2009 Annual Report
Ingredients for Success
About Innophos
Innophos is a leading North American producer of specialty phosphate products, offering
performance-critical ingredients with applications in food and beverage, pharmaceutical,
oral care and industrial end markets. With over a century of experience, Innophos has
developed the expertise to produce complex phosphates to the highest standards of quality
and consistency demanded by customers worldwide. The Company continues to improve its
market leadership by developing new and innovative phosphate-based products to address
specific customer applications and supports these high-value products with industry-leading
technical service.
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
200
150
100
50
0
12/06
3/07
6/07
9/07
12/07
3/08
6/08
9/08
12/08
3/09
6/09
9/09
12/09
Our Vision
To be the most successful, most competitive and
first choice specialty phosphates company in the world.
Innophos Achievements 2009
Second highest ever sales and income
Over 50% of sales were in high-value food & beverage, pharmaceutical and oral care applications
Increased presence in high-growth geographies outside North America
Strengthened market-leading position in low sodium alternatives, driving future growth
Achieved major milestones in transforming supply chain capability and flexibility
Reduced net debt by more than half to $114 million
Dear Fellow Innophos Investors:
I am very proud to report to you that we have navigated successfully
beverage, pharmaceutical and oral care markets, versus just
through the volatility of the last two years, and emerged with our
30 percent historically, demonstrating the strength of these important
business substantially stronger. I have great confidence in our ability
and stable consumer-facing markets.
to continue to deliver strong results this year and beyond. We
successfully overcame major challenges in 2009 and delivered
strong performance, with sales, operating income and net income
second only to the Company’s historic results of 2008.
Higher margin products helped Innophos achieve
strong results in a challenging environment
We faced significant challenges in 2009. High costs for phosphate
rock used in Mexico limited our ability to compete in some markets.
The global economic downturn affected demand across our busi-
ness, and falling market prices for commodity phosphates required
us to respond with reductions in our own selling prices. Despite these
challenges, we remained focused on investing in the future, with an
emphasis on the higher margin products and higher value market
application segments, and continued to enhance our longer term
supply chain capability both through diversified raw material supply
and manufacturing flexibility. While 2009 brought reduced demand
and increased competition to low-margin products, the core of our
business, specialty phosphates, performed very well.
It is clear from 2009 results that the long-term strategy to focus on
improving our capability in core specialty phosphate salts and
acids products is working, both in North America and beyond.
Over 50 percent of our sales were to the value-added food and
In 2009 we began to increase production capacity and capability
in Mexico to support targeted growth in new geographic markets
for value-added food grade specialty salts and acids, and that
effort will continue in 2010. In the United States and Canada
we continued to increase our ability to offer high-margin products
through selective de-bottlenecking. Supporting high product qual-
ity with strong service levels set our offering apart, as the results
demonstrate. Our core business selling prices for the fourth quarter
2009 were approximately 40 percent higher than those of the fourth
quarter 2007.
Our Mexican business was the most affected by the challenges
described above, with the impact most apparent on the profitability
of our fertilizer co-products. In 2008 these products (primarily granu-
lated triple superphosphate, or GTSP) generated gross profit of
$74 million, while in 2009 they recorded a loss of $10 million.
Profits in Mexico on detergent grade products were also sharply
down, partly a result of the factors already noted. In addition, the
business suffered a substantial reduction in sales of detergent grade
acid to a major Mexican customer following the shut down of more
than half their detergent grade sodium tripolyphosphate (STPP)
capacity. It was therefore a significant achievement that our Mexican
operation remained profitable in 2009.
This was only achieved through an organi-
zation-wide focus on cost reduction. We ex-
ceeded our initial targets with the support of
the entire workforce. Meanwhile, we made
significant investments to secure future profit-
ability by preparing to move from being a
single to a multiple source user of phosphate
raw materials in Mexico. The testing and
facility adaptation planning begun in 2009
put us on track to realize the full transition in
2010. We also upgraded the food grade
capability of our main Mexican production
site at Coatzacoalcos, increasing its ability
to produce higher value specialty salts and
acids while reducing the capacity dedicated
to the more commodity-like detergent grade phosphoric acid.
facilities upgrade to food grade; launching an Enterprise Resource
Combining an enhanced food grade production ability with diversi-
Planning (ERP) project with a focus on supply chain efficiency; and
fied sourcing is helping the Mexican facility to become a more
conducting limited evaluation of recently acquired Mexican mining
integral part of our overall North American supply chain. This can
concessions.
benefit the whole company in the longer term.
We expect capital expenditures of approximately $35 million
during 2010 to continue the projects described above, with a few
Progress toward a more flexible and diverse
additions. Operationally, we will continue to strengthen our ability to
supply chain
Following year end, we settled the arbitration with our rock supplier.
With prices agreed upon through September 2010, the Mexican
operating segment was profitable again in the first quarter of 2010,
and we have made progress in restoring our market position in
specialty products supplied by the Mexican business. Further, we
service high-value customer applications and improve research and
development and technical service capability to maintain our leader-
ship in these core product areas. Also, we will support geographic
growth through an increased presence in developing markets,
improved distribution channels and a greater focus on servicing
these international customers.
are working to establish new
phosphate supply relationships
with multiple sources that are
more closely linked to market
prices. Eliminating these supply
While 2009 brought reduced demand and
increased competition to low-margin products,
the core of our business, specialty phosphates,
Finally, we will continue to balance
the use of cash for operational
and corporate purposes. We plan
to maintain our strengthened
balance sheet while continuing to
pay dividends and invest in the
parts of our business that have the
chain constraints is enabling us to
performed very well.
advance our plans for expansion
outside North America, particularly in Latin America.
Maintaining the right capital balance
In response to the challenges of 2009, we focused on disciplined
cash use while closely managing costs, balancing uses of cash
including debt repayment, dividends and targeted capital spending.
We ended the year with $132 million of cash and cash equiva-
lents, enabling us to reduce debt and continue to make dividend
payments as we improved the Company’s core product margins.
Net debt fell from $257 million at the end of 2008 to $114 million
at the end of 2009. We also retired a $73 million term loan and
established a new $65 million, four-year revolving credit facility,
giving us no debt maturities before 2013. We retired $10 million
greatest profitability and growth potential. We have the flexibility
to target and support strategically appropriate acquisitions, most
likely of the “bolt-on” variety, to supplement our growth in our core
business.
First quarter 2010 performance has confirmed the improving volume
trends seen in the second half of 2009. Mexico is contributing to
profitability again, and we expect that pricing has stabilized and
should improve moderately in the near term. Therefore, we are
confident we can continue to deliver strong results in 2010.
To close, I want to thank our employees, our customers and our
stakeholders, all of whom are helping us to achieve our vision:
to be the most successful, most competitive and first choice specialty
face value of the Company’s unsecured notes during the year when
phosphates company in the world.
prices were advantageous and redeemed the remaining $56 million
of the unsecured notes in April 2010.
We prioritized outlays on the most strategically important
capital investments, keeping spending at $20 million, including:
de-bottlenecking U.S. and Canadian specialty salts units that serve
the highest margin markets; initiating the Coatzacoalcos, Mexico
Randy Gress
Chief Executive Officer & Chairman
April 29, 2010
It won’t rise
without Innophos
Functional beneFit:
Flavorful baked goods with reduced
sodium and extra calcium
calcium phosphate
Markets and Applications
Since becoming a public company, Innophos has consistently focused
on increasing its capability and sales into high-value, consumer-
oriented applications and high-performance industrial applications
where its specialty phosphates create sustainable value.
This approach was rewarded in 2009, when the food and bever-
age, pharmaceutical and oral care end markets represented over
50 percent of sales, compared with a third of sales three years ago.
Overall Innophos is the number one North American specialty
phosphate supplier to these high-value end markets, with long-lasting
customer relationships built on a world-leading product range with
excellent brand recognition.
Ingredients that enable customer success
On the sidebars of these pages you will see some examples of
customer products that have Innophos specialty phosphates as a key
ingredient. Innophos products tend to be a small percentage of
customers’ overall product cost, yet they are essential to end product
performance. These products are supported by research and develop-
ment (R & D) and technical service that are the most competitive in the
specialty phosphate industry. These technical service and R & D capa-
bilities were further strengthened in 2009 and, as a result, Innophos
scientists are increasingly working as part of customers’ teams. For
example, they have been helping major food companies adapt their
end products to meet changing consumer needs.
In addition to its experience and success with established products
in the core territories of the United States, Canada and Mexico,
Innophos is aiming to improve long-term growth in two ways:
by increasing its capability in new regions and by developing and
marketing a new high-value product range that supports customers
in meeting consumer trends.
2006
2009
What Innophos products do
Innophos products have a wide variety of applications. Below are some examples of the properties Innophos products bring to customer
end products across a range of industries. In blue are the three product categories within the core specialty phosphate business. Details
on co-products are shown in green. Percentages in section heads represent the category’s contribution to 2009 revenues.
Specialty Salts and Specialty Acids: 67%
Baking:
Core ingredient in baking powder, enabling pancakes, cakes, muffins and
biscuits to rise at rates tailored to specific product requirements
Meat & Seafood:
Keep meat or seafood moist and tender during processing, storage and cooking
ProceSSed cheeSe:
Control melting properties of cheese slices, blocks and shreds
PotatoeS:
Prevent unwanted discoloration during french fry manufacture
Beverage:
Supply required minerals (calcium, phosphorus, magnesium and potassium)
to a broad range of beverages, from soy milk to sports drinks
PharMaceutical exciPientS:
Contribute essential minerals to nutritional supplements and through superior
tableting performance allow for proper dosing of active ingredients
oral care:
Provide abrasive properties to enable cleaning without damage to enamel
aSPhalt:
Improve road durability under both high- and low-temperature conditions
horticulture:
Specialized soluble nutrients for drip irrigation
fire Safety:
Ingredient in fire extinguishers for effective rapid extinguishing of flame and
hot glow
Water treatMent:
Prevent build-up of impurities in municipal and industrial water systems
Food & Technical Grade
Purified Phosphoric Acid: 16%
Beverage:
Provides tartness in colas without taste overtones
Water treatMent:
Prevents accumulation of potentially harmful impurities in municipal water
Metal treatMent:
Brightens aluminum finish
Detergent Grade Phosphoric Acid
and Sodium Tripolyphosphate: 12%
detergentS:
Ingredient in consumer-oriented laundry and automatic dishwasher detergents
induStrial cleaning:
Detergent formulations with phosphate provide superior cleaning
performance in challenging environments
GTSP and Other: 5%
PhoSPhate fertilizer:
Granulated Triple Superphosphate is a phosphate fertilizer particularly
suitable for soybeans and vineyard cultivation
Increased presence in developing markets
During 2009 Innophos increased its focus on high-growth, develop-
In 2009 the U.S.-based National Salt Reduction Initiative was estab-
lished to help food manufacturers and restaurants voluntarily reduce
ing markets such as Latin America and the Asia Pacific region where
the amount of sodium in their products, with the goal of reducing
a rapidly growing middle class is leading to increased demand for
sodium in Americans’ diets by 20 percent over the next five years.
convenience foods such as ready-to-use baking mixes and pack-
Innophos works with its customers to achieve lower sodium levels
aged meat and seafood products. Management expects that a com-
while maintaining important product characteristics such as texture,
bination of its product and application expertise and industry-leading
functionality and appearance, without sacrificing taste.
technical service, together with increased local presence through
distributor partners or direct sales, will, over time, allow Innophos
to build strong relationships with global, regional and local custom-
ers operating in developing markets. Although the Company is still
relatively early into its execution of this strategy, export sales
of specialty phosphates have increased to 12 percent of total
specialty phosphate revenues in 2009, with significant potential
for future growth.
Ingredients meeting consumer needs: sodium reduction
Awareness of the health risks associated with excessive sodium
intake, which include hypertension and increased risk of heart
disease, has grown, and these risks are becoming a focus for
consumers, consumer advocacy groups and medical associations.
For example, producing finished baked goods that have significantly
reduced levels of sodium is a definite competitive advantage for
today’s bakers. That’s why in 2009, Clabber Girl, a leading
producer of leavening systems for the home, foodservice and com-
mercial baker, introduced InnovaFree™, a new sodium free baking
powder. InnovaFree Baking Powder was developed in conjunction
with Innophos, Inc. incorporating CAL-RISE®, the no-sodium, calcium-
fortified leavening agent. Products like these allow bakers to reduce
sodium levels in finished goods such as cakes, muffins and biscuits
by as much as 50 percent.
Other current product offerings include Curavis® So-Lo 93 for
meats and poultry products, and an array of phosphate blends
for cheese applications.
Phosphorus
for bone health
Functional beneFit:
calcium combined with phosphorus
offers an ideal combination for
bone health
calcium phosphate
Supply Chain
The quality and consistency of
Innophos products are critical to their
inclusion in customers’ branded
formulations. Innophos’ high product
quality, process capability and exact-
ing manufacturing standards allow
customers to depend on Innophos
ingredients in their trusted products.
As a specialty phosphate producer,
Innophos has world-leading capability
in the production of purified phosphor-
ic acid and specialty salts and acids.
Innophos produces purified phosphoric
acid at facilities in Geismar, Louisiana
and Coatzacoalcos, Mexico. The
Company also purchases some
additional purified phosphoric acid
under a long-term supply agreement.
Innophos sells a portion of its purified
phosphoric acid directly to customers
Ingredients that allow mineral fortification
of everyday foods
Innophos products allow customers to add essential minerals to
a diverse range of food products including: dairy products,
baked goods, desserts, coffee whiteners and creamers, batter and
breadings, dietary supplements and the full spectrum of beverage
applications from enhanced water beverages to soy milk. Innophos’
portfolio includes VersaCal® Clear for calcium fortification of clear
beverages, VersaCal® MP for calcium fortification of milk and soy-
based beverages, VersaCal® DA for juice-based products and
several potassium phosphates, essential electrolytes in sports and
isotonic drinks, which offer hydration and mineral replacement.
Calcium and phosphorus for pharmaceutical products
According to the International Osteoporosis Foundation, osteoporosis
affects an estimated 75 million people in Europe, USA and Japan.
Clinical studies sponsored by Innophos indicate that both calcium
and phosphorus are essential for developing healthier bones.*
Innophos calcium phosphates are a leading ingredient in combined
vitamin and mineral supplements. Calcium phosphates also offer
tableting performance advantages that make them good excipients –
the inactive binders – in over-the-counter or prescription drugs.
*“Calcium phosphates promoted significant improvement in bone mineralization and
bone strength compared to calcium alone.” R.Shapiro and R.P. Heaney –
Co-dependence of calcium and phosphorus for growth and bone development under
conditions of varying deficiency. Bone; 2003;32:532-540
for consumer and industrial applications, but the majority is con-
sumed internally in the next stage of the value chain, producing high-
er value, technically differentiated, specialty phosphate salt and acid
compounds that sustain higher margins and attractive returns. Finally,
as a co-product of the purification process in Mexico, Innophos also
produces and sells a commodity fertilizer product – granulated triple
superphosphate (GTSP).
Customers have long relied on Innophos for dependable supply in
a changing environment. Innophos continues to make investments to
improve the overall reliability and flexibility of its supply chain and to
incrementally enhance its capability across the portion of its portfolio
focused on higher value products.
The most significant investment in 2009 was in Mexico. Previously
the majority of Mexico’s purified phosphoric acid was produced to
detergent grade standards and subsequently converted by Innophos
or other customers to sodium tripolyphosphate (STPP), a detergent
ingredient. Expecting reduced demand for detergent grade acid
and STPP globally, the Company began a significant program in
2009 to increase Mexico’s food grade acid capability. By the first
quarter of 2010, the Company had successfully doubled Mexico’s
capability in food grade acid, providing important additional supply
for its high-margin business expansion, as well as back-up capability
to U.S. sources. The Mexican facility now has the potential to be the
Company’s largest source of food grade acid.
Innophos has already fully converted capacity in the United States
multiple-sourcing arrangement. The current rock supply contract will
and Canada from detergent grade production to higher value
terminate in September 2010, and Innophos is advanced in putting
specialty products, and the completion of the Mexican food grade
new supply arrangements into place.
project has significantly reduced the amount of capacity dedicated
to detergent grade products.
A strategic focus on the supply chain
In 2010 Innophos aims to complete the implementation of the
Company’s new supply chain strategy. Significant milestones in
this strategy were achieved in 2009, and the main 2010 goal is
A second key goal for 2010 is completion of the previously
announced enterprise resource planning (ERP) project, which will
provide a management and technology backbone for the
company-wide supply chain improvements and support the new
sourcing strategy.
successfully transitioning from the current sole-sourced arrangement
for phosphate rock supply to Mexico to a more flexible, lower risk,
Products
Specialty Salts and Specialty Acids
Specialty salts and specialty acids serving consumer end markets are
currently the most stable and highest value applications. The food
and beverage, oral care and pharmaceutical end markets, as well
as select high-performance industrial end markets, provided stable
demand and strong margins, and in 2009 were the profitable core
of Innophos‘ results. Sales
revenue was down just two
percent in 2009 versus
2008, as these products
continued to do well in
market conditions that were
more challenging to the
Company’s less special-
ized products. Specialty
salts and specialty acids
are the primary area of
focus for Innophos’ busi-
ness both within and
outside North America.
Food and Technical
Grade Acid
Most of Innophos’ purified
phosphoric acid is convert-
ed into specialty salts and
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
specialty acids at dedicated facilities. Some food grade phosphoric
acid is sold directly to customers for applications such as cola bever-
age production. In addition, technical grades of phosphoric acid
are used in municipal water treatment and metal finishing. These
markets were more affected by weak economic conditions in 2009,
and sales revenue was down 29 percent from 2008.
Clear drinks are
healthier
with Innophos
Functional beneFit:
potassium phosphate is an
essential electrolyte in sports
and isotonic drinks that enables
rehydration after exercise
potassium phosphate
STPP and Detergent Grade Acid
Detergent grade products include detergent grade phosphoric acid
have made a positive gross profit contribution, improving somewhat
in tight markets. Absent further unusual factors, historical patterns are
and STPP. Phosphates are very effective cleaning agents, in both
expected to resume. Although they have generally been profitable,
laundry and automatic dishwasher detergents and in specialized
co-products are not part of the core of the Company’s business.
Balance Sheet and
Future Investment
Improving the balance sheet while
investing for growth
Innophos aims to continue improving its capital structure by seeking
productive uses of cash. In 2009 the Company reduced net debt
by more than 50 percent, paid a consistent dividend and improved
Innophos’ production capacity to serve higher margin end markets
through targeted capital spending.
In 2010 and subsequent years Innophos expects to make additional
investments targeted at increasing its presence in high-growth end
markets and new geographic regions. Investments will include con-
tinued improvement of the Company’s manufacturing capability in
high-value products. In addition, Innophos is reviewing a number of
“bolt-on” acquisition opportunities to accelerate its growth strategy.
Management also seeks to continue optimizing the cost and profile
of the Company’s remaining debt facilities. Innophos is committed
to maintaining a strong balance sheet and aims to continue to pay
a dividend.
industrial cleaning applications where high standards of cleanliness
must be maintained in challenging conditions. In the United States
and Canada, phosphates have largely been reformulated out of
consumer-oriented detergents, but remain an important ingredient
in industrial cleaning products. Sales of these products were down
significantly in 2009, with a Mexican customer, formerly the
Company’s largest, shutting more than half of their STPP capacity
and significantly reducing the need for Innophos’ supply of detergent
grade acid. Detergent-grade products now represent less than 12
percent of Innophos’ total sales. While further reformulation is expect-
ed in the detergent industry, the effect on Innophos’ detergent grade
products will be much reduced going forward.
Specialty Phosphates
Specialty phosphates comprise
the following product categories:
specialty salts and specialty acids;
food and technical grade acid;
and detergent grade acid and
STPP. In 2009, specialty phos-
phates sales declined by 23
percent and gross profit declined
by 29 percent from record 2008
levels. The decline came primar-
ily from the impact on Mexico of
reduced detergent grade product
sales and an uncompetitive raw
material sourcing position.
GTSP & Other
Commodity fertilizer co-products,
2005
2006
2007
2008
2009
such as GTSP, produced a loss of $10 million in 2009, a result of
low market prices and an uncompetitive phosphate rock sourcing
position. This compares to the $74 million profit made in 2008,
benefiting from high market prices and raw material costs that
were partly fixed at lower 2007 levels. Both the 2009 loss and
2008 profit were unusual outcomes for this product line, driven by
conditions specific to those years. In all previous years, even in soft
demand environments, Innophos commodity fertilizer co-products
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC, 20549
FORM 10-K
(cid:2)(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
(cid:4)(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
INNOPHOS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware
(state or other jurisdiction
of incorporation)
001-33124
(Commission File number)
20-1380758
(IRS Employer
Identification No.)
259 Prospect Plains Road
Cranbury, New Jersey 08512
(Address of Principal Executive Officer, including Zip Code)
(609) 495-2495
(Registrants’ Telephone Number, Including Area Code)
Not Applicable
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $.001 per share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:4) Yes (cid:2) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:4) Yes (cid:2) No
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. (cid:2) Yes (cid:4) No
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 (cid:4) No (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2)
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 (cid:4) Accelerated Filer (cid:2) Non-accelerated filer (cid:4) Smaller reporting company (cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:4) Yes (cid:2) No
The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $353.8
million as of June 30, 2009, the last business day of the Registrant’s most recently completed second quarter (based on the NASDAQ
National Market closing price on that date).
As of February 28, 2010, the registrant had 21,386,969 shares of Common Stock outstanding.
Portions of Innophos Holdings, Inc. Proxy Statement to be filed
for its Annual Meeting of Stockholders to be held June 11, 2010
DOCUMENTS INCORPORATED BY REFERENCE
Document
Incorporated By Reference In Part No.
III (Items 10, 11, 12, 13 and 14)
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79
PART I
TABLE OF CONTENTS
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Signatures
2
FORWARD-LOOKING STATEMENTS
Certain information set forth in this report contains “forward-looking statements” within the meaning of the federal securities
laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues
or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not
historical information. In some cases, forward-looking statements can be identified by terminology such as “believes,” “expects,”
“may,” “will,” “should,” or “anticipates,” or the negative of such terms or other comparable terminology, or by discussions of
strategy. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking
statements, whether written or oral, by us or on our behalf, are also expressly qualified by these cautionary statements.
All forward-looking statements, including without limitation, management’s examination of historical operating trends, are
based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith
and we believe there is a reasonable basis for them, but there can be no assurance that management’s expectations, beliefs and
projections will result or be achieved. All forward-looking statements apply only as of the date made. Unless required by law, we
undertake no obligation to update or revise forward-looking statements to reflect events or circumstances after the date made or to
reflect the occurrence of unanticipated events.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking
statements contained in or contemplated by this report. The following are among the factors that could cause actual results to differ
materially from the forward-looking statements. There may be other factors, including those discussed elsewhere in this report, which
may cause our actual results to differ materially from the forward-looking statements. Any forward-looking statements should be
considered in light of the risk factors specified in this Form 10-K.
Unless the context otherwise indicates, all references in this report to the “Company,” “Innophos,” “we,” “us” or “our” or
similar words are to Innophos Holdings, Inc. and its consolidated subsidiaries. Innophos Holdings, Inc. is a Delaware corporation and
was incorporated July 15, 2004.
3
ITEM 1.
Our Company
BUSINESS
PART I
Innophos commenced operations as an independent company in August 2004 after purchasing our North American specialty
phosphates business from affiliates of Rhodia, S.A., or Rhodia. In November 2006, we completed an initial public offering and listed
our Common Stock for trading on the NASDAQ Stock Market under the symbol “IPHS”.
Innophos is a leading North American producer of specialty phosphates. Many specialty phosphates are application-specific
compounds engineered to meet customer performance requirements. Specialty phosphates are often critical to the taste, texture and
performance of foods, beverages, pharmaceuticals, oral care products and other applications. For example, specialty phosphates act as
flavor enhancers in beverages, electrolytes in sports drinks, texture additives in cheeses, leavening agents in baked goods, calcium and
phosphorus sources for nutritional supplements, pharmaceutical excipients and cleaning agents in toothpaste.
Key Product Lines
We have three principal product lines: (i) Specialty Salts and Specialty Acids, (ii) Purified Phosphoric Acid, and (iii) Technical
Sodium Tripolyphosphate (STPP) & Other Products. Our products serve diverse end-use markets which historically have exhibited
stable demand growth.
Specialty Salts and Specialty Acids
Specialty Salts and Specialty Acids are the most highly engineered products in our portfolio. There are a wide range of
application-specific products for Specialty Salts, such as flavor enhancers in beverages, electrolytes in sports drinks, texture modifiers
in cheeses, leavening agents in baked goods, calcium and phosphorus sources for nutritional supplements, pharmaceutical excipients
and abrasives in toothpaste. Specialty Acids are used in industrial applications such as asphalt modification and petrochemical
catalysis.
The table below presents a list of the main Specialty Salts and Specialty Acids sold by us in 2009:
Product
Description/End-Use Application
Sodium Aluminum Phosphate, Acidic and Basic (“SALP”)
Sodium Acid PyroPhosphate (“SAPP”)
Sodium HexaMetaPhosphate (“SHMP”)
Monocalcium Phosphate (“MCP”)
Dicalcium Phosphate (“DCP”)
Tricalcium Phosphate (“TCP”)
Pharma Calcium Phosphates (“A-Tab®”, “Di-Tab®”, “Tri-Tab®”)
Ammonium Phosphates (“MAP”, “DAP”)
Potassium Phosphates (“TKPP”, “DKP”, “MKP”, “KTPP”)
Premier leavening agent for baking mixes, cakes, self-rising
flours, baking powders, batter & breadings (acidic). Improves
melting properties of cheese (basic).
