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EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Innophos Holdings, Inc.iphs10q093014ex311.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 - Innophos Holdings, Inc.iphs10q093014ex321.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 - Innophos Holdings, Inc.iphs10q093014ex322.htm
EXCEL - IDEA: XBRL DOCUMENT - Innophos Holdings, Inc.Financial_Report.xls
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 - Innophos Holdings, Inc.iphs10q093014ex312.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________________
FORM 10-Q
 ___________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to               .
Commission File Number 001-33124
 ___________________________________________
INNOPHOS HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
 ___________________________________________
 
Delaware
 
20-1380758
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
259 Prospect Plains Road
Cranbury, New Jersey
 
08512
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (609) 495-2495
 ____________________________________________
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  x    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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    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 definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
  
Accelerated Filer
o
Non-accelerated filer
o
  
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  x
As of September 30, 2014, the registrant had 21,741,864 shares of common stock outstanding.
 



TABLE OF CONTENTS
 


Page 2 of 37




PART I
 
ITEM 1.
FINANCIAL STATEMENTS
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share amounts, the number of shares or where otherwise noted)
 
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
45,164

 
$
32,755

Accounts receivable, net
94,699

 
88,434

Inventories
163,726

 
181,467

Other current assets
78,361

 
81,961

Total current assets
381,950

 
384,617

Property, plant and equipment, net
199,976

 
201,985

Goodwill
84,373

 
84,373

Intangibles and other assets, net
71,373

 
74,691

Total assets
$
737,672

 
$
745,666

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
4,003

 
$
4,002

Accounts payable, trade and other
43,300

 
38,717

Other current liabilities
41,733

 
34,613

Total current liabilities
89,036

 
77,332

Long-term debt
124,003

 
159,007

Other long-term liabilities
46,738

 
45,908

Total liabilities
$
259,777

 
$
282,247

Commitments and contingencies (note 13)

 

Common stock, par value $.001 per share; authorized 100,000,000; issued 22,429,798 and 22,327,670; outstanding 21,741,864 and 21,893,137 shares
22

 
22

Paid-in capital
123,708

 
120,046

Common stock held in treasury, at cost (687,934 and 434,533 shares)
(33,984
)
 
(19,599
)
Retained earnings
389,574

 
364,515

Accumulated other comprehensive loss
(1,425
)
 
(1,565
)
Total stockholders' equity
477,895

 
463,419

Total liabilities and stockholders' equity
$
737,672

 
$
745,666


See notes to condensed consolidated financial statements

Page 3 of 37




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands, except per share amounts, the number of shares or where otherwise noted)
 
 
Three months ended
 
Nine months ended
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Net sales
$
208,815

 
$
219,993

 
$
644,698

 
$
647,610

Cost of goods sold
157,852

 
181,288

 
499,230

 
530,976

Gross profit
50,963

 
38,705

 
145,468

 
116,634

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
19,419

 
17,156

 
58,075

 
53,451

Research & development expenses
1,168

 
828

 
3,264

 
2,407

Total operating expenses
20,587

 
17,984

 
61,339

 
55,858

Operating income
30,376

 
20,721

 
84,129

 
60,776

Interest expense, net
1,089

 
1,709

 
2,922

 
4,455

Foreign exchange loss
1,804

 
674

 
1,763

 
3,091

Income before income taxes
27,483

 
18,338

 
79,444

 
53,230

Provision for income taxes
9,163

 
7,398

 
26,311

 
18,320

Net income
$
18,320

 
$
10,940

 
$
53,133

 
$
34,910

Net income attributable to participating common shareholders
$
18,281

 
$
10,924

 
$
53,021

 
$
34,856

Per share data (note 2):
 
 
 
 
 
 
 
Income per participating share:
 
 
 
 
 
 
 
Basic
$
0.84

 
$
0.50

 
$
2.43

 
$
1.59

Diluted
$
0.83

 
$
0.49

 
$
2.39

 
$
1.56

Weighted average participating shares outstanding:
 
 
 
 

 

Basic
21,741,050

 
21,947,948

 
21,826,771

 
21,932,814

Diluted
22,128,143

 
22,323,705

 
22,204,914

 
22,322,987

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Change in interest rate swaps, (net of tax $220, ($213), ($48) and $700)
$
358

 
$
(347
)
 
$
(78
)
 
$
1,142

Change in pension and post-retirement plans, (net of tax $47, $4, $67 and $258)
146

 
6

 
218

 
362

Other comprehensive (loss) income, net of tax
$
504

 
$
(341
)
 
140

 
1,504

Comprehensive income
$
18,824

 
$
10,599

 
$
53,273

 
36,414


See notes to condensed consolidated financial statements

Page 4 of 37




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
 
 
Nine months ended
 
September 30,
2014
 
September 30,
2013
Cash flows from operating activities
 
 
 
Net income
$
53,133

 
$
34,910

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Depreciation and amortization
26,643

 
27,794

Amortization of deferred financing charges
393

 
425

Deferred income tax (benefit) provision
(71
)
 
610

Share-based compensation
2,688

 
1,766

Changes in assets and liabilities:
 
 
 
Increase in accounts receivable
(6,265
)
 
(5,197
)
Decrease in inventories
17,741

 
5,008

Decrease in other current assets
2,766

 
17,211

Increase in accounts payable
4,583

 
7,079

Increase (decrease) in other current liabilities
7,120

 
(16,226
)
Changes in other long-term assets and liabilities
1,408

 
650

Net cash provided from operating activities
110,139

 
74,030

Cash flows used for investing activities:
 
 
 
Capital expenditures
(21,000
)
 
(30,333
)
Acquisition of intangible assets
(294
)
 

Net cash used for investing activities
(21,294
)
 
(30,333
)
Cash flows used for financing activities:
 
 
 
Proceeds from exercise of options
159

 
500

Long-term debt borrowings

 
28,000

Long-term debt repayments
(35,003
)
 
(42,000
)
Excess tax benefits from exercise of stock options
814

 
1,877

Common stock repurchases and restricted stock forfeitures
(14,384
)
 
(70
)
Dividends paid
(28,022
)
 
(23,020
)
Net cash used for financing activities
(76,436
)
 
(34,713
)
Net change in cash
12,409

 
8,984

Cash and cash equivalents at beginning of period
32,755

 
26,815

Cash and cash equivalents at end of period
$
45,164

 
$
35,799


See notes to condensed consolidated financial statements

Page 5 of 37




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Statement of Stockholders’ Equity (Unaudited)
(Dollars and shares in thousands)
 
Number of
Common
Shares
 
Common
Stock
 
Retained
Earnings
 
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Total
Shareholders'
Equity
Balance, December 31, 2012
21,831

 
$
22

 
$
346,866

 
$
103,371

 
$
(5,936
)
 
$
444,323

Net income
 
 
 
 
49,506

 
 
 
 
 
49,506

Other comprehensive income, (net of tax $2,184)
 
 
 
 
 
 
 
 
4,371

 
4,371

Proceeds from stock award exercises and issuances
217

 

 
 
 
(759
)
 
 
 
(759
)
Share-based compensation
 
 
 
 
 
 
2,174

 
 
 
2,174

Excess tax benefits from exercise of stock options
 
 
 
 
 
 
2,849

 
 
 
2,849

Common stock repurchases
(150
)
 
 
 
 
 
(7,118
)
 
 
 
(7,118
)
Restricted stock forfeitures
(5
)
 
 
 
 
 
(70
)
 
 
 
(70
)
Dividends declared
 
 
 
 
(31,857
)
 
 
 
 
 
(31,857
)
Balance, December 31, 2013
21,893

 
$
22

 
$
364,515

 
$
100,447

 
$
(1,565
)
 
$
463,419

Net income
 
 
 
 
53,133

 
 
 
 
 
53,133

Other comprehensive loss, (net of tax $19)
 
 
 
 
 
 
 
 
140

 
140

Proceeds from stock award exercises and issuances
103

 
 
 
 
 
159

 
 
 
159

Share-based compensation
 
 
 
 
 
 
2,688

 
 
 
2,688

Common stock repurchases
(250
)
 
 
 
 
 
(14,182
)
 
 
 
(14,182
)
Excess tax benefits from exercise of stock options
 
 
 
 
 
 
814

 
 
 
814

Restricted stock forfeitures
(4
)
 
 
 
 
 
(202
)
 
 
 
(202
)
Dividends declared
 
 
 
 
(28,074
)
 
 
 
 
 
(28,074
)
Balance, September 30, 2014
21,742

 
$
22

 
$
389,574

 
$
89,724

 
$
(1,425
)
 
$
477,895


See notes to condensed consolidated financial statements

Page 6 of 37




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, the number of shares or where otherwise noted)

1. Basis of Statement Presentation
Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Innophos Holdings, Inc. and Subsidiaries, or Company, have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S.) for interim financial reporting and do not include all disclosures required by generally accepted accounting principles in the U.S. for annual financial reporting, and should be read in conjunction with the audited consolidated and combined financial statements of the Company at December 31, 2013 and for the three years then ended.
The accompanying unaudited condensed consolidated financial statements of the Company reflect all adjustments which management considers necessary for a fair statement of the results of operations for the interim periods and is subject to year-end adjustments. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The December 31, 2013 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S.
Certain prior year balances have been reclassified to conform to current year presentation.
Out of Period Adjustments
During the first quarter of fiscal 2013, we identified an adjustment necessary for a long-term supply contract. We corrected this item during the first quarter of fiscal 2013, which had the effect of increasing cost of goods sold by $2.3 million, and decreasing net income by $1.6 million for the nine month period ended September 30, 2013. This prior period adjustment was not material to the financial results of the previously issued annual or interim financial statements.
Recently Issued Accounting Standards
Adopted
None.
Issued but not yet adopted
In April 2014, the FASB issued amendments to guidance for reporting discontinued operations and disposals of components of an entity. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014 (early adoption is permitted only for disposals that have not been previously reported). The implementation of the amended guidance is not expected to have a material impact on our consolidated financial position or results of operations and related disclosures.
In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2016 (early adoption is not permitted). The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the amended guidance on our consolidated financial position, results of operations and related disclosures.
In June 2014, the FASB issued guidance which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the

Page 7 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

compensation cost attributable to the period(s) for which the requisite service has already been rendered. The guidance is effective for the interim and annual periods beginning on or after December 15, 2015; early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our financial position, results of operations and related disclosures.
In August 2014 the FASB issued guidance which establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles in U.S. auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued or available to be issued. It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The guidance is effective for the interim and annual periods beginning on or after December 15, 2016; early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our financial position, results of operations and related disclosures.


