XNAS:IPHS Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 June 30, 2012, the registrant had 21,819,199 shares of common stock outstanding.
 



TABLE OF CONTENTS
 


Page 2 of 33




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)
 
 
June 30,
2012
 
December 31, 2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
70,166

 
$
35,242

Accounts receivable, net
98,099

 
104,421

Inventories
152,632

 
169,728

Other current assets
72,732

 
75,316

Total current assets
393,629

 
384,707

Property, plant and equipment, net
179,260

 
187,421

Goodwill
61,554

 
61,587

Intangibles and other assets, net
51,609

 
53,300

Total assets
$
686,052

 
$
687,015

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

 
$
4,000

Accounts payable, trade and other
40,646

 
32,640

Other current liabilities
47,094

 
71,609

Total current liabilities
91,740

 
108,249

Long-term debt
129,000

 
148,000

Other long-term liabilities
37,561

 
37,558

Total liabilities
$
258,301

 
$
293,807

Commitments and contingencies (note 12)

 

Common stock, par value $.001 per share; authorized 100,000,000 shares; issued 21,969,775 and 21,770,641 shares; outstanding 21,819,199 and 21,620,119 shares
22

 
22

Paid-in capital
114,062

 
112,193

Common stock held in treasury, at cost (150,576 and 150,522 shares)
(6,156
)
 
(6,156
)
Retained earnings
324,283

 
292,144

Accumulated other comprehensive loss
(4,460
)
 
(4,995
)
Total stockholders' equity
427,751

 
393,208

Total liabilities and stockholders' equity
$
686,052

 
$
687,015


See notes to condensed consolidated financial statements

Page 3 of 33




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
 
Six months ended
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Net sales
$
214,180

 
$
201,627

 
$
442,432

 
$
399,225

Cost of goods sold
171,812

 
152,463

 
344,196

 
292,732

Gross profit
42,368

 
49,164

 
98,236

 
106,493

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
15,236

 
15,795

 
32,270

 
31,611

Research & development expenses
849

 
752

 
1,544

 
1,443

Total operating expenses
16,085

 
16,547

 
33,814

 
33,054

Operating income
26,283

 
32,617

 
64,422

 
73,439

Interest expense, net
1,595

 
1,282

 
3,222

 
2,585

Foreign exchange (gains) losses
(108
)
 
(152
)
 
(399
)
 
558

Income before income taxes
24,796

 
31,487

 
61,599

 
70,296

Provision for income taxes
8,292

 
10,741

 
17,507

 
23,581

Net income
$
16,504

 
20,746

 
$
44,092

 
46,715

Net income attributable to common shareholders
$
16,493

 
$
20,746

 
$
44,063

 
$
46,715

Per share data (note 2):
 
 
 
 
 
 
 
Income per share:
 
 
 
 
 
 
 
Basic
$
0.76

 
$
0.95

 
$
2.02

 
$
2.15

Diluted
$
0.73

 
$
0.92

 
$
1.94

 
$
2.06

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
21,805,239

 
21,732,093

 
21,803,101

 
21,733,653

Diluted
22,713,254

 
22,645,132

 
22,706,499

 
22,628,828

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in interest rate swaps, (net of tax $117, ($521), $176 and ($359))
$
192

 
$
(850
)
 
$
288

 
$
(587
)
Change in pension and post-retirement plans, (net of tax $84, $32, $88 and $243)
252

 
90

 
247

 
429

Other comprehensive income (loss), net of tax
$
444

 
$
(760
)
 
$
535

 
$
(158
)
Comprehensive income
$
16,948

 
$
19,986

 
$
44,627

 
$
46,557


See notes to condensed consolidated financial statements

Page 4 of 33




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
 
 
Six months ended
 
June 30,
2012
 
June 30,
2011
Cash flows from operating activities
 
 
 
Net income
$
44,092

 
$
46,715

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Depreciation and amortization
21,555

 
20,917

Amortization of deferred financing charges
287

 
312

Deferred income tax (benefit) provision
(359
)
 
4,136

Deferred profit sharing

 
(566
)
Share-based compensation
2,328

 
4,028

Changes in assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable
6,322

 
(7,674
)
Decrease (increase) in inventories
17,096

 
(24,702
)
Decrease in other current assets
2,584

 
8,159

Decrease in accounts payable
8,006

 
6,015

Decrease in other current liabilities
(25,042
)
 
(8,410
)
Changes in other long-term assets and liabilities
(3,488
)
 