Leavening agent for baking powders, doughnuts, and biscuits;
inhibits browning in potatoes; provides moisture and color
retention in poultry and meat.
Water treatment applications; anti-microbial and sequestrant in
beverages; cheese emulsifier; improves tenderness in meat,
seafood and poultry applications.
Leavening agent in double-acting baking powder; acidulant;
buffering agent.
Toothpaste abrasive; leavening agent; calcium fortification.
Calcium and phosphorus fortifier in food and beverage
applications (e.g., orange juice, cereals, and cheese); flow aid;
additive in expandable polystyrene.
Excipients in vitamins, minerals, nutritional supplements and
pharmaceuticals.
High-end fertilizer products for horticultural use; flame
retardant; cigarette additives; culture nutrient.
Water treatment; sports drinks; buffering agent; improves
tenderness in meat, seafood and poultry applications; horticulture
applications.
4
Product
Description/End-Use Application
Specialty Acids (e.g., Polyacid, High Purity)
Additive improving performance properties of asphalt;
electronic applications.
Sodium Blends (e.g., Sodium Tripolyphosphate (STPP (food
grade)))
Ingredient improving yield, tenderness, shelf life, moisture and
color retention in meat, seafood and poultry applications.
Other (Sodium Bicarbonate, Calcium Acid Pyrophosphate
(“CAPP”), Tetrasodium Pyrophosphate (“TSPP”), Mono, Di, &
Trisodium Phosphates (“MSP”, “DSP”, “TSP”))
Baking powders; gelling agent in puddings; cheese emulsifiers.
Each salt or acid derivative typically has a number of different applications and end uses. For example, DCP can be used both as
a leavening agent in bakery products and as an abrasive in oral care products. However, several food grade salts are unique to the end
user in their particular finished product application. Manufacturers often work directly with customers to tailor products to their
required specifications.
Our major competitor in the downstream Specialty Salts and Specialty Acids is Israel Chemicals Limited, or ICL.
Purified Phosphoric Acid
Purified Phosphoric Acid (PPA) is a higher-purity form of phosphoric acid, distinct from the agricultural-grade merchant green
phosphoric acid used in fertilizer production. PPA is used to manufacture specialty phosphate salts and acids and is also used directly
in beverage applications as a flavor enhancer and in water treatment applications. We also sell PPA in the merchant market to third-
party phosphate derivative producers.
Our major PPA competitor is Potash Corporation of Saskatchewan Inc., or PCS, a global fertilizer company for which specialty
phosphates represents only a small part of its business. We consume the majority of our PPA production in our downstream operations
and sell the remainder on the North American merchant market and to other downstream phosphate derivative producers, where we
compete with PCS. To the best of our knowledge, PCS does not have any downstream technical or food grade phosphate derivative
production capacity, other than a small potassium phosphate salt unit which primarily operates under a contract manufacturing
arrangement.
Technical Grade Sodium Tripolyphosphate (STPP) & Other Products
STPP is a specialty phosphate derived from reacting phosphoric acid with a sodium alkali. STPP is a key ingredient in cleaning
products, including automatic dishwashing detergents, industrial and institutional cleaners and (outside the U.S.) consumer laundry
detergents. In addition to its use in cleaning products, STPP is also used in water treatment, clay processing, and copper ore
processing. Over 90% of the end use market for STPP is derived from consumer product applications.
Other Products primarily include phosphate fertilizers produced in Mexico chiefly as co-products of manufacturing PPA.
Our major STPP competitor is Mexichem, S.A.B. de C.V., or Mexichem, in Mexico. Currently, Mexichem produces STPP at
two manufacturing locations in Mexico.
Over the past several decades, there have been efforts to reduce the use of STPP in consumer and institutional cleaners. In the
1980’s STPP use in consumer laundry applications was discontinued in the U.S. and Canada. Over the last several years momentum
has gained in eliminating STPP use in consumer automatic dishwashing applications in the U.S. and Canada. It is expected that most
detergent manufacturers will discontinue the use of STPP in automatic dishwashing detergent applications during 2010. The
Industrial & Institutional market has also reformulated some of its products to reduce STPP content in an effort to market a lower cost
and reduced phosphate content product line. In 2008, a global retailer began an initiative to materially reduce the use of STPP in
consumer laundry detergent in Latin America by 2011. In January 2009, our largest customer, Quimir, a division of Mexichem, closed
its largest STPP plant. Our Mexican operations have historically dedicated a significant portion of their capacity to the production of
STPP directly and have sold purified acid to other producers of STPP. In anticipation of reduced detergent grade STPP related demand
Innophos Mexico is investing in upgrading the food grade acid and salts capability of the Coatzacoalcos facility, and consequently
substantially reducing the portion of capacity dedicated to detergent grade products.
5
Our Industry
The North American marketplaces for each of our product lines have seen consolidation to two primary producers and several
secondary suppliers. We consider the two key producers in each product category to be: (i) our Company and ICL, which acquired
Astaris LLC, or Astaris, in 2005, in Specialty Salts and Specialty Acids; (ii) our Company and PCS, in Purified Phosphoric Acid; and
(iii) our Company and Mexichem in Technical STPP. The production of specialty phosphates begins with phosphate rock, which can
be processed in two alternative ways to produce Purified Phosphoric Acid (PPA): (i) the thermal acid method, in which elemental
phosphorus is combusted in a furnace and subsequently hydrated to produce purified phosphoric acid; or (ii) the purified wet acid
method (PWA), in which mined phosphate rock is reacted with sulfuric acid to produce merchant green acid, or MGA, (agricultural
grade phosphoric acid), which is then purified through solvent-based extraction into purified phosphoric acid. The conversion of
merchant green acid into purified phosphoric acid (PPA) is a technically complex and a capital-intensive process.
The thermal acid method of production is based on the electrolytic production of elemental phosphorus and is therefore
electricity intensive, while phosphoric acid made by the purified wet acid process requires the use of significant amounts of sulfuric
acid. The relative overall costs of the two methods depend on the availability and cost of their component processes, electricity and
coke for the former and sulfur for the latter. Purified phosphoric acid is reacted with appropriate mineral salts or inorganic compounds
to produce various specialty phosphate salts or STPP as required. We currently use purified acid manufactured via the wet acid
process for all of our Specialty Salts and Specialty Acids manufacturing needs.
Consolidation of producers has been most significant in the Specialty Salts and Specialty Acids market.
In addition to consolidation of producers, uneconomic production capacity has been eliminated in North America across all
three major specialty phosphate product categories. For instance, in 2001, Rhodia closed its specialty salts and specialty acids plants in
Buckingham, Quebec and Morrisville, Pennsylvania. In 2002, Vicksburg Chemical Company closed a specialty salts plant in
Vicksburg, Mississippi. In 2003 and 2004, Astaris closed three manufacturing facilities, eliminating roughly 320,000 metric tons of
capacity: a purified wet phosphoric acid plant in Conda, Idaho; a specialty salts plant in Trenton, Michigan; and an STPP plant in
Green River, Wyoming. In January 2009, Mexichem closed its Coatzacoalcos facility eliminating approximately 50% of their
estimated STPP capacity.
In June 2006, PCS started up a fourth PWA based purified phosphoric acid production train at its Aurora, NC facility, a capacity
addition less than the estimated combined level of 2006 North American PPA imports and domestic PPA produced via the thermal
process. The PCS capacity increase was also comparable in capacity to the Astaris Idaho plant closed in 2003 following a failed start-
up.
Penetration from Imports
Over the past several years, we estimate that imports, including domestically located production facilities owned by foreign
based organizations, have accounted for approximately 15-20% of the North American specialty phosphate market. This market share
has been fairly stable for the last two years; however, China imports of STPP and Phosphoric acid increased in 2009, off-setting
reductions in phosphoric acid imports from Belgium & Israel.
The following are the primary importers of purified phosphoric acid products and derivatives into North America: (i) Prayon
SA, or Prayon, and Rotem Amfert Negev Ltd. (a subsidiary of ICL) for purified phosphoric acid, with Prayon primarily supplying acid
to its specialty salts manufacturing facility in Augusta, Georgia; and (ii) various Chinese, European, and Israeli specialty phosphate
manufacturers such as Chemische Fabrik Budenheim, Thermphos, Hubei Xingfa, Jiangyin Chengxing, Guangxi Mingli and BK
Giulini Chemie GmbH & Co. (a subsidiary of ICL) for specialty salts and STPP.
Our Customers
Our customer base is principally composed of consumer goods manufacturers, distributors and specialty chemical
manufacturers. Our customers manufacture products such as soft drinks, sports drinks and juices, various food products, toothpaste
and other dental products, petroleum and petrochemical products, and various cleaners and detergents. Our customers include major
consumer goods manufacturers with global market recognition in the food, beverage, pharmaceutical and cleaning product markets.
We have maintained long-term relationships with the majority of our key customers, with the average customer relationship having
lasted over 15 years, and some relationships spanning nearly a century. Our specialty chemical products are often critical ingredients
in the formulation of our customers’ products, and typically represent only a small percentage of their total product costs. As a result,
we believe that the risks associated with our customers switching suppliers often outweigh the potential gains.
6
For the years ended December 31, 2007, 2008 and 2009, we generated net sales of $579.0 million, $934.8 million and $666.8
million, respectively. Net sales by end-market were as follows:
2007
$579 million
17%
36%
22%
25%
2008
$935 million
19%
19%
36%
26%
2009
$667 million
7%
24%
15%
Pharma, Food &
Beverage, Oral Care
Detergent &
Personal Care
54%
Industrial
Fertilizer
The company delivered record revenues in 2008 as we responded to rapidly rising market raw material costs by effectively
raising our own selling prices. By early 2009, raw material costs had fallen rapidly together with recessionary economic conditions
that also negatively impacted demand in 2009 compared to 2008. We responded with reductions in our own selling prices during
2009. Through this period our continued focus on demonstrating the value of our products and service to high value end markets has
enabled us to significantly enhance our mix with now over 50% of our sales into pharmaceutical, food, beverage and oral care
applications.
Raw Materials and Energy
We purchase a range of raw materials and energy sources on the open market, including phosphate rock, sulfur and sulfuric
acid, agricultural grade phosphoric acid (also known as MGA), PPA, natural gas and electricity. To help secure supply, we purchase
several of our key raw materials under long-term contracts generally providing for fixed or minimum quantities of materials, or
purchase of our full requirements, and predetermined pricing formulae based on various market indices and other factors. We do not
engage in any significant futures or other derivative contracts to hedge against fluctuations of raw material . We are not integrated
vertically back to our sources of supply by ownership interests, joint ventures or affiliated companies, as a result of which raw
materials acquisition at economical price levels is a major risk of our business. See Item 1A “Raw Materials Availability and Pricing”
of this Report Form 10-K.
Phosphate Rock and Merchant Green Acid (MGA). MGA is the main raw material for the creation of our downstream salts and
acids. We purchase MGA for processing at our Geismar, LA facility through a long-term agreement with PCS. At our Coatzacoalcos
facility in Mexico we typically purchase phosphate rock in order to produce MGA internally; however, we can also process externally
purchased MGA, available from various suppliers globally. We have an agreement with OCP, S.A., or OCP, for the supply of
phosphate rock to Mexico, which is scheduled to expire on September 10, 2010. The price we pay OCP under this contract was settled
annually based on parameters established in the contract and has now been fixed for the remainder of the current contract. During
2008 and 2009 volatility in the market price of phosphate rock led to a dispute between OCP and Innophos over the application of the
supply contract pricing clause. Having failed to settle these differences by negotiation the parties began arbitration at the ICC in Paris
over the pricing dispute and counterclaims made by OCP asserting a failure by Innophos to meet implied minimum purchase and
exclusivity commitments. This dispute was settled on February 24 , 2010, details of the settlement are included in Note 16 of Notes to
Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”. We are currently in active negotiations
with several suppliers for phosphate rock supply once the OCP contract expires.
Sulfur and Sulfuric Acid. Sulfur is the key raw material used in the production of Sulfuric Acid. Sulfuric acid is a key raw
material used in the production of merchant green acid. We produce the vast majority of the sulfuric acid required to operate our
Coatzacoalcos facility. The majority of the sulfuric acid required for the production of MGA by PCS, at Geismar is supplied by
Rhodia. Our U.S. needs for sulfuric acid and our Mexican needs for sulfur are handled through long term contracts with Rhodia and
Pemex-Gas y Petroquimica Basica, or PEMEX, respectively.
Purified Phosphoric Acid. The key raw material input for all of our downstream Specialty Salt and Specialty Acid operations is
PPA. We purchase certain quantities of our PPA supply from third parties to optimize our consumption and net sales, including from
PCS with whom we have a long-term supply contract. In 2009 Innophos produced approximately 70 percent and purchased
approximately 30 percent of its total PPA supply.
Natural Gas and Electricity. Natural gas and electricity are used to operate our facilities and generate heat and steam for the
various manufacturing processes. We typically purchase natural gas and electricity on the North American open market at so-called
“spot rates.” From time to time, we will enter into longer term natural gas and electricity supply contracts in an effort to eliminate
some of the volatility in our energy costs. We also seek to increase the energy efficiencies of our facilities and reduce costs through
investments such as the co-generation project for our Coatzacoalcos Plant commissioned into service in March 2008.
7
Research and Development
Our product engineering and development activities are aimed at developing and enhancing products, processes, applications
and technologies to strengthen our position in our markets and with our customers. We focus on:
•
•
•
•
•
•
developing new or improved application-specific specialty phosphate products based on our existing product line and
identified or anticipated customer needs;
creating specialty phosphate products to be used in new applications or to serve new markets;
providing customers with premier technical services as they integrate our specialty phosphate products into their products
and manufacturing processes;
ensuring that our products are manufactured in accordance with our stringent regulatory, health and safety policies and
objectives;
developing more efficient and lower cost manufacturing processes; and
expanding existing, and developing new, relationships with customers to meet their product engineering needs.
Our research expenditures were $1.9 million, $2.3 million and $2.0 million for the years ended December 31,
2009, December 31, 2008 and December 31, 2007, respectively.
Environmental and Regulatory Compliance
Certain of our operations involve manufacturing ingredients for use in food, nutritional supplement and pharmaceutical
excipient products, and therefore must comply with stringent U.S. Food and Drug Administration, or FDA or the U.S. Department of
Agriculture, or USDA good manufacturing practices as well as the quality requirements of our customers. In addition, our operations
that involve the use, handling, processing, storage, transportation and disposal of hazardous materials, are subject to extensive and
frequently changing environmental regulation by federal, state, and local authorities, as well as regulatory authorities with jurisdiction
over our foreign operations. Our operations also expose us to the risk of claims for environmental remediation and restoration or for
exposure to hazardous materials. Our production facilities require operating permits that are subject to renewal or modification.
Violations of health and safety and environmental laws, regulations, or permits may result in restrictions being imposed on operating
activities, substantial fines, penalties, damages, the rescission of an operating permit, third-party claims for property damage or
personal injury, or other costs, any of which could have a material adverse effect on our business, financial condition, results of
operations, or cash flows. Due to changes in health and safety and environmental laws and regulations, the time frames when those
laws and regulations might be applied, and developments in environmental control technology, we cannot predict with certainty the
amount of capital expenditures to be incurred for environmental purposes.
Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of
facilities, and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. Many of
our sites have an extended history of industrial use. Soil and groundwater contamination have been detected at some of our sites, and
additional contamination might occur or be discovered at these sites or other sites in the future (including sites to which we may have
sent hazardous waste). We continue to investigate, monitor or cleanup contamination at most of these sites. The potential liability for
all these sites will depend on several factors, including the extent of contamination, the method of remediation, future developments
and increasingly stringent regulation , the outcome of discussions with regulatory agencies, the liability of third parties, potential
natural resource damage, and insurance coverage. Accruals for environmental matters are recorded in the accounting period in which
our responsibility is established and the cost can be reasonably estimated. Due to the uncertainties associated with environmental
investigations and cleanups and the ongoing nature of the investigations and cleanups at our sites, we are unable to predict precisely
the nature, cost and timing of our future remedial obligations with respect to our sites and, as a result, our actual environmental costs
and liabilities could significantly exceed our accruals.
Further information, including the current status of significant environmental matters and the financial impact incurred for the
remediation of such environmental matters, is included in Note 16, Commitments and Contingencies, of the Notes to Financial
Statements in “Item 8. Financial Statements and Supplementary Data,” and in “Item 1A. Risk Factors”.
Intellectual Property
We rely on a combination of patent, copyright and trademark laws to protect certain key intellectual aspects of our business. In
addition, our pool of proprietary information, consisting of manufacturing know-how, trade secrets and unregistered copyrights
relating to the design and operation of our facilities and systems, is considered particularly important and valuable. Accordingly, we
protect proprietary information through all legal means practicable. However, monitoring the unauthorized use of our intellectual
property is difficult, and the steps we have taken may not prevent all unauthorized use by others. While we consider our copyrights
and trademarks to be important to our business, ultimately our established reputation and the products and service we provide to the
end-customer are more important.
8
Insurance
In the normal course of business, we are subject to numerous operating risks, including risks associated with environmental,
health and safety while manufacturing, developing and supplying products, potential damage to a customer, and the potential for an
environmental accident.
We currently have in force insurance policies covering property, general liability, excess liability, workers’
compensation/employer’s liability, product liability, product recall, fiduciary and other coverages. We seek to maintain coverages
consistent with market practices and required by those with whom we do business. We believe that we are appropriately insured for
the insurable risks associated with our business.
Employees
As of December 31, 2009, we had approximately 990 employees, of whom 693 were unionized hourly wage employees. We
currently employ both union and non-union employees at most of our facilities. We believe we have a good working relationship with
our employees, which has resulted in high productivity and low turnover in key production positions. We have experienced no work
stoppages or strikes at any of our unionized facilities since acquiring them in 2004. We are a party to a collective bargaining
agreement with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers
International Union, Local No. 7-765 through January 16, 2011 at the Chicago Heights facility; International Union of Operating
Engineers, Local No. 912 through April 15, 2010 at the Nashville facility; the Health Care, Professional, Technical, Office,
Warehouse and Mail Order Employees Union, affiliated with the International Brotherhood of Teamsters, Local 743 through June 17,
2011 at the Chicago (Waterway) facility; the United Steelworkers of America, Local No. 6304 through April 30, 2011 at the Port
Maitland, Ontario facility; and the Sindicato de Trabajadores de la Industria Química, Petroquímica, Carboquímica, Similares y
Conexos de la República Mexicana, at the Mexico facilities. The agreement at the Coatzacoalcos, Mexico facility is for an indefinite
period, but wages are reviewed every year and the rest of the agreement is subject to negotiation every two years. The current two-
year period will expire in June 2010.
Executive Officers
The following table and biographical material present information about the persons serving as our executive officers, and key
employees:
Name
Randolph Gress
Neil Salmon
William Farran
Charles Brodheim
Louis Calvarin
Mark Feuerbach
Joseph Golowski
Wilma Harris
Russell Kemp
Michael Lovrich
Abraham Shabot
Mark Thurston
Timothy Treinen
Age Position
54 Chairman of the Board, Chief Executive Officer, President and Director
41 Vice President and Chief Financial Officer
60 Vice President, General Counsel and Corporate Secretary
46 Corporate Controller
46 Vice President—Operations
51 Vice President—Treasury, Financial Planning & Analysis
48 Vice President—Sales
64 Vice President—Human Resources
50 Vice President—Research & Development
56 Vice President—Supply Chain
48 Vice President—Director General—Innophos Latin America
50 Vice President—Corporate Strategy and Worldwide Business Development
59 Vice President—Phosphates Business
Biographical Material
Randolph Gress is Chairman of the Board, Chief Executive Officer, President and Director of Innophos. Mr. Gress has served
as Chief Executive Officer of Innophos since August 2004. Previously, Mr. Gress joined Rhodia in 1997 and became Vice President
and General Manager of the sulfuric acid business. He was named global President of Specialty Phosphates (based in the U.K.) in
2001. Prior to joining Rhodia, Mr. Gress spent fourteen years at FMC Corporation where he worked in various managerial capacities
in the Chemical Products, Phosphorus Chemicals and Corporate Development groups. From 1977 to 1980, Mr. Gress worked at Ford
Motor Company in various capacities within the Plastics, Paint and Vinyl Division. Mr. Gress earned a B.S.E. in Chemical
Engineering from Princeton University and an M.B.A. from Harvard Business School.
Neil Salmon is Vice President and Chief Financial Officer of Innophos. Mr. Salmon joined Innophos in October 2009.
Previously he spent around 20 years with Imperial Chemical Industries PLC (ICI), holding a succession of divisional and corporate
finance roles across various specialty chemicals businesses in Africa, US, UK and Asia Pacific. Most recently he was CFO of the
Adhesives Business Group, a $2 billion division, operating globally. From 2004-2007 he was CFO of the Asia Pacific division of
National Starch and Chemical, an ICI subsidiary. Mr. Salmon is a Chartered Management Accountant and earned an M.A. (Hons) in
Politics, Philosophy and Economics from Oxford University.
9
William Farran is Vice President, General Counsel and Corporate Secretary of Innophos. Prior to joining Innophos, Mr. Farran
was Assistant General Counsel of Rhodia, Inc., providing and managing a wide range of legal services to various Rhodia North
American enterprises. Prior to joining Rhodia in 1987, Mr. Farran was Senior Counsel for UGI Corporation, Valley Forge, PA, and an
associate with Morgan, Lewis & Bockius, Philadelphia, PA. Mr. Farran earned his B.S. in Economics from the Wharton School,
University of Pennsylvania and his J.D. from Case Western Reserve University. He is a member of the bars of the Supreme Court of
Pennsylvania and the Supreme Court of the United States.
Charles Brodheim is Corporate Controller of Innophos. Mr. Brodheim joined Rhodia in 1988 and held various tax, accounting
and business analyst positions within Rhodia. Mr. Brodheim was the North American Finance Director for Specialty Phosphates from
2000-2002. After 2002, Mr. Brodheim was a Finance Director for various Rhodia North American Enterprises, including its Eco-
Services enterprise. Mr. Brodheim earned a B.B.A. degree in Finance/Accounting from Temple University and is a certified public
accountant.
Louis Calvarin is Vice President—Operations of Innophos. Dr. Calvarin joined Rhodia in France in 1986. He has been Director
of Manufacturing and Engineering for Specialty Phosphates since January 2004. Prior to that, Dr. Calvarin held the positions of
Director of Manufacturing for Specialty Phosphates (U.S.), Mineral Chemicals Industrial Operations Manager for Home, Personal
Care and Industrial Ingredients, and Projects Director for Paint, Paper and Construction Materials. Dr. Calvarin earned a Ph.D. degree
in Chemical Engineering from the Ecole Nationale Superieure des Mines in France and graduated from Ecole Polytechnique in
France.
Mark Feuerbach was appointed Vice President—Treasury, Financial Planning & Analysis of Innophos in April, 2005 and had
previously served as Chief Financial Officer of Innophos from August 2004 through April 2005 and again served as Chief Financial
Officer from June through September 2009. Mr. Feuerbach joined Rhodia in 1989 and was Global Finance Director of Specialty
Phosphates from 2000 to 2004, including a two-year assignment in the U.K. immediately following the purchase of the phosphates
business of Albright & Wilson. Prior to this assignment, Mr. Feuerbach was the Finance Director of Rhodia’s North American
phosphates business from 1997 to 2000 and he previously held various finance positions in a number of Rhodia’s businesses. Prior to
joining Rhodia, Mr. Feuerbach held various accounting and finance positions in both manufacturing and service companies.
Mr. Feuerbach earned a B.A. in Business Administration/Accounting from Rutgers College and an M.B.A. in Finance/Information
Systems from Rutgers Graduate School of Management.
Joseph Golowski is Vice President—Sales & Distribution of Innophos. Joining Rhodia in 1989 as Market Development
Specialist, Mr. Golowski has since then held progressive roles in business development, sales, marketing and management. From 1997
through 2000, Mr. Golowski served as a Global Market Director for Rhodia based in Paris, France. Returning to the U.S., he became
the North American Asset Manager for Phosphoric Acid and subsequently the Director of Sales for the Specialty Phosphate Business.
Mr. Golowski has earned a B.S. in Ceramic Engineering from Rutgers University, College of Engineering.
Wilma Harris is Vice President—Human Resources of Innophos. Ms. Harris joined Rhodia in 1986 as Human Resource
Manager for the Agricultural Products business located in Research Triangle Park, NC. Since that time she has held various positions
in corporate, shared services and business human resources and information technology. From January 2003 until August 2005, she
was the Human Resources Director for the Specialty Phosphates and Performance Phosphates and Derivatives businesses. Prior to
joining Rhodia, Ms. Harris worked for Union Carbide Corporation in several labor relations and research and development positions.
She holds a B.S. degree from West Virginia University, a M.P.A. degree from Marshall University and Masters Degrees in
Theological Studies and Divinity from New Brunswick, NJ Theological Seminary.