2. Earnings per share (EPS)
The Company accounts for earnings per share in accordance with ASC 260 and related guidance, which requires two calculations of earnings per share (EPS) to be disclosed: basic EPS and diluted EPS. Under ASC Subtopic 260-10-45, as of January 1, 2009 unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock, are considered participating securities for purposes of calculating EPS. Under the two-class method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock, as shown in the table below.
The numerator for basic and diluted earnings per share is net earnings attributable to shareholders reduced by dividends attributable to unvested shares. The denominator for basic earnings per share is the weighted average number of common stock outstanding during the period. The denominator for diluted earnings per share is weighted average shares outstanding adjusted for the effect of dilutive outstanding stock options, performance share awards and restricted stock awards.

Page 8 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)


The following is a reconciliation of the weighted average basic number of common shares outstanding to the diluted number of common and common stock equivalent shares outstanding and the calculation of earnings per share using the two-class method:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Net income
$
18,320

 
$
10,940

 
$
53,133

 
$
34,910

Less: earnings attributable to unvested shares
(39
)
 
(16
)
 
(112
)
 
(54
)
Net income available to participating common shareholders
$
18,281

 
$
10,924

 
$
53,021

 
$
34,856

Weighted average number of participating common and potential common shares outstanding:
 
 
 
 
 
 
 
Basic number of participating common shares outstanding
21,741,050

 
21,947,948

 
21,826,771

 
21,932,814

Dilutive effect of stock equivalents
387,093

 
375,757

 
378,143

 
390,173

Diluted number of weighted average participating common shares outstanding
22,128,143

 
22,323,705

 
22,204,914

 
22,322,987

Earnings per participating common share:
 
 
 
 
 
 
 
Earnings per participating common share—Basic
$
0.84

 
$
0.50

 
$
2.43

 
$
1.59

Earnings per participating common share—Diluted
$
0.83

 
$
0.49

 
$
2.39

 
$
1.56

 
 
 
 
 
 
 
 
Total outstanding options, performance share awards and unvested restricted stock not included in the calculation of diluted earnings per share as the effect would be anti-dilutive
321,102

 
396,952

 
330,052

 
382,503



3. Dividends
The following is the dividend activity for the three and nine months ended September 30, 2014 and September 30, 2013: 
 
Three Months Ended
 
Nine Months Ended
 
September 30
 
September 30
 
2014
 
2013
 
2014
 
2013
Dividends declared – per share
$
0.48

 
$
0.35

 
$
1.28

 
$
1.05

Dividends declared – aggregate
10,477

 
7,694

 
28,022

 
23,020

Dividends paid – per share
0.48

 
0.35

 
1.28

 
1.05

Dividends paid – aggregate
10,477

 
7,694

 
28,022

 
23,020


We are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends, distributions and other transfers from our subsidiaries, most directly Innophos, Inc., our primary operating subsidiary, and Innophos Investments Holdings, Inc., its parent, to make dividend payments on our Common Stock. The Company's Board of Directors declared an increase to its quarterly dividend to $0.48 per share to be paid in the third quarter of 2014.





4. Stockholders’ Equity / Stock-Based Compensation
Our compensation programs include share-based payments. The primary share-based awards and their general terms and conditions currently in effect are as follows:

Page 9 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

Restricted stock grants, which entitle the holder to receive, at the end of each vesting term, a specified number of shares of the Company's common stock, and which also entitle the holder to receive dividends paid on such grants throughout the vesting period.
Stock options, which entitle the holder to purchase, after the end of a vesting term, a specified number of shares of the Company’s common stock at an exercise price per share set equal to the market price of the Company’s common stock on the date of grant.
Performance share awards which entitle the holder to receive, at the end of a vesting term, a number of shares of the Company’s common stock, within a range of shares from zero to a specified maximum (generally 200%), calculated using a combination of performance indicators as defined solely by reference to the Company’s own activities. Amounts equivalent to dividends will accrue over the performance period and are paid on performance share awards when vested and distributed.
Annual stock retainer grants, which entitle independent members of the Board of Directors to receive a number of shares of the Company’s common stock equal to a fixed retainer value.
 
Restricted Stock
On March 28, 2014 there were a total of 26,574 restricted shares granted to certain employees with a fair value of $1.5 million. These awards are classified as equity awards and vest annually over three years. The related compensation expense is based on the date of grant share price of $55.49. The compensation expense is amortized on a straight-line basis over the requisite vesting period and accelerated for those employees that are retirement eligible during the vesting period.
Stock Options
On March 28, 2014 the Company granted 76,720 non-qualified stock options at an exercise price of $55.49 per share to certain employees with a fair value of $1.5 million. The non-qualified stock options vest annually over three years with a March 28, 2024 expiration date.
The fair value of the options granted during 2014 was determined using the Black-Scholes option-pricing model. The assumptions used in the Black-Scholes option-pricing model were as follows:
 
Non-qualified stock options
 
Expected volatility
50.1
%
Dividend yield
3.2
%
Risk-free interest rate
2.0
%
Expected term (years)
6

Weighted average grant date fair value of stock options
$
20.15

For the 2014 grants the Company had chosen a blended volatility which consists of 50% historical volatility average of a peer group and 50% historical volatility of Innophos. The expected term for the stock options is based on the simplified method since the Company has limited data on the exercises of stock options. These stock options qualify as “plain vanilla” stock options in accordance with SAB 110. The dividend yield is the expected annual dividend payments divided by the average stock price up to the date of grant. The risk-free interest rates are derived from the U.S. Treasury securities in effect on the date of grant whose maturity period equals the options expected term. The Company applies an expected forfeiture rate to stock-based compensation expense. The estimate of the forfeiture rate is based primarily upon historical experience of employee turnover. As actual forfeitures become known, stock-based compensation expense is adjusted accordingly.
Performance Share Awards
On March 28, 2014, the Company granted 44,321 performance shares to certain employees with a fair value of $2.5 million. The performance shares vest at the end of the three year performance cycle and the number of shares distributable depends on the extent to which the Company attains pre-established performance goals. Amounts equivalent to declared dividends will accrue on the performance shares and will vest over the same period.

Page 10 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

Stock Grants
In May 2014 the five external members of the Board of Directors were granted a combined total of 5,145 shares of the Company's common stock with an aggregated fair value of approximately $0.3 million which immediately vested as part of their director fees.
The following table summarizes the components of stock-based compensation expense, all of which has been classified as selling, general and administrative expense:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Stock options
$
241

 
$
73

 
$
1,056

 
$
772

Restricted stock
273

 
169

 
830

 
517

Performance shares
199

 
(227
)
 
532

 
177

Stock grants

 

 
270

 
300

Total share-based compensation expense
$
713

 
$
15

 
$
2,688

 
$
1,766

During 2011 the Board of Directors authorized a repurchase program for Company common stock of up to $50 million. Under the program, shares will be repurchased from time to time at management's discretion, either through open market transactions, block purchases, private transactions or other means and will be funded through existing liquidity and cash from operations. A five year time limit has been set for the expiration of the program as initially structured. The timing of repurchases and the exact number of shares of common stock to be purchased will depend upon market conditions and other factors. However, annual repurchase amounts are expected at a minimum to be sufficient to reduce significantly, or eliminate, earnings per share dilution caused by shares issued upon the exercise of stock options and in connection with other equity based compensation plans. Treasury stock is recognized at the cost to reacquire the shares. During the second quarter of 2014, the Company repurchased 112,002 shares of its common stock on the open market at an average price of 55.16 per share or $6.2 million. During the third quarter of 2014, the Company repurchased 137,781 shares of its common stock on the open market at an average price of 58.09 per share or $8.0 million.

5. Inventories
Inventories consist of the following:
 
 
September 30,
2014
 
December 31,
2013
Raw materials
$
46,660

 
$
60,157

Finished products
104,276

 
108,334

Spare parts
12,790

 
12,976

 
$
163,726

 
$
181,467


Inventory reserves for excess quantities, obsolescence or shelf-life expiration as of September 30, 2014 and December 31, 2013 were $13,075 and $13,857, respectively.

Page 11 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)



6. Other Current Assets
Other current assets consist of the following:
 
 
September 30,
2014
 
December 31,
2013
Creditable taxes (value added taxes)
$
24,681

 
$
24,257

Vendor inventory deposits (prepaid)
10,939

 
14,820

Prepaid income taxes
16,631

 
12,269

Deferred income taxes
21,244

 
22,078

Other
4,866

 
8,537

 
$
78,361

 
$
81,961



7. Intangibles and Other Assets, net
Intangibles and other assets consist of the following:
 
 
Useful life
(years)
 
September 30,
2014
 
December 31,
2013
Developed technology and application patents, net of accumulated amortization of $21,184 for 2014 and $19,015 for 2013
7-20
 
$
23,942

 
$
25,817

Customer relationships, net of accumulated amortization of $12,364 for 2014 and $10,295 for 2013
5-15
 
26,448

 
28,517

Tradenames and license agreements, net of accumulated amortization of $7,231 for 2014 and $6,198 for 2013
5-20
 
10,430

 
11,463

Non-compete agreements, net of accumulated amortization of $914 for 2014 and $796 for 2013
3-10
 
419

 
537

Total intangibles
 
 
$
61,239

 
$
66,334

Deferred financing costs, net of accumulated amortization of $2,044 for 2014 and $1,652 for 2013 (see note 9)
 
 
$
1,616

 
$
2,008

Other assets
 
 
8,518

 
6,349

Total other assets
 
 
$
10,134

 
$
8,357

 
 
 
$
71,373

 
$
74,691


8. Other Current Liabilities
Other current liabilities consist of the following:
 
 
September 30,
2014
 
December 31,
2013
Payroll related
$
11,889

 
$
8,680

Taxes other than income taxes
4,558

 
5,610

Benefits and pensions
6,651

 
7,240

Freight and rebates
3,792

 
3,960

Income taxes
8,166

 
4,368

Other
6,677

 
4,755

 
$
41,733

 
$
34,613


Page 12 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)



9. Short-term Borrowings, Long-Term Debt, and Interest Expense
Short-term borrowings and long-term debt consist of the following:
 