(3,105
)
Net cash provided from operating activities
73,381

 
45,825

Cash flows used for investing activities:
 
 
 
Capital expenditures
(10,491
)
 
(16,698
)
Net cash used for investing activities
(10,491
)
 
(16,698
)
Cash flows used for financing activities:
 
 
 
Proceeds from exercise of stock options
14

 
484

Long-term debt borrowings
5,000

 

Long-term debt repayments
(24,000
)
 
(7,000
)
Excess tax benefits from exercise of stock options
2,310

 
2,487

Common stock repurchases

 
(17
)
Dividends paid
(11,290
)
 
(9,075
)
Net cash used for financing activities
(27,966
)
 
(13,121
)
Net change in cash
34,924

 
16,006

Cash and cash equivalents at beginning of period
35,242

 
63,706

Cash and cash equivalents at end of period
$
70,166

 
$
79,712


See notes to condensed consolidated financial statements

Page 5 of 33




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, 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
 
 
 
 
44,092

 
 
 
 
 
44,092

Other comprehensive income, (net of tax $264)
 
 
 
 
 
 
 
 
535

 
535

Proceeds from stock award exercises and issuances
199

 
 
 
 
 
(2,769
)
 
 
 
(2,769
)
Share-based compensation
 
 
 
 
 
 
2,328

 
 
 
2,328

Excess tax benefits from exercise of stock options
 
 
 
 
 
 
2,310

 
 
 
2,310

Dividends declared
 
 
 
 
(11,953
)
 
 
 
 
 
(11,953
)
Balance, June 30, 2012
21,819

 
$
22

 
$
324,283

 
$
107,906

 
$
(4,460
)
 
$
427,751


See notes to condensed consolidated financial statements

Page 6 of 33




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 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.
Out of Period Adjustments
During the second quarter of fiscal 2012, we identified certain adjustments in our financial statements related to 2011 through the first quarter of fiscal 2012. We corrected the items during the second quarter of fiscal 2012, which had the effect of increasing cost of goods sold by $3.9 million, and decreasing net income by $2.6 million. The impact of these items for the six months ended June 30, 2012 increased cost of goods sold by $2.4 million and decreased net income by $1.6 million. These prior period adjustments are not material to the financial results of the previously issued annual financial statements or current or previously issued interim financial statements. These adjustments are also not expected to be material to the full year 2012 financial statements.
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.




Page 7 of 33



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

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.
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
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
June 30, 2012
 
June 30, 2011
Net income
16,504

 
20,746

 
44,092

 
46,715

Less: earnings attributable to unvested shares
(11
)
 

 
(29
)
 

Net income available to common shareholders
$
16,493

 
$
20,746

 
$
44,063

 
$
46,715

Weighted average number of common and potential common shares outstanding:
 
 
 
 
 
 
 
Basic number of common shares outstanding
21,805,239

 
21,732,093

 
21,803,101

 
21,733,653

Dilutive effect of stock equivalents
908,015

 
913,039

 
903,398

 
895,175

Diluted number of weighted average common shares outstanding
22,713,254

 
22,645,132

 
22,706,499

 
22,628,828

Earnings per common share:
 
 
 
 
 
 
 
Earnings per common share—Basic
$
0.76

 
$
0.95

 
$
2.02

 
$
2.15

Earnings per common share—Diluted
$
0.73

 
$
0.92

 
$
1.94

 
$
2.06

 
 
 
 
 
 
 
 
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
236,127

 
377,329

 
240,744

 
395,193



3. Dividends
The following is the dividend activity for the three and six months ended June 30, 2012 and June 30, 2011: 
 
Three Months Ended
 
Six Months Ended
 
June 30
 
June 30
 
2012
 
2011
 
2012
 
2011
Dividends declared – per share
$
0.27

 
$
0.25

 
$
0.54

 
$
0.50

Dividends declared – aggregate
5,932

 
5,443

 
11,817

 
10,868

Dividends paid – per share
0.27

 
0.25

 
0.52

 
0.42

Dividends paid – aggregate
5,885

 
5,426

 
11,290

 
9,075


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.


