XNAS:IPHS Innophos Holdings Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNAS:IPHS Fair Value Estimate
Premium
XNAS:IPHS Consider Buying
Premium
XNAS:IPHS Consider Selling
Premium
XNAS:IPHS Fair Value Uncertainty
Premium
XNAS:IPHS Economic Moat
Premium
XNAS:IPHS Stewardship
Premium
 

 
 
 
 
 
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 March 31, 2012
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  o    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 March 31, 2012, the registrant had 21,795,242 shares of common stock outstanding.
 



TABLE OF CONTENTS
 


Page 2 of 28




PART I
 
ITEM 1.
FINANCIAL STATEMENTS
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
 
 
March 31,
2012
 
December 31, 2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
60,536

 
$
35,242

Accounts receivable, net
126,763

 
104,421

Inventories
149,952

 
169,728

Other current assets
54,745

 
75,316

Total current assets
391,996

 
384,707

Property, plant and equipment, net
183,963

 
187,421

Goodwill
61,554

 
61,587

Intangibles and other assets, net
53,295

 
53,300

Total assets
$
690,808

 
$
687,015

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
4,000

 
$
4,000

Accounts payable, trade and other
29,904

 
32,640

Other current liabilities
51,309

 
71,609

Total current liabilities
85,213

 
108,249

Long-term debt
152,000

 
148,000

Other long-term liabilities
38,048

 
37,558

Total liabilities
$
275,261

 
$
293,807

Commitments and contingencies (note 12)

 

Common stock, par value $.001 per share; authorized 100,000,000; issued 21,945,764 and 21,770,641; outstanding 21,795,242 and 21,620,119 shares
22

 
22

Paid-in capital
112,806

 
112,193

Common stock held in treasury, at cost (150,522 and 150,522 shares)
(6,156
)
 
(6,156
)
Retained earnings
313,779

 
292,144

Accumulated other comprehensive loss
(4,904
)
 
(4,995
)
Total stockholders' equity
415,547

 
393,208

Total liabilities and stockholders' equity
$
690,808

 
$
687,015


See notes to condensed consolidated financial statements

Page 3 of 28




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
 
 
Three months ended
 
March 31,
2012
 
March 31,
2011
Net sales
$
228,252

 
$
197,598

Cost of goods sold
172,384

 
140,269

Gross profit
55,868

 
57,329

Operating expenses:
 
 
 
Selling, general and administrative
17,034

 
15,816

Research & development expenses
695

 
691

Total operating expenses
17,729

 
16,507

Operating income
38,139

 
40,822

Interest expense, net
1,627

 
1,303

Foreign exchange (gains) losses
(291
)
 
710

Income before income taxes
36,803

 
38,809

Provision for income taxes
9,215

 
12,840

Net income
$
27,588

 
25,969

Net income attributable to common shareholders
$
27,584

 
$
25,969

Per share data (note 2):
 
 
 
Income per share:
 
 
 
Basic
$
1.27

 
$
1.19

Diluted
$
1.22

 
$
1.15

Weighted average shares outstanding:
 
 
 
Basic
21,800,964

 
21,735,230

Diluted
22,699,745

 
22,612,342

 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
Change in interest rate swaps, (net of tax $59 and $162)
$
96

 
$
263

Change in pension and post-retirement plans, (net of tax $4 and $211)
(5
)
 
339

Other comprehensive income, net of tax
$
91

 
$
602

Comprehensive income
$
27,679

 
$
26,571


See notes to condensed consolidated financial statements

Page 4 of 28




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
 
 
Three months ended
 
March 31,
2012
 
March 31,
2011
Cash flows from operating activities
 
 
 
Net income
$
27,588

 
$
25,969

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Depreciation and amortization
10,239

 
10,194

Amortization of deferred financing charges
145

 
158

Deferred income tax (benefit) provision
(334
)
 
2,543

Deferred profit sharing

 
(255
)
Share-based compensation
1,221

 
2,273

Changes in assets and liabilities:
 
 
 
Increase in accounts receivable
(22,342
)
 
(11,794
)
Decrease in inventories
19,776

 
8,891

Decrease in other current assets
20,571

 
2,981

Decrease in accounts payable
(2,736
)
 
(1,035
)
Decrease in other current liabilities
(20,780
)
 
(6,131
)
Changes in other long-term assets and liabilities
(3,488
)
 
(2,473
)
Net cash provided from operating activities
29,860

 
31,321

Cash flows used for investing activities:
 
 
 
Capital expenditures
(5,200
)
 
(7,307
)
Net cash used for investing activities
(5,200
)
 
(7,307
)
Cash flows provided from (used for) financing activities:
 
 
 
Proceeds from exercise of stock options

 
320

Long-term debt borrowings
5,000

 

Long-term debt repayments
(1,000
)
 
(6,000
)
Excess tax benefits from exercise of stock options
2,039

 
2,255

Common stock repurchases

 
(17
)
Dividends paid
(5,405
)
 
(3,649
)
Net cash provided from (used for) financing activities
634

 
(7,091
)
Net change in cash
25,294

 
16,923

Cash and cash equivalents at beginning of period
35,242

 
63,706

Cash and cash equivalents at end of period
$
60,536

 
$
80,629


See notes to condensed consolidated financial statements

Page 5 of 28




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Statement of Stockholders’ Equity (Unaudited)
(Dollars and shares in thousands)
 
Number of
Common
Shares
 
Common
Stock
 
Retained
Earnings
(Deficit)
 
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Total
Shareholders'
Equity
Balance, December 31, 2010
21,464

 
$
21

 
$
227,752

 
$
106,032

 
$
(3,089
)
 
$
330,716

Net income
 
 
 
 
86,522

 
 
 
 
 
86,522

Other comprehensive loss, (net of tax $836)
 
 
 
 
 
 
 
 
(1,906
)
 