 
September 30,
2014
 
December 31,
2013
Term loan due 2017
$
93,000

 
$
96,000

Revolver borrowings under the credit facility
35,000

 
67,000

Capital leases
6

 
9

Total borrowings
$
128,006

 
$
163,009

Less current portion
4,003

 
4,002

Long-term debt
$
124,003

 
$
159,007


The Company's credit facility includes a term loan of $100.0 million and a revolving line of credit from the Lenders of up to $225.0 million, including a $20.0 million letter of credit sub-facility, all maturing on December 21, 2017. Repayments of the term loan are required at the rate of 1% of original principal amount per quarter beginning on March 31, 2013.
As of September 30, 2014, $93.0 million was outstanding under the Term Loan and $35.0 million was outstanding under the revolving line of credit, both of which approximate fair value because they have a floating interest rate (determined using level 2 inputs within the fair value hierarchy) with total availability at $187.7 million, taking into account $2.3 million in face amount of letters of credit issued under the sub-facility. The current weighted average interest rate for all debt is 2.5%.
Simultaneously with initiating the new senior facility, Innophos entered into an interest rate swap, swapping the LIBOR exposure on $100.0 million adjusting quarterly consistent with the Term Loan, with a fixed rate of 0.9475% plus the applicable margin on the debt expiring in December 2017. This interest rate swap has been designated as a cashflow hedge (Level 2) with the changes in value recorded through other comprehensive income. The fair value of this interest rate swap is an asset of approximately $1.0 million as of September 30, 2014.
We manage our interest rate risk by balancing the amount of fixed-rate and floating-rate debt to the extent practicable consistent with our credit status.
Total interest paid by the Company for all indebtedness for the nine months ended September 30, 2014 and September 30, 2013 was $3,154 and $3,429, respectively.
As of September 30, 2014, the Company was in full compliance with all debt covenant requirements.

 
Interest expense, net consists of the following:
 
 
Three months ended
 
Nine months ended
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Interest expense
$
1,008

 
$
1,664

 
$
2,615

 
$
4,280

Deferred financing cost
130

 
137

 
393

 
425

Interest income
(14
)
 
(8
)
 
(28
)
 
(29
)
Less: amount capitalized for capital projects
(35
)
 
(84
)
 
(58
)
 
(221
)
Total interest expense, net
$
1,089

 
$
1,709

 
$
2,922

 
$
4,455


Page 13 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)


10. Other Long-Term Liabilities
Other long-term liabilities consist of the following:
 
 
September 30,
2014
 
December 31,
2013
Deferred income taxes
$
30,879

 
$
32,110

Pension and post retirement liabilities
10,844

 
11,175

Environmental liabilities
1,100

 
1,100

Other liabilities
3,915

 
1,523

 
$
46,738

 
$
45,908


11. Income Taxes
The effective income tax rate on income before taxes was approximately 33% for the nine months ended September 30, 2014 compared to approximately 34% for the comparable period in 2013. The variance in the effective tax rate is primarily due to increased taxable income in lower tax rate jurisdictions, the Mexican CNA Water Tax Claims and other international benefits being recorded as discrete items for income tax provision purposes in the prior year which decreased the prior year effective tax rate by 3%, uncertain income tax position benefits which decreased the effective tax rate by 3% from the prior year and state research and development credits which decreased the current year effective tax rate by 1%.

Business is conducted in various countries throughout the world and is subject to tax in numerous jurisdictions. A significant number of tax returns are filed and subject to examination by various federal, state and local tax authorities. Tax examinations are often complex, as tax authorities may disagree with the treatment of items reported requiring several years to resolve. As such, the Company maintains liabilities for possible assessments by tax authorities resulting from known tax exposures for uncertain income tax positions. The Company’s policy is to accrue associated penalties in selling, general and administrative expenses and to accrue interest in net interest expense. Currently, the Company is under examination, or has been contacted for examination on income tax returns for the years 2007 through 2011. In addition, Innophos Canada, Inc. was assessed approximately $4.0 million for the tax years 2007 and 2008 by the Canadian tax authorities. The Company is contesting the full assessment. The Company believes that its tax position is more likely than not to be sustained and has not recorded a charge for this tax matter. The Company recognized in the consolidated statement of income approximately $0.7 million of benefit as a result of settlements with income tax authorities offset by revisions for existing uncertain income tax positions for the nine months ended September 30, 2014. The Company has also recognized a benefit of approximately $0.2 million for interest and penalties in the consolidated statement of income for the nine months ended September 30, 2014. It is reasonably possible that new issues will be raised by tax authorities which may require adjustments to the amount of unrecognized tax benefits, however as of September 30, 2014, the Company estimates the liability for unrecognized tax benefits will not change during the next twelve months. Other than the items mentioned above, as of September 30, 2014, no material adjustments have been proposed to the Company's tax positions and the Company currently does not anticipate any adjustments that would result in a material change to its financial position during the next twelve months.
Income taxes paid were $24,123 and $21,273 for the nine months ended September 30, 2014 and September 30, 2013, respectively.

12. Commitments and Contingencies
Environmental
The Company's operations are subject to extensive and changing federal and state environmental laws and regulations. The Company's manufacturing sites have an extended history of industrial use, and soil and groundwater contamination have or may have occurred in the past and might occur or be discovered in the future.
Environmental efforts are difficult to assess for numerous reasons, including the discovery of new remedial sites, discovery of new information and scarcity of reliable information pertaining to certain sites, improvements in technology, changes in environmental laws and regulations, numerous possible remedial techniques and solutions, difficulty in assessing the involvement of and the financial capability of other potentially responsible parties and the extended time periods over which remediation occurs. Other than the items listed below, the Company is not aware of material environmental liabilities which are

Page 14 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

probable and estimable. As the Company's environmental contingencies are more clearly determined, it is reasonably possible that amounts may need to be accrued. However, management does not believe, based on current information, that environmental remediation requirements will have a material impact on the Company's results of operations, financial position or cash flows.
Future environmental spending is probable at our site in Nashville, TN, the eastern portion of which had been used historically as a landfill, and a western parcel previously acquired from a third party, which reportedly had housed, but no longer does, a fertilizer and pesticide manufacturing facility. We have an estimated liability with a range of $0.9 million-$1.2 million. The remedial action plan for that site has yet to be finalized, and as such, the Company has recorded a liability, which represents the Company's best estimate, of $1.1 million as of September 30, 2014.
Litigation
2008 RCRA Civil Enforcement - Geismar, Louisiana plant
Following several inspections by the Environmental Protection Agency, or EPA, at our Geismar, LA purified phosphoric acid, or PPA, plant and related submissions we made to support claimed exemptions from the federal Resource, Conservation and Recovery Act, or RCRA, in March 2008, EPA referred our case to the Department of Justice, or DOJ, for civil enforcement. Although no citations were ever issued or formal proceedings instituted, the agencies claim we violate RCRA by failing to manage appropriately two materials that DOJ/EPA alleges are hazardous wastes. Those materials are: (i) Filter Material from an enclosed intermediate filtration step to further process green phosphoric acid we receive as raw material via pipeline from the adjacent site operated by an affiliate of Potash Corporation of Saskatchewan, or PCS; and (ii) Raffinate, a co-product we return to PCS under a long-term contract we have with PCS.
Since referral of the case to DOJ, we and PCS have engaged in periodic discussions with DOJ/EPA and the Louisiana Department of Environmental Quality, or LDEQ, or collectively the Government Parties, in order to resolve the matter. In addition to asserting that the two materials in question are not hazardous wastes, we have also sought to demonstrate that both the nature and character of the materials as well as their use, handling and disposition were detailed in a solid waste permit amendment application filed in 1989 by PCS's predecessor, when our plant was first constructed, and approved by the LDEQ under the state RCRA program.
In the course of discussions with the Government Parties, the DOJ/EPA has required that we undertake, as an interim measure, the construction of a new filter unit to replace the closed system and allow the removal and separate handling of the Filter Material. We built that unit, which has been operating since 2012.
In an attempt to address the remaining concerns of the Government Parties, we and PCS undertook joint efforts to explore possible technical solutions to the issue of Raffinate treatment. Based upon work so far, there appears to be at least one technically viable approach, namely that of “deep well injection,” which we believe is acceptable to regulators as part of a negotiated solution among the parties.
Although we cannot give assurances as to the future course or ultimate outcome of ongoing negotiations, including whether litigation may ultimately ensue, we believe, based on our appreciation of the current state of the proceedings, that deep well injection is likely to be employed as the technologically acceptable approach for Raffinate and that we will not be asked to contribute substantially to the cost of the deep well to be specified by the Government Parties in an anticipated consent decree for settlement of this enforcement matter. However, in negotiated settlements leading to consent decrees with the Governmental Parties, it is also common for penalties relating to previous “non-compliance” to be assessed and, in that connection, we have been advised by the Governmental Parties that they expect to seek penalties against both PCS and us in this case. Although we have argued and made submissions to the effect that for purposes of settlement penalties there is no basis for any substantial penalty to be levied against us, nevertheless, we can give no assurance as to that outcome, or if a penalty is initially assessed as to its amount, or whether it will be necessary for us to oppose or seek indemnity for the assessment by further litigation. Based upon our receipt of a draft consent decree from the Government Parties in June 2014 and subsequent discussions with them, we have established an accrual of $0.9 million for settlement civil penalties. However, further discussions among all parties will be necessary to determine if the matter can be resolved by settlement.

Page 15 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)


Other Legal Matters
In March 2008, Sudamfos S.A., or Sudamfos, an Argentine phosphate producer, filed an arbitration before the ICC International Court of Arbitration, Paris, France, concerning an alleged agreement for our Mexicana subsidiary, Mexicana, to sell it 12,500 metric tons of phosphoric acid, but subsequently withdrew the proceeding. In October 2008, Mexicana filed suit in Mexico against Sudamfos to collect approximately $1.2 million representing the contract price for prior deliveries of phosphoric acid for which Sudamfos had refused to pay. In October 2009, Sudamfos answered the suit and counterclaimed for $3.0 million based upon the agreement originally alleged in the arbitration. In subsequent proceedings including available appeals, Mexicana's claim was sustained and Sudamfos' counterclaim was denied. Mexicana has now begun formal collection proceedings against Sudamfos.
In July 2013, Innophos, Inc. was assessed approximately $1.2 million of sales/use taxes by the State of Louisiana and Ascension Parish. This tax assessment covers certain raw materials used in the production of Phosphoric Acid. The Company is contesting both tax assessments. This assessment covers periods 2004 to 2010 for the Parish and 2007 to 2010 for the State. We have concluded that the contingent liability arising from this matter is neither remote nor probable, but reasonably possible.
In addition, we are party to legal proceedings and contractual disputes that arise in the ordinary course of our business. Except as to the matters specifically discussed, management believes that these matters represent remote liabilities. However, these matters cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, results of operations, financial condition, and/or cash flows.