Page 8 of 33



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



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.
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

Page 9 of 33



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

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 in the first quarter of 2012.
Stock Grants
In May 2012 the six external members of the Board of Directors were each granted 1,275 shares of the Company's common stock with an aggregated fair value of $0.4 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
 
Six Months Ended
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Stock options
$
349

 
$
506

 
$
856

 
$
937

Restricted stock
57

 

 
123

 
6

Performance shares
341

 
949

 
989

 
2,785

Stock grants
360

 
300

 
360

 
300

Total share-based compensation expense
$
1,107

 
$
1,755

 
$
2,328

 
$
4,028

 

5. Inventories
Inventories consist of the following:
 
 
June 30,
2012
 
December 31,
2011
Raw materials
$
36,506

 
$
44,937

Finished products
107,955

 
116,488

Spare parts
8,171

 
8,303

 
$
152,632

 
$
169,728


Inventory reserves for excess quantities, obsolescence or shelf-life expiration as of June 30, 2012 and December 31, 2011 were $11,153 and $9,911, respectively.

6. Other Current Assets
Other current assets consist of the following:
 

Page 10 of 33



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

 
June 30,
2012
 
December 31,
2011
Rhodia indemnity receivable for CNA water tax claims (see note 12)
$

 
$
13,571

Creditable taxes (value added taxes)
21,138

 
20,473

Vendor inventory deposits (prepaid)
17,721

 
19,671

Prepaid income taxes
17,246

 
4,829

Other prepaids
1,237

 
2,585

Deferred income taxes
10,347

 
10,347

Other
5,043

 
3,840

 
$
72,732

 
$
75,316


Page 11 of 33



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)
 
June 30,
2012
 
December 31,
2011
Developed technology and application patents, net of accumulated amortization of $15,023 for 2012 and $13,980 for 2011
7-20

 
22,967

 
24,010

Customer relationships, net of accumulated amortization of $6,762 for 2012 and $5,956 for 2011
5-15

 
12,527

 
13,333

Tradenames and license agreements, net of accumulated amortization of $4,507 for 2012 and $4,246 for 2011
5-20

 
5,713

 
5,974

Non-compete agreement, net of accumulated amortization of $632 for 2012 and $568 for 2011
5

 
9

 
73

Total Intangibles
 
 
$
41,216

 
$
43,390

Deferred financing costs, net of accumulated amortization of $1,124 for 2012 and $837 for 2011 (see note 9)
 
 
$
1,704

 
$
1,991

Deferred income taxes
 
 
6,039

 
5,450

Other Assets
 
 
2,650

 
2,469

Total other assets
 
 
$
10,393

 
$
9,910

 
 
 
$
51,609

 
$
53,300


8. Other Current Liabilities
Other current liabilities consist of the following:
 
 
June 30,
2012
 
December 31,
2011
CNA water tax claims (see Note 12)
$
9,772

 
$
31,523

Payroll related
8,639

 
11,708

Taxes
8,311

 
5,885

Benefits and pensions
4,749

 
7,717

Freight and rebates
5,202

 
4,418

Dividends payable
5,932

 
5,405

Other
4,489

 
4,953

 
$
47,094

 
$
71,609


9. Short-term Borrowings, Long-Term Debt, and Interest Expense
Short-term borrowings and long-term debt consist of the following:
 
 
June 30,
2012
 
December 31,
2011
Term loan due 2015
$
93,000

 
$
95,000

Revolver borrowings under the credit facility
40,000

 
57,000

Total borrowings
$
133,000

 
$
152,000

Less current portion
4,000

 
4,000

Long-term debt
$
129,000

 
$
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 June 30, 2012, $93.0 million was outstanding under the Term Loan and $40.0 million was outstanding under the revolving line of credit, both of which approximate fair value because they have a floating interest rate, level 2 input within the

Page 12 of 33



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

fair value hierarchy, with total availability at $83.7 million, taking into account $1.3 million in face amount of letters of credit issued under the sub-facility. The current weighted average interest rate for all debt is 3.9%.
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 $0.4 million as of June 30, 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 six months ended June 30, 2012 and June 30, 2011 was $2,982 and $3,012.
As of June 30, 2012, the Company was in full compliance with all debt covenant requirements.
 