(1,906
)
Proceeds from stock award exercises and issuances
300

 
1

 
 
 
(2,600
)
 
 
 
(2,599
)
Issuance of annual retainer stock to external Board of Directors
7

 
 
 
 
 
 
 
 
 

Share-based compensation
 
 
 
 
 
 
6,250

 
 
 
6,250

Excess tax benefits from exercise of stock options
 
 
 
 
 
 
2,511

 
 
 
2,511

Common stock repurchases
(151
)
 
 
 
 
 
(6,156
)
 
 
 
(6,156
)
Dividends declared
 
 
 
 
(22,130
)
 
 
 
 
 
(22,130
)
Balance, December 31, 2011
21,620

 
$
22

 
$
292,144

 
$
106,037

 
$
(4,995
)
 
$
393,208

Net income
 
 
 
 
27,588

 
 
 
 
 
27,588

Other comprehensive loss, (net of tax $63)
 
 
 
 
 
 
 
 
91

 
91

Proceeds from stock award exercises and issuances
175

 
 
 
 
 
(2,647
)
 
 
 
(2,647
)
Share-based compensation
 
 
 
 
 
 
1,221

 
 
 
1,221

Excess tax benefits from exercise of stock options
 
 
 
 
 
 
2,039

 
 
 
2,039

Dividends declared
 
 
 
 
(5,953
)
 
 
 
 
 
(5,953
)
Balance, March 31, 2012
21,795

 
$
22

 
$
313,779

 
$
106,650

 
$
(4,904
)
 
$
415,547


See notes to condensed consolidated financial statements

Page 6 of 28




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share amounts, share amounts 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, 2011 and for the three years then ended.
The accompanying unaudited condensed consolidated financial statements of the Company reflect all adjustments, consisting only of normal recurring accruals, 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, 2011 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 restated to conform to current year presentation.
Recently Issued Accounting Standards
Adopted
In May 2011, the FASB issued changes to conform existing guidance regarding fair value measurement and disclosure between U.S. GAAP and International Financial Reporting Standards. These changes both clarify the FASB's intent about the application of existing fair value measurement and disclosure requirements and amend certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. The clarifying changes relate to the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity's shareholders' equity, and disclosure of quantitative information about unobservable inputs used for Level 3 fair value measurements. The amendments relate to measuring the fair value of financial instruments that are managed within a portfolio; application of premiums and discounts in a fair value measurement; and additional disclosures concerning the valuation processes used and sensitivity of the fair value measurement to changes in unobservable inputs for those items categorized as Level 3, a reporting entity's use of a nonfinancial asset in a way that differs from the asset's highest and best use, and the categorization by level in the fair value hierarchy for items required to be measured at fair value for disclosure purposes only. These changes become effective for the Company on January 1, 2012. The implementation of this standard did not have a material impact on the Company's consolidated financial position and results of operations.
In September 2011, the FASB issued amendments to the goodwill impairment guidance which provides an option for companies to use a qualitative approach to test goodwill for impairment if certain conditions are met. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (early adoption is permitted). The implementation of this standard did not have a material impact on the Company's consolidated financial position and results of operations.
Issued but not yet adopted
None.

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

Page 7 of 28



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

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.
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
 
March 31, 2012
 
March 31, 2011
Net income
27,588

 
25,969

Less: earnings attributable to unvested shares
(4
)
 

Net income available to common shareholders
$
27,584

 
$
25,969

Weighted average number of common and potential common shares outstanding:
 
 
 
Basic number of common shares outstanding
21,800,964

 
21,735,230

Dilutive effect of stock equivalents
898,781

 
877,112

Diluted number of weighted average common shares outstanding
22,699,745

 
22,612,342

Earnings per common share:
 
 
 
Earnings per common share—Basic
$
1.27

 
$
1.19

Earnings per common share—Diluted
$
1.22

 
$
1.15


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 are 266,656 and 492,220 for the three months ended March 31, 2012 and March 31, 2011, respectively.

3. Dividends
The following is the dividend activity for the three months ended March 31, 2012 and March 31, 2011:
 
 
Three Months Ended
 
March 31
 
2012
 
2011
Dividends declared – per share
$
0.27

 
$
0.25

Dividends declared – aggregate
5,885

 
5,425

Dividends paid – per share
0.25

 
0.17

Dividends paid – aggregate
5,405

 
3,649

 
 
 
 

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.

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:
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.

Page 8 of 28



INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to 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.
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 30, 2012 there were a total of 14,370 restricted shares granted to certain employees with a fair value of $0.7 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 $50.12. 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 30, 2012 the Company granted 39,683 non-qualified stock options at an exercise price of $50.12 per share to certain employees with a fair value of $0.8 million. The non-qualified stock options vest annually over three years with a 10-year term from date of grant.
The fair value of the options granted during 2012 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
53.2
%
Dividend yield
2.4
%
Risk-free interest rate
1.3
%
Expected term (years)
6

Weighted average grant date fair value of stock options
$
20.41

For the 2012 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 30, 2012, the Company granted 43,106 performance shares to certain employees with a fair value of $2.2 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.
In connection with the vesting of the performance share awards issued in 2009, the Company issued 136,423 shares of common stock, net of minimum tax withholdings, to certain employees as required under the terms of the plan.

Page 9 of 28



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

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
 
March 31,
2012
 
March 31,
2011
Stock options
$
507

 
$
431

Restricted stock
66

 
6

Performance shares
648

 
1,836

Stock grants

 

Total share-based compensation expense
$
1,221

 
$
2,273

 

5. Inventories
Inventories consist of the following:
 
 
March 31,
2012
 
December 31,
2011
Raw materials
$
35,452

 
$
44,937

Finished products
105,980

 
116,488

Spare parts
8,520

 
8,303

 
$
149,952

 
$
169,728


Inventory reserves for excess quantities, obsolescence or shelf-life expiration as of March 31, 2012 and December 31, 2011 were $10,667 and $9,911, respectively.