13. Pension Plans and Postretirement Benefits

Net periodic benefit expense for the United States plans:

For the three months ended September 30, 2014
 
For the three months ended September 30, 2013
 
Pension benefits
 
Other benefits
 
Total
 
Pension benefits
 
Other benefits
 
Total
Service cost
$

 
$
78

 
$
78

 
$

 
$
91

 
$
91

Interest cost
30

 
44

 
74

 
27

 
40

 
67

Expected return on assets
(30
)
 

 
(30
)
 
(27
)
 

 
(27
)
Amortization of
 
 
 
 
 
 
 
 
 
 
 
prior service cost

 

 

 

 

 

unrecognized (gain) loss

 
(10
)
 
(10
)
 
14

 

 
14

Net periodic cost
$

 
$
112

 
$
112

 
$
14

 
$
131

 
$
145

 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2014
 
For the nine months ended September 30, 2013
 
Pension benefits
 
Other benefits
 
Total
 
Pension benefits
 
Other benefits
 
Total
Service cost
$

 
$
234

 
$
234

 
$

 
$
273

 
$
273

Interest cost
91

 
131

 
222

 
81

 
121

 
202

Expected return on assets
(91
)
 

 
(91
)
 
(82
)
 

 
(82
)
Amortization of
 
 
 
 
 
 
 
 
 
 
 
prior service cost

 

 

 

 

 

unrecognized (gain) loss

 
(30
)
 
(30
)
 
42

 

 
42

Net periodic cost
$

 
$
335

 
$
335

 
$
41

 
$
394

 
$
435


In April 2014, Innophos contributed approximately $0.2 million to its U.S. defined benefit pension plan to satisfy the full year 2014 minimum contribution requirements.

Page 16 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

Innophos made its entire cash contribution of $2.9 million for the U.S. defined contribution plan during the first quarter of 2014 for the plan year 2013.

Net periodic benefit expense for the Canadian plans:
 
For the three months ended September 30, 2014
 
For the three months ended September 30, 2013
 
Pension benefits
 
Other benefits
 
Total
 
Pension benefits
 
Other benefits
 
Total
Service cost
$
79

 
$
18

 
$
97

 
$
86

 
$
19

 
$
105

Interest cost
144

 
21

 
165

 
138

 
20

 
158

Expected return on assets
(234
)
 

 
(234
)
 
(223
)
 

 
(223
)
Amortization of
 
 
 
 
 
 
 
 
 
 
 
actuarial loss (gain)
25

 
4

 
29

 
78

 
9

 
87

prior service cost
24

 

 
24

 
25

 

 
25

net transition obligation

 
7

 
7

 

 
8

 
8

Exchange rate changes
329

 
(74
)
 
255

 
(18
)
 
4

 
(14
)
Net periodic cost
$
367

 
$
(24
)
 
$
343

 
$
86

 
$
60

 
$
146

 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2014
 
For the nine months ended September 30, 2013
 
Pension benefits
 
Other benefits
 
Total
 
Pension benefits
 
Other benefits
 
Total
Service cost
$
238

 
$
52

 
$
290

 
$
263

 
$
58

 
$
321

Interest cost
431

 
64

 
495

 
420

 
61

 
481

Expected return on assets
(700
)
 

 
(700
)
 
(679
)
 

 
(679
)
Amortization of

 
 
 
 
 
 
 
 
 
 
actuarial loss (gain)
75

 
11

 
86

 
238

 
27

 
265

prior service cost
71

 

 
71

 
76

 

 
76

net transition obligation

 
21

 
21

 

 
23

 
23

Exchange rate changes
304

 
(68
)
 
236

 
186

 
(43
)
 
143

Net periodic cost
$
419

 
$
80

 
$
499

 
$
504

 
$
126

 
$
630

Innophos Canada, Inc. made cash contributions to its Canadian defined benefit plan of $0.4 million during the nine months ended September 30, 2014. Innophos Canada, Inc. does not plan to make any more cash contributions to its Canadian defined benefit plan during the remainder of 2014.

Page 17 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)



14. Accumulated Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income by Component:
For the three months ended September 30, 2014
Pension and Other Postretirement Adjustments
 
Changes in Fair Value of Effective Cash Flow Hedges
 
Total
Balance at June 30, 2014
$
(2,215
)
 
$
286

 
$
(1,929
)
Other comprehensive income (loss) before reclassifications
146

 
358

 
504

Amounts reclassified from accumulated other comprehensive income

 

 

Net current period other comprehensive income (loss)
146

 
358

 
504

Balance at September 30, 2014
$
(2,069
)
 
$
644

 
$
(1,425
)
 
 
 
 
 
 
For the three months ended September 30, 2013
Pension and Other Postretirement Adjustments
 
Changes in Fair Value of Effective Cash Flow Hedges
 
Total
Balance at June 30, 2013
$
(4,957
)
 
$
866

 
$
(4,091
)
Other comprehensive income before reclassifications
6

 
(347
)
 
(341
)
Amounts reclassified from accumulated other comprehensive income

 

 

Net current period other comprehensive income
6

 
(347
)
 
(341
)
Balance at September 30, 2013
$
(4,951
)
 
$
519

 
$
(4,432
)
 
 
 
 
 
 
For the nine months ended September 30, 2014
Pension and Other Postretirement Adjustments
 
Changes in Fair Value of Effective Cash Flow Hedges
 
Total
Balance at December 31, 2013
$
(2,287
)
 
$
722

 
$
(1,565
)
Other comprehensive income (loss) before reclassifications
218

 
(78
)
 
140

Amounts reclassified from accumulated other comprehensive income

 

 

Net current period other comprehensive income (loss)
218

 
(78
)
 
140

Balance at September 30, 2014
$
(2,069
)
 
$
644

 
$
(1,425
)
 
 
 
 
 
 
For the nine months ended September 30, 2013
Pension and Other Postretirement Adjustments
 
Changes in Fair Value of Effective Cash Flow Hedges
 
Total
Balance at December 31, 2012
$
(5,313
)
 
$
(623
)
 
$
(5,936
)
Other comprehensive income before reclassifications
362

 
1,142

 
1,504

Amounts reclassified from accumulated other comprehensive income

 

 

Net current period other comprehensive income
362

 
1,142

 
1,504

Balance at September 30, 2013
$
(4,951
)
 
$
519

 
$
(4,432
)

15. Segment Reporting
The company discloses certain financial and supplementary information about its reportable segments, revenue by products and revenues by geographic area. Operating segments are defined as components of an enterprise about which separate discrete financial information is evaluated regularly by the chief operating decision maker, in order to decide how to

Page 18 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

allocate resources and assess performance. The primary performance indicators for the chief operating decision maker are sales and operating income, with sales presented on a ship-from basis. All references to sales in this Form 10-Q, either on a ship-from or ship-to basis, are on the same basis of revenue recognition and are recognized when title and risk of loss passes to the customer, which occurs either upon shipment or delivery, depending upon the agreed sales terms with customers.
The Company's reportable segments reflect the core businesses in which Innophos operates and how it is managed. The Company reports its core specialty phosphates business separately from granular triple super-phosphate, or GTSP, and other non-specialty phosphate products (GTSP & Other). Kelatron, AMT, CMI and Triarco are included in the Specialty Phosphates US & Canada segment and in the Specialty Ingredients product line. Specialty Phosphates consists of the products lines Specialty Ingredients, Food & Technical Grade PPA, and STPP & Detergent Grade PPA. GTSP & Other includes fertilizer co-product GTSP and other non-specialty phosphate products.

For the three months ended September 30, 2014
 
Specialty
Phosphates
US & Canada
 
Specialty
Phosphates
Mexico
 
GTSP &
Other
 
Eliminations
 
Total
Sales
 
$
147,220


$
43,075


$
18,520


$


$
208,815

Intersegment sales
 
2,086


11,094


55


(13,235
)


Total sales
 
$
149,306


$
54,169


$
18,575


$
(13,235
)

$
208,815

Operating income
 
$
23,603


$
5,904


$
869


$


$
30,376

Depreciation and amortization expense
 
$
6,483


$
2,156


$
605


$


$
9,244

 
 
 
 
 
 
 
 
 
 
 
For the three months ended September 30, 2013
 
Specialty
Phosphates
US & Canada
 
Specialty
Phosphates
Mexico
 
GTSP &
Other
 
Eliminations
 
Total
Sales
 
$
153,588

 
$
44,712

 
$
21,693

 
$

 
$
219,993

Intersegment sales
 
720

 
16,972

 

 
(17,692
)
 

Total sales
 
$
154,308

 
$
61,684

 
$
21,693

 
$
(17,692
)
 
$
219,993

Operating income
 
$
21,482

 
$
2,964

 
$
(3,725
)
 
$

 
$
20,721

Depreciation and amortization expense
 
$
6,967

 
$
1,740

 
$
236

 
$

 
$
8,943

 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2014
 
Specialty
Phosphates
US & Canada
 
Specialty
Phosphates
Mexico
 
GTSP &
Other
 
Eliminations
 
Total
Sales
 
$
455,497

 
$
128,449

 
$
60,752

 
$

 
$
644,698

Intersegment sales
 
3,636

 
38,852

 
94

 
(42,582
)
 

Total sales
 
$
459,133

 
$
167,301

 
$
60,846

 
$
(42,582
)
 
$
644,698

Operating income
 
$
65,150

 
$
22,085

 
$
(3,106
)
 
$

 
$
84,129

Depreciation and amortization expense
 
$
18,092

 
$
7,202

 
$
1,349

 


 
$
26,643

 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2013
 
Specialty
Phosphates
US & Canada
 
Specialty
Phosphates
Mexico
 
GTSP &
Other
 
Eliminations
 
Total
Sales
 
$
463,633

 
$
126,997

 
$
56,980

 
$

 
$
647,610

Intersegment sales
 
2,021

 
44,095

 
239

 
(46,355
)
 

Total sales
 
$
465,654

 
$
171,092

 
$
57,219

 
$
(46,355
)
 
$
647,610

Operating income (a) (b)
 
$
56,032

 
$
4,954

 
$
(210
)
 
$

 
$
60,776

Depreciation and amortization expense
 
$
20,540

 
$
5,815

 
$
1,439

 
$

 
$
27,794


(a)
The nine months ended September 30, 2013 includes a $7.2 million benefit to earnings related to updates to the provision for the CNA Fresh Water Claims in GTSP & Other.
(b)
The nine month period ended September 30, 2013 includes a $2.3 million charge to earnings for out of period costs in the US.

