—Diluted
264,930

 
286,569

Dividends Declared per Common Share
$
0.5504

 
$
0.5877

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

4


IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except Per Share Data)
(Unaudited)
 
Six Months Ended
June 30,
 
2017
 
2018
Revenues:
 

 
 

Storage rental
$
1,162,518

 
$
1,306,588

Service
726,164

 
796,693

Total Revenues
1,888,682

 
2,103,281

Operating Expenses:
 
 


Cost of sales (excluding depreciation and amortization)
840,991

 
900,185

Selling, general and administrative
477,611

 
520,056

Depreciation and amortization
252,806

 
316,798

(Gain) Loss on disposal/write-down of property, plant and equipment (excluding real estate), net
(675
)
 
(1,676
)
Total Operating Expenses
1,570,733

 
1,735,363

Operating Income (Loss)
317,949

 
367,918

Interest Expense, Net (includes Interest Income of $8,090 and $3,666 for the six months ended June 30, 2017 and 2018, respectively)
176,021

 
199,733

Other (Income) Expense, Net
(25,730
)
 
1,095

Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes and Gain on Sale of Real Estate
167,658

 
167,090

Provision (Benefit) for Income Taxes
27,229

 
27,573

Gain on Sale of Real Estate, Net of Tax
(1,563
)
 

Income (Loss) from Continuing Operations
141,992

 
139,517

(Loss) Income from Discontinued Operations, Net of Tax
(2,363
)
 
(822
)
Net Income (Loss)
139,629

 
138,695

Less: Net Income (Loss) Attributable to Noncontrolling Interests
2,874

 
610

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
136,755

 
$
138,085

Earnings (Losses) per Share—Basic:
 

 
 

Income (Loss) from Continuing Operations
$
0.53

 
$
0.49

Total (Loss) Income from Discontinued Operations, Net of Tax
$
(0.01
)
 
$

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
0.52

 
$
0.48

Earnings (Losses) per Share—Diluted:
 

 
 

Income (Loss) from Continuing Operations
$
0.53

 
$
0.49

Total (Loss) Income from Discontinued Operations, Net of Tax
$
(0.01
)
 
$

Net Income (Loss) Attributable to Iron Mountain Incorporated
$
0.52

 
$
0.48

Weighted Average Common Shares Outstanding—Basic
264,036

 
285,622

Weighted Average Common Shares Outstanding—Diluted
264,870

 
286,282

Dividends Declared per Common Share
$
1.1008

 
$
1.1765

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


5


IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
(Unaudited)
 
Three Months Ended
June 30,
 
2017
 
2018
Net Income (Loss)
$
81,122

 
$
93,543

Other Comprehensive Income (Loss):
 

 
 

Foreign Currency Translation Adjustments
7,538

 
(139,172
)
Change in Fair Value of Interest Rate Swap Agreements

 
2,388

Total Other Comprehensive Income (Loss)
7,538

 
(136,784
)
Comprehensive Income (Loss)
88,660

 
(43,241
)
Comprehensive Income (Loss) Attributable to Noncontrolling Interests
2,381

 
(3,274
)
Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated
$
86,279

 
$
(39,967
)
 
Six Months Ended
June 30,
 
2017
 
2018
Net Income (Loss)
$
139,629

 
$
138,695

Other Comprehensive Income (Loss):
 

 
 

Foreign Currency Translation Adjustments
58,322

 
(107,521
)
Change in Fair Value of Interest Rate Swap Agreements

 
2,203

Total Other Comprehensive Income (Loss)
58,322

 
(105,318
)
Comprehensive Income (Loss)
197,951

 
33,377

Comprehensive Income (Loss) Attributable to Noncontrolling Interests
2,213

 
(1,247
)
Comprehensive Income (Loss) Attributable to Iron Mountain Incorporated
$
195,738

 
$
34,624

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

6


IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In Thousands, except Share Data)
(Unaudited)
 
 
 
Iron Mountain Incorporated Stockholders' Equity
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
(Distributions in Excess of Earnings) Earnings in Excess of Distributions
 
 
 