Russell Kemp is Vice President—Research & Development of Innophos. Mr. Kemp joined Rhodia in 1989, first holding several
manufacturing management jobs and – from 1998 through 2007 – fulfilling a business management role. Previously, he worked as a
process and production engineer at Monsanto Company. Mr. Kemp earned a BS in Chemical Engineering from the Colorado School
of Mines and an MBA from Southern Illinois University – Edwardsville.
Michael Lovrich is Vice President—Supply Chain of Innophos. Mr. Lovrich joined Innophos in August, 2007 from Coach, Inc.,
where he served as Vice President, Supply Chain from 2004 through 2007 for that specialty leather and women’s accessories
manufacturer. Prior to his tenure with Coach, Mr. Lovrich was with Engelhard Corporation where he held various positions in Supply
Chain Operations and Information Technology focusing on leading several supply chain transformation initiatives. Prior to Engelhard,
Mr. Lovrich held positions with Fisher Scientific, Thompson Medical and Becton-Dickinson. Mr. Lovrich earned his B.A. in History
from William Paterson College and his MBA from New York University Stern School of Business.
Abraham Shabot is Vice President and Director General—Innophos Latin America. Mr. Shabot joined Innophos in July 2009.
Prior to joining Innophos, he served as Managing Director of Kaltex Fibers, a leading acrylic fiber producer in the Americas, from
2007 to 2009. Before that, he held various positions in Sales and Business Development for Comex, a large Mexican building supplies
manufacturer and distributor. In addition, he was Latin American Director for Polyone Corporation, a large publicly held manufacturer
and distributor of plastic resin and rubber compounds. He earned a degree in Chemical Engineering from Iberoamericana University
in Mexico City.
10
Mark Thurston is Vice President—Corporate Strategy and Worldwide Business Development. Prior to his appointment to his
current role in 2009, Mr. Thurston served as Vice President—Specialties of Innophos from 2004 through 2008. Mr. Thurston joined
Rhodia in 1985 working in Fine Organics and has been Business Director of Specialties since February 2004. Previously,
Mr. Thurston was a Vice President and General Manager of Food Ingredients North America from 2002 to 2004 and, prior to that,
worked in various sales and marketing capacities for Rhodia. Mr. Thurston previously worked at RTZ Corp. as an assistant planning
and marketing manager and an assistant production manager. Mr. Thurston earned a B.S. in Chemical Engineering from the
University of Aston in Birmingham, England.
Timothy Treinen is Vice President—Phosphates Business of Innophos. Mr. Treinen joined Rhodia in 2000 as the Global Asset
Director, Acid and had been a Business Director of Performance Chemicals since February 2004. Prior to joining Rhodia, Mr. Treinen
spent thirteen years at Albright & Wilson where he worked as a Vice President and General Manager of Industrial Chemicals from
1994 to 2000. Previously, Mr. Treinen worked at Tenneco Inc. in the finance department in various capacities including strategic
planning, plant controller and accounting manager. Mr. Treinen earned a B.B.A. in Accounting from the University of Iowa.
Available Information
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including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the
SEC at http://www.sec.gov. The Company files annual reports, quarterly reports, proxy statements and other documents with the
Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and
copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-
800-SEC-0330.
Innophos also makes available free of charge through its website (www.innophos.com) the Company’s Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or
furnished pursuant to the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or
furnishes it to, the SEC.
ITEM 1A. RISK FACTORS
Investing in our company involves a high degree of risk of varying origins, including from our operations and financial matters.
If any of the following risks or uncertainties actually occurs, our business, prospects, financial condition and results of operations
could be materially and adversely affected.
Risks Related to Our Business Operations
Raw Materials Availability and Pricing
Our principal raw materials consist of phosphate rock, sulfur and sulfuric acid, MGA, PPA and energy (principally natural gas
and electricity). Our raw materials are generally purchased under long-term supply contracts typically priced according to
predetermined formulae dependent on price indices or market prices. The prices we pay under these contracts generally may lag the
market prices of the underlying raw material. In periods of increasing market prices, these long-term supply contracts tend to be
favorable to the Company, possibly by material amounts. Conversely, in periods of decreasing market prices, these long-term supply
contracts tend to be unfavorable to the Company, possibly by material amounts. We do not typically engage in futures or other
derivatives contracts to hedge against fluctuations in future prices. These effects may also be amplified in the case of supply contracts
that have multiple-year durations. The Company may enter into sales contracts where the selling prices for our products (or some of
the components within a specific pricing formula) are fixed for a period of one year, exposing us to volatility in raw materials prices
that we acquire on a spot market basis.
Various market conditions can affect the price and supply of our raw materials. Because phosphate rock is also used globally for
fertilizer production, the cost of that material is heavily influenced by demand conditions in the fertilizer market and freight costs,
which traditionally have been volatile, and both of which escalated rapidly during 2007 and 2008, although they have declined since
the fourth quarter of 2008 and throughout 2009. We obtain substantially all our phosphate rock for our Coatzacoalcos, Mexico facility
from OCP, a state-owned mining company in Morocco under a 1992 supply agreement set to expire September 10, 2010, with an
option to take delivery of a portion of the committed volume through December 2010. Our supply of that material could be affected by
capacity constraints, political unrest, or weather conditions in the areas where our supplier operates or a failure to reach new supply
agreements. Innophos has also been exploring various alternatives for phosphate rock and MGA, supplies around the world to reduce
our dependence on a single supplier for phosphate rock. Through plant trials at production scale and in our pilot plant, we have made
significant progress in confirming our ability to use multiple sources of rock and MGA. At the present time, we do not have
committed volume beyond the expiry of our OCP contract; however, we are in active discussions with several suppliers.
11
New supply arrangements may be on long-term contracts with historical market index pricing similar to OCP or be based on
more current market prices. We cannot guarantee that all our production needs in Mexico (at least when measured at historic levels)
could be met from alternative rock sources or downstream intermediate products, such as MGA or, that we could do so without
significant purchases at spot market prices. We also cannot guarantee that there will be no material financial impact in the form of
higher supply cost from procuring alternative rock and MGA supplies. Alternative grades of rock or MGA could reduce the operating
efficiency of the plant and the complexity of handling multiple sources could affect supply chain costs. Nevertheless, based on
conditions known thus far, management believes that there are several alternative phosphate rock sources available to us which should
meet our current production needs in Mexico.
Natural gas prices have experienced significant volatility in the past several years. Wide fluctuations in natural gas prices may
result from relatively minor changes in the supply and demand, market uncertainty, and other factors, both domestic and foreign, that
are beyond our control. In addition, natural gas is often a substitute for petroleum-based energy supplies and natural gas prices are
positively correlated with petroleum prices. Future increases in the price of petroleum (resulting from increased demand, political
instability or other factors) may result in significant additional increases in the price of natural gas. We typically purchase natural gas
at spot market prices for use at our facilities which exposes us to that price volatility, except in those instances where, from time to
time, we enter into longer term, fixed-price natural gas contracts.
Most of our raw materials are supplied to us by either one or a small number of suppliers. Some of those suppliers rely, in turn,
on sole or limited sources of supply for raw materials included in their products. Failure of our suppliers to maintain sufficient
capability to meet changes in demand or to overcome unanticipated interruptions in their own sources of supply from force majeure
conditions, such as disaster or political unrest, may prevent them from continuing to supply raw materials as we require them, or at all.
Our inability to obtain sufficient quantities of sole or limited source raw materials or to develop alternative sources on a timely basis if
required could result in increased costs, which may be material, in our operations or our inability to properly maintain our existing
level of operations.
Environmental, Product Regulations and Sustainability Initiative Concerns
Our operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials and some of
our products are ingredients in foods, nutritional supplements or pharmaceutical excipients that are used in finished products
consumed or used by humans or animals. As a result, we are subject to extensive and frequently changing environmental and other
regulatory requirements and periodic inspection by federal, state, and local authorities, including the U.S. Environmental Protection
Agency, or EPA, the FDA, and the USDA, as well as other regulatory authorities and those with jurisdiction over our foreign
operations. Our operations also expose us to the risk of claims for environmental remediation and restoration or for exposure to
hazardous materials. Our production facilities require various operating permits that are subject to renewal or modification. Violations
of environmental laws, regulations, or permits may result in restrictions being imposed on operating activities, substantial fines,
penalties, damages, the rescission of operating permits, third-party claims for property damage or personal injury, or other costs.
Maintaining compliance with health and safety and environmental laws and regulations has resulted in ongoing costs for us.
Currently, we are involved in several compliance and remediation efforts and agency inspections concerning health, safety and
environmental matters.
EPA has indicated that compliance at facilities in the phosphate industry is a high enforcement priority. After several years of
expressing various concerns (without issuing any notice of violation) about aspects of our Geismar, LA operations, in March 2008, we
received notice from the Department of Justice, or DOJ, indicating that EPA had referred the case for civil enforcement, contending,
among other things, that we do not qualify for certain exemptions we have claimed, and alleging that we violate the Resource
Conservation and Recovery Act, or RCRA at Geismar by failing to manage two materials appropriately. Although the communication
stated that EPA/DOJ intended to seek unspecified penalties and corrective action, it proposed discussions to explore possible
resolution, which we undertook and are pursuing. In late 2008, the DOJ/EPA demanded that Innophos and its neighboring
interconnected supplier, PCS, undertake certain “interim measures” to address DOJ/EPA’s chief environmental concerns. We and PCS
have initiated joint technical efforts to explore solutions to the government concerns. Based on our contact with the agencies to date in
2009, we have determined it is probable that one of the process modifications will need to be undertaken in the next several months,
and likewise probable that the capital expenditure and future operating expense of that modification will not be material, unless the
DOJ adds terms and conditions that could result in the parties not reaching agreement. However, the second measure sought by
DOJ/EPA has not yet been fully evaluated from a technological or cost standpoint. The companies have proposed to DOJ/EPA a
schedule for such evaluation, and although the government has not formally approved the schedule, the companies are proceeding as
proposed. Based upon work so far, there appears to be at least one technically viable approach, but costs of a full scale operation as
compared to other approaches are not known at this time. Even though the companies have begun substantial technical work in an
attempt to develop a feasible approach to address DOJ/EPA’s concerns, we cannot guarantee that our technical efforts will be
successful, whether either party would be willing to implement solutions or, depending on those factors and the agencies’ position,
whether this matter will be settled with DOJ/EPA or will require litigation. Should litigation become necessary to defend our
operations at Geismar as compliant with environmental laws and regulations, no assurance can be given as to its outcome.
12
Since similar action has been taken by EPA/DOJ with regard to PCS’s interconnected plant at Geismar from which we obtain
acid raw material, it is possible that, in the event of further enforcement, PCS’s operations could be interrupted for an extended time.
The impact of any such occurrence would likely be material to our operations, as our Geismar facility may not be able to operate
economically under current market conditions without raw materials from that supplier’s plant. Depending upon the facts and
circumstances of, and developments arising from, any non-compliance, our long-term raw material supply contract with PCS at
Geismar also may be adversely affected. That contract provides important protections that should safeguard Innophos from adverse
financial or operating consequences either through continued operations at Geismar or alternative supplies from PCS. Nevertheless,
we cannot guarantee that the contract provides full protection against losses we may suffer, or that our operating costs would not
increase by a material amount, as a result of the provision.
Some existing environmental laws and regulations impose liability and responsibility on present and former owners, operators
or users of facilities and sites for contamination at those locations without regard to causation or knowledge of contamination. Many
of our sites have an extended history of industrial use. Soil and groundwater contamination have been detected at some of our sites,
and additional contamination might occur or be discovered at these sites or other sites (including sites to which we may have sent
hazardous waste) in the future. We continue to investigate, monitor or clean-up contamination at most of these sites. Due to the
uncertainties associated with environmental investigations and clean-ups and the ongoing nature of the investigations and clean-ups at
our sites, we cannot predict precisely the nature, cost, and timing of our future remedial obligations with respect to our sites.
Additional laws or regulations focused on phosphate-based products may be implemented in the future. For example, a number
of states within the U.S. and the Canadian provinces have moved or are moving to effectively ban the use of phosphate-based products
in consumer automatic dishwashing detergents. The trade association that includes major manufacturers of consumer automatic
dishwashing detergents has actively supported these efforts in the U.S. and Canada, increasing the likelihood they will become
widespread as most of the non-phosphate legislation becomes effective in July 2010. This trend and related changes in consumer
preferences has already reduced our requirements for auto dish markets and we have responded with a shift in our capabilities to serve
other food and industrial applications. We can not predict the impact and the corresponding responses made by our competitors.
Furthermore, although already banned in consumer laundry detergents in many U.S. States, phosphates are still permitted for those
applications in many Latin American regions and other parts of the world. We cannot be sure that such a ban for use in consumer
laundry detergents may not be implemented in some or all of these markets in the future, or that the same effect may not result from
manufacturers reformulating to reduce phosphate levels. Additional laws, regulations or distribution policies focused on reduced use
of other phosphate-based products could occur in the future. For example, a global retailer, as part of a corporate sustainability
initiative, issued a statement indicating its intent to reduce phosphates in laundry and dish detergents by 70% in its Latin American
and Canadian stores. Also, some jurisdictions have threatened to further regulate or ban the use of polyphosphoric acid and
orthophosphoric acid in asphalt road construction. During 2008, such restrictions were implemented in New York State, but reversed
in Nebraska and in 2009 restrictions were reversed in Wyoming and relaxed in Colorado. In 2009, Colorado allowed the use of
polyphosphoric acid in asphalt road construction on an exception basis. Such a ban, if instituted in multiple jurisdictions or throughout
the U.S. and Canada, could have a significant impact on our business.
Increased Costs and Pricing May Accelerate Substitution of Competing Products
Prices for raw materials necessary to manufacture our products, particularly phosphate rock and sulfur, rose dramatically from
mid-2007 through most of 2008, although falling demand and prices for some raw materials, particularly sulfur, were seen in 2009.
Although we have generally been successful in recovering costs and enhancing margins through price increases on prior occasions,
there can be no assurance we will be able to do so in the future. See Item 7, Management’s Discussion and Analysis of Results of
Operations and Financial Condition “Recent Trends and Outlook”.
As the costs and prices of our products correspondingly rise, certain of those products, particularly those directed at end use
markets such as the detergent and oral care markets (where their portion of the end product cost is often larger), face an increasing
threat of substitution from cost factors alone. Under circumstances where the costs of known and acceptable substitute non-phosphate
chemistries become economically viable for a significant portion of our end use markets, our customers may decide to utilize the
substitute chemistries to control their costs. If higher costs and prices result in such substitutions for major products and markets and
we are not able to shift our manufacturing capabilities to alternate products we can sell profitably, we could face a loss of volumes,
revenues and/or profits from this kind of cost-driven substitution. Although we cannot estimate the pricing levels at which cost
substitution will affect us (since it depends on variables such as the duration of price escalations, the availability and costs of our
products relative to the substitutes, and future marketing and pricing decisions made by our customers), we believe, based on our
understanding of where substitutions become feasible, at least 30% of our current end use markets could be exposed to some level of
potential cost substitution. We cannot be sure that actions we take to reduce the effects of cost driven substitution will be effective, nor
that those effects ultimately will not be material to our results of operations or financial position.
13
Competitive Factors
We face significant competition in each of our markets. In the specialty chemicals industry, competition is based upon a number
of considerations, including product differentiation and innovation, product quality, technical service, and supply reliability. In
addition, in some markets, our products are subject to price competition due to factors such as competition from low-cost producers,
import competition, excess industry capacity and consolidation among our customers and competitors. New products or technologies
developed by competitors may also have an adverse impact on our competitive position. Future expansions could have a negative
impact on our competitive position.
Innophos’ Mexican production is sold across Latin America where, from time to time, it faces strong competition from Chinese
materials produced by the thermal method, a process more heavily dependent on energy which may be cost advantaged during periods
of low energy costs. The collapse in energy prices, when combined with depressed domestic markets and relaxed export controls in
China, has resulted in a shift in Chinese specialty phosphate products into American markets, and has put heavy pressure on our
Mexican operations. In the event that prices for Chinese products remain low for an extended time and it is possible that our Mexican
operations could be unable to compete effectively with Chinese phosphate products and thus become uneconomic.
From time to time, we have experienced pricing pressure, particularly from significant customers and often coincident with
periods of overcapacity in the markets in which we compete. The pricing environment for 2009, in line with worldwide economic
slowdown, substitutions and increased import presence, took that character. In the past, we have taken steps to reduce costs and resist
possible price reductions by structuring our contracts and developing strong “value-oriented” non-price related customer service
relationships. However, price reductions in the past have adversely affected our sales and margins, and if we are not able to offset
price pressure when it arises through improved operating efficiencies, reduced expenditures and other means, we may be subject to
those same effects in the future.
Supplier Contract Concentration
Our business activities depend on long-term or renewable contracts to supply materials or products. In particular, we rely to a
significant degree on single-source supply contracts and some of these contractual relationships may be with a relatively limited
number of suppliers. Although most of our supplier relationships are typically the result of multiple contractual arrangements of
varying terms, in any given year, one or more of these contracts may come up for renewal. In addition, from time to time, we enter
into toll manufacturing agreements or other arrangements to produce minimum quantities of product for a certain duration. If we
experience delays in delivering contracted production, we may be subject to contractual liabilities to the buyers to whom we have
promised the products.
Changing Technologies
Our future results will depend on our ability to continue to introduce new products and applications that offer distinct value for
our customers. Many of our products could be affected by technological change and new product introductions and enhancements. For
example: technical grade STPP (used as a builder in automatic dishwasher detergents) may be substituted by a new builder; Specialty
Acids products, such as Polyphosphoric Acid (used in asphalt modification applications), may be substituted by polymers; or
Specialty Salts products, such as Calcium Phosphates (used in Calcium fortification), may be substituted by other sources of Calcium
such as Calcium Carbonate. We expect to continue to enhance our existing products, to identify, develop, and manufacture new
products with improved capabilities, and to make improvements in our productivity in order to maintain our competitive position. We
also intend to devote resources to the development of new technologically advanced products and systems and to continue to devote a
substantial amount of expenditures to the research and development functions of our business. However, we cannot be sure that we
will be successful in achieving our goals in those regards.
Reliance on Rhodia
We depend on Rhodia’s ability to perform its obligations under our 2004 acquisition agreements, primarily to indemnify us (or
provide security) against potential liabilities whether asserted or yet to be asserted. Rhodia has experienced financial difficulties in
recent years and suffered from margin pressure during the global recession. In its most recent filing, Rhodia reported significantly
reduced debt and improving margins; however, there is no assurance that Rhodia will be able to fund its obligations to us when, as and
if required. In February 2008, New York State’s highest court affirmed a declaratory judgment we won in the lower courts holding
Rhodia liable for taxes asserted by the Mexican National Waters Commission, or CNA, for fresh water extraction, or Fresh Water
Claims, at our Coatzacoalcos, Mexico facility dating back to the period 1998-2002, but subsequently the 1998 claim was determined
to be beyond the applicable statute of limitations. As now assessed, the claims through 2002 total approximately $23.6 million at
current exchange rates as of February 18, 2010, including basic charges of $7.1 million and $16.5 million for interest, inflation and
penalties. If the legal proceedings in Mexico under which the CNA taxes are being contested are not successful and Rhodia cannot
perform under the judgment, we may have to pay CNA taxes from our own resources.
14
We also depend on Rhodia’s ability to fulfill its responsibilities under certain operating arrangements, including the sulfuric acid
supply agreement providing feedstock to the interconnected PCS facility supplying MGA at our Geismar, LA plant. Adverse financial
developments affecting Rhodia’s continued performance under its supply agreement with Innophos could require us to provide
replacement sulfuric acid, if available, at significantly higher market prices than provided in the contract with Rhodia.
International Operations
We have significant production operations in Mexico and Canada and believe that revenue from sales outside the U.S. will
continue to account for a material portion of our total revenue for the foreseeable future. There are inherent risks in international
operations, including currency fluctuations and devaluations, economic and business conditions that differ from US cycles, unsettled
political conditions and communication and translation errors due to language barriers. Among those additional risks potentially
affecting our Mexican operations are changes in local economic conditions, currency devaluations, disruption from political unrest and
difficulty in enforcing agreements due to differences in the Mexican legal and regulatory regimes compared to those of the U.S. Risks
that our Canadian operations may be subject to include changes in laws or regulations differing from trends in the U.S. and currency
fluctuations and devaluations.
Our overall success as a multinational business depends, in part, upon our ability to succeed in differing economic, social and
political conditions. Among other things, we are faced with potential difficulties in staffing and managing local operations, and we
have to design local solutions to manage credit risks posed by local customers and distributors. We may not continue to succeed in
developing and implementing policies and strategies that are effective in each location where we do business. These risks are not
limited to just those countries in which we operate facilities. For example, our Mexican operations and indirectly our Geismar
operations, (where we recently exercised an option extending to July 2021 our long-term purchase agreement for MGA converted
from phosphate rock), are supplied with phosphate rock from Morocco, including territories under disputed Moroccan sovereignty
claims, and both could be subject to the risk of adverse affects that may arise from local political unrest.
As a U.S. corporation, we are subject to the regulations imposed by the Foreign Corrupt Practices Act, or FCPA, which
generally prohibit U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of
obtaining or keeping business. We sell many of our products in developing countries through sales agents and distributors that are not
subject to our disciplinary procedures. While we and our subsidiaries are committed to conducting business in a legal and ethical
manner and we communicate our policies to all who do business with us, we cannot be sure that all our third party distributors or
agents remain in full compliance with the FCPA at all times.
Product Liability Exposure
Many of our products are additives used in the food and beverage, consumer product, nutritional supplement and pharmaceutical
industries. The sale of these additives and our customers’ products that include them involve the risk of product liability and personal
injury claims, which may be brought by our customers or end-users of products. While we adhere to stringent quality standards, in the
course of their production, storage and transportation, our products could be subject to adverse effects from foreign matter such as
moisture, dust, odors, insects, mold, or other substances (organic or inorganic), or from excessive temperature. Historically, we have
not been subject to material product liability claims, and none are currently outstanding. However, because our products are used in
manufacturing a wide variety of our customers’ products, including those ingested by people, we cannot be sure we will not be subject
to material product liability or recall claims in the future.
Production Facility Operating Hazards
Our production facilities are subject to hazards associated with the manufacturing, handling, storage, and transportation of
chemical materials and products, including failure of pipeline integrity, explosions, fires, inclement weather and natural disasters,
terrorist attacks, mechanical failures, unscheduled downtime, transportation interruptions, remedial complications, chemical spills,
discharges or releases of toxic or hazardous substances, storage tank leaks and other environmental risks. We have implemented and
installed various management systems and engineering controls and procedures at all our production facilities to minimize these risks.
We also insure our facilities to protect against a range of risks. However, these potential hazards do exist and could cause personal
injury and loss of life, severe damage to or destruction of property and equipment, and environmental and natural resource damage,
and may result in a suspension of operations (or extended shutdowns) and the imposition of civil or criminal penalties, whose nature,
timing, severity and non-insured exposures are unknown.
Intellectual Property Rights
We rely on a combination of contractual provisions, confidentiality procedures and agreements, and patent, trademark,
copyright, unfair competition, trade secrecy, and other intellectual property laws to protect our intellectual property and other
proprietary rights. Nonetheless, we cannot be sure that any pending patent application or trademark application will result in an issued
patent or registered trademark, or that any issued or registered patents or trademarks will not be challenged, invalidated, circumvented
or rendered unenforceable. The use of our intellectual property by others could reduce any competitive advantage we have developed
or otherwise harm our business. Moreover, we cannot be sure that our property rights can be asserted in all cases or that we can defend
ourselves successfully or cost-effectively against the assertion of rights by others.
15
Contingency Planning
We operate a number of manufacturing facilities in the US, Canada and Mexico, and we coordinate company activities,
including our sales, customer service, information technology systems and administrative services and the like, through headquarters
operated in those countries. In 2009, the Company launched an enterprise resource planning, or ERP, system and business process
redesign project to upgrade its information technology systems including updated contingency plans. We cannot be sure that our plans,
intentions or expectations of the business process redesign and information technology systems upgrade will be achieved and we may
experience business disruptions as a result of our business process and information technology systems conversions.
Our sites and those of others who provide services to them are subject to varying risks of disaster and follow on consequences,
both manmade and natural, that could degrade or render inoperable one or more of our facilities for an extended period of time. Such
disaster related risks and effects are not predictable with certainty and, although they can be mitigated, they cannot be avoided. We
seek to mitigate our exposures to physical disaster events in a number of ways. For example, where feasible, we design and engineer
the configuration of our plants to reduce the consequences of disasters. We also maintain insurance for our facilities against casualties,
including extended business interruption, and we continually evaluate our risks and develop contingency plans for dealing with them.
Although we have reviewed and analyzed a broad range of risks applicable to our business, the ones that actually affect us may not be
those we have concluded most likely to occur. Furthermore, although our reviews have led to more systematic contingency planning,
our plans are in varying stages of development and execution, such that they may not be adequate at the time of occurrence for the
magnitude of any particular disaster event that befalls us.