Page 19 of 37



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)


16. Acquisitions

In October 2013, Innophos purchased substantially all of the assets of privately held Chelated Minerals International, Inc. (CMI), based in Salt Lake City, Utah. CMI has significant knowhow in the manufacture and science of chelated minerals supplied to the human nutrition market. The acquisition of CMI strengthens Innophos’ position in micronutrient ingredients, which further enhances the Company’s ability to supply a broad range of nutrition fortification solutions to its customers. Innophos enjoys a strong position in macronutrient minerals such as calcium, magnesium and potassium that are required in relatively large amounts for a balanced diet. The human diet also requires smaller quantities of a wide range of other minerals such as chromium, selenium, zinc and iron classified as micronutrients. The acquisition had a purchase price of approximately $5 million, subject to specified adjustments, and was funded from cash on-hand.
The purchase accounting for the acquisition has been closed with no adjustments recognized in the nine month period
ended September 30, 2014.
The final purchase price allocation for CMI resulted in the following amounts being allocated to the assets acquired and liabilities assumed at the acquisition date based upon their respective fair values summarized below:

 
CMI
Cash
$
97

Accounts receivable
299

Inventory, including fair value adjustment of $20
125

Property, plant and equipment
1,092

Goodwill
1,265

Intangible assets
2,348

Accounts payable
(69
)
Other current liabilities
(57
)
Total
$
5,100





Page 20 of 37




ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements about our markets, the demand for our products and services and our future results. We based these statements on assumptions that we consider reasonable. Actual results may differ materially from those suggested by our forward-looking statements for various reasons including those discussed in the “Risk Factors” and “Forward-Looking Statements” sections of this report.
Innophos is a leading international producer of performance-critical and nutritional specialty ingredients, with applications in food, beverage, dietary supplements, pharmaceutical, oral care and industrial end markets. Innophos combines more than a century of experience in specialty phosphate manufacturing with a growing capability in a broad range of other specialty ingredients to supply a product range produced to stringent regulatory manufacturing standards and the quality demanded by customers worldwide. Many of Innophos' products are application-specific compounds engineered to meet customer performance requirements and are often critical to the taste, texture and performance of foods, beverages, pharmaceuticals, oral care products and other applications. For example, Innophos products act as flavor enhancers in beverages, electrolytes in sports drinks, texture additives in cheeses, leavening agents in baked goods, pharmaceutical excipients, cleaning agents in toothpaste and provide a wide range of nutritional fortification solutions for food, beverage and nutritional supplement manufacturers.

Page 21 of 37





Recent Trends and Outlook
Specialty Phosphates volumes were down 3% in the third quarter 2014 compared to the prior year period primarily due to the previously mentioned reduced US/Canada Purified Phosphoric Acid (PPA) availability as well as lower demand and order patterns in certain US markets as noted earlier. These shortfalls overshadowed a record quarter for INNOVALT® sales for asphalt markets which were up 40% year-over-year for the third quarter, and up 17% year-to-date, following the extension of the Federal Transportation Fund. Export sales were essentially flat year-over-year, as a 22% improvement in Europe, Middle East and Africa and modest growth in Asia Pacific was nearly offset by declines in Latin America. As a result of the noted challenges in the US markets, tight PPA availability that was not resolved until late October, as well as our year-to-date performance, our expectation for Specialty Phosphates full year 2014 volumes is now a decline of 1-2% compared to full year 2013.
Specialty Phosphates operating income margins were 16% for the third quarter 2014, above the high end of the full year expected range, due to improved product mix and profitability levels in both US/Canada and Mexico. However, we expect our full year 2014 results to be at the low end of the targeted 14-15% operating income margin range for Specialty Phosphates. Fourth quarter margins are expected to be in the 11-12% range due to lower sequential and year-over-year sales volumes along with approximately $5 million of higher third quarter 2014 inventory costs, caused by increased raw material prices and lower production rates, that will reduce earnings in the fourth quarter 2014.
Fertilizer market prices remained fairly stable during the third quarter 2014 but decreased approximately 5% in early October and decreased another 5-10% in late October. Market phosphate rock prices were fairly stable sequentially in the third quarter 2014 and are expected to remain stable for the fourth quarter. Sulfur market prices increased approximately 25% in the third quarter 2014 but decreased 5% in the fourth quarter 2014.
GTSP & Other recorded $1 million operating income for the third quarter 2014 as expected. Given recent selling price movements and the fact that the fourth quarter is seasonally weak for fertilizers, we expect to record somewhere between break-even and a $1 million operating loss in this segment for the fourth quarter 2014.
Net debt (total long-term debt (including any current portion) less cash and cash equivalents) decreased sequentially by $17 million in the third quarter 2014 to $83 million due to lower working capital. Innophos spent $8 million to repurchase approximately 138,000 shares during the third quarter 2014 and another $7.4 million in October to repurchase approximately 135,000 shares.

 





 

Page 22 of 37





Historical Performance
Results of Operations
The following table sets forth a summary of the Company’s operations and their percentages of total revenue for the periods indicated. (dollars in millions):
 
 
Three Months Ended
 
Three Months Ended
 
September 30, 2014
 
September 30, 2013
 
Amount
 
%
 
Amount
 
%
Net sales
$
208.8

 
100.0

 
$
220.0

 
100.0

Cost of goods sold
157.8

 
75.6

 
181.3

 
82.4

Gross profit
51.0

 
24.4

 
38.7

 
17.6

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
19.5

 
9.3

 
17.2

 
7.8

Research & development
1.1

 
0.5

 
0.8

 
0.4

Income from operations
30.4

 
14.6

 
20.7

 
9.4

Interest expense, net
1.1

 
0.5

 
1.7

 
0.8

Foreign exchange losses (gains), net
1.8

 
0.9

 
0.7

 
0.3

Provision for income taxes
9.2

 
4.4

 
7.4

 
3.4

Net income
$
18.3

 
8.8

 
$
10.9

 
5.0

 
 
 
 
 
 
 
 
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
Amount
 
%
 
Amount
 
%
Net sales
$
644.7

 
100.0

 
$
647.6

 
100.0

Cost of goods sold
499.2

 
77.4

 
531.0

 
82.0

Gross profit
145.5

 
22.6

 
116.6

 
18.0

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
58.0

 
9.0

 
53.4

 
8.2

Research & development
3.4

 
0.5

 
2.4

 
0.4

Income from operations
84.1

 
13.0

 
60.8

 
9.4

Interest expense, net
2.9

 
0.4

 
4.5

 
0.7

Foreign exchange losses (gains), net
1.8

 
0.3

 
3.1

 
0.5

Provision for income taxes
26.3

 
4.1

 
18.3

 
2.8

Net income
$
53.1

 
8.2

 
$
34.9

 
5.4


Three months ended September 30, 2014 compared to the three months ended September 30, 2013
Net Sales
Net sales represent the selling price of the products, net of any customer-related rebates, plus freight and any other items invoiced to customers. Net sales for the three months ended September 30, 2014 were $208.8 million, a decrease of $11.2 million, or 5.1%, as compared to $220.0 million for the same period in 2013. Specialty Phosphates sales were down 4.0% or $8.0 million with selling prices down 0.9% or $1.8 million and volume down 3.1% or $6.2 million. Prices were down primarily for our Mexico segment due to increased competition in the Latin American export markets. The volume decrease was primarily due to a 13.5% year-over-year decline in US & Canada Food & Technical Grade PPA volumes caused by a lack of product availability from the Company’s phosphoric acid supplier who experienced a longer than planned maintenance outage at its Geismar Merchant Grade Acid (MGA) facility and was unable to keep to a normal PPA shipment pace out of its other facility. GTSP & Other sales were down 14.6% or $3.2 million with volumes lower by 10.4% or $2.3 million and prices lower by 4.2% or $0.9 million.
The Company calculates pure selling price dollar variances as the selling price for the current year to date period minus the selling price for the prior year to date period, and then multiplies the resulting selling price difference by the prior year to

Page 23 of 37




date period volume. Volume variance is calculated as the total sales variance minus the selling price variance and refers to the revenue effect of changes in tons sold at the relative prices applicable to the variation in tons, otherwise known as volume/mix.
The following table illustrates for the three months ended September 30, 2014 the percentage changes in net sales by reportable segment compared with the same period of the prior year, including the effect of price and volume/mix changes upon revenue:
 
 
Price
 
Volume/Mix
 
Total
Specialty Phosphates US & Canada
(0.2
)%
 
(3.9
)%
 
(4.1
)%
Specialty Phosphates Mexico
(3.3
)%
 
(0.4
)%
 
(3.7
)%
Total Specialty Phosphates
(0.9
)%
 
(3.1
)%
 
(4.0
)%
GTSP & Other
(4.2
)%
 
(10.4
)%
 
(14.6
)%
Total
(1.2
)%
 
(3.9
)%
 
(5.1
)%

The following table illustrates for the three months ended September 30, 2014 the percentage changes for net sales by Specialty Phosphates product lines compared with the prior year, including the effect of price and volume/mix changes:
 
 
Price
 
Volume/Mix
 
Total
Specialty Ingredients
(0.5
)%
 
(2.6
)%
 
(3.1
)%
Food & Technical Grade PPA
(3.1
)%
 
(4.8
)%
 
(7.9
)%
STPP & Detergent Grade PPA
0.2
 %
 
(3.7
)%
 
(3.5
)%

Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the three months ended September 30, 2014 was $51.0 million, an increase of $12.3 million, or 31.8%, as compared to $38.7 million for the same period in 2013. Gross profit percentage increased to 24.4% for the three months ended September 30, 2014 versus 17.6% for the same period in 2013. Gross profit in 2014 was favorably affected by $12.0 million of lower raw material costs, mainly phosphate rock and sulfur, a net $3.6 million decrease in planned maintenance outage expense mainly at our Coatzacoalcos, Mexico manufacturing facility, $0.5 million favorable sales volume effects, and $0.4 million favorable exchange rate from our Mexican peso and Canadian dollar based costs. These favorable effects were partially offset by $2.9 million higher manufacturing costs, $2.7 million lower selling prices, and $0.2 million higher depreciation. Included in 2013 was expense of $1.6 million for a lower of cost or market reserve recorded in GTSP.
Operating Expenses and Research and Development
Operating expenses consist primarily of selling, general and administrative and research and development expenses. Operating expenses for the three months ended September 30, 2014 were $20.6 million, an increase of $2.6 million, or 14.4%, as compared to $18.0 million for the same period in 2013. The increase is primarily due to $1.3 million higher employee related expenses and $1.1 million higher professional services fees.
Operating Income
Operating income for the three months ended September 30, 2014 was $30.4 million, an increase of $9.7 million, or 46.9%, as compared to $20.7 million for the same period in 2013. Operating income as a percentage of net sales increased to 14.6% versus 9.4% for the same period in 2013, for the reasons noted above.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the three months ended September 30, 2014 was $1.1 million, a decrease of $0.6 million or 35.3% as compared to $1.7 million for the same period in 2013. The decrease was mainly due to a favorable change in interest expense for income tax audits in the US and lower average debt levels.
Foreign Exchange
Foreign exchange for the three months ended September 30, 2014 was a loss of $1.8 million as compared to a loss of $0.7 million for the same period in 2013. The U.S. Dollar is the functional currency of our Mexican and Canadian operations. Consequently, foreign exchange gain or loss is recorded on remeasurement of non-U.S. dollar denominated monetary assets

Page 24 of 37




and liabilities. Such gains and losses fluctuate from period to period as the foreign currencies strengthen or weaken against the U.S. dollar and the amount of non-U.S. dollar denominated assets and liabilities increases or decreases.