Noncontrolling
Interests
 
 
 
 
Total
 
Shares
 
Amounts
 
 
 
Accumulated
Other
Comprehensive
Items, Net
 
 
Redeemable Noncontrolling Interests
Balance, December 31, 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
16,150

 
696,938

 
8

 
16,142

 

 

 

 
 

Change in value of redeemable noncontrolling interests
(918
)
 

 

 
(918
)
 

 

 

 
 
918

Parent cash dividends declared
(291,729
)
 

 

 

 
(291,729
)
 

 

 
 

Foreign currency translation adjustment
58,870

 

 

 

 

 
58,983

 
(113
)
 
 
(548
)
Net income (loss)
138,870

 

 

 

 
136,755

 

 
2,115

 
 
759

Noncontrolling interests equity contributions

 

 

 

 

 

 

 
 
13,230

Noncontrolling interests dividends
(1,956
)
 

 

 

 

 

 
(1,956
)
 
 
(972
)
Purchase of noncontrolling interests
1,339

 

 

 

 

 

 
1,339

 
 

Balance, June 30, 2017
$
1,857,297

 
264,379,608

 
$
2,644

 
$
3,505,019

 
$
(1,498,285
)
 
$
(153,590
)
 
$
1,509

 
 
$
68,084

 
 
 
Iron Mountain Incorporated Stockholders' Equity
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
(Distributions in Excess of Earnings) Earnings in Excess of Distributions
 
 
 
Noncontrolling
Interests
 
 
 
 
Total
 
Shares
 
Amounts
 
 
 
Accumulated
Other
Comprehensive
Items, Net
 
 
Redeemable Noncontrolling Interests
Balance, December 31, 2017
$
2,298,842

 
283,110,183

 
$
2,831

 
$
4,164,562

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

 
 
$
91,418

Cumulative-effect adjustment for adoption of ASU 2014-09 (see Note 2.c.)
(30,233
)
 

 

 

 
(30,233
)
 

 

 
 

Issuance of shares under employee stock purchase plan and option plans and stock-based compensation
13,805

 
540,558

 
6

 
13,799

 

 

 

 
 

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
(6,351
)
 

 

 
(6,351
)
 

 

 

 
 
6,351

Parent cash dividends declared
(338,251
)
 

 

 

 
(338,251
)
 

 

 
 

Foreign currency translation adjustment
(105,512
)
 

 

 

 

 
(105,664
)
 
152

 
 
(2,009
)
Change in fair value of interest rate swap agreements
2,203

 

 

 

 

 
2,203

 

 
 
 
Net income (loss)
138,036

 

 

 

 
138,085

 

 
(49
)
 
 
659

Noncontrolling interests dividends

 

 

 

 

 

 

 
 
(1,079
)
Balance, June 30, 2018
$
2,057,447

 
286,099,227

 
$
2,861

 
$
4,256,894

 
$
(1,996,365
)
 
$
(207,450
)
 
$
1,507

 
 
$
95,340

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

7


IRON MOUNTAIN INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Six Months Ended
June 30,
 
2017
 
2018
Cash Flows from Operating Activities:
 

 
 

Net income (loss)
$
139,629

 
$
138,695

Loss (Income) from discontinued operations
2,363

 
822

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

 
 

Depreciation
201,907

 
224,933

Amortization (includes amortization of deferred financing costs and discounts of $7,875 and $7,580 for the six months ended June 30, 2017 and 2018, respectively)
58,774

 
99,445

Revenue reduction associated with amortization of permanent withdrawal fees and above- and below-market leases (see Note 2.b.)
5,906

 
7,925

Stock-based compensation expense
15,092

 
16,073

(Benefit) provision for deferred income taxes
(9,536
)
 
898

(Gain) loss on disposal/write-down of property, plant and equipment, net (including real estate)
(2,238
)
 
(1,676
)
Gain on Russia and Ukraine Divestment (see Note 10)
(38,869
)
 

Foreign currency transactions and other, net
23,508

 
497

(Increase) decrease in assets
(69,036
)
 