6. Other Current Assets
Other current assets consist of the following:
 
 
March 31,
2012
 
December 31,
2011
Rhodia indemnity receivable for CNA water tax claims (see note 12)
$

 
$
13,571

Creditable taxes (value added taxes)
20,637

 
$
20,473

Vendor inventory deposits (prepaid)
20,451

 
19,671

Prepaid income taxes

 
4,829

Other prepaids
1,758

 
2,585

Deferred income taxes
10,348

 
10,347

Other
1,551

 
3,840

 
$
54,745

 
$
75,316


Page 10 of 28



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


7. Intangibles and Other Assets, net
Intangibles and other assets consist of the following:
 
 
Useful life
(years)
 
March 31,
2012
 
December 31,
2011
Developed technology and application patents, net of accumulated amortization of $14,459 for 2012 and $13,980 for 2011
7-20

 
23,531

 
24,010

Customer relationships, net of accumulated amortization of $6,363 for 2012 and $5,956 for 2011
5-15

 
12,926

 
13,333

Tradenames and license agreements, net of accumulated amortization of $4,376 for 2012 and $4,246 for 2011
5-20

 
5,844

 
5,974

Non-compete agreement, net of accumulated amortization of $600 for 2012 and $568 for 2011
5

 
41

 
73

Total Intangibles
 
 
$
42,342

 
$
43,390

Deferred financing costs, net of accumulated amortization of $982 for 2012 and $837 for 2011 (see note 9)
 
 
$
1,846

 
$
1,991

Deferred income taxes
 
 
6,379

 
5,450

Other Assets
 
 
2,728

 
2,469

Total other assets
 
 
$
10,953

 
$
9,910

 
 
 
$
53,295

 
$
53,300


8. Other Current Liabilities
Other current liabilities consist of the following:
 
 
March 31,
2012
 
December 31,
2011
CNA water tax claims (see Note 12)
$
10,146

 
$
31,523

Payroll related
8,060

 
11,708

Taxes
9,770

 
5,885

Benefits and pensions
5,666

 
7,717

Freight and rebates
6,285

 
4,418

Dividends payable
5,885

 
5,405

Other
5,497

 
4,953

 
$
51,309

 
$
71,609


9. Short-term Borrowings, Long-Term Debt, and Interest Expense
Short-term borrowings and long-term debt consist of the following:
 
 
March 31,
2012
 
December 31,
2011
Term loan due 2015
$
94,000

 
$
95,000

Revolver borrowings under the credit facility
62,000

 
57,000

Total borrowings
$
156,000

 
$
152,000

Less current portion
4,000

 
4,000

Long-term debt
$
152,000

 
$
148,000


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 $125.0 million, including a $20.0 million letter of credit sub-facility, all maturing on August 26, 2015. Prepayments of the term loan are required at the rate of 1% of original principal amount per quarter beginning on December 31, 2010.
As of March 31, 2012, $94.0 million was outstanding under the Term Loan and $62.0 million was outstanding under the revolving line of credit, both of which approximate fair value, with total availability at $61.7 million, taking into account $1.3

Page 11 of 28



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

million in face amount of letters of credit issued under the sub-facility. The current weighted average interest rate for all debt is 3.7%.
In the third quarter of 2010 the Company entered into an interest rate swap with an original notional amount of $100.0 million adjusting quarterly consistent with the Term Loan, with a fixed rate of 1.994% plus the applicable margin on the debt expiring in August 2015. The Company has the right to cancel the swap with no fee on September 28, 2012 and anytime thereafter. The fair value of this interest rate swap is a liability of approximately $0.7 million as of March 31, 2012.
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 three months ended March 31, 2012 and March 31, 2011 was $1,455 and $1,543.
As of March 31, 2012, the Company was in full compliance with all debt covenant requirements.
 
Interest expense, net consists of the following:
 
 
Three months ended
 
March 31,
2012
 
March 31,
2011
Interest expense
$
1,504

 
1,546

Deferred financing cost
145

 
158

Interest income
(22
)
 
(190
)
Less: amount capitalized for capital projects

 
(211
)
Total interest expense, net
$
1,627

 
$
1,303


10. Other Long-Term Liabilities
Other long-term liabilities consist of the following:
 
 
March 31,
2012
 
December 31,
2011
Deferred income taxes
$
24,605

 
$
24,308

Pension and post retirement liabilities (U.S. and Canada only)
6,298

 
6,185

Environmental liabilities
1,100

 
1,100

Profit sharing liabilities
4,246

 
3,795

Other liabilities
1,799

 
2,170

 
$
38,048

 
$
37,558


11. Income Taxes
The effective income tax rate on income before taxes was approximately 25% for the three months ended March 31, 2012 compared to approximately 33% for the comparable period in 2011. The variance in the effective tax rate is primarily due to the recording of an indemnity receivable related to the Mexican CNA Water Tax Claims (see note 12, Mexican CNA Water Tax Claims) being recorded as a discrete item for income tax provision purposes in the current quarter.
The Company does not have any material uncertain income tax positions in accordance with ASC 740-10-25. If any material uncertain tax positions did arise, 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, by certain foreign jurisdictions for its income tax returns for the years 2006 through 2009. As of March 31, 2012, our subsidiary, Innophos Mexicana requested a refund of $2.4 million for the 2009 tax year which is being disputed by the Mexican tax authorities. 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. In addition, our subsidiary, Innophos Canada, Inc. was assessed approximately $4.0 million for the tax years 2006, 2007, and 2008 by the Canadian tax authorities. On April 27, 2012, Innophos Canada filed a response to the Canadian tax authorities for the above tax matter disputing the full assessment. The Company believes that its

Page 12 of 28



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

tax position is more likely than not to be sustained and has not recorded a charge for this tax matter. Other than the assessments mentioned above, as of March 31, 2012, no significant 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 $1,060 and net income tax refunds were $2,164 for the three months ended March 31, 2012 and March 31, 2011, 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.
Liabilities for environmental matters 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. 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-$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 March 31, 2012.
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 provide 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 that would replace the existing closed system and allow the removal and separate handling of the Filter Material. We built that unit, which is ready for commissioning and operation once appropriate agreements are reached with the Government Parties.
We and PCS also have initiated joint efforts to explore possible technical solutions to remaining concerns of the Government Parties, including Raffinate treatment. To date, treatment techniques for Raffinate have not yet been fully evaluated from a technological or cost standpoint. The companies have proposed a schedule for evaluation, and although the Government Parties have not formally approved it, the companies are continuing with the schedule. Based upon work so far, there appears to be at least one technically viable approach, but it has yet to be fully evaluated.