Provision for Income Taxes
The effective income tax rate was 33% for the three months ended September 30, 2014 compared to 40% for the same period in 2013. The variance in the effective tax rate is due to the recording of uncertain income tax positions in the prior year which increased the tax rate by 7% in the prior year.
Net Income
Net income for the three months ended September 30, 2014 was $18.3 million, an increase of $7.4 million as compared to $10.9 million for the same period in 2013, due to the factors described above.

Nine months ended September 30, 2014 compared to the nine months ended September 30, 2013
Net Sales
Net sales represent the selling price of the products, net of any customer-related rebates, plus freight and any other items invoiced to customers. Net sales for the nine months ended September 30, 2014 were $644.7 million, a decrease of $2.9 million, or 0.4%, as compared to $647.6 million for the same period in 2013. Specialty Phosphates sales were down 1.1% or $6.7 million with prices lower by 0.9% or $5.6 million and volumes lower by 0.2% or $1.1 million. The price decrease was seen primarily in Food & Technical Grade PPA and to a lesser extent Specialty Ingredients. The US/Canada price declines were primarily in Food & Technical Grade PPA and have been consistent throughout the year while the Mexico price declines were primarily in the third quarter 2014 and due to increased competition in the Latin American export markets. Volumes were relatively flat for the current period compared to the same period last year with increases in Specialty Ingredients, despite a year over year decline for the Nutrition businesses, offsetting declines in STPP & Detergent Grade PPA, leaving a small decline in Food & Technical Grade PPA. GTSP & Other sales were up 6.6% or $3.8 million with volumes higher by 18.8% or $10.8 million but prices lower 12.2% or $7.0 million.
The Company calculates pure selling price dollar variances as the selling price for the current year to date period minus the selling price for the prior year to date period, and then multiplies the resulting selling price difference by the prior year to date period volume. Volume variance is calculated as the total sales variance minus the selling price variance and refers to the revenue effect of changes in tons sold at the relative prices applicable to the variation in tons, otherwise known as volume/mix. The following table illustrates for the nine months ended September 30, 2014 the percentage changes in net sales by reportable segment compared with the same period of the prior year, including the effect of price and volume/mix changes upon revenue:
 
 
Price
 
Volume/Mix
 
Total
Specialty Phosphates US & Canada
(0.8
)%
 
(1.0
)%
 
(1.8
)%
Specialty Phosphates Mexico
(1.6
)%
 
2.7
 %
 
1.1
 %
Total Specialty Phosphates
(0.9
)%
 
(0.2
)%
 
(1.1
)%
GTSP & Other
(12.2
)%
 
18.8
 %
 
6.6
 %
Total
(1.9
)%
 
1.5
 %
 
(0.4
)%

The following table illustrates for the nine months ended September 30, 2014 the percentage changes for net sales by Specialty Phosphates product lines compared with the prior year, including the effect of price and volume/mix changes:
 
 
Price
 
Volume/Mix
 
Total
Specialty Ingredients
(0.5
)%
 
0.6
 %
 
0.1
 %
Food & Technical Grade PPA
(3.0
)%
 
(1.0
)%
 
(4.0
)%
STPP & Detergent Grade PPA
(0.4
)%
 
(4.0
)%
 
(4.4
)%





Page 25 of 37






Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the nine months ended September 30, 2014 was $145.5 million, an increase of $28.9 million, or 24.8%, as compared to $116.6 million for the same period in 2013. Gross profit percentage increased to 22.6% for the nine months ended September 30, 2014 versus 18.0% for the same period in 2013.
Gross profit in 2014 was favorably affected by $29.5 million lower raw material costs, primarily phosphate rock, a net $3.3 million decrease in planned maintenance outage expense mainly at our Coatzacoalcos, Mexico manufacturing facility, $2.3 million favorable sales volume effects, $1.4 million favorable exchange rate from Mexican peso and Canadian dollar based costs, and $1.3 million lower depreciation. These favorable effects were partially offset by $12.5 million lower selling prices, $5.3 million higher manufacturing costs, and $0.9 million for the accrual of Geismar, La. contingent liabilities. Included in 2013 were $15.4 million in elevated cost of goods sold, of which $7.9 million related to Mexico manufacturing issues, $2.4 million related to demurrage on raw material purchases and other inventory related costs, $2.3 million related to an out of period adjustment on a long term supply agreement, $2.1 million related to a revision of estimates for phosphate rock inventories in Mexico and $0.7 million related to acquisition accounting expenses. Also included in 2013 was a benefit of $7.2 million for settlement of historical water duty claims by the Mexican authorities and expense of $1.6 million for a lower of cost or market reserve recorded in GTSP.
 
Operating Expenses and Research and Development
Operating expenses consist primarily of selling, general and administrative and research and development expenses. Operating expenses for the nine months ended September 30, 2014 were $61.4 million, an increase of $5.6 million, or 10.0%, as compared to $55.8 million for the same period in 2013. The increase is due to $3.3 million higher employee related expenses for short-term incentive and stock compensation, $0.9 million higher professional services fees, $0.5 million increase in commercial activities and $0.9 million increase in all other costs.

Operating Income
Operating income for the nine months ended September 30, 2014 was $84.1 million, an increase of $23.3 million, or 38.3%, as compared to $60.8 million for the same period in 2013. Operating income as a percentage of net sales increased to 13.0% versus 9.4% for the same period in 2013, for the reasons noted above.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the nine months ended September 30, 2014 was $2.9 million, a decrease of $1.6 million, or 35.6% as compared to $4.5 million for the same period in 2013. The decrease was mainly due to a favorable change in interest expense for income tax audits in the US and lower average debt levels.
Foreign Exchange
Foreign exchange for the nine months ended September 30, 2014 was a loss of $1.8 million as compared to a loss of $3.1 million for the same period in 2013. The U.S. Dollar is the functional currency of our Mexican and Canadian operations. Consequently, foreign exchange gain or loss is recorded on remeasurement of non-U.S. dollar denominated monetary assets and liabilities. Such gains and losses fluctuate from period to period as the foreign currencies strengthen or weaken against the U.S. dollar and the amount of non-U.S. dollar denominated assets and liabilities increases or decreases.
Provision for Income Taxes
The effective income tax rate was 33% for the nine months ended September 30, 2014 compared to 34% for the same period in 2013. The variance in the effective tax rate is primarily due to increased taxable income in lower tax rate jurisdictions, the Mexican CNA Water Tax Claims and other international benefits being recorded as discrete items for income tax provision purposes in the prior year which decreased the prior year effective tax rate by 3%, uncertain income tax position benefits which decreased the effective tax rate by 3% from the prior year and state research and development credits which decreased the current year effective tax rate by 1%.
Net Income
Net income for the nine months ended September 30, 2014 was $53.1 million, an increase of $18.2 million as compared to $34.9 million for the same period in 2013, due to the factors described above.

Page 26 of 37





Segment Reporting
The Company reports its core Specialty Phosphates business separately from GTSP & Other. Specialty Phosphates consists of the products lines Specialty Ingredients, Food & Technical Grade PPA and STPP & Detergent Grade PPA. Kelatron, AMT, CMI and Triarco are included in the Specialty Phosphates US & Canada segment and in the Specialty Ingredients product line. GTSP & Other includes fertilizer co-product GTSP and other non-Specialty Phosphate products. The primary performance indicators for the chief operating decision maker are sales and operating income. The following table sets forth the historical results of these indicators by segment:
 
 
Three Months Ended
 
 
 
September 30,
2014
 
September 30,
2013
 
Net Sales % Change
Segment Net Sales
 
 
 
 
 
Specialty Phosphates US & Canada
$
147,220

 
$
153,588

 
(4.1
)%
Specialty Phosphates Mexico
43,075

 
44,712

 
(3.7
)%
Total Specialty Phosphates
190,295

 
198,300

 
(4.0
)%
GTSP & Other
18,520

 
21,693

 
(14.6
)%
Total
$
208,815

 
$
219,993

 
(5.1
)%
 
 
 
 
 
 
Segment Operating Income
 
 
 
 
 
Specialty Phosphates US & Canada
$
23,603

 
$
21,482

 
 
Specialty Phosphates Mexico
5,904

 
2,964

 
 
Total Specialty Phosphates
29,507

 
24,446

 
 
GTSP & Other
869

 
(3,725
)
 
 
Total
$
30,376

 
$
20,721

 
 
 
 
 
 
 
 
Segment Operating Income % of net sales
 
 
 
 
 
Specialty Phosphates US & Canada
16.0
%
 
14.0
 %
 
 
Specialty Phosphates Mexico
13.7
%
 
6.6
 %
 
 
Total Specialty Phosphates
15.5
%
 
12.3
 %
 
 
GTSP & Other
4.7
%
 
(17.2
)%
 
 
Total
14.5
%
 
9.4
 %
 
 
 
 
 
 
 
 
Depreciation and amortization expense
 
 
 
 
 
Specialty Phosphates US & Canada
$
6,483

 
$
6,967

 
 
Specialty Phosphates Mexico
2,156

 
1,740

 
 