Interest expense, net consists of the following:
 
 
Three months ended
 
Six months ended
 
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Interest expense
$
1,475

 
1,451

 
$
2,979

 
2,997

Deferred financing cost
142

 
154

 
287

 
312

Interest income
(22
)
 
(115
)
 
(44
)
 
(305
)
Less: amount capitalized for capital projects

 
(208
)
 

 
(419
)
Total interest expense, net
$
1,595

 
$
1,282

 
$
3,222

 
$
2,585


10. Other Long-Term Liabilities
Other long-term liabilities consist of the following:
 
 
June 30,
2012
 
December 31,
2011
Deferred income taxes
$
24,665

 
$
24,308

Pension and post retirement liabilities (U.S. and Canada only)
6,148

 
6,185

Environmental liabilities
1,100

 
1,100

Profit sharing and post employment liabilities
4,106

 
3,795

Other liabilities
1,542

 
2,170

 
$
37,561

 
$
37,558


11. Income Taxes
The effective income tax rate on income before taxes was approximately 28% for the six months ended June 30, 2012 compared to approximately 34% 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 first quarter of 2012.
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 June 30, 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 13 of 33



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 June 30, 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 $28,324 and net income tax refunds were $16,175 for the six months ended June 30, 2012 and June 30, 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 June 30, 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 and PCS.
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. Based upon work so far, there appears to be at least one technically viable approach, but it has yet to be fully evaluated.

Page 14 of 33



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 - 2005-2008
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 $9.8 million at current exchange rates, for which the Company has recorded an accrual. The Company has timely contested the resolutions in Mexican Courts and posted security for the amount claimed by granting liens, in accordance with Mexican law, on specified production assets located at its Coatzacoalcos plant.
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 believes that these matters currently represent contingent liabilities that are not material. 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 15 of 33



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 June 30, 2012
 
For the three months ended June 30, 2011
 
Pension benefits
 
Other benefits
 
Total
 
Pension benefits
 
Other benefits
 
Total
Service cost
$

 
$
81

 
$
81

 
$

 
$
72

 
$
72

Interest cost
27

 
36

 
63

 
28

 
37

 
65

Expected return on assets
(27
)
 

 
(27
)
 
(18
)
 

 
(18
)
Amortization of
 
 
 
 
 
 
 
 
 
 
 
prior service cost

 
32

 
32

 

 
32

 
32

unrecognized (gain) loss
3

 
(7
)
 
(4
)
 

 
(15
)
 
(15
)
Net periodic cost
$
3

 
$
142

 
$
145

 
$
10

 
$
126

 
$
136

 
 
 
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2012
 
For the six months ended June 30, 2011
 
Pension benefits
 
Other benefits
 
Total
 
Pension benefits
 
Other benefits
 
Total
Service cost
$

 
$
162

 
$
162

 
$

 
$
147

 
$
147

Interest cost
54

 
72

 
126

 
56

 
74

 
130

Expected return on assets
(54
)
 

 
(54
)
 
(36
)
 

 
(36
)
Amortization of
 
 
 
 
 
 
 
 
 
 
 
prior service cost

 
64

 
64

 

 
67

 
67

unrecognized (gain) loss
6

 
(14
)
 
(8
)
 

 
(31
)
 
(31
)
Net periodic cost
$
6

 
$
284

 
$
290

 
$
20

 
$
257

 
$
277


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 16 of 33



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 June 30, 2012
 
For the three months ended June 30, 2011
 
Pension benefits
 
Other benefits
 
Total
 
Pension benefits
 
Other benefits
 
Total
Service cost
$
84

 
$
20

 
$
104

 
$
72

 
$
17

 
$
89

Interest cost
150

 
24

 
174

 
147

 
24

 
171

Expected return on assets
(235
)
 

 
(235
)
 
(247
)
 

 
(247
)
Amortization of
 
 
 
 
 
 
 
 
 
 
 
actuarial loss (gain)
65

 
12

 
77

 
43

 
10

 
53

prior service cost
26

 

 
26

 
27

 

 
27

net transition obligation

 
8

 
8

 

 
8

 
8

Exchange rate changes
(110
)
 
34

 
(76
)
 
20

 
5

 
25

Net periodic cost
$
(20
)
 
$
98

 
$
78

 
$
62

 
$
64

 
$
126

 
 
 
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2012
 
For the six months ended June 30, 2011
 
Pension benefits
 
Other benefits
 
Total
 
Pension benefits
 
Other benefits
 
Total
Service cost
$
168

 
$
40

 
$
208

 
$
142

 
$
34

 
$
176

Interest cost
300

 
48

 
348

 
291

 
48

 
339

Expected return on assets
(470
)
 

 
(470
)
 
(488
)
 

 
(488
)
Amortization of
 
 
 
 
 
 
 
 
 
 
 
actuarial loss (gain)
130

 
24

 
154

 
84

 
20

 
104

prior service cost
52

 

 
52

 
54

 

 
54

net transition obligation

 
16

 
16

 

 
16

 
16

Exchange rate changes
20

 
7

 
27

 
186

 
(25
)
 
161

Net periodic cost
$
200

 
$
135

 
$
335

 
$
269

 
$
93

 
$
362

Innophos Canada, Inc. made cash contributions to its Canadian defined benefit plan of $0.4 million during the six months ended June 30, 2012. Innophos Canada, Inc. plans to make additional cash contributions to its Canadian defined benefit plan of approximately $0.4 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. 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 is 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.