(54,729
)
(Decrease) increase in liabilities
(5,460
)
 
(39,077
)
Cash Flows from Operating Activities - Continuing Operations
322,040

 
393,806

Cash Flows from Operating Activities - Discontinued Operations
(2,363
)
 
(477
)
Cash Flows from Operating Activities
319,677

 
393,329

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)
(165,207
)
 
(217,601
)
Cash paid for acquisitions, net of cash acquired
(38,223
)
 
(1,666,869
)
Acquisition of customer relationships
(21,037
)
 
(23,383
)
Customer inducements (see Note 2.b.)
(7,473
)
 
(4,041
)
Contract fulfillment costs (see Note 2.c.)

 
(9,809
)
Net proceeds from divestments
2,423

 

Proceeds from sales of property and equipment and other, net (including real estate)
8,547

 
207

Cash Flows from Investing Activities - Continuing Operations
(220,970
)
 
(1,921,496
)
Cash Flows from Investing Activities - Discontinued Operations

 

Cash Flows from Investing Activities
(220,970
)
 
(1,921,496
)
Cash Flows from Financing Activities:
 

 
 

Repayment of revolving credit, term loan facilities and other debt
(5,751,416
)
 
(7,876,796
)
Proceeds from revolving credit, term loan facilities and other debt
5,494,125

 
8,944,416

Net proceeds from sales of senior notes
332,683

 

Debt financing and equity contribution from noncontrolling interests
13,230

 

Debt repayment and equity distribution to noncontrolling interests
(3,079
)
 
(1,079
)
Parent cash dividends
(147,393
)
 
(337,052
)
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
810

 
(2,259
)
Payment of debt financing and stock issuance costs
(544
)
 
(13,385
)
Cash Flows from Financing Activities - Continuing Operations
(61,584
)
 
798,753

Cash Flows from Financing Activities - Discontinued Operations

 

Cash Flows from Financing Activities
(61,584
)
 
798,753

Effect of Exchange Rates on Cash and Cash Equivalents
17,412

 
(8,093
)
Increase (Decrease) in Cash and Cash Equivalents
54,535

 
(737,507
)
Cash and Cash Equivalents, including Restricted Cash, Beginning of Period
236,484

 
925,699

Cash and Cash Equivalents, including Restricted Cash, End of Period
$
291,019

 
$
188,192

Supplemental Information:
 

 
 

Cash Paid for Interest
$
177,303

 
$
185,804

Cash Paid for Income Taxes, Net
$
55,922

 
$
33,858

Non-Cash Investing and Financing Activities:
 

 
 

Capital Leases
$
57,383

 
$
34,260

Accrued Capital Expenditures
$
79,775

 
$
49,320

Accrued Purchase Price and Other Holdbacks
$

 
$
26,089

Fair Value of Initial OSG Investment (see Note 10)
$
18,000

 
$

Increase (decrease) in Fair Value of OSG Investment (see Note 10)
$

 
$
(94
)
Dividends Payable
$
149,961

 
$
173,301


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

8


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 June 30, 2018, we had approximately $22,167 and $17,703, respectively, of restricted cash held by certain financial institutions related to bank guarantees.

9

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

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 June 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 six 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.

10

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

The changes in the carrying value of goodwill attributable to each reportable operating segment for the six months ended June 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

Non-deductible goodwill acquired during the year

 

 

 
5,330

 
443,368

 

 
448,698

Fair value and other adjustments(1)
(376
)
 

 

 
7,797

 

 
4,704

 
12,125

Currency effects
(9,257
)
 
(2,527
)
 
(9,353
)
 
(43,373
)
 
(2
)
 
(590
)
 
(65,102
)
Gross Balance as of June 30, 2018
$
2,465,196

 
$
549,199

 
$
444,184

 
$
816,475

 
$
443,366

 
$
64,162

 
$
4,782,582

Accumulated Amortization Balance as of December 31, 2017
$
205,383

 
$
53,875

 
$
57,048


$
288

 
$

 
$

 
$
316,594

Currency effects
(327
)
 
(82
)
 
(237
)
 