Total Specialty Phosphates
$
8,639

 
$
8,707

 
 
GTSP & Other
605

 
236

 
 
Total
$
9,244

 
$
8,943

 
 




Page 27 of 37




 
Nine Months Ended
 
 
 
September 30,
2014
 
September 30,
2013
 
Net Sales % Change
Segment Net Sales
 
 
 
 
 
Specialty Phosphates US & Canada
$
455,497

 
$
463,633

 
(1.8
)%
Specialty Phosphates Mexico
128,449

 
126,997

 
1.1
 %
Total Specialty Phosphates
583,946

 
590,630

 
(1.1
)%
GTSP & Other
60,752

 
56,980

 
6.6
 %
Total
$
644,698

 
$
647,610

 
(0.4
)%
 
 
 
 
 
 
Segment Operating Income
 
 
 
 
 
Specialty Phosphates US & Canada
$
65,150

 
$
56,032

 
 
Specialty Phosphates Mexico
22,085

 
4,954

 
 
Total Specialty Phosphates
87,235

 
60,986

 
 
GTSP & Other (a) (b)
(3,106
)
 
(210
)
 
 
Total
$
84,129

 
$
60,776

 
 
 
 
 
 
 
 
Segment Operating Income % of net sales
 
 
 
 
 
Specialty Phosphates US & Canada
14.3
 %
 
12.1
 %
 
 
Specialty Phosphates Mexico
17.2
 %
 
3.9
 %
 
 
Total Specialty Phosphates
14.9
 %
 
10.3
 %
 
 
GTSP & Other (a) (b)
(5.1
)%
 
(0.4
)%
 
 
Total
13.0
 %
 
9.4
 %
 
 
 
 
 
 
 
 
Depreciation and amortization expense
 
 
 
 
 
Specialty Phosphates US & Canada
$
18,092

 
$
20,540

 
 
Specialty Phosphates Mexico
7,202

 
5,815

 
 
Total Specialty Phosphates
$
25,294

 
$
26,355

 
 
GTSP & Other
1,349

 
1,439

 
 
Total
$
26,643

 
$
27,794

 
 

(a)
The nine months ended September 30, 2013 includes a $7.2 million benefit to earnings related to updates to the provision for the CNA Fresh Water Claims in GTSP & Other.
(b)
The nine month period ended September 30, 2013 includes a $2.3 million charge to earnings for out of period costs in the US.


Page 28 of 37




Three months ended September 30, 2014 compared to the three months ended September 30, 2013
Segment Net Sales:
Specialty Phosphates US & Canada net sales decreased 4.1% for the three months ended September 30, 2014 when compared with the same period in 2013. Average selling prices decreased by 0.2% while volumes decreased 3.9% primarily due to a 13.5% decline in Food & Technical Grade PPA caused by a lack of product availability from the Company’s phosphoric acid supplier who experienced a longer than planned maintenance outage at its Geismar Merchant Grade Acid (MGA) facility and was unable to keep to a normal PPA shipment pace out of its other facility. Specialty Ingredients volumes were also down 2.1% due to order patterns on ammonium phosphates for the fire-fighting market, continued softness in the nutrition business and lower resale products for the baking market which, when combined, more than offset record volumes for the INNOVALT® asphalt business and strong demand for Cal-Rise®.
Specialty Phosphates Mexico net sales decreased 3.7% for the three months ended September 30, 2014 when compared with the same period in 2013. Selling prices decreased 3.3% due to increased competition in the Latin American export markets and volumes decreased 0.4%.
GTSP & Other net sales decreased 14.6% for the three months ended September 30, 2014 when compared with the same period in 2013. Volumes decreased 10.4% and selling prices decreased 4.2%. Fertilizer market prices were fairly stable throughout the the 2014 period, unlike the 2013 period where market prices dropped 15-20% during the quarter which required the posting of a lower of cost or market reserve in that period.
Segment Operating Income Percentage of Net Sales:
The 200 basis point increase in Specialty Phosphates US & Canada operating income margins for the three months ended September 30, 2014 compared with the same period in 2013 is due to decreased raw material costs, primarily phosphate rock, which increased margins 560 basis points and lower depreciation which increased margins by 30 basis points. This was partially offset by higher manufacturing and operating costs, including currency exchange, which decreased margins by 330 basis points, increased planned maintenance outage expenses which decreased margins by 30 basis points, lower average selling prices which decreased margins by 20 basis points and lower sales volume/mix which decreased margins by 10 basis points.
The 710 basis point increase in Specialty Phosphates Mexico operating income margins for the three months ended September 30, 2014 compared with the same period in 2013 is due to lower planned maintenance outage expenses which increased margins by 690 basis points, lower manufacturing cost which increased margins by 160 basis points, lower raw material costs which increased margins by 140 basis points, increased sales volume/mix which increased margins by 120 basis points and favorable exchange which increased margins by 60 basis points. This was partially offset by lower average selling prices which decreased margins by 310 basis points, higher depreciation which decreased margins by 90 basis points and higher operating cost which decreased margins by 60 basis points.
The 2,190 basis point increase in GTSP & Other operating income margins for the three months ended September 30, 2014 compared with the same period in 2013 is due to lower raw material cost which increased margins by 1,320 basis points, higher sales volume/mix which increased margins by 650 basis points, lower planned maintenance outage expenses which increased margins by 470 basis points and favorable exchange which increased margins by 30 basis points. This was partially offset by lower selling prices which decreased margins 510 basis points, higher manufacturing and operating costs which decreased margins by 340 basis points and higher depreciation which decreased margins by 170 basis points. Included in 2013 was expense for a lower of cost or market reserve which had a favorable impact on 2014 margins when compared to 2013 of 740 basis points.


Page 29 of 37




Nine months ended September 30, 2014 compared to the nine months ended September 30, 2013
Segment Net Sales:
Specialty Phosphates US & Canada net sales decreased 1.8% for the nine months ended September 30, 2014 when compared with the same period in 2013. Average selling prices decreased by 0.8%, primarily in Food & Technical Grade PPA which have been consistent throughout the year. Volumes decreased 1.0%, with 6.8% decreases in both Food & Technical Grade PPA and STPP & Detergent Grade PPA partially offset by increases in Specialty Ingredients.
Specialty Phosphates Mexico net sales increased 1.1% for the nine months ended September 30, 2014 when compared with the same period in 2013. Volumes increased 2.7%, primarily in Food & Technical Grade PPA as a result of improved operations, while selling prices decreased 1.6% due to increased competition in the Latin American export markets.
GTSP & Other net sales increased 6.6% for the nine months ended September 30, 2014 when compared with the same period in 2013. Volumes increased 18.8% while selling prices decreased 12.2% due to higher fertilizer market prices in the first half of 2013.
Segment Operating Income Percentage of Net Sales:
The 220 basis point increase in Specialty Phosphates US & Canada operating income margins for the nine months ended September 30, 2014 compared with the same period in 2013 is due to decreased raw material costs which increased margins 400 basis points and lower depreciation which increased margins by 50 basis points. This was partially offset by higher manufacturing and operating cost, including currency exchange, which decreased margins by 230 basis points, lower average selling prices which decreased margins by 70 basis points, lower sales volume/mix which reduced margins by 30 basis points and higher planned maintenance outage expenses which decreased margins by 20 basis points. Included in 2013 were elevated cost of goods sold for previously noted items which had a favorable effect on 2014 margins of 120 basis points when compared to the prior year period.
The 1,330 basis point increase in Specialty Phosphates Mexico operating income margins for the nine months ended September 30, 2014 compared with the same period in 2013 is due to lower raw material costs which increased margins by 430 basis points, lower planned maintenance outage expenses which increased margins by 240 basis points, lower manufacturing cost, including a favorable exchange effect, which increased margins by 250 basis points and increased sales volume/mix which increased margins by 100 basis points. This was partially offset by lower average selling prices which decreased margins by 160 basis points and higher depreciation which decreased margins by 110 basis points. Included in 2013 were elevated cost of goods sold due to manufacturing inefficiencies and maintenance expenses stemming from premature equipment failures and a revision of estimates for phosphate rock inventories which had a total favorable impact on 2014 margins of 580 basis points when compared to the prior year period.
The 470 basis point decrease in GTSP & Other operating income margins for the nine months ended September 30, 2014 compared with the same period in 2013 is due to lower raw material cost which increased margins by 990 basis points, higher sales volume/mix which increased margins by 690 basis points, lower planned maintenance outage expenses which increased margins by 180 basis points, a favorable exchange rate effect which increased margins by 50 basis points and lower depreciation which increased margins by 20 basis points. This was partially offset by lower selling prices which decreased margins 1,400 basis points, higher manufacturing and operating costs which lowered margins 320 basis points and the accrual of Geismar, La. contingent liabilities which lowered margins by 160 basis points. Included in 2013 were elevated cost of goods sold due to manufacturing inefficiencies and maintenance expenses stemming from premature equipment failures and a revision of estimates for phosphate rock inventories which had a total favorable impact on 2014 margins when compared to 2013 of 470 basis points and expense for a lower cost or market reserve which had a favorable impact on 2014 margins when compared to 2013 of 280 basis points. Also included in 2013 was a benefit of $7.2 million due to progress made in reducing the amount required to be paid to settle historical water duty claims by the Mexican authorities which had an unfavorable impact on 2014 margins when compared to 2013 of 1,270 basis points.



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Liquidity and Capital Resources
The following table sets forth a summary of the Company’s cash flows for the periods indicated.
 