Page 17 of 33



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 June 30, 2012
 
Specialty
Phosphates
US & Canada
 
Specialty
Phosphates
Mexico
 
GTSP &
Other
 
Eliminations
 
Total
Sales
 
$
146,270

 
$
47,800

 
$
20,110

 
$

 
$
214,180

Intersegment sales
 
532

 
13,696

 
129

 
(14,357
)
 

Total sales
 
$
146,802

 
$
61,496

 
$
20,239

 
$
(14,357
)
 
$
214,180

Operating income (b)
 
$
20,267

 
$
8,534

 
$
(2,518
)
 
$

 
$
26,283

Depreciation and amortization expense
 
$
6,178

 
$
3,790

 
$
1,348

 
$

 
$
11,316

 
 
 
 
 
 
 
 
 
 
 
For the three months ended June 30, 2011
 
Specialty
Phosphates
US & Canada
 
Specialty
Phosphates
Mexico
 
GTSP &
Other
 
Eliminations
 
Total
Sales
 
$
132,068

 
$
38,531

 
$
31,028

 
$

 
$
201,627

Intersegment sales
 
340

 
9,254

 
125

 
(9,719
)
 

Total sales
 
$
132,408

 
$
47,785

 
$
31,153

 
$
(9,719
)
 
$
201,627

Operating income (c)
 
$
26,460

 
$
1,262

 
$
4,895

 
$

 
$
32,617

Depreciation and amortization expense
 
$
5,199

 
$
3,981

 
$
1,543

 
$

 
$
10,723

 
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2012
 
Specialty
Phosphates
US & Canada
 
Specialty
Phosphates
Mexico
 
GTSP &
Other
 
Eliminations
 
Total
Sales
 
$
287,865

 
$
98,728

 
$
55,839

 
$

 
$
442,432

Intersegment sales
 
848

 
30,995

 
263

 
(32,106
)
 

Total sales
 
$
288,713

 
$
129,723

 
$
56,102

 
$
(32,106
)
 
$
442,432

Operating income (a) (b)
 
$
47,503

 
$
14,796

 
$
2,123

 
$

 
$
64,422

Depreciation and amortization expense
 
$
11,548

 
$
7,563

 
$
2,444

 
$

 
$
21,555

 
 
 
 
 
 
 
 
 
 
 
For the six months ended June 30, 2011
 
Specialty
Phosphates
US & Canada
 
Specialty
Phosphates
Mexico
 
GTSP &
Other
 
Eliminations
 
Total
Sales
 
$
262,412

 
$
84,033

 
$
52,780

 
$

 
$
399,225

Intersegment sales
 
772

 
20,681

 
180

 
(21,633
)
 

Total sales
 
$
263,184

 
$
104,714

 
$
52,960

 
$
(21,633
)
 
$
399,225

Operating income (c)
 
$
56,282

 
$
5,215

 
$
11,942

 
$

 
$
73,439

Depreciation and amortization expense
 
$
10,033

 
$
7,905

 
$
2,979

 
$

 
$
20,917


(a)
The six months ended June 30, 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 CNA Fresh Water Claims in GTSP & Other.
(b)
The three and six months ended June 30, 2012 include $3.9 million and $2.4 million, respectively, of out of period cost in Mexico in GTSP & Other.
(c)
The three and six months ended June 30, 2011 include a $0.1 million benefit and a $3.9 million benefit, respectively, to earnings related to updates to the provision for the CNA Fresh Water Claims in GTSP & Other.

Page 18 of 33



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


15. Acquisitions
On October 31, 2011, the Company acquired all of 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 purchase accounting for the acquisition has been closed and immaterial adjustments have been recognized in the six month period ended June 30, 2012.