Page 13 of 28



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

Even though the companies have conducted substantial technical work in an attempt to develop a feasible approach to address regulatory concerns, we cannot guarantee that our technical efforts will be successful, whether either party would be willing to implement solutions at what cost allocation or, depending on those factors and the Government Parties' position, whether this matter will be settled or will require litigation. Should litigation become necessary to defend our operations at Geismar as compliant with environmental laws and regulations or with PCS as to cost responsibility, no assurance can be given as to its outcome.
Based upon advice of our environmental counsel, we have determined that the risk of an effort by the Government Parties to shut down our Geismar plant or PCS's Geismar plant from which we obtain the green acid raw material is remote. In addition, we have concluded that the contingent liability arising from compliance costs for this matter as discussed above is neither remote nor probable, but is reasonably possible. On the assumption that “deep well injection” at the site is ultimately employed or required as the technologically acceptable approach for Raffinate, based on preliminary cost estimates to date, we estimate this technical approach to range from approximately $10 to $16 million.
Mexican CNA Water Tax Claims
As previously reported, in February 2012, we settled certain claims by CNA and all claims with Rhodia affiliates in ongoing New York litigation, or the New York Litigation, concerning their related indemnification obligations to us.
Settlements were negotiated with CNA for the 1999-2002 claims in the approximate amount of $17.5 million. We withdrew our appeals associated with those years and made the required payments to CNA in accordance with the CNA settlement. In accordance with the settlement of New York litigation, the Rhodia parties reimbursed us in an amount equal to the CNA 1999-2002 payment, and waived their rights to related tax benefits in addition to other agreed consideration. An additional $7.2 million benefit, at current exchange rates, was recorded in the first quarter 2012 as a result of the settlement.
As part of the CNA settlement process, in February 2012, our Mexican subsidiary, Fosfatados, was required to pay disputed higher water rates and discounted surcharges and penalties for 2009 and 2010, totaling approximately $2.8 million, which was less than the amounts previously accrued for potential liability associated with those years. We agreed to make those payments as part of the settlement of the New York Litigation. In addition, Fosfatados paid the higher rates demanded by CNA for 2011 and intends to continue to pay the higher rates going forward. Further legal challenges concerning the higher rates are possible, but there can be no assurance of the outcome of any challenges, or the possibility of refunds of higher rates.
2005-2008 CNA Claims. In January 2012, Fosfatados was served with CNA resolutions claiming higher water fees, surcharges and penalties for 2005 through 2008 for the total amount of approximately $10.1 million, which are subject of continuing settlement negotiations. We cannot guarantee that full settlement will be achieved, and have therefore retained accruals for these contingent liabilities in the amount of the statutory settlement discounts proposed by the CNA of approximately $10.1 million. Pending ongoing settlement discussions, which also include Fosfatados' request for a favorable amendment to its water use permit to reflect lower rates, the Company has contested the resolutions in Mexican Courts.
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 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. As a result, Mexicana expects to pursue collection in due course.
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 does believe that these matters currently 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.

Page 14 of 28



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


13. Pension Plans and Postretirement Benefits

Net periodic benefit expense for the United States plans:
For the three months ended March 31, 2012
Pension benefits
 
Other benefits
 
Total
Service cost
$

 
$
81

 
$
81

Interest cost
27

 
36

 
63

Expected return on assets
(27
)
 

 
(27
)
Amortization of
 
 
 
 
 
prior service cost

 
32

 
32

unrecognized (gain) loss
3

 
(7
)
 
(4
)
Net periodic cost
$
3

 
$
142

 
$
145

 
 
 
 
 
 
For the three months ended March 31, 2011
Pension benefits
 
Other benefits
 
Total
Service cost
$

 
$
75

 
$
75

Interest cost
28

 
37

 
65

Expected return on assets
(18
)
 

 
(18
)
Amortization of
 
 
 
 
 
prior service cost

 
35

 
35

unrecognized (gain) loss

 
(16
)
 
(16
)
Net periodic cost
$
10

 
$
131

 
$
141


In April 2012, Innophos contributed approximately $0.2 million to its U.S. defined benefit pension plan to satisfy the full year 2012 minimum contribution requirements.
Innophos made its entire cash contribution of $3.0 million for the U.S. defined contribution plan during the first quarter of 2012 for the plan year 2011.


Page 15 of 28



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

Net periodic benefit expense for the Canadian plans:
For the three months ended March 31, 2012
Pension benefits
 
Other benefits
 
Total
Service cost
$
84

 
$
20

 
$
104

Interest cost
150

 
24

 
174

Expected return on assets
(235
)
 

 
(235
)
Amortization of
 
 
 
 
 
actuarial loss (gain)
65

 
12

 
77

prior service cost
26

 

 
26

net transition obligation

 
8

 
8

Exchange rate changes
130

 
(27
)
 
103

Net periodic cost
$
220

 
$
37

 
$
257

 
 
 
 
 
 
For the three months ended March 31, 2011
Pension benefits
 
Other benefits
 
Total
Service cost
$
70

 
$
17

 
$
87

Interest cost
144

 
24

 
168

Expected return on assets
(241
)
 

 
(241
)
Amortization of
 
 
 
 
 
actuarial loss (gain)
41

 
10

 
51

prior service cost
27

 

 
27

net transition obligation

 
8

 
8

Exchange rate changes
166

 
(30
)
 
136

Net periodic cost
$
207

 
$
29

 
$
236

Innophos Canada, Inc. made cash contributions to its Canadian defined benefit plan of $0.3 million during the three months ended March 31, 2012. Innophos Canada, Inc. plans to make additional cash contributions to its Canadian defined benefit plan of approximately $0.6 million during the remainder of 2012.