 

 

 
(646
)
Accumulated Amortization Balance as of June 30, 2018
$
205,056

 
$
53,793

 
$
56,811

 
$
288

 
$

 
$

 
$
315,948

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 June 30, 2018
$
2,260,140

 
$
495,406

 
$
387,373

 
$
816,187

 
$
443,366

 
$
64,162

 
$
4,466,634

Accumulated Goodwill Impairment Balance as of December 31, 2017
$
85,909

 
$

 
$
46,500

 
$

 
$

 
$
3,011

 
$
135,420

Accumulated Goodwill Impairment Balance as of June 30, 2018
$
85,909

 
$

 
$
46,500

 
$

 
$

 
$
3,011

 
$
135,420

_______________________________________________________________________________
(1)
Total fair value and other adjustments include $12,125 in net adjustments primarily related to property, plant and equipment, customer relationship intangible assets and deferred income taxes and other liabilities.




11

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

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 six months ended June 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 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.


12

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

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.


13

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

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 June 30, 2018 are as follows:
 
December 31, 2017
 
June 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

 
$
1,690,147

 
$
(436,076
)
 
$
1,254,071

Customer inducements(1)
140,030

 
(66,981
)
 
73,049

 
57,555

 
(35,430
)
 
22,125

Data center lease-based intangible assets(2)
19,314

 
(643
)
 
18,671

 
276,936

 
(22,583
)
 
254,353

 
$
1,863,449

 
$
(462,902
)
 
$
1,400,547

 
$
2,024,638

 
$
(494,089
)
 
$
1,530,549

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Data center below-market leases
$

 
$

 
$

 
$
12,338

 
$
(761
)
 
$
11,577

_______________________________________________________________________________

(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 June 30, 2018. See Note 2.c. for information regarding Contract Fulfillment Costs included in our Condensed Consolidated Balance Sheet as of June 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 over a weighted average of four years and are included in depreciation and amortization in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2018. The other finite-lived intangible assets as of December 31, 2017 and June 30, 2018 are as follows:
 
December 31, 2017
 
June 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

 
$
20,365

 
$
(12,611
)
 
$
7,754


14

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

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 six months ended June 30, 2017 and 2018 are as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2018
 
2017
 
2018
Amortization expense included in depreciation and amortization associated with:
 
 
 
 
 
 
 
 
Customer relationship and customer inducement intangible assets
 
$
24,611

 
$
28,813

 
$
47,410

 
$
57,619

Data center in-place leases and tenant relationships
 

 
7,563

 

 
18,401

Other finite-lived intangible assets
 
1,173

 
1,659

 
3,489

 
2,844

Revenue reduction associated with amortization of:
 
 
 
 
 
 
 
 
Permanent withdrawal fees
 
$
2,748

 
$
2,968

 
$
5,906

 
$
5,553

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

 
1,293

 

 
2,372

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 six months ended June 30, 2017 and the Condensed Consolidated Statement of Equity and the Condensed Consolidated Statement of Cash Flows for the six months ended June 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.

15

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

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 six months ended June 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 June 30, 2018 are as follows:
 
 
 
 
January 1, 2018 (Date of Adoption of
ASU 2014-09)
 
 
June 30, 2018
Description
 
Location in Balance Sheet
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Commissions asset
 
Other (within Other Assets, Net)
 
$
42,072

 
$
(21,173
)
 
$
20,899

 
 
$
48,833

 
$
(28,355
)
 
$
20,478

Intake Costs asset
 
Other (within Other Assets, Net)
 
31,604

 
(14,954
)
 
16,650

 
 
35,643

 
(20,135
)
 
15,508



16

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

Amortization expense associated with the commissions asset and Intake Costs asset for the three and six months ended June 30, 2018 are as follows:
 
Three Month Ended June 30, 2018
 
Six Months Ended June 30, 2018
Commissions asset
 
$
3,793

 
 
$
7,380

Intake Costs asset
 
2,891

 
 
5,621


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 June 30, 2018 are as follows:
Description
 