16. Subsequent Events:
On July 17, 2012, Innophos, Inc. purchased for cash all of the equity of AMT Labs, Inc. and an affiliated real estate company holding all AMT real property, including unused land and buildings to support future expansion. AMT, a privately held company based in North Salt Lake, Utah, has been manufacturing high quality custom ingredients for the food, beverage, confectionary and nutraceutical industries for more than 20 years. AMT specializes in mineral ingredients essential to the human diet that are manufactured in various forms, including as chelates, to be easily digested (bioactive).
AMT's strengths are highly complementary to the Company's new bioactive mineral ingredients business platform, providing high quality manufacturing facilities better able to support the future growth expected in this product range.
The combined purchase price was $27 million, with $19.5 million being allocated to the AMT purchase and $7.5 million being allocated to the real estate entity. The transaction includes potential for additional consideration of up to $3 million contingent upon success in developing new market opportunities. The price was funded from our revolving line of credit as well as cash from operations.

Page 19 of 33






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 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

Specialty Phosphates achieved volume growth despite a moderate decline in market demand during the second quarter. Demand conditions weakened from a combination of limited further STPP reformulation in North America, customer destocking, particularly in international markets, and lower demand in a few market segments. This was offset by good progress on targeted growth initiatives, including excellent results from the recently acquired Kelatron business. Management expects to offset continued weaker market demand conditions in the second half through ongoing success with growth initiatives, and, overall, anticipates second half volume growth of approximately 1-3%, with acquisitions, including the recently announced AMT acquisition, contributing a further 4%.
Specialty Phosphates selling prices were 9% higher in the first half versus the same period last year and improved moderately in the second quarter on a sequential basis. We will continue to carefully monitor market and raw material cost trends and will consider additional price increases as market conditions allow. Our primary focus remains on continuing to meet our growth goals, both geographically and through product innovation.
Market prices for Innophos key raw materials of phosphate rock and sulfur were relatively unchanged through the second quarter, with the sequential increase seen in cost of goods sold arising as expected from contract terms catching up to current market prices. Prices for finished fertilizer products, including GTSP, increased sequentially during the second quarter before stabilizing again, and remain significantly below their 2011 levels.
Overall, therefore, management expects operating performance in both Specialty Phosphates and GTSP & Other in the 2012 third quarter to be similar to the second quarter. In addition, scheduled maintenance outages in Mexico and the US, together with an increased level of mining activity as we continue to evaluate the quality of our mining concessions in Mexico, are expected to result in a sequential increase in third and fourth quarter costs compared to the second quarter of approximately $2 million per quarter, affecting GTSP & Other and Specialty Phosphates equally.
The company generated strong operating cash flows including the benefits of delivering on working capital reduction targets with net debt (total debt less cash) decreasing by $33 million in the 2012 second quarter to $63 million.


Page 20 of 33





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
 
June 30, 2012
 
June 30, 2011
 
Amount
 
%
 
Amount
 
%
Net sales
$
214.2

 
100.0

 
$
201.6

 
100.0

Cost of goods sold
171.8

 
80.2

 
152.5

 
75.6

Gross profit
42.4

 
19.8

 
49.1

 
24.4

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
15.3

 
7.1

 
15.8

 
7.8

Research & development
0.8

 
0.4

 
0.7

 
0.3

Income from operations
26.3

 
12.3

 
32.6

 
16.2

Interest expense, net
1.6

 
0.7

 
1.3

 
0.6

Foreign exchange losses (gains), net
(0.1
)
 

 
(0.2
)
 
(0.1
)
Provision for income taxes
8.3

 
3.9

 
10.7

 
5.3

Net income
$
16.5

 
7.7

 
$
20.8

 
10.3



 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
Amount
 
%
 
Amount
 
%
Net sales
$
442.4

 
100.0

 
$
399.2

 
100.0

Cost of goods sold
344.2

 
77.8

 
292.7

 
73.3

Gross profit
98.2

 
22.2

 
106.5

 
26.7

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
32.3

 
7.3

 
31.6

 
7.9

Research & development
1.5

 
0.3

 
1.4

 
0.4

Income from operations
64.4

 
14.6

 
73.5

 
18.4

Interest expense, net
3.2

 
0.7

 
2.6

 
0.7

Foreign exchange losses (gains), net
(0.4
)
 
(0.1
)
 
0.6

 
0.2

Provision for income taxes
17.5

 
4.0

 
23.6

 
5.9

Net income
$
44.1

 
10.0

 
$
46.7

 
11.7



Three months ended June 30, 2012 compared to the three months ended June 30, 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 June 30, 2012 were $214.2 million, an increase of $12.6 million, or 6.3%, as compared to $201.6 million for the same period in 2011. Selling price increases had a positive effect on revenue of 3.6% or $7.4 million which included a 7.0% increase in Specialty Phosphates showing positives across all product lines that was partially offset by lower pricing in GTSP & Other caused by declining fertilizer market price trends. Volumes increased 2.7% or $5.2 million with all of the Specialty Phosphate product lines showing increases but GTSP & Other showing a decline.
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.