Risks Relating to Our Indebtedness
Leverage Issues
Our assets were acquired in 2004 in a transaction with a high proportion of debt. After our initial public offering of equity in
2006, we remained what could be characterized as a highly leveraged company through 2007. However, by December 31, 2009, our
total indebtedness had been reduced to $246.0 million and our stockholders’ equity had grown to $295.4 million, respectively,
reflecting a significant de-leveraging in accordance with our business policy. Nevertheless, to the extent we are not prohibited by our
debt instruments in effect from time to time from incurring additional debt or obligations that do not constitute “indebtedness,” doing
so could intensify the risks to our financial condition resulting from a renewed condition of higher leverage. Those risks may include,
for example, difficulty satisfying our ongoing obligations directly related to our debt (including complying with restrictive financial
covenants), increasing our vulnerability to general adverse economic and industry conditions, requiring us to dedicate a substantial
portion of cash flow from operations to payments on our indebtedness (thereby reducing the availability of our cash flow to fund
working capital), limiting our flexibility in planning for, or reacting to, changes in our business (thereby placing us at a competitive
disadvantage compared to our competitors with less debt), and limiting our ability to borrow additional funds, refinance existing debt
or make discretionary use of funds such as the payment of dividends on our stock.
Risks Related to Our Equity Ownership Structure
Contingencies Affecting Dividends
Following our 2006 public offering, our Board of Directors initiated a policy of paying regular quarterly cash dividends on our
Common Stock, subject to the availability of funds, legal and contractual restrictions and prudent needs of our business. However, we
are a holding company that does not conduct any business operations of our own. As a result, we are normally dependent upon cash
dividends, distributions and other transfers from our subsidiaries, most directly Innophos, Inc., our primary operating subsidiary, and
Innophos Investments Holdings, Inc., its parent, to make dividend payments on our Common Stock. The amounts available to us to
pay cash dividends are restricted by covenants in debt agreements governing our subsidiaries and by provisions of Delaware law. As
allowed by existing debt instruments, we may incur additional indebtedness that may restrict to an even greater degree, or prohibit, the
payment of dividends on stock. We cannot be sure that agreements governing our current or future indebtedness will permit us to
adhere to our current dividend policy, or pay any dividends at all, or that continued payment of dividends will remain prudent for our
business in the future judgment of our Board of Directors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
16
ITEM 2.
PROPERTIES
Our headquarters are located in Cranbury, New Jersey, with manufacturing facilities strategically located throughout the United
States, Canada, and Mexico. We operate seven facilities which manufacture our three main product lines: Specialty Salts and
Specialty Acids, Purified Phosphoric Acid, and STPP & Other Products. Our largest manufacturing facility is located in
Coatzacoalcos, Mexico. We operate four medium-size plants in Chicago Heights, Illinois, Nashville, Tennessee, Port Maitland,
Canada (Ontario), and Geismar, Louisiana, which collectively produce our major products. We produce additional specialty salts in
two plants located in Chicago, Illinois (Waterway), and Mission Hills, Mexico. All the facilities listed above are owned with the
exception of Mission Hills, Mexico, where the land is leased long-term. We also lease facilities at Cranbury, New Jersey, Mexico
City, Mexico, and Mississauga, Canada (Ontario) which house our executive, commercial, administrative, product engineering and
research and development employees, with the Cranbury, New Jersey facility serving as our world headquarters. We also own a
distribution facility in Chicago which we use to service our customer base. We do not own and are not responsible for any closed U.S.
or Canadian elemental phosphorus or phosphate production sites, as these were not part of the assets or liabilities acquired from
Rhodia.
ITEM 3.
LEGAL PROCEEDINGS
The information set forth in Note 16 to our consolidated financial statements, “Commitments and Contingencies,” contained in
this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Certain Market Data
Our Common Stock has been listed and traded since November 2006 on the NASDAQ Stock Market under the symbol “IPHS.”
Stock price comparisons:
Quarter
First
Second
Third
Fourth
2009
Low
$ 7.80
11.23
16.10
18.60
High
$19.81
19.44
21.10
25.78
Dividends
Paid
Per Share
$ 0.17
0.17
0.17
0.17
High
$ 16.09
35.23
40.98
26.75
2008
Low
$ 10.85
16.01
22.65
12.19
Dividends
Paid
Per Share
$ 0.17
0.17
0.17
0.17
The Company paid a dividend of $0.17 per share in the first quarter of 2010.
The number of holders of record of our Common Stock at February 5, 2010 was 12,417.
Dividends
Consistent with the determination of our Board of Directors made in December 2006, we continued to declare and pay quarterly
dividends of $0.17 per share of Common Stock in 2009. Subject to action by the Board of Directors on a quarterly basis,
management’s present policy is to recommend such dividends be continued, reflecting its judgment at the present time that
stockholders are better served if we distribute to them, as quarterly dividends payable at the discretion of the Board, a portion of the
cash generated by our business in excess of our expected cash needs rather than retaining or using the cash for other purposes. Our
expected cash needs include operating expenses and working capital requirements, interest and principal payments on our
indebtedness, capital expenditures, costs associated with being a public company, taxes and other costs. If our financial needs change,
management’s recommendations concerning dividends may also change.
We are not required to pay dividends, and our stockholders will not be guaranteed, or have contractual or other rights, to receive
dividends. Our Board of Directors may decide, in its discretion at any time, to decrease the amount of dividends, otherwise modify or
repeal the dividend policy or discontinue entirely the payment of dividends.
17
In addition to prudent business considerations, our ability to pay dividends is restricted by the laws of Delaware, our state of
incorporation, and may be restricted by agreements governing debt.
Since we are a holding company, substantially all assets shown on our consolidated balance sheet are held by our subsidiaries.
Accordingly, our earnings and cash flow and our ability to pay dividends are largely dependent upon the earnings and cash flows of
our subsidiaries and the distribution or other payment of such earnings to us in the form of dividends. Our ability to pay dividends on
our Common Stock is limited by restrictions in indebtedness of our subsidiaries affecting the ability to pay dividends. See Note 9 of
Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”.
Equity Compensation Plans
The following information is provided for our most recently completed fiscal year for certain plans providing compensation in
the form of equity securities.
Equity Compensation Plan Information
Plan category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted average exercise
price of outstanding
options, warrants and rights
(b) **
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
1,398,700
—
1,398,700
$
$
$
12.86
—
12.86
2,244,470*
—
2,244,470
*
**
Includes in the total 79,603 shares of Common Stock available for future grant and issuance under, our 2006 Long Term Equity
Incentive Plan. The remaining shares shown in column (c) are attributable to our 2009 Long Term Incentive Plan.
In column (b), the weighted average exercise price is only applicable to stock options and restricted stock.
Issuer Purchases of Equity Securities
The Company has not repurchased Common Stock since its initial public offering in November 2006.
18
ITEM 6.
SELECTED FINANCIAL DATA
The following table presents selected historical consolidated statements of operations, balance sheet and other data for the
periods presented and should only be read in conjunction with our audited consolidated financial statements and the related notes
thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included
elsewhere in this Form 10-K.
Net income (loss)
$
63,144
$
207,183
$
Statement of operations data:
Net sales
Cost of goods sold
Gross profit
Operating expenses:
Selling, general and
administrative
Research and development
Total operating expenses
Operating income
Interest expense, net
Foreign exchange (gains) losses, net
Other income, net
Income (loss) before income taxes
Provision for income taxes
Allocation of net income (loss) to
common shareholders:
Class A
Class L
Common
Per share data:
Income (loss) per share:
Basic
Class A
Class L
Common
Diluted
Class A
Class L
Common
Weighted average shares outstanding:
Basic
Class A
Class L
Common
Diluted
Class A
Class L
Common
* Not applicable
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Year Ended December 31,
2007
2009
2006
2008
2005
$
666,759
470,780
195,979
$
934,758
570,176
364,582
$
578,982
474,785
104,197
$
541,797
449,516
92,281
$ 535,499
443,254
92,245
67,151
1,938
69,089
126,890
23,313
(769)
—
104,346
41,202
63,417
2,310
65,727
298,855
34,193
2,663
(386)
262,385
55,202
*
*
63,141
*
*
2.97
*
*
2.87
$
$
$
*
*
207,150
*
*
9.89
*
*
9.54
$
$
$
$
$
$
54,441
2,047
56,488
47,709
41,559
40
(299)
6,409
11,896
(5,487)
*
*
(5,487)
*
*
(0.27)
*
*
(0.27)
59,598
1,734
61,332
30,949
58,242
(162)
(228)
(26,903)
5,914
48,685
2,240
50,925
41,320
46,628
177
(516)
(4,969)
6,724
$
(32,817)
$
(11,693)
$
$
$
$
$
$
$
$
$
(26,546)
1,605
(7,876)
(2.77)
0.60
(0.39)
(2.77)
0.60
(0.39)
$
$
$
$
$
$
(14,867)
3,174
*
(1.55)
1.19
*
(1.55)
1.19
*
*
*
21,258,536
*
*
20,956,566
*
*
21,968,904
*
*
21,718,537
*
*
20,676,859
*
*
20,676,859
9,595,061
2,677,648
20,270,463
9,597,696
2,678,383
*
9,595,061
2,677,648
20,270,463
9,597,696
2,678,383
*
19
Other data:
Cash flows provided from (used in):
Operating activities
Investing activities
Financing activities
Capital expenditures
Ratio of earnings to fixed charges (1)
(Dollars in thousands)
Year Ended December 31,
2007
2008
2009
2006
2005
$ 174,100
(19,609)
(147,368)
19,609
4.6x
$142,794
(18,536)
(14,591)
18,536
8.0x
$ 43,441
(30,476)
(29,064)
28,356
1.1x
$ 40,937
(15,577)
(55,003)
15,577
*
$ 46,058
(10,862)
13,445
10,862
*
* Due to the losses for 2006 and 2005 the coverage ratio was less than 1:1. Innophos would have had to generate additional earnings
of $26,903 for 2006 and $4,969 for 2005, respectively, to achieve a ratio of 1:1.
Balance sheet data:
Cash and cash equivalents
Accounts receivable
Inventories
Property, plant & equipment, net
Total assets
Total debt
Total stockholders’ equity
2009
2008
(Dollars in thousands)
Year Ended December 31,
2007
2006
2005
$132,451
56,345
113,636
204,527
662,468
246,000
$295,378
$125,328
79,541
145,310
230,422
728,204
382,500
$242,760
$ 15,661
60,079
78,728
260,563
542,699
384,500
$ 44,704
$ 31,760
56,316
70,569
277,222
565,320
399,800
$ 60,712
$ 61,403
55,842
76,281
305,016
646,189
528,795
$ 10,786
(1) For purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed
charges. Fixed charges consist of interest expense and one-third of operating rental expenses which management believes is
representative of the interest component of rent expense.
ITEM 7. 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.
Background
Innophos is a leading North American producer of specialty phosphates. Most specialty phosphates are highly customized,
application-specific compounds that are engineered to meet customer performance requirements. Specialty phosphates are often
critical to the taste, texture and performance of foods, beverages, pharmaceuticals, oral care products and other applications. For
example, specialty phosphates act as flavor enhancers in beverages, electrolytes in sports drinks, texture additives in cheeses,
leavening agents in baked goods, calcium and phosphorus sources for nutritional supplements, pharmaceutical excipients and cleaning
agents in toothpaste.
20
Below is a summary chart of the corporate structure of our subsidiaries.
2009 Overview
Our financial performance in 2009 was highlighted by:
•
Net sales of $666.8 million compared to a record $934.8 million for 2008, with lower volume and mix accounting for
most of the $268.0 million decline;
Operating income of $126.9 million compared to the peak of $298.9 million for 2008, with U.S. & Canada achieving a
profit improvement and Mexico down sharply, due to lower selling prices and volumes, with the business significantly
disadvantaged versus market price raw material costs in the period;
Net Interest expense improvement of $10.9 million as a result of $136.5 million of debt retirements in 2009;
Net income of $63.1 million or $2.87 per share (diluted);
Net cash from operations of $174.1 million with a net increase in cash of $7.1 million;
A 28% decrease in net working capital (current assets excluding cash minus current liabilities excluding current portion of
long-term debt) to $140.5 million at December 31, 2009;
Capital expenditures of $19.6 million;
Dividends of $.68 per share paid on the Common Stock.
•
•
•
•
•
•
•
Refer to the Company’s results of operations and liquidity for the year ended December 31, 2009 for further details.
21
Recent Trends and Outlook
Sales volume and mix accounted for 97% of the $268.0 million revenue decline for 2009 compared to 2008. Each segment
recorded a volume and mix decline in excess of 24% for 2009 compared to 2008, but those rates of decline were considerably reduced
in the fourth quarter 2009, with the U.S. recording a fourth quarter volume increase against the comparable 2008 period. Selling prices
for U.S. and Canada were both up more than 20% for the year while Mexico was down almost 29% for 2009 compared to 2008, but
each segment experienced lower prices in the fourth quarter 2009 compared to fourth quarter 2008. Pricing reached a peak during first
quarter 2009, began declining on a sequential basis in the second quarter, and continued to decline, though at a slowing sequential
rate, through the fourth quarter 2009. 2009 raw material costs were $24 million higher than 2008, as high market prices for some of
our raw materials in 2008 fed through into 2009 from lagged price adjustment conditions included in certain contracts. Mexico made
good progress in 2009 on delivering lower, restructured fixed costs, although legal fees relating to the rock supply contract arbitration
affected results.
Management currently expects first quarter 2010 volumes (excluding commodity fertilizer co-products, primarily GTSP) to
increase on a sequential basis by approximately 7%, driven by Mexico, and overall expects the business to deliver the first quarter of
year over year volume growth since 2007.
Selling prices (excluding GTSP) in the first quarter 2010 are expected to decline sequentially at no more than 6%. Beyond the
first quarter 2010, management believes the correction related to the fall in commodity prices in early 2009 will have run its course,
and that Innophos will have achieved an improvement in the margins of its U.S. and Canadian businesses over this cycle.
The Company expects a portion of its U.S. and Canada raw material cost structure to adjust down in the first quarter 2010
reflecting market conditions at the beginning of the year. However other raw materials, in particular sulfur and ammonia are expected
to increase in the quarter. Market prices for phosphate fertilizers and Chinese exports have also increased and while it is difficult to
predict the sustainability of these trends, Innophos is also expecting to increase prices during the 1st quarter. Specifically for GTSP,
higher prices should allow the business to make a small profit on co-product sales of this co-product versus a loss in 2009.
Under the terms of the addendum recently agreed to for the existing rock supply contract with OCP, Innophos Mexicana will
purchase rock from OCP during the first nine months of 2010, with an option to take delivery of a portion of the committed volume
through December 2010, at prices broadly in line with current market conditions and favorable to the significant disadvantage vs.
market raw material costs experienced in 2009. Management expects the Mexican business in 2010 to build on the significant progress
made in the fourth quarter 2009 in restoring its market position, and with the benefits of returning to a competitive sourcing position,
anticipates an operating income in the mid single digit millions for the first quarter 2010, and for the subsequent quarters of 2010, is
targeting significant progress in restoring pre 2008 levels of profitability.
Capital expenditures for 2010 are expected to be in the $30 to $35 million range. Major items of expenditure are anticipated to
include: completion of the Mexican food grade acid expansion; incremental improvements to existing Mexican food grade salts
capability; completion of our enterprise resource planning (ERP) system and business redesign project; additional debottlenecking and
expansion of food grade salts capability in Canada and various U.S. locations; and finally, investment to enhance Mexico’s capability
to store, handle and process multiple grades of rock consistent with the Company’s supply chain diversification strategy. Management
continues to make progress in executing its phosphate sourcing strategy, which will take effect with the end of the current rock
contract, and is actively negotiating with several suppliers for rock sourcing agreements beginning in September 2010.
22
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):
Net sales
Cost of goods sold
Gross profit
Operating expenses:
Selling, general and administrative
Research & development
Income from operations
Interest expense, net
Foreign exchange (gains) losses, net
Other income
Provision for income taxes
Net income (loss)
2009
Year Ended December 31,
2008
2007
Amount
$666.8
470.8
196.0
67.2
1.9
126.9
23.3
(0.8)
—
41.3
$ 63.1
%
100.0
70.6
29.4
10.1
0.3
19.0
3.5
(0.1)
—
6.2
9.5
Amount
$934.8
570.2
364.6
63.4
2.3
298.9
34.2
2.7
(0.4)
55.2
$207.2
%
100.0
61.0
39.0
6.8
0.2
32.0
3.7
0.3
(0.0)
5.9
22.2
Amount
$579.0
474.8
104.2
54.5
2.0
47.7
41.6
—
(0.3)
11.9
$ (5.5)
%
100.0
82.0
18.0
9.4
0.3
8.2
7.2
—
(0.1)
2.1
(0.9)
Year Ended December 31, 2009 compared to the Year Ended December 31, 2008
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 year ended December 31, 2009 were $666.8 million, a decrease of $268.0 million, or 28.7%,
as compared to $934.8 million for the same period in 2008. Selling price decreases had a negative impact on revenue of 0.9% or $8.4
million. Lower prices for GTSP fertilizer co-product sales, and to a lesser extent technical grade STPP and Purified Phosphoric Acid,
were mostly offset by increased prices in Specialty Salts & Specialty Acids. Volume and mix effects upon revenue had a negative
effect of 27.8% or $259.6 million which occurred across all product lines and reporting segments, but most significantly in Purified
Phosphoric Acid in Mexico, where Innophos’ largest customer reduced volumes due to a permanent shutdown of their largest STPP
plant in the first quarter of 2009.
The following table illustrates for the year ended December 31, 2009 the percentage changes in net sales by reportable segment
compared with the prior year, including the effect of price and volume/mix changes upon revenue:
United States
Mexico
Canada
Price
20.6%
(28.7)%
22.5%
Volume/Mix
Total
(4.7)%
(59.7)%
(1.6)%
(25.3)%
(31.0)%
(24.1)%
The following table illustrates for the year ended December 31, 2009 the percentage changes for net sales by major product lines
compared with the prior year, including the effect of price and volume/mix changes:
Purified Phosphoric Acid
Specialty Salts and Specialty Acids
STPP & Other Products
Gross Profit
Price
(2.5)%
19.4%
(38.2)%
Volume/Mix
Total
(51.8)%
(1.5)%
(56.1)%
(49.3)%
(20.9)%
(17.9)%
Gross profit represents net sales less cost of goods sold. Gross profit for the year ended December 31, 2009 was $196.0 million,
a decrease of $168.6 million, or 46.2%, as compared to $364.6 million for the same period in 2008. Gross margin decreased to 29.4%
for the year ended December 31, 2009 versus 39.0% for the same period in 2008. The change in gross profit was due to lower selling
prices, which had a negative impact of $8.4 million, unfavorable sales volume and mix impact upon revenue and higher raw material
costs which had a combined unfavorable impact of $158.1 million. As a result of reduced operating rates and higher raw material costs
for 2009, the company incurred $12.2 million of reduced fixed cost absorptions and unfavorable inventory related variances. In
addition, the company took a charge of approximately $7.0 million as a result of the settlement of the OCP arbitration matter and also
23
took a charge of $1.6 million for Mexican workforce reduction costs. These unfavorable effects were partially offset by $8.9 million
lower cash fixed costs and $7.2 million favorable exchange rate impacts, both primarily in Mexico. Included in 2008 results were $1.3
million expense for a scheduled Geismar, LA plant maintenance outage, and $1.3 million asset impairment charge for two obsolete
production units.
Operating Expenses and Research and Development
Operating expenses in 2009 consisted primarily of selling, general and administrative and research and development expenses.
Operating expenses for the year ended December 31, 2009 were $69.1 million, an increase of $3.4 million, or 5.2%, as compared to
$65.7 million for 2008. The change in operating expenses was due to an increase of $6.4 million for our ERP project, and $5.0 million
increased legal expenses related to our OCP arbitration, partially offset by $2.1 million lower legal and other fees which were incurred
in 2008 to comply with the DOJ STPP document request subpoena, $2.5 million lower professional fees used to support growth and
other corporate initiatives, net $1.7 million lower post-restructured expenses in Mexico, $1.6 million favorable exchange rate impact
from our Mexican peso based costs, and $0.1 million decrease in all other costs.
Operating Income
Operating income for the year ended December 31, 2009 was $126.9 million, a decrease of $172.0 million, or 57.5%, as
compared to $298.9 million for the same period in 2008. Operating income percentages decreased to 19.0% for 2009 from 32.0% for
2008.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the year ended December 31, 2009 was $23.3
million, a decrease of $10.9 million, or 31.9% as compared to $34.2 million for the same period in 2008. This decrease is primarily
due to a gain of $3.5 million on the retirement of $10.0 million of the 9.5% Senior Unsecured Notes due April 2012, lower average
interest rates and the lower average balance of our Term Loan resulting from the $126.5 million principal payments made in the first
half of 2009 to pay off the balance of the Term Loan.
Foreign Exchange
Foreign exchange gain for the year ended December 31, 2009 was $0.8 million as compared to a $2.7 million loss for 2008. The
U.S. Dollar is the functional currency of our Mexican and Canadian operations. Consequently, foreign exchange gain or loss is
recorded on re-measurement 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
Provision for income tax expense for the year ended December 31, 2009 was $41.3 million, a decrease of $13.9 million or
25.2% as compared to $55.2 million for 2008. The increase in the effective tax rate from 21.0% in 2008 to 39.5% in 2009 is primarily
a result of a $24.9 million benefit in 2008 from the reversal of valuation allowances against U.S. federal net deferred tax assets mainly
as the result of the usage of our net operating loss carry-forwards. In addition, there were unfavorable 2009 impacts on deferred taxes
of a strengthening Mexican peso versus the U.S. dollar, a recently enacted increase in Mexican corporate tax rates for 2010 and
approximately $1.0 million additional tax liability under the Mexican alternative minimum tax (IETU) rules which exceeded a
favorable enacted tax rate change in Canada.
Net Income
Net income for the year ended December 31, 2009 was $63.1 million, a decrease of $144.1 million as compared to $207.2
million for the same period in 2008, due to the factors described above.
Year Ended December 31, 2008 compared to the Year Ended December 31, 2007
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 year ended December 31, 2008 were $934.8 million, an increase of $355.8 million, or 61.5%,
as compared to $579.0 million for the same period in 2007. Selling price increases had a positive impact of 83.0% or $480.3 million
on sales that occurred across all product lines. Volume and mix impacts upon revenue had a negative impact of 21.5% or $124.5
million that occurred mostly in STPP & Other Products due to reduced demand for GTSP fertilizer co-product and limited
reformulation in detergents using STPP. Strong demand and efforts to grow the Specialty Salts and Specialty Acids business in 2008
resulted in a positive volume and mix impact, while unfavorable volume and mix impacted Purified Phosphoric Acid in 2008
compared to 2007. On a unit basis, the average selling price for all Innophos products increased by 90.9% compared to 2007, while
total volume shipped decreased by 15.4%.
24
The following table illustrates for the year ended December 31, 2008 the percentage changes in net sales by reportable segment
compared with the prior year, including the effect of price and volume/mix changes upon revenue:
United States
Canada
Mexico
Price
52.0%
53.8%
132.2%
Volume/Mix
Total
(3.3)% 48.7%
(21.7)% 32.1%
(48.2)% 84.0%
The following table illustrates for the year ended December 31, 2008 the percentage changes for net sales by major product lines
compared with the prior year, including the effect of price and volume/mix changes:
Purified Phosphoric Acid
Specialty Salts and Specialty Acids
STPP & Other Products
Price
117.6%
47.0%
121.9%
Volume/Mix
Total
(22.3)% 95.3%
6.3% 53.3%
(73.1)% 48.8%
Shipped volume for the year ended December 31, 2008 declined approximately 34% on a pure tonnage basis for STPP & Other
Products compared with the same period in 2007.
Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the year ended December 31, 2008 was $364.6 million,
an increase of $260.4 million, or 249.9%, as compared to $104.2 million for the same period in 2007. Gross profit percentage
increased to 39.0% for the year ended December 31, 2008 versus 18.0% for the same period in 2007. The change in gross profit was
due to higher selling prices in 2008 which had a favorable impact of $480.3 million, partially offset by unfavorable volume and mix
impacts upon revenue, and higher raw material, energy, freight and manufacturing expenses which had a combined unfavorable
impact of $226.6 million. Gross profit was unfavorable by $1.3 million for a scheduled maintenance outage at our Geismar, LA plant
in the second quarter of 2008, which was lower than anticipated, $1.3 million for the asset impairment expense for two obsolete
production units in the second quarter of 2008, and a $1.9 million charge related to the write-down of on hand GTSP fertilizer in the
fourth quarter of 2008. Gross profit was favorable relative to 2007 by $3.3 million, of which $3.2 million reflects out of period
adjustments in 2008 related to deferred Mexican employee statutory profit sharing. Gross profit was also favorable relative to 2007 by
$5.4 million for maintenance costs and $1.1 million of replacement raw material cost from the planned and unplanned maintenance
outages in 2007 at our Coatzacoalcos facility and supply shortages. Gross profit was also favorable relative to 2007 by unusual items
of $1.4 million for Mexican workforce reorganization costs and $2.0 million for the regularization of Mexican port facilities taxes
covering the periods 1996 to 2006, both of which occurred in 2007.
Operating Expenses and Research and Development
Operating expenses in 2008 consisted primarily of selling, general and administrative and research and development expenses.
Operating expenses for the year ended December 31, 2008 were $65.7 million, an increase of $9.2 million, or 16.3%, as compared to
$56.5 million for 2007. Operating expenses increased $3.3 million for professional fees to support growth and other corporate
initiatives such as assessing our IT systems, $3.5 million for higher short-term incentive program accruals, $2.7 million for increased
commercial efforts, $2.4 million for non-cash share based compensation, and $3.6 million for all other costs. The overall increases
over prior year were partially offset by $6.3 million for unusual expenses incurred in 2007 primarily in connection with the early
cancellation of the company’s “pharma” sales agency arrangement with Rhodia, Inc. and the transfer of related assets to Innophos.