Location in Balance Sheet
 
January 1, 2018 (Date of Adoption of ASU 2014-09)
 
June 30, 2018
Deferred revenue - Current
 
Deferred revenue
 
$
9,671

 
$
10,140

Deferred revenue - Long-term
 
Other Long-term Liabilities
 
9,877

 
7,467


The following table presents certain components of our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 as reported and as if we had not adopted ASU 2014-09 on January 1, 2018:
 
Three Months Ended
June 30, 2018
 
Six Months Ended
June 30, 2018
 
As Reported
 
If ASU 2014-09 was not adopted
 
As Reported
 
If ASU 2014-09 was not adopted
Revenues
$
1,060,823

 
$
1,057,608

 
$
2,103,281

 
$
2,098,872

Operating Income
$
203,359

 
$
201,664

 
$
367,918

 
$
366,983

Income from Continuing Operations
$
93,903

 
$
92,208

 
$
139,517

 
$
138,582

 
 
 
 
 
 
 
 
Per Share Income from Continuing Operations - Basic
$
0.33

 
$
0.32

 
$
0.49

 
$
0.48

Per Share Income from Continuing Operations - Diluted
$
0.33

 
$
0.32

 
$
0.49

 
$
0.48

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 six months ended June 30, 2017 was $8,543 ($5,945 after tax or $0.02 per basic and diluted share) and $15,092 ($10,530 after tax or $0.04 per basic and diluted share), respectively. Stock-based compensation expense for Employee Stock-Based Awards for the three and six months ended June 30, 2018 was $8,689 ($8,032 after tax or $0.03 per basic and diluted share) and $16,073 ($14,865 after tax or $0.05 per basic and diluted share), respectively. As of June 30, 2018, unrecognized compensation cost related to the unvested portion of our Employee Stock-Based Awards was $57,429 and is expected to be recognized over a weighted-average period of 2.2 years.

17

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

Stock-based compensation expense for Employee Stock-Based Awards included in the accompanying Condensed Consolidated Statements of Operations is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Cost of sales (excluding depreciation and amortization)
$
27

 
$
29

 
$
55

 
$
58

Selling, general and administrative expenses
8,516

 
8,660

 
15,037

 
16,015

Total stock-based compensation
$
8,543

 
$
8,689

 
$
15,092

 
$
16,073


Stock Options
A summary of stock option activity for the six months ended June 30, 2018 is as follows:
 
Stock Options
Outstanding at December 31, 2017
3,671,740

Granted
846,517

Exercised
(118,304
)
Forfeited
(23,334
)
Expired
(4,260
)
Outstanding at June 30, 2018
4,372,359

Options exercisable at June 30, 2018
2,409,054

Options expected to vest
1,844,046

Restricted Stock Units
The fair value of RSUs vested during the three and six months ended June 30, 2017 and 2018 is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Fair value of RSUs vested
$
2,047

 
$
676

 
$
16,073

 
$
16,006

A summary of RSU activity for the six months ended June 30, 2018 is as follows:
 
RSUs
Non-vested at December 31, 2017
1,071,469

Granted
701,259

Vested
(455,224
)
Forfeited
(53,080
)
Non-vested at June 30, 2018
1,264,424


18

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

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.
The majority of our PUs are earned based on our performance against revenue, ROIC and, beginning with PUs granted in 2018, Adjusted EBITDA targets during their applicable performance period; therefore, we forecast the likelihood of achieving the predefined revenue, ROIC and Adjusted EBITDA 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 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 June 30, 2018, we expected 85%, 100% 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 six months ended June 30, 2017 and 2018 is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Fair value of earned PUs that vested
$

 
$

 
$
905

 
$
3,033

A summary of PU activity for the six months ended June 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
(79,121
)
 

 
(79,121
)
Forfeited/Performance or Market Conditions Not Achieved
(12,368
)
 
(49,881
)
 
(62,249
)
Non-vested at June 30, 2018
979,896

 
(299,948
)
 
679,948

_______________________________________________________________________________

(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.