Page 21 of 33




The following table illustrates for the three months ended June 30, 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
7.0
 %
 
3.8
 %
 
10.8
 %
Specialty Phosphates Mexico
6.9
 %
 
17.2
 %
 
24.1
 %
Total Specialty Phosphates
7.0
 %
 
6.8
 %
 
13.8
 %
GTSP & Other
(14.7
)%
 
(20.5
)%
 
(35.2
)%
Total
3.6
 %
 
2.7
 %
 
6.3
 %
Note: Included within Specialty Phosphates US & Canada and Total Specialty Phosphates volume/mix variances were benefits of 3.2% and 2.4%, respectively, from the Kelatron business acquired in the fourth quarter of 2011.
The following table illustrates for the three months ended June 30, 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
7.4
%
 
4.3
%
 
11.7
%
Food & Technical Grade PPA
5.4
%
 
19.2
%
 
24.6
%
STPP & Detergent Grade PPA
6.6
%
 
3.8
%
 
10.4
%
Note: Included within Specialty Ingredients volume/mix variance was a 3.5% benefit from the Kelatron business acquired in the fourth quarter of 2011.

Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the three months ended June 30, 2012 was $42.4 million, a decrease of $6.7 million, or 13.6%, as compared to $49.1 million for the same period in 2011. Gross profit percentage decreased to 19.8% for the three months ended June 30, 2012 versus 24.4% for the same period in 2011. Gross profit was unfavorably affected by higher raw material costs, partially offset by lower manufacturing costs and increased volumes, which had a combined unfavorable impact of $12.1 million. There was $3.9 million of out of period cost in Mexico during the current quarter, which was partially offset by revision to our estimates for the effect of contract terms on raw material pricing in 2012 of $1.2 million. Gross profit was favorably affected $7.4 million for higher selling prices and $0.7 million favorable exchange rate mostly from Mexican peso based costs.
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 June 30, 2012 were $16.1 million, a decrease of $0.4 million, or 2.4%, as compared to $16.5 million for the same period in 2011. The decrease was primarily due to $0.7 million lower non-cash stock compensation and a $0.9 decrease in all other costs partially offset by $1.2 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 June 30, 2012 was $26.3 million, a decrease of $6.3 million, or 19.3%, as compared to $32.6 million for the same period in 2011. Operating income as a percentage of net sales decreased to 12.3% versus 16.2% for the same period in 2011, for the reasons noted above.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the three months ended June 30, 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.
Foreign Exchange
Foreign exchange gain for the three months ended June 30, 2012 was $0.1 million as compared to a gain of $0.2 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.

Page 22 of 33




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 June 30, 2012 compared to 34% for the same period in 2011.
Net Income
Net income for the three months ended June 30, 2012 was $16.5 million, a decrease of $4.3 million as compared to $20.8 million for the same period in 2011, due to the factors described above.

Six months ended June 30, 2012 compared to the six months ended June 30, 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 six months ended June 30, 2012 were $442.4 million, an increase of $43.2 million, or 10.8%, as compared to $399.2 million for the same period in 2011. Selling price increases had a positive effect on revenue of 6.1%, or $24.5 million, with Specialty Phosphates up 9.0% on positive trends in all product lines, partially offset by lower pricing in GTSP & Other caused by declining fertilizer market price trends. Volumes increased 4.7% or $18.7 million with all major product lines contributing except STPP & Detergent Grade PPA which is down because of a strong first 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 six months ended June 30, 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
7.7
 %
 
2.0
%
 
9.7
%
Specialty Phosphates Mexico
12.9
 %
 
4.6
%
 
17.5
%
Total Specialty Phosphates
9.0
 %
 
2.6
%
 
11.6
%
GTSP & Other
(12.5
)%
 
18.3
%
 
5.8
%
Total
6.1
 %
 
4.7
%
 
10.8
%
Note: Included within Specialty Phosphates US & Canada and Total Specialty Phosphates volume/mix variances were benefits of 3.2% and 2.4%, respectively, from the Kelatron business acquired in the fourth quarter of 2011.