Operating Income
Operating income for the year ended December 31, 2008 was $298.9 million, an increase of $251.2 million, or 526.6%, as
compared to $47.7 million for the same period in 2007. Operating income percentages increased to 32.0% for 2008 from 8.2% for
2007.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the year ended December 31, 2008 was $34.2
million, a decrease of $7.4 million, or 17.8% as compared to $41.6 million for the same period in 2007. This decrease is primarily due
to the lower average balance of our Term Loan from prepayments made in 2007 along with lower interest rates, and lower bond
interest expense from the retirement/refinancing of our Floating Rate Senior Notes in 2007. This was partially offset by fees associated
with the fourth amendment to our credit facility.
25
Foreign Exchange
Foreign exchange loss for the year ended December 31, 2008 was $2.7 million, an increase of $2.7 million as compared to a net
zero impact for 2007, primarily due to the strengthening of the U.S. Dollar against the Mexican peso in the fourth quarter of 2008. The
U.S. Dollar is the functional currency of our Mexican and Canadian operations. Consequently, foreign exchange gain or loss is
recorded on re-measurement 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
Provision for income tax expense for the year ended December 31, 2008 was $55.2 million, an increase of $43.3 million or
363.9% as compared to $11.9 million for 2007. Income earned by our subsidiaries in Mexico and Canada is fully taxable, so increases
in their earnings, as we had in 2008, would normally be expected to result in increased income tax expense. The low effective tax rate
of 21.0% for the current year is due to a $24.9 million benefit from the reversal of valuation allowances against U.S. Federal net
deferred tax assets mainly as the result of the usage of our net operating loss carryforwards.
Net Income
Net income for the year ended December 31, 2008 was $207.2 million, an improvement in results of $212.7 million as
compared to a net loss of $5.5 million for the same period in 2007, due to the factors described above.
Segment Reporting
We report our operations in three business segments—United States, Mexico and Canada, each of which sells the entire
portfolio of products. The primary performance indicators for the chief operating decision maker are sales and operating income, with
sales on a ship-from basis. The following table sets forth the historical results of these indicators by segment:
Segment Net Sales
United States
Mexico
Canada
Total
Net Sales % Growth
United States
Mexico
Canada
Total
Segment Operating Income
United States
Mexico
Canada
Total
Segment Operating Income % of net sales
United States
Mexico
Canada
Segment Net Sales:
2009
2008
2007
$463,286
165,269
38,204
$666,759
$486,186
409,745
38,827
$934,758
$326,882
222,699
29,401
$578,982
(4.7)%
(59.7)%
(1.6)%
(28.7)%
48.7%
84.0%
32.1%
61.4%
2.8%
14.4%
1.2%
6.9%
$111,647
614
14,629
$126,890
$108,743
183,587
6,525
$298,855
$ 3,299
39,819
4,591
$ 47,709
24.1%
0.4%
38.3%
22.4%
44.8%
16.8%
1.0%
17.9%
15.6%
In the United States net sales decreased 4.7% for the year ended December 31, 2009 when compared with the same period in
2008. Selling prices increased sales 20.6% with increases across all product lines, most notably in Specialty Salts and Specialty Acids.
Volume and mix impact upon revenue was a decrease of 25.3%, with decreases across all product lines. In 2008 net sales increased
48.7% when compared with 2007. Selling prices increased sales 52.0% with increases across all product lines, most notably in
Specialty Salts and Specialty Acids. Volume and mix impact upon revenue was a decrease of 3.3%, with decreases in Purified
Phosphoric Acids and STPP & Other Products being partially offset by an increase in Specialty Salts and Specialty Acids where
demand for these products was strong in 2008.
26
In Mexico net sales decreased 59.7% for the year ended December 31, 2009 when compared with the same period in 2008.
Selling prices decreased sales 28.7% with decreases across all product lines, most notably in STPP and Other Products, due to lower
prices for granular triple super-phosphate (GTSP) fertilizer co-product sales. Volume and mix impact upon revenue was a decrease of
31.0% which occurred across all product lines, most notably in Purified Phosphoric Acids, where Innophos’ largest customer reduced
volumes due to a permanent shutdown of their largest plant in the first quarter of 2009. In 2008 net sales increased 84.0% when
compared with 2007. Selling prices increased sales 132.2% with significant increases across all product lines. Volume and mix impact
upon revenue was a decrease of 48.2%, mainly in STPP & Other Products due to reduced demand for GTSP fertilizer co-product and
limited reformulation in detergents using STPP.
In Canada net sales decreased 1.6% for the year ended December 31, 2009 when compared with the same period in 2008.
Selling price increased sales 22.5% with increases across all product lines. Volume and mix impact upon revenue was a decrease of
24.1% with decreases across all product lines. In 2008 net sales increased 32.1% when compared with 2007. Selling prices increased
sales 53.8% with increases across all product lines. Volume and mix impact upon revenue was a decrease of 21.7% across all product
lines.
Segment Operating Income % of Net Sales:
The 1.7% increase in the United States for the year ended December 31, 2009 compared with the same period in 2008 was
mainly due to favorable selling prices which were offset by unfavorable volume and mix impact on revenue, higher raw material costs
and higher manufacturing costs. Included in 2008 results were expenses for a scheduled Geismar, LA plant maintenance outage and
asset impairment charges for two obsolete production units. Operating expenses were flat, with increases from our enterprise resource
planning (ERP) system and business redesign project partially offset by lower legal and other fees which were incurred in 2008 to
comply with the DOJ STPP document request subpoena, and lower professional fees used to support growth and other corporate
initiative. The 21.4% increase in the United States from 2007 to 2008 was mainly due to favorable selling prices which were partially
offset by an unfavorable volume and mix impact on revenue, higher raw material and energy costs, increased manufacturing cost
including cost for a scheduled maintenance outage at our Geismar, LA plant, the asset impairment expense for two obsolete
production units, and increased operating expenses. Operating expenses increased mainly due to professional fees to support growth
and other corporate initiatives such as assessing our IT systems, higher short-term incentive program accruals, higher non-cash share
based compensation, and increased commercial efforts, partially offset by expense incurred in 2007 in connection with the early
cancellation of the company’s “pharma” sales agency arrangement with Rhodia, Inc.
The 44.4% decrease in Mexico for the year ended December 31, 2009 compared with the same period in 2008 was due to
unfavorable selling prices, unfavorable volume and mix impacts upon revenue, increased cost of goods sold as a result of
disadvantaged raw material costs to market and charges for the settlement of the OCP arbitration matter and increased operating
expenses mainly for legal expenses related to the OCP arbitration matter. As a result of reduced operating rates and higher raw
material costs for 2009, Mexico incurred $9.2 million of reduced fixed cost absorptions and unfavorable inventory related variances,
and took a charge of $2.0 million for Mexican workforce reorganization costs. These unfavorable effects were more than offset by
$11.1 million lower cash fixed costs and $8.2 million favorable exchange rate impacts from our Mexican peso based costs. The 26.9%
increase in Mexico from 2007 to 2008 was due to favorable selling prices, which were partially offset by decreased volume and mix
impacts upon revenue, increased raw material and energy costs and increased operating expenses. The operating income percent
increase is also due to expenses incurred in 2007 for the planned and un-planned maintenance outages and the related raw material
replacement costs, the Mexican workforce reorganization, and the regularization of Mexican port facilities taxes covering the periods
1996 to 2006.
The 21.5% increase in Canada for the year ended December 31, 2009 compared with the same period in 2008 was due to
increased selling prices partially offset by unfavorable volume and mix impact on revenue. The 1.2% increase in Canada from 2007 to
2008 was due to favorable selling prices partially offset by unfavorable volume and mix impact on revenue, higher raw material and
energy costs, and increased manufacturing costs.
The United States had depreciation and amortization of $28.5 million, $30.3 million, and $28.4 million in 2009, 2008, and 2007,
respectively. Canada had depreciation and amortization of $2.0 million, $2.2 million, and $1.5 million in 2009, 2008 and 2007,
respectively. Mexico had depreciation and amortization of $20.7 million, $20.0 million, and $17.5 million in 2009, 2008, and 2007,
respectively.
27
Liquidity and Capital Resources
The following table sets forth a summary of the Company’s cash flows for the periods indicated.
(Dollars in millions)
Operating Activities
Investing Activities
Financing Activities
Year Ended December 31,
2008
$ 142.8
(18.5)
(14.6)
2009
$ 174.1
(19.6)
(147.4)
2007
$ 43.4
(30.5)
(29.1)
Year Ended December 31, 2009 compared to the Year Ended December 31, 2008
Net cash provided by operating activities was $174.1 million for the year ended December 31, 2009 as compared to $142.8
million for 2008, an increase of $31.3 million. The increase in operating activities cash resulted from favorable changes of $165.1
million in working capital and $11.9 million in non-cash items affecting net income, partially offset by unfavorable changes of
$144.1million in net income and $1.6 million in non-current accounts.
The change in working capital is a source of cash of $56.9 million in 2009 compared to a use in 2008 of $108.2 million, an
increase in the source of cash of $165.1 million. The increase in working capital is due to decreases in accounts receivable and
inventory, and increased other current liabilities, partially offset by decreased accounts payable and increased other current assets. The
change in working capital for our Mexican operations is a source of cash of $23.3 million in 2009 compared to a use in 2008 of $56.9
million, an increase in working capital of $80.2 million mainly due to decreases in inventory.
Total inventories decreased $31.7 million from December 2008 levels. Days of inventory on hand decreased 4 days as a result.
The following chart shows its historical performance:
Inventory Days on Hand
2009
2008
89
93
2007
61
Net cash used for investing activities was $19.6 million for the year ended December 31, 2009, compared to $18.5 million for
2008, an increase in the use of cash of $1.1 million which was mainly due to higher capital spending. Net cash used for investing
activities for our Mexican operations, mainly capital expenditures, was $5.5 million in 2009, compared to $4.8 million for the same
period in 2008, an increase in the use of cash of $0.7 million.
In the second quarter of 2009 the Company launched an enterprise resource planning, or ERP, system and business process
redesign project to upgrade its systems technology and to improve its position as a reliable specialty phosphate supplier. To date the
Company has spent approximately $11.4 million on this project, of which approximately $5.0 million was capitalized as of
December 31, 2009, and future expenditures on the ERP project are expected to total approximately $12 to $14 million by the end of
2010, with the majority of this spending anticipated as capital expenditures.
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 are underway in the U.S. to debottleneck and increase production
capabilities of various specialty salts. Additionally, in conjunction with the investment in the Coatzacoalcos facility to more than
double its existing food grade purified phosphoric acid capacity by the first quarter 2010, the site personnel have conducted successful
production tests of several additional food grade salts to enable a shift in focus from detergency to the multiple food market segments
served by salts and acid.
Innophos currently estimates that full exploration costs to a proven reserves standard for the Santo Domingo deposit could
require expenditures of $10 to $15 million over a three year period, 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. It is estimated that 2010 expenditures will be
approximately $1 to $2 million, with efforts primarily focused on the Santo Domingo deposit. 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 used for financing activities for the year ended December 31, 2009, was a use of $147.4 million, compared to a use of
$14.6 million in 2008, an increase in the use of cash of $132.8 million. This was mainly due to $124.5 million higher Term Loan
principal payments to satisfy the excess cash flow requirement for 2008 and subsequently to pay off the remaining balance of the
Term loan as described below, a $6.5 million payment to retire a portion of the Senior Unsecured Notes due 2012, $1.0 million
deferred financing charges on the new loan and security agreement and $0.6 million lower excess tax benefit from exercise of stock
options. Net cash from financing activities for our Mexican operations in 2009 was a use of $51.5 million compared to a use of $31.0
million in for the same period in 2008, an increase in cash payments of $20.5 million for intercompany debt obligations which are
eliminated in consolidation.
28
Year Ended December 31, 2008 compared to the Year Ended December 31, 2007
Net cash provided by operating activities was $142.8 million for the year ended December 31, 2008 as compared to $43.4
million for 2007, an increase of $99.4 million. The increase in operating activities cash resulted from a favorable change of $212.7
million in net income partially offset by unfavorable changes of $103.0 million in working capital, $8.9 million in non-cash items
affecting net income, and $1.4 million in non-current accounts.
The change in working capital is a use of cash of $108.2 million in 2008 compared to a use in 2007 of $5.2 million, an increase
in the use of cash of $103.0 million. The increased use of cash is due to higher selling prices which increased accounts receivable
balances, higher quantities and raw material costs increasing inventory values without any compensating increase in accounts payable
due primarily to advance payments with raw material suppliers to ensure timely deliveries. Decreased current liabilities and accounts
payable, and increased other current assets also added to the increased use of cash in 2008. During the fourth quarter of 2008, the
company made a significant estimated tax payment in Mexico due to the high Mexican income for 2008.
Total inventories increased $66.6 million from December 2007 levels as the result of increased raw material costs, higher
quantities of raw materials purchased prior to January 1, 2009 price increases and increased on-hand GTSP inventory due to reduced
fertilizer demand. Days of inventory on hand increased 32 days as a result. The following chart shows its historical performance:
Inventory Days on Hand
2008
2007
93
61
2006
57
Net cash used for investing activities was $18.5 million for the year ended December 31, 2008, compared to $30.5 million for
2007, a decrease in the use of cash of $12.0 million. This was mainly due to $13.8 million lower capital spending related to the 2007
cogeneration project in Coatzacoalcos, Mexico, and $2.1 million lower spending for the purchase in 2007 of certain assets from
Rhodia related to the early cancellation of our 2004 ten-year “pharma” sales agency agreement. This was partially offset by an
increase in capital spending of $3.9 million in all other projects.
Net cash used for financing activities for the year ended December 31, 2008, was a use of $14.6 million, compared to a use of
$29.1 million in 2007, a decrease in the use of cash of $14.5 million. This was primarily due to $18.5 million lower Term Loan
principal payments and $1.1 million tax benefits from stock option exercises, partially offset by $1.3 million higher dividend
payments, $0.4 million lower proceeds from stock option exercises, and $3.4 million less for the bond refinancing done in 2007.
Indebtedness
Total debt was $246.0 million as of December 31, 2009. Short term and long term debt net of cash was $113.5 million as of
December 31, 2009, a decrease of $143.7 million, or 56% from December 31, 2008. Total debt comprised borrowings of $190.0
million Senior Subordinated Notes due 2014, and $56.0 million Senior Unsecured Notes due 2012.
The Company was party to a Credit Agreement dated as of August 13, 2004, as subsequently amended (the “2004 Credit
Facility”). On May 22, 2009, the Company entered into a Termination pursuant to which, among other things, the 2004 Credit Facility
was terminated, the Company paid the $72.7 million of outstanding term loan balance (principal and accrued interest) from cash on
hand, and security held by the lenders on substantially all the Company’s property was released.
On April 13, 2009 the Company purchased $10.0 million of the 9.5% Senior Unsecured Notes due April 2012 for $6.5 million.
The $3.5 million retirement gain is reflected as interest income in our Consolidated Statement of Operations in the second quarter of
2009. The Company also recorded accelerated deferred financing costs of approximately $0.2 million in the second quarter of 2009.
On May 22, 2009, our wholly owned subsidiary Innophos, Inc. and its wholly owned subsidiary, Innophos Canada, Inc. entered
into a Loan and Security Agreement (the “Loan Agreement”) with certain lenders (collectively, the “Lenders”) including Wachovia
Bank, National Association, as agent. The Loan Agreement provides the Company with a revolving line of credit from the Lenders of
up to $65.0 million in the aggregate, with a $20 million letter of credit sub-facility, terminating on May 22, 2013. The amount actually
available to the Company may be less than the maximum credit and will vary from time to time depending on, among other factors,
the amount of its net eligible inventory and accounts receivable as calculated for purposes of the Loan Agreement. The obligations of
the Company under the Loan Agreement are secured by the accounts receivable, inventory and other assets of Innophos, Inc. and
Innophos Canada, Inc., not including equipment or real property. Innophos Inc.’s Mexico-based subsidiaries are excluded from certain
of the covenants under the Loan Agreement, do not guaranty the indebtedness of Innophos, Inc. and Innophos Canada, Inc. incurred
under it, and do not furnish collateral in connection with it.
As of December 31, 2009, the Company had $41.9 million excess availability above the minimum excess availability
requirements, as calculated in accordance with the Loan Agreement, and there was no amount outstanding on the revolving credit line.
A total of $2.2 million in face amount of letters of credit were issued under the sub-facility to support instruments outstanding under
the terminated 2004 Credit Facility.
29
As indicated elsewhere, the current recommendation of management and the policy of our Board of Directors is to pay a
quarterly dividend on our Common Stock at an annual rate of $0.68 per share. That policy may change and is subject to numerous
conditions and variables. See the section entitled “Dividends” in Item 5 of this Form 10-K.
We believe that on-hand cash combined with cash generated from operations, including our Mexican operations, 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.
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 are insufficient to fund our debt
and other liquidity needs, the Company may have to take alternative actions that differ from the Company’s current operating plan.
Innophos and its subsidiaries and affiliates may from time to time seek to acquire or otherwise retire outstanding debt (including
publicly issued debt) through open market purchases, privately negotiated transactions, tender offers, 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.
Capital Expenditures
We spent $19.6 million in 2009 on projects that were capitalized. Additionally, we spent $23.3 million in 2009 on maintenance
projects that were expensed during the year. There were no planned major non-annual maintenance expenses in 2009. These amounts
compare to $18.5 million of 2008 capitalized projects and $32.8 million of maintenance projects that were expensed during 2008 of
which $1.3 million was related to planned major non-annual maintenance. We expect our capital expenditures to continue to run
below depreciation levels. However, as 2004 purchase accounting effects on step-up depreciation and useful lives mature, the per
annum depreciation expense will trend down towards sustaining capital expenditure levels. Based on assets currently in service, we
expect annual depreciation to decline by approximately $14 million over the next 3 years compared to 2009 levels, with approximately
half of that decline expected in 2011 and the remainder equally split between 2010 and 2012. This depreciation decline will be
partially offset by the depreciation of future capital expenditures including our enterprise resource planning upgrades.
Contractual Obligations and Commercial Commitments
The following table sets forth our long-term contractual cash obligations as of December 31, 2009 (dollars in thousands):
Contractual Obligations
Senior Subordinated Notes Due 2014 (1)
Future Service Pension Benefits
Other (2)
Operating Leases
Senior Unsecured Notes due April 2012 (3)
Total contractual cash obligations
Total
274,313
9,632
459,249
18,540
69,300
2010
16,862
537
89,845
4,113
5,320
Years ending December 31,
2012
16,862
735
48,764
2,824
58,660
2011
16,863
642
48,764
3,688
5,320
$831,034
$ 116,677
$ 75,277
$127,845
2013
2014
16,863
206,863
825
902
48,764
48,764
2,690
2,246
—
—
$ 69,142 $258,775
Thereafter
—
5,991
174,348
2,979
—
$ 183,318
(1) Amounts include fixed rate interest payments at 8.875% for years 2010 and thereafter.
(2) Represents minimum annual purchase commitments to buy raw materials.
(3) Represents the $56.0 million 9.5% Senior Unsecured Notes due 2012 which were issued on April 16, 2007. Amounts include
fixed rate interest payments at 9.5% for years 2010 and thereafter.
Critical Accounting Estimates and Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of
these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent liabilities. On an ongoing basis, we evaluate our estimates,
including those related to allowance for bad debts, the recoverability of long-term assets such as goodwill and intangible assets,
depreciation and amortization periods, income taxes and commitments and contingencies. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. We believe that the following critical accounting
policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
30
Claims and Legal Proceedings
The categories of asserted or unasserted claims for which the Company has estimated a probable liability and for which amounts
are estimable are critical accounting estimates. Please refer to Note 16 of Notes to Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data” for additional information about such estimates.
Deferred Taxes
Deferred taxes are accounted for by recognizing deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the financial statements. Accordingly, deferred tax assets and liabilities are determined based on
the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
Deferred tax assets are assessed for recoverability and a valuation allowance is considered necessary if it is more likely than not
that some portion or all of the net deferred tax assets will not be realized. We continue to analyze our current and future profitability
and probability of the realization of our net deferred tax assets in future periods. Please refer to Note 15 of Notes to Consolidated
Financial Statements in “Item 8. Financial Statements and Supplementary Data” for additional information regarding deferred taxes.
Goodwill
Goodwill represents the excess of the acquisition cost over the fair value of net assets of the businesses acquired. ASC 350,
“Intangibles—Goodwill and Other,” requires periodic tests of the impairment of goodwill. ASC 350 requires a comparison, at least
annually, of the net book value of the assets and liabilities associated with a reporting unit, including goodwill, with the fair value of
the reporting unit, which corresponds to the discounted cash flows of the reporting unit, in the absence of an active market. When this
comparison indicates that impairment must be recorded, the impairment recognized is the amount by which the carrying amount of the
assets exceeds the fair value of these assets. The annual goodwill impairment review is conducted during the fourth quarter of each
year.
Fair values for goodwill testing are estimated using a discounted cash flow approach. Significant estimates in the discounted
cash flow approach include the cash flow forecasts for each of our reporting units (Mexico, U.S. and Canada), the discount rate and
the terminal value. The five year cash flow forecasts of the company’s reporting units is based upon management’s estimate at the date
of the assessment, which incorporates managements long-term view of selling prices, sales volumes for Innophos’ products, key raw
materials and energy costs, and our operating cost structure. The aggregated fair value of our reporting units was reconciled to our
market capitalization at the date of the assessment, plus a suitable control premium. Our market capitalization during fourth quarter of
2009 exceeded the book value of our equity. The terminal value was determined by applying business growth factors for each
reporting unit which are in-line with longer term historical growth rates, to the latest year for which a forecast exists.
Solely for the purpose of goodwill valuation for our Mexico reporting unit, the 2009 goodwill impairment analysis included
estimates addressing changes in phosphate rock pricing, weakness in the markets served by those operations, loss of traditional
business which in part is a result of the softness in the fertilizer markets, and operating the Coatzacoalcos, Mexico complex at
substantially reduced levels. Our 2009 goodwill impairment analysis included: (i) for the first three quarters of 2010, assumed
phosphate rock prices estimated to be below the 2009 price paid, trending towards an estimated market price; and (ii) for late 2010 and
thereafter, assumptions that Mexico operations would return to an estimated market price for phosphate rock. The reporting unit’s cash
flow model is estimated to be higher than 2009 levels, with improvement occurring as our phosphate rock price returns to market
pricing in 2011. Revenue levels are estimated to have a slight recovery in 2011 and estimated to return to a historical growth rate of
3% per annum in 2012. We applied operating margin percentages slightly below our historical trends and used a 3% growth rate to
calculate the terminal value for our Mexican reporting unit. We used a 12% discount rate, which is above our weighted average cost of
capital and consistent with our prior year goodwill impairment test. Based on this valuation, we determined that the fair values of our
reporting units exceeded their carrying values and no goodwill impairment charge was required.
As of December 31, 2009, the Mexican reporting unit had a carrying value, including goodwill, of approximately $187 million.
The fair value of the reporting unit exceeded its carrying value by approximately 15%. In addition, if we were to decrease the long-
term growth rate or increase the discount rate used in the calculation by 1%, there would still be no goodwill impairment for the
Mexican reporting unit.
Given the current economic environment and uncertainties surrounding the impact on our Mexican business of factors such as
market conditions affecting our selling prices, sales volumes, and raw material costs and other factors not limited to those enumerated,
we cannot be sure that the estimates and assumptions used in the goodwill impairment analysis will prove to be accurate predictions of
the future. Significant changes in assumptions will influence the goodwill impairment analysis and may result in goodwill impairment
charges in future periods.
31
Long-lived assets
Under ASC 360,” Property, Plant, and Equipment,” long-lived assets including property, plant and equipment and amortized
intangible assets are evaluated and reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of the assets to the undiscounted future cash flows expected to be generated by the asset or asset group. When this
comparison indicates that impairment must be recorded, the impairment recognized is the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
The determination of whether or not assets are impaired and the corresponding useful lives of these long-lived assets requires
significant judgment. The development of future cash flow projections requires management estimates related to forecasted sales and
expected costs trends. To the extent that changes in business conditions occur or other management decisions are made that result in
adjusted management projections or alternative use of the assets, impairment losses or accelerated depreciation may occur in future
periods.
In our Mexican operations, we continue to monitor changes in circumstances where the undiscounted cash flows would indicate
that the carrying amount of an asset or asset group may not be recoverable. The uncertainty in phosphate rock prices, volume
decreases, sales price erosion, and the reduced operating rates for the Coatzacoalcos plant were included in management’s estimates
and are consistent with management’s expectations. The carrying value of the Coatzacoalcos plant was approximately $84.2 million at
December 31, 2009. The undiscounted cash flows of the STPP (Sodium Tripolyphosphate) asset group exceeded their carrying value
by 31%, while the other asset groups exceeded their carrying values by significantly greater margins. The Company did not conduct
an asset impairment test during the fourth quarter as there were no triggering events that warranted an impairment test.
Stock-Based Compensation Expense
Our compensation programs can 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
Innophos common stock at an exercise price per share set equal to the market price of Innophos common stock on the date
of grant.