14. 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 allocate resources and assess performance. The primary performance indicators for the chief operating decision maker are sales and operating income, with sales on a ship-from basis.
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). 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.


Page 16 of 28



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

For the three months ended March 31, 2012
 
Specialty
Phosphates
US & Canada
 
Specialty
Phosphates
Mexico
 
GTSP &
Other
 
Eliminations
 
Total
Sales
 
$
141,594

 
$
50,928

 
$
35,730

 
$

 
$
228,252

Intersegment sales
 
316

 
17,298

 
134

 
(17,748
)
 

Total sales
 
141,910

 
68,226

 
35,864

 
(17,748
)
 
228,252

Operating income (a)
 
$
27,236

 
$
6,262

 
$
4,641

 

 
$
38,139

Depreciation and amortization expense
 
$
5,371

 
$
3,772

 
$
1,096

 
$

 
$
10,239

 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2011
 
Specialty
Phosphates
US & Canada
 
Specialty
Phosphates
Mexico
 
GTSP &
Other
 
Eliminations
 
Total
Sales
 
$
130,344

 
$
45,502

 
$
21,752

 
$

 
$
197,598

Intersegment sales
 
432

 
11,427

 
55

 
(11,914
)
 

Total sales
 
130,776

 
56,929

 
21,807

 
(11,914
)
 
197,598

Operating income (b)
 
$
29,822

 
$
3,970

 
$
7,030

 

 
$
40,822

Depreciation and amortization expense
 
$
4,834

 
$
3,924

 
$
1,436

 
$

 
$
10,194



(a)
The three month period ended March 31, 2012 includes a $7.1 million benefit to earnings primarily for the settlement with Rhodia on their liability for the charges to be paid to the CNA.
(b)
The three months ended March 31, 2011 includes a $3.8 million benefit to earnings related to updates to the provision for the CNA Fresh Water Claims.

15. Acquisitions
On October 31, 2011, the Company acquired all the outstanding stock of the privately held parent of Kelatron in a transaction accounted for under the acquisition method of accounting for business combinations. Kelatron Corporation is a leading producer of bioactive mineral nutrients sold into the nutritional and dietary supplements markets, based in Ogden, Utah. The combination of Kelatron's micronutrient range of products with the macronutrients of calcium, magnesium, potassium and phosphorus currently manufactured by Innophos is expected to significantly strengthen Innophos' offering to its food, beverage and dietary supplement customers.
The acquisition had a purchase price of approximately $21 million, subject to working capital adjustments. The price was funded from our revolving line of credit. Under the acquisition method of accounting, the assets acquired and liabilities assumed were recorded as of the acquisition date, at their respective fair values. The reported consolidated financial condition and results of operations after completion of the acquisition reflect these fair values. Kelatron's results of operations are included in the consolidated financial statements from the date of acquisition.
The allocation of the purchase price for the acquisition has been prepared on a preliminary basis and changes to that allocation may occur as additional information becomes available related to various contingent liabilities. No provisional amounts have been provided for these contingent liabilities. No measurement period adjustments have been recognized in the three month period ended March 31, 2012.

Page 17 of 28




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, 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 mineral ingredients to supply a product range produced to the highest standards of quality and consistency 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 mineral fortification solutions for food, beverage and nutritional supplement manufacturers.

Recent Trends and Outlook

Underlying demand conditions continued to be favorable for Specialty Phosphates with market demand in most sectors seen as stable to moderately improving. Management continues to expect above market volume growth of 4-6% for 2012 driven by product innovation and geographic growth.
The Specialty Phosphates business continued to achieve price increases into the first quarter and we will continue to maintain a close watch on fertilizer market trends and their potential impact on our raw material costs. Currently, we do not expect significant sequential price increases in the second quarter, and our primary focus is now on continuing to deliver against our growth goals, both geographically and through product innovation. However, if the very recent signs of improving fertilizer conditions gain momentum and look likely to create further upward pressure on raw material costs for the second half of 2012, then we will be ready to respond as necessary.
The time lag between changes in market raw material prices and their effect on Innophos' contract raw material prices will result in a sequential increase of approximately $4-6 million in Innophos' cost of goods sold in the second quarter, primarily affecting the US/Canada business. This will affect second quarter margins unfavorably compared to the first quarter. Overall for the year, however, management continues to expect 2012 operating income growth for Specialty Phosphates in line with 7-10% long term expectations.
Recent industry publications have reported improved fertilizer demand and pricing for the second quarter as the industry enters the seasonally stronger demand months, although prices remain significantly below year ago levels. These market trends are expected to contribute to a sequential improvement in GTSP & Other margins resulting in expected operating income around break-even for this segment on sales of $20-25 million for the second quarter.
Net debt (total debt less cash) decreased $21 million in the first quarter 2012 on strong earnings and a moderate seasonal increase in working capital. Management expects strong operating cash flow generation in 2012 with a moderate reduction in working capital levels and capital expenditures targeted below depreciation levels.