(Dollars in millions)
Nine months ended
 
September 30,
2014
 
September 30,
2013
Operating Activities
$
110.1

 
$
74.0

Investing Activities
(21.3
)
 
(30.3
)
Financing Activities
(76.4
)
 
(34.7
)

Nine months ended September 30, 2014 compared to nine months ended September 30, 2013
Net cash provided by operating activities was $110.1 million for the nine months ended September 30, 2014 as compared to $74.0 million for 2013, an increase of $36.1 million. The increase in operating activities cash resulted primarily from favorable changes of $18.2 million in net income as described earlier and $18.1 million from reduced working capital.
The favorable change in working capital is derived from it being a source of cash of $26.0 million in 2014 compared to a source in 2013 of $7.9 million, an increase in cash of $18.1 million. Favorable changes in other current liabilities of $23.4 million, of which $6.3 million related to a 2013 reduction in the CNA water claim payable, and $12.7 million in inventory, due to lower purified phosphoric acid inventories, were partially offset by unfavorable changes of $14.5 million in other current assets, mainly due to accelerate refunds of value added tax last year by our Mexican subsidiaries, $3.2 million in accounts payable, and $0.3 million in accounts receivable. Accounts receivable as a percent of quarterly sales, when adjusted for GTSP open accounts receivable of $2.2 million, $11.0 million, $0.2 million, $1.3 million, and $1.0 million as of September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013, and September 30, 2013 respectively, was consistent with the last four quarters' average.
Net cash used for investing activities was $21.3 million for the nine months ended September 30, 2014, compared to $30.3 million for 2013, a decrease in spending of $9.0 million. The change is mainly due to $12.2 million lower capital spending at our Coatzacoalcos, Mexico manufacturing facility as we were making substantial investments in 2013 to improve the capability and reliability of that operation after suffering from premature equipment failures during the first half of 2013. This was partially offset by $2.8 million increased spending at our Nashville, TN facility.
Approximately three-quarters of the year-to-date September 2014 capital spending was for maintenance and the remaining 25% was for strategic growth initiatives. The majority of the strategic growth investments were focused on capacity expansions at Nashville as well as on improving capabilities, yields and capacity at Coatzacoalcos. Our expectation for 2014 capital expenditures is now in the $30-35 million range with the maintenance portion of these capital expenditures expected to be within the typical $20-$25 million range.
Innophos currently estimates that full exploration costs to a proven reserves standard for its Baja California mining concessions could require expenditures of $10 to $15 million over the next three to four years. This estimate includes mineral rights payments, taxes, mineral resource measurement, beneficiation process design and completion of feasibility studies. Full expenditures would only occur if interim milestone goals are successfully attained. Combined 2010 through 2013 expenditures on the exploration of the Baja California Sur concession deposits were approximately $3.8 million. Spending in 2014 will likely remain at the previous annual trend rate. Innophos intends to seek one or more partners for these efforts, but anticipates no difficulties in completing the exploration phase without a partnership.
Net cash from financing activities for the nine months ended September 30, 2014, was a use of $76.4 million, compared to a use of $34.7 million in 2013, an increase in the use of cash of $41.7 million. This was largely due to $28.0 million decreased loan borrowings, $14.3 million increased stock repurchases, $5.0 million higher dividend payments, $1.1 million lower excess tax benefits from the exercise of stock options and $0.3 million lower stock option exercises, partially offset by $7.0 million decreased loan repayments.
Innophos and its subsidiaries and affiliates may from time to time seek to acquire or otherwise retire outstanding debt through privately negotiated transactions, exchanges or otherwise. Debt repurchases or exchanges, if any, will depend on prevailing market conditions, Company liquidity requirements, restrictive financial covenants and other factors applicable at the time. The amounts involved may be material.

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On September 30, 2014, the Company had cash and cash equivalents outside the United States of $41.2 million, or 91% of the Company's balance. Further, the foreign cash amounts are not restricted by law to be used in other countries. Our current operating plan does not include repatriation of any of the cash and cash equivalents held outside the United States to fund the United States operations. However, in the event we do repatriate cash and cash equivalents held outside of the United States, we may be required to accrue and pay United States income taxes to repatriate these funds.
The Company's available financial resources allow for the continuation of dividend payments, pursuit of several “bolt-on” acquisition projects and further geographic expansion initiatives. We further believe that on-hand cash combined with cash generated from operations, including our Mexican operations, and availability under our revolving line of credit, will be sufficient to meet our obligations such as debt service, tax payments, capital expenditures and working capital requirements for at least the next twelve months. We expect to fund all of these obligations through our existing cash and our future operating cash flows. However, future operating performance for the Company is subject to prevailing economic and competitive conditions and various other factors that are uncertain. If the cash flows and other capital resources available to the Company, such as its revolving loan facility, are insufficient to fund our debt and other liquidity needs, the Company may have to take alternative actions that differ from current operating plans.
Under the share repurchase program approved by the Board of Directors in 2011, from time to time at management’s discretion, we will repurchase our common stock either through open market transactions, block purchases, private transactions or other means and will fund these transactions through existing liquidity and cash from operations. During the second quarter, the Company repurchased 112,002 shares of its common stock on the open market at an average price of $55.16 per share or $6.2 million. During the third quarter, the Company repurchased 137,781 shares of its common stock on the open market at an average price of 58.09 per share or $8.0 million. Also, in the early part of the fourth quarter, the Company repurchased approximately another 135,000 shares at an average price of $55.00 or $7.4 million.
The Company's Board of Directors declared an increase to its quarterly dividend to $0.48 per share starting in the third quarter of 2014.

Critical Accounting Estimates and Policies
There have been no material changes from the critical accounting estimates previously disclosed in our 2013 Annual Report on Form 10-K.
 

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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks as part of our ongoing business operations. Primary exposures include changes in interest rates, as borrowings under our Loan Agreement will bear interest at floating rates based on LIBOR plus an applicable borrowing margin. We manage our interest rate risk by balancing the amount of fixed-rate and floating-rate debt to the extent practicable consistent with our credit status. For fixed-rate debt, interest rate changes do not affect earnings or cash flows. Conversely, for floating-rate debt, interest rate changes generally affect our earnings and cash flows, assuming other factors are held constant.
At September 30, 2014, we had $93 million principal amount of variable-rate debt remaining on a term loan and a $225.0 million revolving credit facility, of which $35.0 million was outstanding, both of which approximate fair value (determined using level 2 inputs within the fair value hierarchy). Total remaining availability was $187.7 million, taking into account $2.3 million in face amount of letters of credit issued under the sub-facility. Simultaneously with initiating the new senior facility, Innophos entered into an interest rate swap, swapping the LIBOR exposure on $100.0 million of floating rate debt with a fixed rate of 0.9475% plus the applicable margin on the debt expiring in December 2017. This interest rate swap has been designated as a cash flow hedge with the changes in value recorded through other comprehensive income. The fair value of this interest rate swap is an asset of approximately $1 million (determined using level 2 inputs within the fair value hierarchy) as of September 30, 2014.
Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense on our revolving line of credit. Changes in economic conditions may also result in lower operating income, reducing our funds available for capital investment, operations or other purposes. In addition, a substantial portion of our cash flow has been used to service debt and fund working capital needs, which may affect our ability to make future acquisitions or capital expenditures. We may from time to time use interest rate protection agreements to minimize our exposure to interest rate fluctuation. Regardless of hedges, we may experience economic loss and a negative impact on earnings or net assets as a result of interest rate fluctuations. Based on $28.0 million outstanding borrowings as floating rate debt (amount not covered by the swap), an immediate increase of one percentage point would cause an increase to interest expense of approximately $0.3 million per year.
We currently do not have any, but from time to time, we may enter into longer term natural gas supply contracts in an effort to eliminate some of the volatility in our energy costs. Our natural gas spending for 2014 is estimated to be less than 3% of cost of goods sold.
We do not currently hedge our currency rate risks.
We believe that our concentration of credit risk related to trade accounts receivable is limited since these receivables are spread among a number of customers and are geographically dispersed. No customer accounted for more than 10% of our sales in the last 3 years.
Foreign Currency Exchange Rates
The U.S. Dollar is the functional currency of the Canadian and Mexican operations. Accordingly, these operations’ monetary assets and liabilities are translated at current exchange rates, non-monetary assets and liabilities are translated at historical exchange rates, and revenue and expenses are translated at average exchange rates and at historical exchange rates for the related revenue and expenses of non-monetary assets and liabilities. All transaction gains and losses are included in net income.
Our principal source of exchange rate exposure in our foreign operations consists of expenses, such as labor expenses, which are denominated in the foreign currency of the country in which we operate. A decline in the value of the U.S. Dollar relative to the local currency would generally cause our operational expenses (particularly labor costs) to increase (conversely, a decline in the value of the foreign currency relative to the U.S. Dollar would cause these expenses to decrease). We believe that normal exchange rate fluctuations consistent with recent historical trends would have a modest impact on our expenses, and would not materially affect our financial condition or results of operations. Nearly all of our sales are denominated in U.S. Dollars and our exchange rate exposure in terms of sales revenues is minimal.
Inflation and changing prices
Our costs and expenses will be subject to inflation and price fluctuations. Significant price fluctuations in raw materials, freight, and energy costs, if not compensated for by cost savings from production efficiencies or price increases passed on to customers could have a material effect on our financial condition and results of operations.

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Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance or special purpose entities”, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Control and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be reported in the Company's consolidated financial statements and filings is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission, or SEC, and that such information is accumulated and communicated to the Company's management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.
As of September 30, 2014 the Company completed an evaluation under the supervision and with the participation of the Company's management, including the Company's Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures are effective at the reasonable assurance level.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during or with respect to the third quarter of 2014 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


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PART II
 
ITEM 1.
LEGAL PROCEEDINGS
Note 12 of Notes to Consolidated Condensed Financial Statements in “Item 1. Financial Statements" contained in this Quarterly Report on Form 10-Q is incorporated herein by reference.
 
ITEM 1A.
RISK FACTORS
There have been no material changes from the risk factors previously disclosed in our 2013 Annual Report on Form 10-K.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.
MINE SAFETY DISCLOSURES
None.

ITEM 5.
OTHER INFORMATION
None.

ITEM 6.
EXHIBITS
a) Exhibits. The following exhibits are filed or furnished as part of this report:
Exhibit No.
 
Description
31.1
 
Certification of Principal Executive Officer dated October 29, 2014 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Principal Financial Officer dated October 29, 2014 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
 
Certification of Principal Executive Officer dated October 29, 2014 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
 
Certification of Principal Financial Officer dated October 29, 2014 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
Not to be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor deemed to be incorporated by reference into any filing under that Act or the Securities Act of 1933.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INNOPHOS HOLDINGS, INC.
 
 
 
/s/ Randolph Gress
By:
Randolph Gress
Its:
Chief Executive Officer and Director
 
(Principal Executive Officer)
 
Dated:
October 29, 2014
 
INNOPHOS HOLDINGS, INC.
 
 
 
/s/ Robert Harrer
By:
Robert Harrer
Its:
Vice President and Chief Financial Officer
 
(Principal Financial Officer)
 
Dated:
October 29, 2014


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EXHIBIT INDEX
Exhibit No.
 
Description
31.1
 
Certification of Principal Executive Officer dated October 29, 2014 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Principal Financial Officer dated October 29, 2014 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of Principal Executive Officer dated October 29, 2014 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of Principal Financial Officer dated October 29, 2014 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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