Restricted stock grants, which entitle the holder to receive, at the end of each vesting term, a specified number of shares of
Innophos common stock, and which also entitle the holder to receive dividends paid on such grants throughout the vesting
period.
Performance share awards which entitle the holder to receive, at the end of a vesting term, a number of shares of Innophos
common stock, within a range of shares from zero to a specified maximum, calculated using a three year future average
return on invested capital (i.e. the three year period 2008-2010 for a 2007 award) as defined solely by reference to the
Company’s own activities. Dividends will accrue over the vesting period and are paid on performance share awards when
fully vested.
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.
The fair value of the options granted during 2009, 2008 and 2007 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
Dividend yield
Risk-free interest rate
Expected term
Weighted average grant date fair value of stock options
Year Ended
December 31,
2009
Year Ended
December 31,
2008
Year Ended
December 31,
2007
61.4%
5.0%
2.7%
6 years
6.19
$
36.8%
4.6%
3.4%
6 years
4.52
$
36.8%
4.5%
4.2%
6 years
3.97
$
Prior to 2009, since Innophos Holdings, Inc. was a newly public entity and has limited historical data on the price of its publicly
traded shares, the expected volatility for the valuation of its stock options and performance shares was based on peer group historical
volatility data equaling the expected term. In 2009, the Company had chosen a blended volatility which consists of 50% average
historical volatility of the peer group and 50% historical volatility of Innophos. The increase in the expected volatility in 2009 versus
prior periods is a result of broader market conditions. 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. The
dividend yield is the expected annual dividend payments divided by the average stock price up to the date of grant. The risk-free
32
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.
Pension and Post-Retirement Costs / Post-Employment Plan
The Company maintains both noncontributory defined benefit pension plans and defined contribution plans that together cover
all U.S. and Canadian employees.
In the United States, salaried and hourly employees are covered by a defined contribution plan with a 401(k) feature. The plan
provides for employee contributions, company matching contributions, and an age-weighted annual company contribution to eligible
employees. Union-represented hourly employees, at our Nashville site, are covered by a traditional defined benefit plan providing
benefits based on years of service and final average pay whose benefit accruals were frozen as of August 1, 2007, after which the
Nashville union employees now participate in the Company’s existing non contributory defined contribution benefit plan. All plans
were established by Innophos in 2004.
In Canada, salaried employees are covered by defined contribution plans which provide for company contributions as a percent
of pay, employee contributions, and company matching contributions. Union-represented hourly employees are covered by a defined
benefit plan providing benefits based on a negotiated benefit level and years of service.
Our pension and postretirement benefit costs are developed from actuarial valuations. Inherent in these valuations are key
assumptions, including the discount rate and the expected long-term rate on plan assets. These assumptions require significant
judgment and material changes in our pension and postretirement benefit costs may occur in the future due to changes in these
assumptions, changes in levels of benefits provided, and changes in asset levels. Such assumptions are based on benchmarks obtained
from third party sources.
As a sensitivity measure, the effect of a 25 basis-point decrease in our discount rate assumption would increase our net periodic
benefit cost for our pension and post-retirement plans by approximately $60. A 1% decrease in our expected rate of return on plan
assets would increase our pension plan expense by $135.
Recently Issued Accounting Standards
New accounting standards effective in 2009 are described in the Recent Accounting Pronouncements section in Note 1 of Notes
to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
ITEM 7A. 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 December 31, 2009, we had $246.0 million principal amount of fixed-rate debt and a $65.0 million revolving credit facility,
of which we had $41.9 million available above the minimum excess availability requirements, which has not been drawn upon.
Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense and other operating
expenses and reducing our funds available for capital investment, operations or other purposes. In addition, a substantial portion of our
cash flow must be used to service debt, 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.
We do not currently, but may from time to time, hedge our commodity, interest rate or 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. Our largest customer in 2008 represented 11.1% of that year’s sales,
otherwise, no other customer accounted for more than 10% of our sales in the last 3 years.
33
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. Refer to “Item 1A. Risk Factors” contained in this Annual
Report on Form 10-K for further information on raw materials availability and pricing.
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.
34
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheets at December 31, 2009 and December 31, 2008
Statements of Operations for each of the three years ended December 31, 2009
Statements of Stockholders’ Equity and Other Comprehensive Income (Loss) for each of the three years ended
December 31, 2009
Statements of Cash Flows for each of the three years ended December 31, 2009
Notes to Consolidated Financial Statements
Page
36
37
38
39
40
41
35
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Innophos Holdings, Inc:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the
financial position of Innophos Holdings, Inc. and its subsidiaries at December 31, 2009 and 2008, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the
accompanying index appearing under Item 15(b) presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions
on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting
based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 8, 2010
36
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangibles and other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable, trade and other
Other current liabilities
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Commitments and contingencies (note 16)
Common stock, par value $.001 per share; authorized 100,000,000 shares; issued and outstanding
21,333,940 and 21,091,399 shares
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2009
2008
$132,451
1,749
56,345
113,636
49,865
354,046
204,527
51,706
52,189
$125,328
—
79,541
145,310
40,184
390,363
230,422
51,706
55,713
$662,468
$728,204
$ —
21,379
59,696
81,075
246,000
40,015
$ 72,613
26,359
44,482
143,454
309,887
32,103
$367,090
$485,444
21
100,066
197,541
(2,250)
21
95,571
149,192
(2,024)
295,378
242,760
$662,468
$728,204
See notes to consolidated financial statements
37
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Net sales
Cost of goods sold
Gross profit
Operating expenses:
Selling, general and administrative
Research & Development Expenses
Total operating expenses
Operating income
Interest expense, net
Foreign exchange (gains)/losses
Other income, net
Income before income taxes
Provision for income taxes
Net income (loss)
Net income (loss) attributable to common shareholders
Per share data (see Note 12):
Income (loss) per share:
Basic
Diluted
Weighted average
shares outstanding:
Basic
Diluted
Year Ended December 31,
2008
934,758
570,176
$
$
2007
578,982
474,785
104,197
54,441
2,047
56,488
47,709
41,559
40
(299)
6,409
11,896
(5,487)
364,582
63,417
2,310
65,727
298,855
34,193
2,663
(386)
262,385
55,202
207,183
2009
666,759
470,780
195,979
67,151
1,938
69,089
126,890
23,313
(769)
—
104,346
41,202
63,144
63,141
$
$
$
$
$
$
207,150
$
(5,487)
2.97
2.87
$
$
9.89
9.54
$
$
(0.27)
(0.27)
21,258,536
21,968,904
20,956,566
21,718,537
20,676,859
20,676,859
See notes to consolidated financial statements
38
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Statements of Stockholders’ Equity and Other Comprehensive Income (Loss)
(Dollars and shares in thousands)
Number of
Common
Shares
20,270
Common
Stock
20
$
Retained
Earnings
(Deficit)
$ (45,288)
(5,487)
Paid-in
Capital
$109,796
Accumulated
Other
Comprehensive
Income/(Loss)
(3,816)
$
1,545
Balance, December 31, 2006
Net loss
Change in pension and post-retirement plans,
(net of tax $243)
Other comprehensive (loss), net of tax
Adjustment to initial public offering expenses
Proceeds from exercise of stock options and
restricted stock
Share-based compensation
Dividends declared ($0.68 per share)
597
1
Balance, December 31, 2007
20,867
$
21
$ (50,775)
Net income
Change in pension and post-retirement plans,
(net of tax $144)
Other comprehensive income, net of tax
Proceeds from exercise of stock options and
restricted stock
Issuance of annual retainer stock to external
Board of Directors
Share-based compensation
Excess tax benefits from exercise of stock
options
Dividends declared ($0.68 per share)
207
17
207,183
(7,216)
Balance, December 31, 2008
21,091
$
21
$149,192
Net income
Change in pension and post-retirement plans,
(net of tax $109)
Other comprehensive income, net of tax
Proceeds from exercise of stock options and
restricted stock
Issuance of annual retainer stock to external
Board of Directors
Share-based compensation
Excess tax benefits from exercise of stock
options
Dividends declared ($0.68 per share)
Balance, December 31, 2009
224
19
63,144
(14,795)
125
950
1,077
(14,219 )
$ 97,729
542
3,467
1,108
(7,275 )
$ 95,571
633
3,367
495
Total
Shareholders’
Equity
$ 60,712
(5,487)
1,545
(3,942)
125
951
1,077
(14,219)
$
(2,271)
$ 44,704
207,183
247
247
207,430
542
—
3,467
1,108
(14,491)
$
(2,024)
$ 242,760
(226)
63,144
(226)
62,918
633
—
3,367
495
(14,795)
21,334
$
21
$197,541
$100,066
$
(2,250)
$ 295,378
See notes to consolidated financial statements
39
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided from operating
activities:
Depreciation and amortization
Amortization of deferred financing charges
Deferred income tax provision (benefit)
Deferred profit sharing
Stock based compensation
Gain on retirement of bonds
Changes in assets and liabilities:
Increase in restricted cash
Decrease/(increase) in accounts receivable
Decrease/(increase) in inventories
Increase in other current assets
(Decrease)/increase in accounts payable
Increase/(decrease) in other current liabilities
Changes in other long-term assets and liabilities
Net cash provided from operating activities
Cash flows used for investing activities:
Capital expenditures
Purchase of assets
Net cash used for investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Proceeds from issuance of senior unsecured notes
Principal payments of floating rate senior note
Principal payments of term-loan
Principal repayment of senior unsecured notes
Deferred financing costs
Excess tax benefits from exercise of stock options
Dividends paid
Net cash used for financing activities
Net change in cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended December 31,
2008
2009
2007
$ 63,144
$ 207,183
$ (5,487)
51,186
3,130
1,867
(756)
3,367
(3,500)
(1,749)
23,196
31,674
(6,433)
(4,980)
15,172
(1,218)
174,100
52,507
2,726
(12,105)
(3,258)
3,467
—
—
(19,462)
(66,582)
(11,116)
(10,085)
(934)
453
47,486
4,643
(1,807)
800
1,077
—
—
(3,763)
(8,159)
(2,645)
5,565
3,861
1,870
142,794
43,441
(19,609)
—
(19,609)
(18,536)
—
(28,356)
(2,120)
(18,536)
(30,476)
633
—
—
(126,500)
(6,500)
(1,050)
495
(14,446)
(147,368)
7,123
125,328
$ 132,451
542
—
—
(2,000)
—
—
1,108
(14,241)
950
66,000
(60,800)
(20,500)
—
(1,815)
—
(12,899)
(14,591)
(29,064)
109,667
15,661
(16,099)
31,760
$ 125,328
$ 15,661
See notes to consolidated financial statements
40
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
1. Basis of Statement Presentation:
Summary of Significant Accounting Policies
Fiscal Year
Our fiscal year end is December 31.
Description of Business and Principles of Consolidation
Innophos is a leading North American producer of specialty phosphates. Many specialty phosphates are application-specific
compounds engineered to meet customer performance requirements. Specialty phosphates are often critical to the taste, texture and
performance of foods, beverages, pharmaceuticals, oral care products and other applications. For example, specialty phosphates act as
flavor enhancers in beverages, electrolytes in sports drinks, texture additives in cheeses, leavening agents in baked goods, calcium and
phosphorus sources for nutritional supplements, pharmaceutical excipients and cleaning agents in toothpaste.
Innophos Holdings, Inc. is the parent of Innophos Investments Holdings, Inc., which owns 100% of Innophos, Inc; all are
incorporated under the laws of the State of Delaware. All intercompany transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires the
use of judgments and estimates made by management. Actual results could differ from those estimates. Some of the more significant
estimates pertaining to the Company include accruals for contingencies, distributor incentives and rebates, the valuation of
inventories, the allowance for doubtful accounts, income tax valuation allowances, the recoverability of long-lived assets and goodwill
analysis. Management routinely reviews its estimates and assumptions utilizing currently available information, changes in facts and
circumstances, and historical experience.
Cash Equivalents
All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.
Accounts Receivable and Allowances for Doubtful Accounts
Trade accounts receivable is recorded at the invoiced amount and does not bear interest. The collectability of accounts
receivable is evaluated based on a combination of factors. Allowances for doubtful accounts are recorded based on the length of time
the receivables are past due and historical experience. In circumstances when it is probable that a specific customer is unable to meet
its financial obligations, an allowance is recorded against amounts due to reduce the receivable to the amount that is reasonably
expected to be collected.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined on the basis of the first-in, first-out method. These costs
include raw materials, direct labor, manufacturing overhead and depreciation. Spare parts are included in inventory and are initially
recorded at cost.
Inventories, including spare parts, are evaluated for excess quantities, obsolescence or shelf-life expiration. This evaluation
includes an analysis of historical sales levels by product and projections of future demand. To the extent management determines there
are excess, obsolete or expired inventory quantities, valuation reserves are recorded against all or a portion of the value of the related
products with the appropriate charge to cost of goods sold.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Major renewals and improvements are
capitalized. Maintenance, repairs and minor renewals are expensed as incurred. The cost and related accumulated depreciation of all
property, plant and equipment retired or otherwise disposed of are eliminated from the accounts and any resulting gain or loss is
reflected in net income. Interest is capitalized in connection with the construction of major renewals and improvements. Capitalized
interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. Depreciation is
calculated on the straight-line basis over the estimated useful lives of the related assets, ranging from ten to forty years for buildings
and improvements, three to twenty years for machinery and equipment, and three to seven years for capitalized software. Leasehold
improvements are amortized over the lease term or the estimated useful life of the improvement, whichever is less.
41
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Long-Lived Assets
Under ASC 360,” Property, Plant, and Equipment,” long-lived assets including property, plant and equipment and amortized
intangible assets are evaluated and reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of the assets to the undiscounted future cash flows expected to be generated by the asset or asset group. When this
comparison indicates that impairment must be recorded, the impairment recognized is the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
The determination of whether or not assets are impaired and the corresponding useful lives of these long-lived assets requires
significant judgment. The development of future cash flow projections requires management estimates related to forecasted sales and
expected costs trends. To the extent that changes in business conditions occur or other management decisions are made that result in
adjusted management projections or alternative use of the assets, impairment losses or accelerated depreciation may occur in future
periods.
Goodwill
Goodwill represents the excess of the acquisition cost over the fair value of net assets of the businesses acquired. ASC 350,
“Intangibles—Goodwill and Other,” requires periodic tests of the impairment of goodwill. ASC 350 requires a comparison, at least
annually, of the net book value of the assets and liabilities associated with a reporting unit, including goodwill, with the fair value of
the reporting unit, which corresponds to the discounted cash flows of the reporting unit, in the absence of an active market. When this
comparison indicates that impairment must be recorded, the impairment recognized is the amount by which the carrying amount of the
assets exceeds the fair value of these assets. The annual goodwill impairment review is conducted during the fourth quarter of each
year.
Other Intangible Assets
Other intangible assets, which consist of developed technology, customer relationships, tradenames, a non-compete agreement,
patents, licenses and software, are amortized on a straight-line basis over their estimated useful lives. For capitalized software the
amortization period is three to seven years; all other identifiable intangibles amortization period is up to twenty years.
External direct costs in developing or obtaining internal use computer software and payroll, and payroll-related costs for
employees dedicated solely to the project, to the extent of the time spent directly on the project and which they meet the requirements
of ASC 350-40, are capitalized.
Revenue Recognition
Revenues from sales of products are recognized when delivery has occurred and title and risk of loss passes to the customer. In
the United States and Canada, the Company records estimated reductions to revenue for distributor incentives and customer incentives
such as rebates, at the time of the initial sale. Distributor and customer incentives in Mexico are immaterial to the consolidated
financial statements. The estimated reductions are based on the sales terms, historical experience and trend analysis. Accruals for
distributor incentives are reflected as a direct reduction to accounts receivable and accruals for rebates are recorded as accrued
expenses. This analysis requires a significant amount of judgment from management. Changes in the assumptions used to calculate
these estimates or changes resulting from actual results are recorded against revenue in the period in which the change occurs.
Shipping and Handling Fees and Costs and Advertising Expenses
Shipping and handling fees and costs invoiced to customers are included in Net sales. Shipping and handling fees and costs
incurred by the Company are included in Cost of goods sold. Advertising expenses, which are not significant, are expensed as
incurred.
Foreign Currency Translation
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. Revenue and expenses related to monetary assets and liabilities are translated at average exchange rates and at historical
exchange rates for the related revenue and expenses of non-monetary assets and liabilities. All translation gains and losses are
included in net income.
42
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Research and Development Expenses
Research and development expenditures, including expenditures relating to the development of new products and processes and
significant improvements and refinements to existing products, are expensed as incurred.
Employee Termination Benefits
The Company does not have a written severance plan for its Mexican operations, nor does it offer similar termination benefits to
affected employees in all Mexican restructuring initiatives however, Mexican law requires payment of certain minimum termination
benefits. Accordingly, in situations where minimum statutory termination benefits must be paid to the affected employees, the
Company records employee severance costs associated with these activities in accordance with Accounting Standards Codification
(ASC) 712 (formerly SFAS No. 112), Compensation – Nonretirement Postemployment Benefits. The Company does have a written
severance plan which is in accordance with ASC 712 for its U.S. and Canadian operations. The Company has no accrued obligation
for post-employment benefits for U.S. and Canadian operations because the amount is not probable and reasonably estimated. Charges
associated with these activities are recorded when the payment of benefits is probable and can be reasonably estimated. In all other
situations where the Company pays out termination benefits, including supplemental benefits paid in excess of statutory minimum
amounts and benefits offered to affected employees based on management’s discretion, the Company records these termination costs
in accordance with ASC 420 (formerly SFAS No. 146), Exit or Disposal Cost Obligations.
The timing of the recognition of charges for employee severance costs depends on whether the affected employees are required
to render service beyond their legal notification period in order to receive the benefits. If affected employees are required to render
service beyond their legal notification period, charges are recognized ratably over the future service period. Otherwise, charges are
recognized when a specific plan has been confirmed by management and required employee communication requirements have been
met.
Legal Costs
The Company expenses legal costs as incurred, including those legal costs expected to be incurred in connection with a loss
contingency.
Income Taxes
The Company’s United States subsidiaries file a consolidated U.S. tax return. The Mexican subsidiaries file separate tax returns
and current income taxes receivable or payable are reflected on the accompanying balance sheets. The Company accounts for income
taxes in accordance with ASC 740 (formerly SFAS No. 109), Income Taxes. Under ASC 740, deferred tax assets and liabilities are
determined based on the differences between the financial statement and tax bases using enacted tax rates applied to those differences.
Deferred tax assets are assessed for recoverability and a valuation allowance is provided if it is more likely than not that the
associated tax benefit will not be recognized.
The Company does not have any material uncertain income tax positions in accordance with ASC 740-10-25 (formerly FIN 48).
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 as part of net interest expense. All of the tax years since the Company’s inception in
2004 are subject to examination by the Canadian, Mexican and United States revenue authorities. Currently, the Company is under
examination, or has been contacted for examination, by certain foreign jurisdictions for its income tax returns for the years 2004
through 2008. As of December 31, 2009, 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. The Company
does not anticipate that total unrecognized tax benefits will significantly change prior to December 31, 2010.
Environmental Costs
Environmental liabilities are recorded undiscounted when it is probable that these liabilities have been incurred and the amounts
can be reasonably estimated. These liabilities are estimated based on an assessment of many factors, including the amount of
remediation costs, the timing and extent of remediation actions required by the applicable governmental authorities, and the amount of
the Company’s liability after considering the liability and financial resources of other potentially responsible parties. Generally, the
recording of these accruals coincides with the assertion of a claim or litigation, completion of a feasibility study or a commitment to a
formal plan of action. Anticipated recoveries from third parties are recorded as a reduction of expense only when such amounts are
realized. Any insurance receivables would be recorded gross of the estimated liability.
43
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Other Comprehensive Income (Loss)
Other comprehensive income (loss) is composed of net income (loss), adjusted for changes in other comprehensive income
items such as changes in defined benefit pension plan funded status. In accordance with ASC 220 (formerly SFAS No. 130),
Comprehensive Income, the Company has identified and reported other comprehensive income in stockholders’ equity.
Stock Options
In connection with the Company’s initial public offering, the historical stock option strips originally granted on April 1, 2005
under the Innophos Holdings, Inc. 2005 Stock Option Plan, or 2005 Plan, were converted, as required under the terms of the 2005
Plan, to 1,116,944 single class common stock options currently outstanding with the same vesting schedule. The exercise price is
$2.55 per option. The determination of the fair value of the underlying common stock used to determine the exercise prices for the
stock options granted on April 1, 2005 was performed contemporaneously with the issuance of these common stock option grants.
Under the prospective transition method, only new awards (or awards modified, repurchased, or cancelled after the effective
date) are accounted for under the provisions of ASC 718 (formerly SFAS No. 123(R)), Compensation – Stock Compensation. The
Company will continue to account for the outstanding 2005 Plan awards under APB 25, which falls under grandfathered material
excluded from the first release of the FASB Codification, until they are settled or modified. See Note 11 for further description of our
stock-based compensation programs.
Recently Issued Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued a standard that established the FASB Accounting
Standards Codification™ (ASC) and amended the hierarchy of generally accepted accounting principles (GAAP) such that the ASC
became the single source of authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S. GAAP, but was
intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic
in one place. All previously existing accounting standard documents were superseded and all other accounting literature not included
in the ASC is considered non-authoritative. New accounting standards issued subsequent to June 30, 2009 are communicated by the
FASB through Accounting Standards Updates (ASUs). For Innophos, the ASC was effective July 1, 2009. This standard did not have
an impact on the Company’s consolidated results of operations or financial condition. However, throughout the notes to the
consolidated financial statements references that were previously made to various former authoritative U.S. GAAP pronouncements
have been changed to coincide with the appropriate section of the ASC.
The Company adopted the provisions of ASC 820-10, Fair Value Measurements and Disclosures (formerly Statement of
Financial Standards (SFAS) No. 157, Fair Value Measurements), with respect to non-financial assets and liabilities effective
January 1, 2009. This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The adoption of ASC 820-10 did not have a material impact on the Company’s consolidated financial
position and results of operations.
The Company adopted ASC 805 (formerly SFAS No. 141(R), Business Combinations and SFAS No. 160, Non-controlling
Interests in Consolidated Financial Statements), for business combinations on or after January 1, 2009. This requires recognition of
assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair
values as of that date. In a business combination achieved in stages, this pronouncement requires recognition of identifiable assets and
liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. This pronouncement also
requires the fair value of acquired in-process research and development (IPRD) to be recorded as indefinite lived intangibles,
contingent consideration to be recorded on the acquisition date, and restructuring and acquisition-related deal costs to be expensed as
incurred. In addition, any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated
contingencies are to be recorded in earnings. The implementation of this standard did not have a material impact on the Company’s
consolidated financial position and results of operations.
The Company adopted ASC 855 as of June 30, 2009 (formerly SFAS No. 165, Subsequent Events). ASC 855 should not result
in significant changes in the subsequent events that an entity reports. Rather, ASC 855 introduces the concept of financial statements
being available to be issued. Financial statements are considered available to be issued when they are complete in a form and format
that complies with generally accepted accounting principles (GAAP) and all approvals necessary for issuance have been obtained.
In June 2009, the FASB issued an amendment to ASC topic 860 (the amendment was formerly SFAS No. 166, Accounting for
Transfers of Financial Asset). Among other items the provision removes the concept of a qualifying special-purpose entity and
clarifies that the objective of paragraph ASC 860-10-40-4 is to determine whether a transferor and all of the entities included in the
transferor’s financial statements being presented have surrendered control over transferred financial assets. This pronouncement is
effective January 1, 2010. The implementation of this standard will not have a material impact on the Company’s consolidated
financial position and results of operations.
44
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
In June 2009, the FASB issued an amendment to ASC topic 810 (the amendment was formerly SFAS No. 167, Disclosure
Requirements for Variable Interest Entities). The provisions of ASC 810 provide guidance in determining whether an enterprise has a
controlling financial interest in a variable interest entity. This determination identifies the primary beneficiary of a variable interest
entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impacts the
entity’s economic performance, and the obligation to absorb losses or the right to receive benefits of the entity that could potentially
be significant to the variable interest entity. This pronouncement also requires ongoing reassessments of whether an enterprise is the
primary beneficiary and eliminates the quantitative approach previously required for determining the primary beneficiary. New
provisions of this pronouncement are effective January 1, 2010. The implementation of this standard will not have a material impact
on the Company’s consolidated financial position and results of operations.
In July 2009, the FASB issued ASC topic 105 (formerly SFAS No. 168, The Hierarchy of Generally Accepted Accounting
Principles). ASC 105 contains guidance which reduces the U.S. GAAP hierarchy to two levels, one that is authoritative and one that is
not. This pronouncement is effective September 15, 2009. The adoption of this pronouncement did not have an effect on the
consolidated financial statements.
In October 2009, the FASB approved for issuance (currently within the scope of FASB Accounting Standards Codification
(ASC) Subtopic 605-25) Emerging Issues Task Force (EITF) issue 08-01, Revenue Arrangements with Multiple Deliverables. This
statement provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and
accounting for separate deliverables under an arrangement. The EITF introduces an estimated selling price method for valuing the
elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and
significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a
retrospective basis, and early application is permitted. The implementation of this standard will not have a material impact on the
Company’s consolidated financial position and results of operations.
2. Restricted Cash:
Restricted cash consisted of escrow funds agreed to be deposited in connection with a dispute between the Company and a third
party. The dispute was settled on February 24, 2010 and the funds will be disbursed to the third party in accordance with the
settlement terms.