Page 18 of 28




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
 
March 31, 2012
 
March 31, 2011
 
Amount
 
%
 
Amount
 
%
Net sales
$
228.3

 
100.0

 
$
197.6

 
100.0

Cost of goods sold
172.4

 
75.5

 
140.3

 
71.0

Gross profit
55.9

 
24.5

 
57.3

 
29.0

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
17.1

 
7.5

 
15.8

 
8.0

Research & development
0.7

 
0.3

 
0.7

 
0.4

Income from operations
38.1

 
16.7

 
40.8

 
20.6

Interest expense, net
1.6

 
0.7

 
1.3

 
0.7

Foreign exchange losses (gains), net
(0.3
)
 
(0.1
)
 
0.7

 
0.4

Provision for income taxes
9.2

 
4.0

 
12.8

 
6.5

Net income
$
27.6

 
12.1

 
$
26.0

 
13.2


Three months ended March 31, 2012 compared to the three months ended March 31, 2011
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 March 31, 2012 were $228.3 million, an increase of $30.7 million, or 15.5%, as compared to $197.6 million for the same period in 2011. Selling price increases had a positive effect on revenue of 8.7% or $17.1 million which occurred across all of the Specialty Phosphate product lines as GTSP & Other had lower pricing caused by declining fertilizer market price trends. Volumes increased 6.8% or $13.6 million, which occurred primarily in GTSP & Other, as the beginning of the fertilizer season allowed for the sale of high inventory levels carried over from the fourth quarter 2011.
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 three months ended March 31, 2012 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
8.4
 %
 
0.2
 %
 
8.6
%
Specialty Phosphates Mexico
18.0
 %
 
(6.1
)%
 
11.9
%
Total Specialty Phosphates
10.9
 %
 
(1.4
)%
 
9.5
%
GTSP & Other
(9.4
)%
 
73.7
 %
 
64.3
%
Total
8.7
 %
 
6.8
 %
 
15.5
%
Note: Included within Specialty Phosphates US & Canada volume/mix and total variances was a 3.2% benefit from the recently acquired Kelatron business.

Page 19 of 28




The following table illustrates for the three months ended March 31, 2012 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
8.7
%
 
(0.2
)%
 
8.5
%
Food & Technical Grade PPA
15.0
%
 
2.4
 %
 
17.4
%
STPP & Detergent Grade PPA
15.9
%
 
(12.6
)%
 
3.3
%
Note: Included within Specialty Ingredients volume/mix and total variances was a 3.5% benefit from the recently acquired Kelatron business.

Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the three months ended March 31, 2012 was $55.9 million, a decrease of $1.4 million, or 2.4%, as compared to $57.3 million for the same period in 2011. Gross profit percentage decreased to 24.5% for the three months ended March 31, 2012 versus 29.0% for the same period in 2011. Gross profit was unfavorably affected by higher raw material costs, higher manufacturing costs and lower volumes which had a combined unfavorable impact of $26.8 million. This was partially offset by $17.1 million for higher selling prices, $1.2 million for lower depreciation, $7.1 million primarily due to the recording of a settlement with Rhodia on their liability for the charges to be paid to the Mexican water authority (CNA), and a $0.6 million favorable exchange rate impact mostly from Mexican peso based costs. Included in 2011 was $3.2 million expense for a planned maintenance outage at our Coatzacoalcos, Mexico manufacturing facility and $3.8 million income for updates to the provision for the Mexican CNA Water Tax Claims. The Specialty Phosphates segments were able to offset raw material cost increases with selling price increases, but the GTSP & Other segment was not able to do so, which is typical for a deflationary period as we just experienced. This is because our GTSP selling prices respond immediately to decreases in fertilizer market prices but our raw material costs will lag market price changes by one to two quarters.
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 March 31, 2012 were $17.8 million, an increase of $1.3 million, or 7.9%, as compared to $16.5 million for the same period in 2011. The increase was due to $1.3 million higher depreciation due to the ERP system that was put into service on August 27, 2011.
Operating Income
Operating income for the three months ended March 31, 2012 was $38.1 million, a decrease of $2.7 million, or 6.6%, as compared to $40.8 million for the same period in 2011. Operating income as a percentage of net sales decreased to 16.7% versus 20.6% for the same period in 2011.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the three months ended March 31, 2012 was $1.6 million, an increase of $0.3 million, or 23.1% as compared to $1.3 million for the same period in 2011. The increase is due to lower interest income on lower average cash balances and higher interest expense on higher average debt balances.
Foreign Exchange
Foreign exchange gain for the three months ended March 31, 2012 was $0.3 million as compared to a loss of $0.7 million for the same period in 2011. 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 25% for the three months ended March 31, 2012 compared to 33% for the same period in 2011. The variance in the effective tax rate is due to the Rhodia settlement related to the Mexican CNA Water Tax Claims being recorded as a discrete item for income tax provision purposes in the first quarter of 2012 which had an 8% effect on the effective tax rate.

Page 20 of 28




Net Income
Net income for the three months ended March 31, 2012 was $27.6 million, an increase of $1.6 million as compared to $26.0 million for the same period in 2011, due to the factors described above.
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 is 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
 
 
 
March 31,
2012
 
March 31,
2011
 
Net Sales % Change
Segment Net Sales
 
 
 
 
 
Specialty Phosphates US & Canada
$
141,594

 
$
130,344

 
8.6
%
Specialty Phosphates Mexico
50,928

 
45,502

 
11.9
%
Total Specialty Phosphates
192,522

 
175,846

 
9.5
%
GTSP & Other
35,730

 
21,752

 
64.3
%
Total
$
228,252

 
$
197,598

 
15.5
%
 
 
 
 
 
 
Segment Operating Income
 
 
 
 
 
Specialty Phosphates US & Canada
$
27,236

 
$
29,822

 
 
Specialty Phosphates Mexico
6,262

 
3,970

 
 
Total Specialty Phosphates
33,498

 
33,792

 
 
GTSP & Other (a) (b)
4,641

 
7,030

 
 
Total
$
38,139

 
$
40,822

 
 
 
 
 
 
 
 