19

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

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 six months ended June 30, 2017 and 2018 is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Income (loss) from continuing operations
$
83,148

 
$
93,903

 
$
141,992

 
$
139,517

Less: Net income (loss) attributable to noncontrolling interests
2,492

 
142

 
2,874

 
610

Income (loss) from continuing operations (utilized in numerator of Earnings Per Share calculation)
$
80,656

 
$
93,761

 
$
139,118

 
$
138,907

(Loss) income from discontinued operations, net of tax
$
(2,026
)
 
$
(360
)
 
$
(2,363
)
 
$
(822
)
Net income (loss) attributable to Iron Mountain Incorporated
$
78,630

 
$
93,401

 
$
136,755

 
$
138,085

 
 
 
 
 
 
 
 
Weighted-average shares—basic
264,217,000

 
285,984,000

 
264,036,000

 
285,622,000

Effect of dilutive potential stock options
395,044

 
237,708

 
428,403

 
243,636

Effect of dilutive potential RSUs and PUs
318,375

 
347,543

 
405,640

 
415,929

Weighted-average shares—diluted
264,930,419

 
286,569,251

 
264,870,043

 
286,281,565

 
 
 
 
 
 
 
 
Earnings (losses) per share—basic:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
0.31

 
$
0.33

 
$
0.53

 
$
0.49

(Loss) income from discontinued operations, net of tax
(0.01
)
 

 
(0.01
)
 

Net income (loss) attributable to Iron Mountain Incorporated(1)
$
0.30

 
$
0.33

 
$
0.52

 
$
0.48

 
 
 
 
 
 
 
 
Earnings (losses) per share—diluted:
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
0.30

 
$
0.33

 
$
0.53

 
$
0.49

(Loss) income from discontinued operations, net of tax
(0.01
)
 

 
(0.01
)
 

Net income (loss) attributable to Iron Mountain Incorporated(1)
$
0.30

 
$
0.33

 
$
0.52

 
$
0.48

 
 
 
 
 
 
 
 
Antidilutive stock options, RSUs and PUs, excluded from the calculation
2,701,129

 
3,272,502

 
2,597,692

 
3,257,322


_______________________________________________________________________________

(1) Columns may not foot due to rounding.

20

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

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 six months ended June 30, 2017 were 18.1% and 16.2%, 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 June 30, 2017 were the benefit derived from the dividends paid deduction and differences in the rates of tax at which our foreign earnings are subject. The primary reconciling items between the then current federal statutory tax rate of 35.0% and our overall effective tax rate for the six months ended June 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 $7,511 as a result of the merger of certain of our foreign subsidiaries. Our effective tax rates for the three and six months ended June 30, 2018 were 21.9% and 16.5%, 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 June 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 six months ended June 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 amends 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.
Our estimate of the amount of Undistributed E&P deemed repatriated under the Tax Reform Legislation in our taxable year ending December 31, 2017 is approximately $186,000 (the “Estimated Undistributed E&P”). We will opt to include the full amount of Estimated 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 $82,000 related to the deemed repatriation of Undistributed E&P (the “Deemed Repatriation Taxable Income”).

21

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

The Estimated Undistributed E&P includes certain assumptions made by us regarding the cumulative earnings and profits of our foreign subsidiaries, as well as the characterization of such Estimated Undistributed E&P (liquid versus non-liquid assets). We are currently performing additional analysis to determine the actual amount of Undistributed E&P associated with our foreign subsidiaries, as well as the characterization of such Undistributed E&P, and anticipate this analysis will continue until we file our 2017 United States federal income tax return. We do not believe this will have an impact on our provision for income taxes or our qualification as a REIT. However, it may impact our shareholder dividend reporting.
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.

22

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

The assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2017 and June 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
June 30, 2018 Using
Description
 
Total Carrying
Value at
June 30,
2018
 
Quoted prices
in active
markets
(Level 1)
 
 
 
Significant other
observable
inputs
(Level 2)
 
 
 
Significant
unobservable
inputs
(Level 3)
Time Deposits(1)
 
$
5,759

 
$

 
 
 
$
5,759

 
 
 
$

Trading Securities
 
11,265

 
10,529

 
(2)
 
736

 
(3)
 

Derivative Assets(4)
 
318

 

 
 
 
318

 
 
 

Derivative Liabilities(4)
 
3,413

 

 
 
 
3,413

 
 
 

Interest Rate Swap Agreements Assets(5)
 
2,203

 

 
 
 
2,203

 
 
 

_______________________________________________________________________________

(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 June 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.
(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.