3. Inventories:
Inventories consist of the following:
Raw materials
Finished products
Spare parts
2009
$ 31,770
73,924
7,942
$ 113,636
2008
$ 26,183
111,031
8,096
$ 145,310
Inventory reserves for excess quantities, obsolescence or shelf-life expiration as of December 31, 2009 and December 31, 2008
were $13,189 and $8,863, respectively.
4. Other Current Assets:
Other current assets consist of the following:
Creditable taxes (value added taxes)
Prepaid income taxes
Deferred income taxes
Other prepaids
Other
45
2009
$ 4,028
10,435
16,019
13,110
6,273
$ 49,865
2008
$ 5,444
1,492
12,771
16,220
4,257
$ 40,184
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
5. Property, Plant and Equipment, net:
Property, plant and equipment, at cost, consist of the following:
Land and buildings
Machinery and equipment
Construction-in-progress
Less accumulated depreciation
2009
$ 90,384
322,523
10,799
423,706
219,179
$ 204,527
2008
$ 87,635
315,865
5,813
409,313
178,891
$ 230,422
Under ASC 360, “Property, Plant, and Equipment,” long-lived assets including property, plant and equipment and amortized
intangible assets are evaluated and reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of the assets to the undiscounted future cash flows expected to be generated by the asset or asset group. When this
comparison indicates that impairment must be recorded, the impairment recognized is the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
The determination of whether or not assets are impaired and the corresponding useful lives of these long-lived assets requires
significant judgment. The development of future cash flow projections requires management estimates related to forecasted sales and
expected costs trends. To the extent that changes in business conditions occur or other management decisions are made that result in
adjusted management projections or alternative use of the assets, impairment losses or accelerated depreciation may occur in future
periods.
In our Mexican operations, we continue to monitor changes in circumstances where the undiscounted cash flows would indicate
that the carrying amount of an asset or asset group may not be recoverable. The uncertainty in phosphate rock prices, volume
decreases, sales price erosion, and the reduced operating rates for the Coatzacoalcos plant were included in management’s estimates
and are consistent with management’s expectations. The carrying value of the Coatzacoalcos plant was approximately $84.2 million at
December 31, 2009. The undiscounted cash flows of the STPP (Sodium Tripolyphosphate) asset group exceeded their carrying value
by 31%, while the other asset groups exceeded their carrying values by significantly greater margins. The Company completed an
impairment analysis for certain of its long lived assets during the third quarter of 2009 and, based on the undiscounted cash flows, no
asset impairment charges were recorded for the Mexican assets. The Company did not conduct an asset impairment test during the
fourth quarter as there were no triggering events that warranted an impairment test.
Depreciation expense, excluding depreciation expense in changes of inventory, was $45,837, $45,904 and $42,469 in 2009,
2008 and 2007, respectively.
6. Goodwill:
Balance, December 31, 2007
Adjustments, net of tax
Balance, December 31, 2008 and 2009
United
States
$ 7,237
—
$ 7,237
Mexico
$ 37,501
4,438
$ 41,939
Canada
$2,530
—
$2,530
Total
$47,268
4,438
$51,706
In 2008, the Company had an immaterial adjustment to its August 13, 2004 opening balance sheet of $4.4 million related to its
deferred Mexican employee statutory profit sharing. A benefit of approximately $2.0 million was recorded for deferred income taxes
and deferred profit sharing liabilities for 2008 related to prior years, which was immaterial individually and in the aggregate to all
periods.
Goodwill represents the excess of the acquisition cost over the fair value of net assets of the businesses acquired. ASC 350,
“Intangibles - Goodwill and Other,” requires periodic tests of the impairment of goodwill. ASC 350 requires a comparison, at least
annually, of the net book value of the assets and liabilities associated with a reporting unit, including goodwill, with the fair value of
the reporting unit, which corresponds to the discounted cash flows of the reporting unit, in the absence of an active market. When this
comparison indicates that impairment must be recorded, the impairment recognized is the amount by which the carrying amount of the
assets exceeds the fair value of these assets. The annual goodwill impairment review is conducted during the fourth quarter of each
year.
46
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Fair values for goodwill testing are estimated using a discounted cash flow approach. Significant estimates in the discounted
cash flow approach include the cash flow forecasts for each of our reporting units (Mexico, U.S. and Canada), the discount rate and
the terminal value. The five year cash flow forecasts of the company’s reporting units is based upon management’s estimate at the date
of the assessment, which incorporates managements long-term view of selling prices, sales volumes for Innophos’ products, key raw
materials and energy costs, operating cost structure and other industry data. The aggregated fair value of our reporting units was
reconciled to our market capitalization at the date of the assessment, plus a suitable control premium. Our market capitalization during
fourth quarter of 2009 exceeded the book value of our equity. The terminal value was determined by applying business growth factors
for each reporting unit which are in-line with longer term historical growth rates, to the latest year for which a forecast exists.
7. Intangibles and Other Assets, net:
Intangibles and other assets consist of the following:
Developed technology and application patents, net of accumulated amortization of $10,168 for
2009 and $8,279 for 2008
Customer relationships, net of accumulated amortization of $3,961 for 2009 and $3,012
for 2008
Useful life
(years)
2009
2008
10-20
26,432
28,321
5-15
7,369
8,318
Tradenames and license agreements, net of accumulated amortization of $3,401 for 2009 and
$2,839 for 2008
Capitalized software, net of accumulated amortization of $2,279 for 2008 and $2,496 for 2008
Non-compete agreement, net of accumulated amortization of $315 for 2009 and $189 for 2008
5-20
3-5
5
Total Intangibles
Deferred financing costs, net of accumulated amortization of $7,473 for 2009 and $14,262 for 2008
Deferred income taxes
Other Assets
Total other assets
5,959
700
315
$ 40,775
$ 6,921
1,409
3,084
$ 11,414
$ 52,189
6,521
1,293
441
$ 44,894
$ 9,001
512
1,306
$ 10,819
$ 55,713
Amortization expense for intangibles was $4,312, $4,312 and $4,034 in 2009, 2008 and 2007, respectively. Anticipated
amortization expense for the next five years related to intangibles is as follows:
Intangible amortization expense
2010
$ 3,853
2011
$ 3,554
2012
$ 3,266
2013
$ 3,061
2014
$ 2,980
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated
amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets
and other events.
8. Other Current Liabilities:
Other current liabilities consist of the following:
Payroll related
Taxes
Interest
Freight and rebates
Benefits and pensions
Dividends payable
Legal
Other
47
2009
$ 13,480
8,984
7,505
3,794
5,104
3,627
2,820
14,382
2008
$ 9,318
9,642
7,813
4,942
5,688
3,585
828
2,666
$ 59,696
$ 44,482
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
9. Short-term Borrowings, Long-Term Debt, and Interest Expense:
Short-term borrowings and long-term debt consist of the following:
Senior credit facility
Senior subordinated notes
Senior unsecured notes
Less current portion
2009
$ —
190,000
56,000
$ 246,000
—
2008
$ 126,500
190,000
66,000
$ 382,500
72,613
$ 246,000
$ 309,887
On May 22, 2009, our wholly owned subsidiary Innophos, Inc. and its wholly owned subsidiary, Innophos Canada, Inc. (the
“Borrowers”) entered into a Loan and Security Agreement (the “Loan Agreement”) with certain lenders (collectively, the “Lenders”)
including Wachovia Bank, National Association, as agent.
The Loan Agreement provides the Borrowers with a revolving line of credit from the Lenders of up to $65.0 million in the
aggregate, with a $20 million letter of credit sub-facility, terminating on May 22, 2013. The amount actually available to the
Borrowers may be less than the maximum credit and will vary from time to time depending on, among other factors, the amount of its
net eligible inventory and accounts receivable as calculated for purposes of the Loan Agreement. The obligations of the Borrowers
under the Loan Agreement are secured by the accounts receivable, inventory and other assets of Innophos, Inc. and Innophos Canada,
Inc., not including equipment or real property. Innophos Inc.’s Mexico-based subsidiaries are excluded from certain of the covenants
under the Loan Agreement, do not guaranty the indebtedness of Innophos, Inc. and Innophos Canada, Inc. incurred under it, and do
not furnish collateral in connection with it.
The Loan Agreement includes affirmative as well as negative covenants that prohibit or restrict a variety of actions without the
Lenders’ approval, including covenants that affect the ability of the Borrowers and its subsidiaries among other things to (a) incur or
guarantee debt, (b) create liens, (c) enter into mergers, recapitalizations or similar transactions or purchase all or substantially all of the
assets or stock of another party, (d) sell assets, (e) change names, (f) make certain changes to their business, (g) optionally prepay,
amend, acquire or refinance indebtedness, (h) pay dividends on, or purchase, acquire or redeem shares of, capital stock, (i) change
accounting methods, (j) make investments, or (k) enter into transactions with affiliates.
In addition, the Loan Agreement requires the Borrowers to maintain a fixed charge coverage ratio (on a consolidated basis) of at
least 1.00 to 1.00 as of the last day of each calendar month for the preceding twelve consecutive fiscal months during any
“Compliance Period.” Compliance Period is defined as any period beginning on a day on which (i) an event of default under the Loan
Agreement has occurred and is continuing or (ii) the excess availability under the revolving credit facility is less than $16.0 million
through and including the first day when excess availability has exceeded $16.0 million for 60 consecutive days during each of which
no event of default has occurred. The Loan Agreement also requires the Borrowers to maintain at all times excess availability under
the revolving credit facility of at least $6.5 million. The Loan Agreement allows the Borrowers to declare and pay dividends or make
other distributions to stockholders in an aggregate amount not to exceed $5.0 million in any calendar quarter.
As of December 31, 2009, the Borrowers had $41.9 million excess availability above the minimum excess availability
requirements, as calculated in accordance with the Loan Agreement, and there was no amount outstanding on the revolving credit line.
A total of $2.2 million in face amount of letters of credit were issued under the sub-facility to support instruments outstanding under a
prior credit facility terminated on that date.
The Company was party to a Credit Agreement dated as of August 13, 2004, as subsequently amended (the “2004 Credit
Facility”). On May 22, 2009, the Company entered into a Termination Agreement with the agent and J P Morgan Chase Bank, N.A.
and National City Bank, the latter two as issuing banks relating to letters of credit, pursuant to which, among other things, the 2004
Credit Facility was terminated, the Company paid the $72.7 million of outstanding term loan balance (principal and accrued interest)
from cash on hand, and security held by the lenders on substantially all the Company’s property was released. In the second quarter of
2009 this payment resulted in an approximate $0.4 million charge to earnings for the acceleration of deferred financing charges.
Prior to the termination of the term loan the Company made a $53.6 million excess cash flow payment of the term loan on
March 16, 2009. In the first quarter of 2009 this payment resulted in an approximate $0.4 million charge to earnings for the
acceleration of deferred financing charges.
48
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
2004 Senior Subordinated Notes
On August 13, 2004, the Company issued $190.0 million aggregate principal amount of 8.875% Senior Subordinated Notes due
August 15, 2014. We issued the notes in transactions exempt from or not subject to registration under the Securities Act, pursuant to
Rule 144A and Regulation S under the Securities Act. The Company did file a registration statement which became effective on
February 14, 2006.
Interest . Interest on the notes accrues at the rate of 8.875% per annum and is payable semi-annually on February 15 and
August 15. Interest on overdue principal and interest accrues at a maximum rate that is 1% higher than the then applicable interest rate
on the notes. We make each interest payment to the holders of record on the immediately preceding February 1 and August 1.
Subsidiary Guarantees. Our obligations under the Innophos, Inc. Notes are fully, unconditionally, jointly and severally
guaranteed on a senior subordinated unsecured basis by all of our existing and future domestic restricted subsidiaries. As of the date of
this Form 10-K, Innophos Mexico Holdings, LLC was the only guarantor of the Innophos, Inc. 2004 Senior Subordinated Notes.
Optional Redemption. We may redeem any of the notes at any time on or after August 15, 2009, in whole or in part, in cash at
the redemption prices described in the indenture governing the notes, plus accrued and unpaid interest and liquidated damages, if any,
to the date of redemption.
Change of Control. Upon a change of control, we may be required to make an offer to purchase each holder’s notes at a price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, to the date of
purchase.
Certain Covenants. The indenture governing the 2004 Senior Subordinated Notes contains covenants that, among other things,
limit our ability and the ability of our restricted subsidiaries to:
•
•
•
•
•
•
•
pay dividends on, redeem or repurchase our capital stock;
make investments and other restricted payments;
incur additional indebtedness or issue preferred stock;
create liens;
permit dividend or other payment restrictions on our restricted subsidiaries;
sell all or substantially all of our assets or consolidate or merge with or into other companies; and
engage in transactions with affiliates.
Any dividends or similar payments to Holdings from Innophos, Inc. will be treated as restricted payments under the indenture
governing the 2004 Senior Subordinated Notes. Holdings will rely upon the ability of Innophos, Inc. to make such restricted payments
to us in order for us to make any payments on the notes. The amount of all restricted payments that can be made by the Company is
approximately equal to 50% of the consolidated net income (as defined in the indenture governing the 2004 Senior Subordinated
Notes) of the Company since the beginning of the first fiscal quarter following the date on which the 2004 Senior Subordinated Notes
were issued, plus 100% of the net cash proceeds received by the Company since the date of the indenture from the issue or sale of
equity interests. The indenture governing the 2004 Senior Subordinated Notes prohibits all restricted payments if a default or event of
default has occurred under that indenture or if Innophos, Inc.’s fixed charge coverage ratio is below 2.0 to 1.0.
Senior Unsecured Notes
On April 16, 2007, Holdings issued $66.0 million aggregate principal amount of Senior Unsecured Notes. We issued the Senior
Unsecured Notes in transactions exempt from or not subject to registration under the Securities Act, pursuant to Rule 144A and
Regulation S under the Securities Act.
Interest . Interest on the Senior Unsecured Notes accrues at the rate of 9.5% per annum and is payable semi-annually on
April 15 and October 15, commencing on October 15, 2007. Interest on overdue principal and interest accrues at a maximum rate that
is 1% higher than the then applicable interest rate on the Senior Unsecured Notes. We make each interest payment to the holders of
record on the immediately preceding April 1 and October 1.
Optional Redemption. We may, at our option, redeem some or all of the Senior Unsecured Notes at any time on or after
April 15, 2009, at the redemption prices described in the indenture governing the Senior Unsecured Notes, plus accrued and unpaid
interest and liquidated damages, if any, to the date of redemption.
49
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Change of Control. Upon a change of control, we may be required to make an offer to purchase each holder’s Senior Unsecured
Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, to the
date of purchase.
Certain Covenants. The indenture governing the Senior Unsecured Notes contains covenants that, among other things, limit our
ability and the ability of our restricted subsidiaries to:
•
•
•
•
•
•
•
pay dividends on, redeem or repurchase our capital stock;
make investments and other restricted payments;
incur additional indebtedness or issue preferred stock;
create liens;
permit dividend or other payment restrictions on our restricted subsidiaries;
sell all or substantially all of our assets or consolidate or merge with or into other companies; and
engage in transactions with affiliates.
These limitations are subject to a number of important qualifications and exceptions as described in the indenture governing the
Senior Unsecured Notes. Innophos Holdings, Inc. is dependent on the earnings and distributions from Innophos, Inc. and subsidiaries
to fund this obligation.
The proceeds from the sale of the Senior Unsecured notes, together with $0.5 million of cash on hand, were applied to pay
expenses and redeem the entire remaining outstanding amount of Floating Rate Senior Notes due 2015 (including the payment of
principal, premium and accrued interest) issued by our wholly-owned subsidiary, Innophos Investments Holdings, Inc. Fees and
expenses related to the Senior Unsecured notes offering were approximately $1.8 million. This amount was recorded as deferred
financing costs and will be amortized over the life of the Senior Unsecured notes using the effective interest method.
On April 13, 2009 the Company purchased $10.0 million of the 9.5% Senior Unsecured Notes due April 2012 for $6.5 million.
The $3.5 million retirement gain was reflected in interest expense, net in our Consolidated Statement of Operations in the second
quarter of 2009. The Company also recorded accelerated deferred financing costs of approximately $0.2 million in the second quarter
of 2009.
Innophos and its subsidiaries and affiliates may from time to time seek to acquire or otherwise retire outstanding debt (including
publicly issued debt) through open market purchases, privately negotiated transactions, tender offers, 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.
Floating Rate Senior Notes
On April 16, 2007, Innophos Investments Holdings, Inc. called for the redemption of the remaining $60.8 million in principal of
its Floating Rate Senior Notes due 2015 effective May 17, 2007. The redemption of the Floating Rate Senior Notes resulted in an
approximate $1.5 million charge to earnings for the acceleration of deferred financing charges and a $1.8 million charge to earnings
for the call premium. The $3.3 million charge was recorded in interest expense.
We believe that the cash generated from operations and availability under our revolving credit facility will be sufficient to meet
our debt service, tax payments, capital expenditures and working capital requirements for at least the next twelve months. Our current
business plans support these operating needs, including our scheduled repayments of debt in accordance with the terms of those
agreements. However, future operating performance is subject to prevailing economic and competitive conditions and other factors
that are uncertain. If the cash flows and other capital resources available to the Company are insufficient to fund our debt and other
liquidity needs, the Company may have to take alternative actions that differ from the Company’s current operating plan.
Total interest paid by the Company for all indebtedness for 2009, 2008 and 2007 was $24,761, $33,136 and $38,786.
As of December 31, 2009, the Company was in full compliance with all debt covenant requirements.
50
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Interest expense, net consists of the following:
Interest expense
Deferred financing cost
Interest income
Gain on retirement of bonds
Less: amount capitalized for capital projects
Total interest expense, net
10. Other Long-Term Liabilities:
Other long-term liabilities consist of the following:
Environmental liabilities
Profit sharing liabilities
Deferred income taxes
Pension and post retirement liabilities (U.S. and Canada only)
Other Liabilities
Year Ended December 31,
2008
33,170
2,726
(1,372)
—
(331)
2007
$38,891
4,643
(1,307)
—
(668)
$34,193
$41,559
2009
$24,455
3,130
(541)
(3,500)
(231)
$23,313
2009
$ 1,100
2,350
23,617
5,240
7,708
2008
1,100
3,106
17,714
4,647
5,536
$ 40,015
$ 32,103
11. 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:
•
•
•
•
Restricted stock grants, which entitle the holder to receive, at the end of each vesting term, a specified number of shares of
the Company’s common stock, and which also entitle the holder to receive dividends paid on such grants throughout the
vesting period.
Stock options, which entitle the holder to purchase, after the end of a vesting term, a specified number of shares of the
Company’s common stock at an exercise price per share set equal to the market price of the Company’s common stock on
the date of grant.
Performance share awards which entitle the holder to receive, at the end of a vesting term, a number of shares of the
Company’s common stock, within a range of shares from zero to a specified maximum (generally 200%), calculated using
a three year future average return on invested capital (i.e. the three year period 2009-2011 for a 2009 award) as defined
solely by reference to the Company’s own activities. Dividends will accrue over the vesting period and are paid on
performance share awards when fully vested.
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.
In 2005 the Company’s Board of Directors approved the Innophos Holdings, Inc. 2005 Stock Option Plan, or 2005 Plan. The
2005 Plan provided for grants of qualified and non-qualified stock options with a ten year term. All options vest ratably over an
approximate five year term. The 2005 Plan, for all practical purposes, was discontinued with the adoption of the Innophos Holdings,
Inc. 2006 Stock Option Plan, or 2006 Plan. The 2006 Plan was adopted as a successor to the Company’s 2005 Plan prior to the IPO in
November 2006. The 2006 Plan allows for the issuance of up to 1,000,000 shares of Common Stock under its stock provisions.
Subsequently, in June 2009 the stockholders approved the Company’s 2009 Long Term Incentive Plan (the 2009 Plan), which
effectively replaced the 2006 Plan.
51
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Restricted Stock
In October 2006, the Company’s Board of Directors awarded 173,568 shares of restricted Common Stock with a fair value of
$2.1 million to certain executive officers. These awards are classified as equity awards and vest over nine quarters in equal
installments of 11.11% per quarter beginning January 1, 2007. Declared dividends will accrue on the restricted stock and will vest
over the same period. The restricted stock is fully vested as of January 1, 2009 and has converted into an equivalent number of shares
of common stock. The related compensation expense is based on the public offering price of $12. The compensation expense is
amortized on a straight-line basis over the requisite service period. The Company recognized approximately $0.9 million of
compensation expense in 2008 and 2007, respectively. As of December 31, 2009 all shares have vested. There were 96,428 unvested
and 77,140 vested shares granted as of December 31, 2007. As of December 31, 2008, there were 19,288 unvested and 154,280 vested
shares granted.
There were 5,500 restricted shares granted with a fair value of $45 in the first quarter of 2009. These awards are classified as
equity awards and vest through no later than January 31, 2011. The related compensation expense is based on the date of grant share
price of $8.24. The compensation expense is amortized on a straight-line basis over the requisite vesting period.
Stock Options
In connection with the Company’s initial public offering, the historical stock option strips originally granted on April 1, 2005
under the Innophos Holdings, Inc. 2005 Stock Option Plan, or 2005 Plan, were converted, as required under the terms of the 2005
Plan, to 1,116,944 single class common stock options currently outstanding with the same vesting schedule. The exercise price is
$2.55 per option. The determination of the fair value of the underlying common stock used to determine the exercise prices for the
stock options granted on April 1, 2005 was performed contemporaneously with the issuance of these common stock option grants.
On May 24, 2007 the two independent directors of the Company were granted a total of 4,424 stock options which were fully
vested with an exercise price of $15.37 per share. These grants were reissued options under the 2005 Plan of previously forfeited
options. These options are accounted for under the provisions of ASC 718 (formerly SFAS No. 123(R)). The compensation expense to
these immediate vesting options was approximately $22.
On October 22, 2007 the Company granted 287,200 non-qualified stock options at an exercise price of $15.20 per share to
certain employees with a fair value of $1.0 million. The non-qualified stock options vest annually over three years with a ten-year
term from date of grant.
On December 19, 2007 the Company granted 2,000 non-qualified stock options to a certain employee at an exercise price of
$14.47 per share with a fair value of $7. The non-qualified stock options vest annually over three years with a ten-year term from date
of grant.
On April 25, 2008 the Company granted 248,550 non-qualified stock options at an exercise price of $18.38 per share to certain
employees with a fair value of $0.9 million. The non-qualified stock options vest annually over three years with a ten-year term from
date of grant.
On May 7, 2009 and June 2, 2009 the Company granted 84,651 and 136,849 non-qualified stock options with a fair value of
$0.5 million and $0.9 million, respectively. The non-qualified stock options vest annually over three years with a ten-year term from
date of grant.
Performance Share Awards
On October 22, 2007 the Company granted 74,650 performance share awards to certain employees with a fair value of $0.9
million. The performance share awards vest at the end of the three year service period with a ten-year term from date of grant.
Declared dividends will accrue on the performance shares and will vest over the same period.
On December 19, 2007 the Company granted 600 performance share awards to a certain employee with a fair value of $8. The
performance share awards vest at the end of the three year service period with a ten-year term from date of grant. Declared dividends
will accrue on the performance shares and will vest over the same period.
On April 25, 2008 the Company granted 82,340 performance share awards to certain employees with a fair value of $1.4
million. The performance share awards vest at the end of the three year service period with a ten-year term from date of grant.
Declared dividends will accrue on the performance shares and will vest over the same period. During 2008 the Company revised its
estimate of the number of performance shares expected to be earned at the end of the performance periods, as a result of revising its
estimate of projected performance, and increased the number of performance shares by 157,590 with an associated fair value of $2.3
million.
52
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
On May 7, 2009 the Company granted 94,150 performance share awards to certain employees with a fair value of $0.9 million.
The performance share awards vest at the end of the three year service period with a ten-year term from date of grant. Declared
dividends will accrue on the performance shares and will vest over the same period. In the third quarter of 2009 the Company revised
its estimate of the number of performance shares expected to be earned at the end of the performance period, as a result of revising its
estimate of projected performance, and increased the number of performance shares by 94,150 with an associated fair value of $1.4
million.
On October 30, 2009 the Company granted 2,067 performance share awards to certain employees with a fair value of less than
$0.1 million. The performance share awards vest at the end of the three year service period with a ten-year term from date of grant.
Declared dividends will accrue on the performance shares and will vest over the same period. In the fourth quarter of 2009 the
Company revised its estimate of the number of performance shares expected to be earned at the end of the performance period, as a
result of revising its estimate of projected performance, and increased the number of performance shares by 2,067 with an associated
fair value of less than $0.1 million.
Stock Grants
In December 2008 the five external members of the Board of Directors were each granted 3,349 shares of the Company’s
common stock with an aggregated fair value of $250,000 which immediately vested as part of their director fees.
In July 2009 the six external members of the Board of Directors were each granted 3,106 shares of the Company’s common
stock with an aggregated fair value of $0.3 million which immediately vested as part of their director fees.
At December 31, 2009, assuming all performance share grants are at maximum, there were 2.2 million shares available for
future grants under the 2009 Plan.