Segment Operating Income % of net sales
 
 
 
 
 
Specialty Phosphates US & Canada
19.2
%
 
22.9
%
 
 
Specialty Phosphates Mexico
12.3
%
 
8.7
%
 
 
Total Specialty Phosphates
17.4
%
 
19.2
%
 
 
GTSP & Other (a) (b)
13.0
%
 
32.3
%
 
 
Total
16.7
%
 
20.7
%
 
 
 
 
 
 
 
 
Depreciation and amortization expense
 
 
 
 
 
Specialty Phosphates US & Canada
$
5,371

 
$
4,834

 
 
Specialty Phosphates Mexico
3,772

 
3,924

 
 
Total Specialty Phosphates
$
9,143

 
8,758

 
 
GTSP & Other
1,096

 
1,436

 
 
Total
$
10,239

 
$
10,194

 
 

(a)
The three month period ended March 31, 2012 includes a $7.1 million benefit to earnings primarily for the settlement with Rhodia on their liability for the charges to be paid to the CNA for the Mexican CNA Water Tax Claims.
(b)
The three months ended March 31, 2011 includes a $3.8 million benefit to earnings related to updates to the provision for the Mexican CNA Water Tax Claims.


Page 21 of 28




Three months ended March 31, 2012 compared to the three months ended March 31, 2011
Segment Net Sales:
Specialty Phosphates US & Canada net sales increased 8.6% for the three months ended March 31, 2012 when compared with the same period in 2011. Selling prices increased 8.4% with increases across all product lines. Volumes increased 0.2% including a benefit of 3.2% for the Kelatron acquisition.
Specialty Phosphates Mexico net sales increased 11.9% for the three months ended March 31, 2012 when compared with the same period in 2011. Selling prices increased 18.0% with increases across all product lines. Volumes decreased 6.1% arising from an unfavorable order pattern in STPP & Detergent Grade Acid in comparison to a strong first quarter 2011.
GTSP & Other net sales increased 64.3% for the three months ended March 31, 2012 when compared with the same period in 2011, with 73.7% higher volumes, as the beginning of the fertilizer season allowed for the sale of high inventory levels carried over from the previous quarter when fertilizer market demand was essentially non-existent. This was partially offset by 9.4% lower selling prices caused by declining fertilizer market price trends.
Segment Operating Income Percentage of Net Sales:
The 360 basis point decrease in Specialty Phosphates US & Canada for the three months ended March 31, 2012 compared with the same period in 2011 is mainly due to increases in raw material costs, manufacturing expenses and depreciation, which combined for a 960 basis point decrease in margin percent and were partially offset by increased selling prices which increased the margin percent by 600 basis points.
The 360 basis point increase in Specialty Phosphates Mexico for the three months ended March 31, 2012 compared with the same period in 2011 is mainly due to increased selling prices which increased margin percent by 1,390 basis points. Higher raw material costs and manufacturing expenses exceeded a benefit from the 2011 maintenance outage causing a 1,030 basis point decrease in margin percent.
The 1,930 basis point decrease in GTSP & Other for the three months ended March 31, 2012 compared with the same period in 2011 is primarily due to higher raw material costs and manufacturing expenses which exceeded a benefit from the 2011 maintenance outage causing a 2,780 basis point decrease in margin percent. Lower selling prices contributed an additional margin percent decline of 690 basis points. Finally, the net effect of the 2012 versus 2011 benefit of $3.3 million for the settlement with Rhodia on their liability for the charges to be paid to the CNA increased margin percent by 1,540 basis points.

Liquidity and Capital Resources
The following table sets forth a summary of the Company’s cash flows for the periods indicated.
 
(Dollars in millions)
Three months ended
 
March 31,
2012
 
March 31,
2011
Operating Activities
$
29.9

 
$
31.3

Investing Activities
(5.2
)
 
(7.3
)
Financing Activities
0.6

 
(7.1
)

Three months ended March 31, 2012 compared to three months ended March 31, 2011
Net cash provided by operating activities was $29.9 million for the three months ended March 31, 2012 as compared to $31.3 million for 2011, a decrease of $1.4 million. The decrease in operating activities cash resulted primarily from unfavorable changes of $3.6 million in non-cash adjustments to income and $1.0 million in other long term assets and liabilities partially offset by favorable changes of $1.6 million in working capital and $1.6 million in net income as described earlier.
The change in working capital is a use of cash of $5.5 million in 2012 compared to a use in 2011 of $7.1 million, an increase in cash of $1.6 million. The increase in cash is primarily due to decreases in other current assets that exceeded increases in other current liabilities, both primarily a result of the Rhodia settlement and payments to the CNA. Benefits from inventory reductions were offset by increases in accounts receivable. Higher accounts receivable balances were due to approximately $19 million of GTSP sales near the end of the current quarter which were not collected until early April. While