The following table illustrates for the six months ended June 30, 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
8.1
%
 
2.0
 %
 
10.1
%
Food & Technical Grade PPA
10.5
%
 
10.3
 %
 
20.8
%
STPP & Detergent Grade PPA
11.7
%
 
(5.2
)%
 
6.5
%
Note: Included within Specialty Ingredients volume/mix was a 3.5% benefit from the Kelatron business acquired in the fourth quarter of 2011.

Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the six months ended June 30, 2012 was $98.2 million, a decrease of $8.3 million, or 7.8%, as compared to $106.5 million for the same period in 2011. Gross profit percentage decreased to 22.2% for the six months ended June 30, 2012 versus 26.7% for the same period in 2011. Gross profit was unfavorably affected by higher raw material costs, partially offset by lower manufacturing costs and increased volumes,

Page 23 of 33




which had a combined unfavorable impact of $39.3 million. There was $2.4 million of out of period cost in Mexico during the six months ended June 30, 2012, which was partially offset by revision to our estimates for the effect of contract terms on raw material pricing in 2012 of $1.2 million. Gross profit was favorably affected $24.5 million for higher selling prices, $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 $1.3 million favorable exchange rate impact mostly from Mexican peso based costs. Included in 2011 was $3.2 million expense for a scheduled maintenance outage at our Coatzacoalcos, Mexico manufacturing facility and $3.9 million income for updates to the provision for the Mexican CNA Water Tax Claims.
Operating Expenses and Research and Development
Operating expenses consist primarily of selling, general and administrative and research and development expenses. Operating expenses for the six months ended June 30, 2012 were $33.8 million, an increase of $0.8 million, or 2.4%, as compared to $33.0 million for the same period in 2011. The increase was due to $2.4 million higher depreciation due to the ERP system that was put into service on August 27, 2011 and $1.1 million increase due to the Kelatron business acquired in the fourth quarter of 2011 partially offset by $1.7 million lower non-cash stock compensation and a $1.0 million decrease in all other costs.
Operating Income
Operating income for the six months ended June 30, 2012 was $64.4 million, a decrease of $9.1 million, or 12.4%, as compared to $73.5 million for the same period in 2011. Operating income as a percentage of net sales decreased to 14.6% versus 18.4% for the same period in 2011, for the reasons noted above.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the six months ended June 30, 2012 was $3.2 million, an increase of $0.6 million, or 23.1% as compared to $2.6 million for the same period in 2011.
Foreign Exchange
Foreign exchange gain for the six months ended June 30, 2012 was $0.4 million as compared to a loss of $0.6 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 28% for the six months ended June 30, 2012 compared to 34% 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 a 5% effect on the effective tax rate.
Net Income
Net income for the six months ended June 30, 2012 was $44.1 million, a decrease of $2.6 million as compared to $46.7 million for the same period in 2011, due to the factors described above.

Page 24 of 33





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
 
 
 
June 30,
2012
 
June 30,
2011
 
Net Sales % Change
Segment Net Sales
 
 
 
 
 
Specialty Phosphates US & Canada
$
146,270

 
$
132,068

 
10.8
 %
Specialty Phosphates Mexico
47,800

 
38,531

 
24.1
 %
Total Specialty Phosphates
194,070

 
170,599

 
13.8
 %
GTSP & Other
20,110

 
31,028

 
(35.2
)%
Total
$
214,180

 
$
201,627

 
6.3
 %
 
 
 
 
 
 
Segment Operating Income
 
 
 
 
 
Specialty Phosphates US & Canada
$
20,267

 
$
26,460

 
 
Specialty Phosphates Mexico
8,534

 
1,262

 
 
Total Specialty Phosphates
28,801

 
27,722

 
 
GTSP & Other (a)
(2,518
)
 
4,895

 
 
Total
$
26,283

 
$
32,617

 
 
 
 
 
 
 
 
Segment Operating Income % of net sales
 
 
 
 
 
Specialty Phosphates US & Canada
13.9
 %
 
20.0
%
 
 
Specialty Phosphates Mexico
17.9
 %
 
3.3
%
 
 
Total Specialty Phosphates
14.8
 %
 
16.2
%
 
 
GTSP & Other (a)
(12.5
)%
 
15.8
%
 
 
Total
12.3
 %
 
16.2
%
 
 
 
 
 
 
 
 
Depreciation and amortization expense
 
 
 
 
 
Specialty Phosphates US & Canada
$
6,178

 
$
5,199

 
 
Specialty Phosphates Mexico
3,790

 
3,981