23

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

Disclosures are required in the financial statements for items measured at fair value on a non-recurring basis. There were no material items that are measured at fair value on a non-recurring basis at December 31, 2017 and June 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 six months ended June 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 June 30, 2018.
h.    Accumulated Other Comprehensive Items, Net
The changes in accumulated other comprehensive items, net for the three and six months ended June 30, 2017, respectively, are as follows:
 
Three Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2017
 
Foreign
Currency
Translation
Adjustments
 
Total
 
Foreign
Currency
Translation
Adjustments
 
Total
Beginning of Period
$
(161,239
)
 
$
(161,239
)
 
$
(212,573
)
 
$
(212,573
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments(1)
7,649

 
7,649

 
58,983

 
58,983

Total other comprehensive income (loss)
7,649

 
7,649

 
58,983

 
58,983

Balance as of June 30, 2017
$
(153,590
)
 
$
(153,590
)
 
$
(153,590
)
 
$
(153,590
)
______________________________________________________________
(1)
During the three and six months ended June 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).
The changes in accumulated other comprehensive items, net for the three and six months ended June 30, 2018, respectively, are as follows:
 
Three Months Ended
June 30, 2018
 
Six Months Ended
June 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
$
(73,897
)
 
$
(185
)
 
$
(74,082
)
 
$
(103,989
)
 
$

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


 


 


Foreign currency translation adjustments
(135,756
)
 

 
(135,756
)
 
(105,664
)
 

 
(105,664
)
Fair value adjustments for interest rate swap agreements

 
2,388

 
2,388

 

 
2,203

 
2,203

Total other comprehensive (loss) income
(135,756
)
 
2,388

 
(133,368
)
 
(105,664
)
 
2,203

 
(103,461
)
Balance as of June 30, 2018
$
(209,653
)
 
$
2,203

 
$
(207,450
)
 
$
(209,653
)
 
$
2,203

 
$
(207,450
)

24

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)

i.    Other (Income) Expense, Net (including Foreign Currency)
Other (income) expense, net for the three and six months ended June 30, 2017 and 2018 consists of the following:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Foreign currency transaction losses (gains), net
$
20,199

 
$
(18,624
)
 
$
16,035

 
$
3,161

Other, net
(39,565
)
 
(432
)
 
(41,765
)
 
(2,066
)
 
$
(19,366
)
 
$
(19,056
)
 
$
(25,730
)
 
$
1,095


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).

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

25

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)

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. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements.


26

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 June 30, 2018, we had outstanding forward contracts to (i) purchase 93,000 Euros and sell 112,315 United States dollars and (ii) purchase 68,015 United States dollars and sell 58,000 Euros to hedge our foreign exchange exposures. 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 six months ended June 30, 2017 and 2018 are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Net cash receipts (payments)
$
893

 
$
(7,554
)
 
$
893

 
$
(1,211
)
Our policy is to record the fair value of each derivative instrument on a gross basis. The following table provides the fair value of our derivative instruments not designated as hedging instruments as of December 31, 2017 and June 30, 2018:
Derivatives Not Designated as Hedging Instruments
 
Balance Sheet Location
 
December 31, 2017
 
June 30, 2018
Derivative assets
 
Prepaid expenses and other
 
$
1,579

 
$
318

Derivative liabilities
 
Accrued expenses
 
2,329

 
3,413

(Gains) losses for our derivative instruments not recognized as hedging instruments for the three and six months ended June 30, 2017 and 2018 are as follows:
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Derivatives Not Designated as Hedging Instruments
 
Location of Loss (Gain) Recognized in Income on Derivative
 
2017
 
2018
 
2017
 
2018
Foreign exchange contracts