Page 22 of 28




not a contributor to the first quarter 2012 increase in accounts receivable, the Company has continued to grow its business in export markets where terms are typically 30 - 45 days longer than standard domestic terms to compensate for extended delivery times.
Net cash used for investing activities was $5.2 million for the three months ended March 31, 2012, compared to $7.3 million for 2011, as lower spending on the company's ERP project was partially offset by higher spending on several manufacturing expansion projects including its China subsidiary.
The Company is investing to grow its food, beverage and pharmaceutical phosphate business, especially geographically, and also to diversify its raw material supply long term. Projects were completed in 2011 in the U.S. to increase production capabilities of various specialty ingredients such as the $4.5 million calcium leavening agents project at the Nashville, TN plant and the tri-calcium phosphate capacity expansion project at Chicago Heights, IL. In Mexico, projects are focused on increasing production capabilities of our Specialty Ingredients units and on enhancing Mexico's capability to process multiple grades of rock consistent with the Company's supply chain diversification strategy. The Company also announced in the 2011 third quarter a new China subsidiary aimed at developing its Food Grade Specialty Phosphates business in Asia.
Management projects total 2012 capital expenditures to be approximately $40 million.
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 a period, currently estimated at three to five years, inclusive of expenditures to date. 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 were successfully attained. Combined 2010 and 2011 expenditures on the exploration of the Baja California Sur concession deposits were approximately $2.4 million, and management currently expects to spend in 2012 to early 2013 an additional $2-3 million above the previous trend rate to accelerate evaluations of its Santo Domingo concession. 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 provided from financing activities for the three months ended March 31, 2012, was a source of $0.6 million, compared to a use of $7.1 million in 2011, a decrease in the use of cash of $7.7 million. This was mainly due to $10.0 million increase in cash from revolver loan activities ($5.0 million borrowing in 2012 versus a $5.0 million repayment in 2011) partially offset by $1.8 million higher dividend payments, $0.3 million lower stock option exercises and $0.2 million decrease in cash for excess tax benefits from exercise of stock options.
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.
On March 31, 2012, the Company had cash and cash equivalents outside the United States of $44.3 million, or 73% of the Company's balance. Further, the foreign cash amounts are not restricted by law to be used in other countries.
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 these obligations through our existing cash and our future operating cash flows. It's our current operating plan not to repatriate any of the cash and cash equivalents held outside the United States to fund the United States operations. 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.
On February 27, 2012 the Company declared an increase to its dividend from $0.25 per share to $0.27 per share to holders of record on April 16, 2012.

Page 23 of 28





Contractual Obligations and Commercial Commitments
The following table sets forth our long-term contractual cash obligations as of March 31, 2012 (dollars in thousands):
 
 
 
Years ending December 31,
Contractual Obligations
 
Total
 
2012
 
2013
 
2014
 
2015
 
2016
 
Thereafter
Term loan and revolver borrowings (1)
 
$
156,000

 
$
3,000

 
$
4,000

 
$
4,000

 
$
145,000

 
$

 
$

Future Service Pension Benefits
 
10,990

 
611

 
790

 
876

 
983

 
1,087

 
6,643

Other (2)
 
555,030

 
114,522

 
73,418

 
73,418

 
73,418

 
73,418

 
146,836

Operating Leases
 
16,433

 
5,104

 
4,296

 
2,888

 
2,041

 
671

 
1,433

Total contractual cash obligations
 
$
738,453

 
$
123,237

 
$
82,504

 
$
81,182

 
$
221,442

 
$
75,176

 
$
154,912

  ______________________
(1)
Amounts exclude interest payments. Interest on the $94.0 million current balance of the term loan at the fixed rate of 4.244% would be approximately $4.0 million annually and interest on the $62.0 million revolver borrowings current balance at current rates would be approximately $1.6 million annually.
(2)
Represents minimum annual purchase commitments to buy raw materials from suppliers.

Critical Accounting Estimates and Policies
There have been no material changes from the critical accounting estimates previously disclosed in our 2011 Annual Report on Form 10-K.
 
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 March 31, 2012, we had $94.0 million principal amount of variable-rate debt and a $125.0 million revolving credit facility, of which $62.0 million was outstanding, both of which approximate fair value. Total remaining availability was $61.7 million, taking into account $1.3 million in face amount of letters of credit issued under the sub-facility. In the third quarter of 2010 we entered into an interest rate swap with an original notional amount of $100 million adjusting quarterly consistent with the Term Loan, with a fixed rate of 1.994% plus the applicable margin on the debt, expiring in August 2015. The Company has the right to cancel the swap with no fee on September 28, 2012 and anytime thereafter. The fair value of this interest rate swap is a liability of approximately $0.7 million as of March 31, 2012.
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 $62.0 million outstanding borrowings as floating rate debt under our revolving credit facility, an immediate increase of one percentage point would cause an increase to interest expense of approximately $0.6 million per year.
From time to time, we will 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 2012 is estimated to be less than 2% of cost of goods sold. We did

Page 24 of 28




enter into a financial hedge for approximately 75% of our 2012 U.S. & Canada natural gas requirements, to reduce price volatility using fixed price contracts. At March 31, 2012, the Company had with a fair value liability of approximately $0.4 million for these natural gas contracts.
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.
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 March 31, 2012, 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.
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 first quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


Page 25 of 28




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 2011 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 May 2, 2012 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Principal Financial Officer dated May 2, 2012 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
 
Certification of Principal Executive Officer dated May 2, 2012 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
 
Certification of Principal Financial Officer dated May 2, 2012 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.


Page 26 of 28




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:
May 2, 2012
 
INNOPHOS HOLDINGS, INC.
 
 
 
/s/ Neil I. Salmon
By:
Neil I. Salmon
Its:
Vice President and Chief Financial Officer
 
(Principal Financial Officer)
 
Dated:
May 2, 2012


Page 27 of 28




EXHIBIT INDEX
Exhibit No.
  
Description
31.1
  
Certification of Principal Executive Officer dated May 2, 2012 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
  
Certification of Principal Financial Officer dated May 2, 2012 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
  
Certification of Principal Executive Officer dated May 2, 2012 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
  
Certification of Principal Financial Officer dated May 2, 2012 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



Page 28 of 28


XNAS:IPHS Innophos Holdings Inc Quarterly Report 10-Q Filling

Innophos Holdings Inc XNAS:IPHS Stock - Get Quarterly Report SEC Filing of Innophos Holdings Inc XNAS:IPHS stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

Content Partners
XNAS:IPHS Innophos Holdings Inc Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Popularity |  Our Choices |  Most Recent Title |  Date |  Company |  Symbol |  Interest |  Popularity

Previous: XNAS:IPHS Innophos Holdings Inc Insider Activity 4 Filing - 8/9/2012  |  Next: XNAS:IPHS Innophos Holdings Inc Quarterly Report 10-Q Filing - 6/30/2012