The Company will continue to account for the outstanding 2005 Plan awards under APB 25, which falls under grandfathered
material excluded from the first release of the FASB Codification, until they are settled or modified. All of the awards granted under
the 2009 Plan and the 2006 Plan are accounted for under the provisions of ASC 718 (formerly SFAS No. 123(R)). The compensation
expense is amortized on a straight-line basis over the requisite service period, adjusted for forfeiture assumptions.
The following table summarizes the components of stock-based compensation expense, all of which has been classified as
selling, general and administrative expense:
Stock options
Restricted stock
Performance shares
Stock grants
Year Ended December 31,
2008
$ 644
926
1,647
250
2007
$ 91
926
60
—
2009
$ 937
20
2,110
300
Total stock-based compensation expense
$3,367
$3,467
$1,077
53
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
A summary of stock option activity during the three years ended December 31, 2009, is presented below:
Outstanding at January 1, 2007
Granted
Forfeited
Exercised
Outstanding at December 31, 2007
Exercisable at December 31, 2007
Outstanding at January 1, 2008
Granted
Forfeited
Exercised
Outstanding at December 31, 2008
Exercisable at December 31, 2008
Outstanding at January 1, 2009
Granted
Forfeited
Exercised
Outstanding at December 31, 2009
Exercisable at December 31, 2009
Number of
Options
1,116,943
293,624
(65,649)
(422,860)
922,058
389,526
922,058
248,550
(351)
(207,763)
962,494
484,323
962,494
221,500
(46,503)
(218,405)
919,086
473,716
Weighted
Average
Exercise
Price
$ 2.55
15.20
2.55
2.55
$ 6.58
$ 2.70
$ 6.58
18.38
15.20
2.62
$ 10.48
$ 5.53
$ 10.48
14.57
16.77
3.12
$ 12.89
$ 10.10
The fair value of the options granted during 2009, 2008 and 2007 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
Dividend yield
Risk-free interest rate
Expected term
Weighted average grant date fair value of stock options
Year Ended
December 31,
2009
Year Ended
December 31,
2008
61.4%
5.0%
2.7%
6 years
6.19
$
36.8%
4.6%
3.4%
6 years
4.52
$
Year Ended
December 31,
2007
36.8%
4.5%
4.2%
6 years
3.97
$
Prior to 2009, since Innophos Holdings, Inc. was a newly public entity and has limited historical data on the price of its publicly
traded shares, the expected volatility for the valuation of its stock options and performance shares was based on peer group historical
volatility data equaling the expected term. In 2009, the Company had chosen a blended volatility which consists of 50% historical
volatility average of the peer group and 50% historical volatility of Innophos. The increase in the expected volatility in 2009 versus
prior periods is a result of broader market conditions. 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. 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.
54
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
A summary of performance share activity is presented below:
Outstanding at January 1, 2007
Granted
Forfeited
Vested
Outstanding at December 31, 2007
Outstanding at January 1, 2008
Granted (at targeted return on invested capital)
Forfeited
Vested
Adjustment to estimate of shares to be earned
Outstanding at December 31, 2008
Outstanding at January 1, 2009
Granted (at targeted return on invested capital)
Forfeited
Vested
Adjustment to estimate of shares to be earned
Outstanding at December 31, 2009
Number
of Shares
—
75,250
—
—
75,250
75,250
82,340
—
—
157,590
315,180
315,180
96,217
(28,000)
—
96,217
479,614
Weighted
Average
Grant Date
Fair Value
$ —
13.28
—
—
$ 13.28
$ 13.28
18.38
—
—
15.95
$ 15.95
$ 15.95
14.67
16.02
—
14.67
$ 15.43
The total intrinsic value of options exercised and stock grants during 2009, 2008 and 2007 was $2.7 million, $5.1 million and
$5.2 million, respectively. The aggregate intrinsic value of stock options outstanding and exercisable at December 31, 2009 was $12.9
million and $6.1 million, respectively. The total remaining unrecognized compensation expense related to share-based payments is as
follows:
Unrecognized Compensation Expense
Amount
Weighted-average years to be recognized
12. Earnings per share (EPS)
Restricted
Stock
$
26
2.2 years
Stock
Options
$
1,987
1.6 years
Performance
Based
$
3,602
1.6 years
The Company accounts for earnings per share in accordance with ASC 260 (formerly SFAS No. 128, Earnings Per Share) 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. Retrospective application is required for periods prior to the effective date
and as a result, all prior period earnings per share data presented herein have been adjusted to conform to these provisions. This
resulted in a $0.02 reduction in previously reported basic EPS for the year ended December 31, 2008.
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.
55
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
The following is a reconciliation of the weighted average basic number of common shares outstanding to the diluted number of
common and common stock equivalent shares outstanding and the calculation of earnings per share using the two-class method:
Net income (loss)
Less: earnings attributable to unvested shares
Net income (loss) available to common shareholders
$
Year Ended December 31,
2008
207,183
(33)
207,150
$
2009
63,144
(3)
63,141
2007
(5,487)
—
(5,487)
$
Weighted average number of common and potential common shares outstanding:
Basic number of common shares outstanding
Dilutive effect of stock equivalents
Diluted number of weighted average common shares outstanding
21,258,536
710,368
21,968,904
20,956,566
761,971
20,676,859
—
21,718,537
20,676,859
Earnings (loss) per common share:
Earnings (loss) per common share - Basic
Earnings (loss) per common share - Diluted
$
$
2.97
2.87
$
$
9.89
9.54
$
$
(0.27)
(0.27)
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 688,332, 486,877 and 1,093,736 for the years ended 2009, 2008 and 2007,
respectively.
13. Dividends
The following is the dividend activity for 2009, 2008 and 2007:
Dividends declared - per share
Dividends declared - aggregate
Dividends paid - per share
Dividends paid - aggregate
Dividends declared - per share
Dividends declared - aggregate
Dividends paid - per share
Dividends paid - aggregate
Dividends declared - per share
Dividends declared - aggregate
Dividends paid - per share
Dividends paid - aggregate
March 31
$ 0.17
3,611
0.17
3,590
March 31
$ 0.17
3,551
0.17
3,549
June 30
$ 0.17
3,622
0.17
3,611
June 30
$ 0.17
3,563
0.17
3,551
March 31
June 30
$ 0.17
3,533
0.17
2,275
$ 0.17
3,544
0.17
3,533
2009
Quarters ended
September 30
0.17
$
3,623
0.17
3,622
2008
Quarters ended
September 30
$ —
—
0.17
3,563
2007
Quarters ended
September 30
0.17
$
3,547
0.17
3,544
December 31
$
0.17
3,627
0.17
3,623
Total
$ 0.68
14,483
0.68
14,446
December 31
$
0.34
7,166
0.17
3,578
Total
$ 0.68
14,280
0.68
14,241
December 31
$
0.17
3,549
0.17
3,547
Total
$ 0.68
14,173
0.68
12,899
56
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
14. Pension Plans and Postretirement Benefits:
Innophos maintains both noncontributory defined benefit pension plans and defined contribution plans that together cover
substantially all U.S. and Canadian employees.
In the United States, salaried and hourly employees are covered by a defined contribution plan with a 401(k) feature. The plan
provides for employee contributions, company matching contributions, and an age-weighted annual company contribution to eligible
employees. Union-represented hourly employees, at our Nashville site, are covered by a traditional defined benefit plan providing
benefits based on years of service and final average pay. On April 26, 2007, the Company and the Union for the hourly employees at
our Nashville facility agreed that it would freeze its defined benefit pension plan (the “Plan”) as of August 1, 2007. The accrual of
additional benefits or increase in the current level of benefits under the Plan ceased as of August 1, 2007, after which the Nashville
union employees now participate in the Company’s existing non contributory defined contribution benefit plan. All plans were
established by Innophos in 2004.
In Canada, salaried employees are covered by defined contribution plans which provide for company contributions as a percent
of pay, employee contributions, and company matching contributions. Union-represented hourly employees are covered by a defined
benefit plan providing benefits based on a negotiated benefit level and years of service. The defined contribution plans were
established by the Company in 2004; the defined benefit plan for union-represented hourly employees is a continuation of the Rhodia
Canada Inc.’s pension plan for its Port Maitland union employees, which was included in the acquisition of the Phosphates Business
from Rhodia on August 13, 2004.
Innophos also has other postretirement benefit plans covering substantially all of its U.S. and Canadian employees. Certain
employee groups covered under the plans do not receive benefits post-age 65. In the United States, the health care plans are
contributory with participants’ contributions adjusted annually, and limits on the company’s share of the costs; the life insurance plans
are noncontributory. The effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or the Act, are not
significant. In Canada, the plans are non-contributory.
Innophos uses a December 31 measurement date for all of its plans. For the purposes of the following schedules, beginning of
the year is January 1.
The weighted average discount rate at the measurement dates for the Company’s defined benefit pension plans and the post-
retirement benefit plans is developed using a spot interest yield curve based upon a broad population of corporate bonds rated AA or
higher, adjusted to match the duration of each plan’s projected benefit payment stream.
The expected return is based on a specific asset mix, active management, rebalancing among diversified asset classes within the
portfolio, and a consistent underlying inflation assumption to calculate the appropriate long-term expected investment return.
As a sensitivity measure, the effect of a 25 basis-point decrease in our discount rate assumption would increase our net periodic
benefit cost for our pension and post-retirement plans by approximately $60. A 1% decrease in our expected rate of return on plan
assets would increase our pension plan expense by $135.
The amounts in accumulated other comprehensive income (loss), or AOCI, for all plans that are expected to be amortized as
components of net periodic benefit cost (benefit) during 2010 are as follows:
Prior Service Cost
Net Actuarial Loss/(Gain)
Transition Obligation
Pension
$ 93
87
—
Other
Benefits
$ 261
(58)
27
Total
$354
29
27
57
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
The changes in benefit obligations recognized in other comprehensive loss during 2009 and 2008 are as follows:
Change in accumulated other comprehensive income
Amortization of net gain
Amortization of prior service cost
Prior service cost arising during period from amendments
Net loss arising during period
Total change in accumulated other comprehensive income
Deferred taxes
Net amount recognized
Pension Benefits
2008
2009
Other Benefits
2008
2009
Total
2009
2008
$ (75)
(93)
—
504
336
(114)
$ 222
$ (28)
—
259
(5)
226
1
$227
$ 90
(289)
—
198
(1)
6
5
$
$ 109
(289)
(30)
(120)
(330)
(144)
$ 15
(382)
—
702
335
(108)
$ 81
(289)
229
(125)
(104)
(143)
$(474)
$ 227
$(247)
58
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
U.S. Plans
On April 26, 2007, the Company and the Union for the hourly employees at our Nashville facility agreed that it would freeze its
defined benefit pension plan (the “Plan”) as of August 1, 2007. The accrual of additional benefits or increase in the current level of
benefits under the Plan will cease as of August 1, 2007, after which the Nashville union employees will participate in the Company’s
existing non contributory defined contribution benefit plan. As of January 1, 2007, Plan assets were less than the projected benefit
obligation. Freezing of the Plan was accounted for as a curtailment under ASC 715 (formerly SFAS No. 88), Compensation –
Retirement Benefits. The Company remeasured the pension obligation during the three months ended June 30, 2007 and as a result,
reduced the projected benefit obligation by $1.2 million and recognized $1.4 million largely attributable to the recognition of prior
service cost, resulting in a net curtailment loss of $0.2 million to earnings.
Obligations and Funded Status—U.S. Plans
At December 31
Accumulated benefit obligation
Change in Projected Benefit Obligation
Projected Benefit Obligation at Beginning of Year
Service cost
Interest cost
Actuarial (Gain)/Loss
Actual Benefits Paid
Plan Amendments
Projected Benefit Obligation at End of Year
Change in Plan Assets
Fair Value of Trust Assets at Beginning of Year
Actual Return on Plan Assets
Employer Contributions
Actual Benefits Paid
Fair Value of Trust Assets at End of Year
Pension Benefits
2008
$ 1,898
2009
$ 1,928
Other Benefits
2009
$ 3,402
2008
$ 2,992
$ 1,898
—
104
(64)
(10)
—
$ 1,928
$ 982
130
83
(10)
$ 1,185
$ 1,915
—
100
(112)
(5)
—
$ 1,898
$ 1,184
(295)
98
(5)
$ 982
$ 2,992
342
161
(36)
(57)
—
$ 2,589
323
142
(14)
(48)
—
$ 3,402
$ 2,992
$ —
—
57
(57)
$ —
—
48
(48)
$ —
$ —
Funded Status of the Plan
$ (743)
$ (916)
$(3,402)
$(2,992)
Amounts Recognized in the Consolidated Balance Sheets
Noncurrent Assets
Current Liabilities
Noncurrent Liabilities
Net Amounts Recognized
Amounts Recognized in Accumulated Other Comprehensive Income
Net Transition (Asset)/Obligation
Prior Service Cost/(Credit)
Net Actuarial (Gain)/Loss
Total Amount Recognized
Deferred Taxes
Net Amount Recognized
$ —
—
(743)
$ —
—
(916)
$ —
(119)
(3,283)
$ —
(87)
(2,905)
$ (743)
$ (916)
$(3,402)
$(2,992)
$ —
—
8
$
8
(3)
5
$ —
—
86
86
$
(33)
53
$ —
1,311
(981)
$ —
1,573
(1,039)
$ 330
$ 534
(127)
203
(205)
329
59
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Components of Net Periodic Benefit Cost
Service cost......................................................................
Interest cost......................................................................
Expected Return on Assets ..............................................
Amortization of................................................................
Prior Service Cost...................................................
Actuarial (Gain)/Loss .............................................
Curtailment Expense........................................................
Net Periodic Cost .............................................................
Weighted Average Assumptions for Balance Sheet Liability
at End of Year
Discount Rate...................................................................
Expected Long-Term Rate of Return...............................
Rate of Compensation Increase........................................
Weighted Average Assumptions for Net Periodic Benefit
Cost at End of Year
Discount Rate...................................................................
Expected Long-Term Rate of Return...............................
Rate of Compensation Increase........................................
Estimated Future Benefit Payments
Fiscal 2010
Fiscal 2011
Fiscal 2012
Fiscal 2013
Fiscal 2014
Fiscal Years 2015-2019
Pension Benefits
2008
2009
2007
2009
Other Benefits
2008
2007
$ —
104
(109)
—
(7)
—
$ (12)
$ —
100
(100)
—
(41)
—
$ (41)
$ 201
134
(61)
43
2
203
$ 522
$ 342
161
—
262
(95)
—
$ 670
$ 323
142
—
261
(115)
—
$ 611
$ 311
126
—
262
(115)
—
$ 584
5.50% 5.50% 6.00% 5.50%
8.00% 8.00% 8.00% NA
NA
3.00%
NA
NA
5.50% 6.00% 5.75% 5.50%
8.00% 8.00% 8.00% NA
NA
3.00% 3.00%
NA
5.50% 5.75%
NA
NA
3.00% 3.00%
5.75% 5.75%
NA
NA
3.00% 3.00%
Pension Benefits
38
$
50
65
79
91
632
Other Benefits
119
$
159
206
250
288
2,054
Innophos expects to contribute approximately $0.1 million to its U.S. defined benefit pension plan in 2010.
There are no estimated net actuarial gain, prior service cost, or transition obligation (asset) for all defined benefit pension plans
that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the 2010 fiscal year.
The estimated actuarial gain, prior service cost, and transition obligation (asset) for the postretirement plan that will be
amortized from accumulated other comprehensive income into net periodic benefit cost during the 2010 fiscal year are ($78), $261
and $0, respectively.
Assumed health care cost trend rates on the U.S. plans do not have a significant effect on the amounts reported for the health
care plans as a result of limits on the Company’s share of the cost.
60
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Plan Assets
As of December 31, 2009 the Innophos, Inc. Pension Investment Committee was in the process of formalizing an investment
policy designed to achieve long-term objectives of return, while mitigating against downside risk and considering expected cash flow.
Innophos, Inc.’s pension plan invests in mutual funds and commercial paper and the weighted-average asset allocations at
December 31, 2009 and 2008 by asset category are as follows:
Asset Category
Equity securities
Fixed income securities
Other
Total
Plan Assets at
December 31
2009
2008
35.8%
61.5
2.7
100.0%
59.9%
40.1
0.0
100.0%
The fair values of Innophos, Inc.’s pension plan assets at December 31, 2009 by asset category are as follows:
Equity securities
Fixed income securities
Other
Defined Contribution Plan—U.S.
Total
$ 424
729
32
Level 1
$ 424
729
32
$1,185
$1,185
Level 2
Level 3
$ —
—
—
$ —
$ —
—
—
$ —
Innophos Inc.’s expense for the defined contribution plan was $2.7 million, $2.9 million and $2.2 million for 2009, 2008 and
2007, respectively.
61
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Canadian Plans
Obligations and Funded Status—Canadian Plans at December 31
Accumulated benefit obligation
Projected Change in Benefit Obligation
Projected Benefit Obligation at Beginning of Year
Service cost
Interest cost
Plan Amendments
Actuarial (Gain)/Loss
Actual Benefits Paid
Exchange Rate Changes
Projected Benefit Obligation at End of Year
Change in Plan Assets
Fair Value of Trust Assets at Beginning of Year
Actual Return on Plan Assets
Employer Contributions
Actual Benefits Paid
Exchange Rate Changes
Fair Value of Trust Assets at End of Year
Funded Status of the Plan
Amounts Recognized in the Consolidated Balance Sheets
Noncurrent Assets
Current Liabilities
Noncurrent Liabilities
Net Amounts Recognized
Amounts Recognized in Accumulated Other Comprehensive Income
Net Transition (Asset)/Obligation
Prior Service Cost/(Credit)
Net Actuarial (Gain)/Loss
Total Amount Recognized
Deferred Taxes
Net Amount Recognized
Pension Benefits
2009
$ 8,175
2008
$ 5,852
Other Benefits
2009
$ 1,254
2008
$ 853
$ 5,852
157
473
—
915
(301)
1,079
$ 8,175
$ 6,837
1,353
1,637
(301)
1,415
$ 10,941
$ 2,766
$ 2,766
—
—
$ 2,766
$ —
201
2,344
$ 2,545
(890)
1,655
$ 8,543
218
446
299
(1,971)
(292)
(1,391)
$ 5,852
$ 9,017
(1,452)
1,132
(292)
(1,568)
$ 6,837
$ 984
$ 984
—
—
$ 984
$ —
258
1,873
$ 2,131
(746)
1,385
$ 853
40
71
—
158
(29)
161
$ 998
55
54
(35)
(3)
(28)
(188)
$ 1,254
$ 853
$ —
—
29
(29)
—
$ —
—
28
(28)
—
$ —
$ —
$ (1,254)
$ (853)
$ —
(40)
(1,214)
$ —
(27)
(826)
$ (1,254)
$ (853)
$ 277
—
319
$ 596
(209)
$ 263
—
131
$ 394
(138)
387
256
62
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Components of Net Periodic Benefit Cost
Service cost
Interest cost
Expected Return on Assets
Amortization of
Actuarial (Gain)/Loss
Prior Service Cost
Net Transition Obligation
Net Periodic Cost
Weighted Average Assumptions for Balance Sheet Liability
at End of Year
Discount Rate
Rate of Compensation Increase
Weighted Average Assumptions for Net Periodic Benefit
Cost at End of Year
Discount Rate
Expected Long-Term Rate of Return
Rate of Compensation Increase
Accrued Health Care Cost Trend Rates at End of Year
Health Care Cost Trend Rate Assumed for Next Year
(Initial Rate)
Rate to which the Cost Trend Rate is Assumed to
Decline (Ultimate Rate)
Pension Benefits
2008
2009
2007
2009
Other Benefits
2008
$ 157
473
(667)
82
93
—
$ 138
$ 218
446
(660)
80
—
—
$ 84
$ 230
420
(565)
49
—
—
$ 134
$ 40
71
—
5
—
27
$ 143
$ 55
54
—
7
—
33
$ 149
2007
$ 55
49
—
13
—
32
$ 149
6.50%
NA
7.50%
NA
5.50%
NA
6.50%
NA
7.50%
NA
5.50%
NA
7.50%
7.00%
NA
5.50%
7.00%
NA
5.25%
7.00%
NA
7.50%
0.00%
NA
5.50%
0.00%
NA
5.25%
0.00%
NA
10%
5%
9%
5%
10%
5%
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-
percentage-point change in assumed health care cost trend rates would have the following effects:
Effect of a Change in the Assumed Rate of Increase in Health Benefit Costs
Effect of a 1% Increase On
Total of Service Cost and Interest Cost
Postretirement Benefit Obligation
Effect of a 1% Decrease On
Total of Service Cost and Interest Cost
Other Benefits
2008
2009
$ 22
$ 194
$ 15
$ 131
$ (18)
$ (12)
The estimated net actuarial loss, prior service cost, and transition obligation (asset) for all defined benefit pension plans that will
be amortized from accumulated other comprehensive income into net periodic benefit cost during the 2010 fiscal year are $91, $93
and $0, respectively.
The estimated actuarial loss, prior service cost, and transition obligation (asset) for the postretirement plan that will be amortized
from accumulated other comprehensive income into net periodic benefit cost during the 2010 fiscal year are $20, $0 and $27,
respectively.
63
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Plan Assets
Innophos Canada Inc.’s pension plan invests in mutual funds and the weighted-average asset allocations at December 31, 2009
and 2008 by asset category are as follows:
Asset Category
Equity securities
Fixed income securities
Other
Total
2009
2008
57.6%
41.7
0.7
100%
55.7%
40.1
4.2
100%
The fair values of Innophos Canada, Inc.’s pension plan assets at December 31, 2009 by asset category are as follows:
Equity securities
Fixed income securities
Other
Total
$ 6,298
4,566
77
Level 1
$ 6,298
4,566
77
Level 2
$ —
—
—
Level 3
$ —
—
—
$ 10,941
$ 10,941
$ —
$ —
The Pension Committee has promulgated a Statement of Investment Policies and Procedures based on the “prudent person
portfolio approach” to ensure investment and administration of the assets of the Plan within the parameters set out in the Ontario
Pension Benefits Act and the Regulations hereunder. Investment managers appointed by the Plan are directed to achieve a satisfactory
return through a diversified portfolio consistent with acceptable risks and prudent management. In accordance with the investment and
risk philosophy of the Committee, a target asset mix of 60% equities and 40% fixed income instruments has been established.
Investment weightings and results are tested regularly against appropriate benchmark portfolios.
Cash Flows
Contributions
Innophos Canada, Inc. contributed $1.7 million to its pension plan in 2009.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Estimated Future Benefit Payments
Fiscal 2010
Fiscal 2011
Fiscal 2012
Fiscal 2013
Fiscal 2014
Pension Benefits
340
$
396
427
453
466
Other Benefits
$
40
37
37
43
57
Innophos plans to contribute approximately $1.0 million to its Canadian pension plan in 2010.
Defined Contribution Plans—Canada
Innophos Canada Inc.’s expense for the defined contribution plans was approximately $0.1 million for 2009, 2008 and 2007,
respectively.
Mexico
In accordance with Mexican labor law, a Mexican employee is entitled to certain post employment payments after reaching
fifteen years of service. In addition, Mexican employees also participate in a statutory profit sharing program based on 10% of
adjusted taxable income. For 2009, 2008 and 2007, Innophos Fosfatados de Mexico, S.A. de C.V., recorded provisions of zero, $4,546
and $2,135, respectively, for these liabilities.
64
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
15. Income Taxes:
A reconciliation of the U.S. statutory rate and income taxes follows:
US
Canada/Mexico
Total
Current income taxes
Deferred income taxes
Total
2009
Income
before
income taxes
$ 89,827
14,519
$ 104,346
Income tax
expense
$ 33,390
7,812
$ 41,202
$ 39,335
1,867
$ 41,202
Year Ended December 31,
2008
2007
Income
before
income taxes
$ 80,184
182,201
$ 262,385
Income
(loss) before
income taxes
$ (29,003)
35,412
6,409
$
Income tax
expense/
(benefit)
$ 3,922
51,280
$ 55,202
$ 67,307
(12,105)
$ 55,202
Income tax
expense/
(benefit)
293
$
11,603
$ 11,896
$ 13,703
(1,807)
$ 11,896
Income tax expense at the U.S. statutory rate
State income taxes (net of federal tax effect and State valuation allowance
Foreign tax rate differential
Change in Federal U.S. valuation allowance
Non-deductible permanent items
Provision for income taxes
Net deferred tax assets were reflected on the consolidated balance sheets as follows:
Net current deferred tax assets
Net noncurrent deferred tax assets
Net current deferred tax liabilities
Net noncurrent deferred tax liabilities
Net deferred tax liabilities
The components of the Company’s deferred tax assets/ (liabilities) were as follows:
Deferred tax assets:
Inventories
Accrued liabilities
Intangibles
Tax losses
Total deferred tax assets
Deferred tax liabilities:
Gain on bond retirement
Intangibles
Fixed assets
Total deferred tax liabilities
Total valuation allowances
Net deferred tax liabilities
65
Year Ended December 31,
2008
$ 91,835
851
(12,314)
(24,858)
(312)
$ 55,202
2009
$ 36,520
3,182
3,041
—
(1,541)
$ 41,202
2007
$ 2,244
90
(504)
10,040
26
$ 11,896
Year Ended December 31,
2008
2009
$ 12,771
$ 16,019
512
1,409
—
—
(17,714)
(23,617)
$ (4,431)
$ (6,189)
Year Ended December 31,
2009
2008
$ 4,536
12,229
—
10,079
26,844
(1,345)
(514)
(25,511)
(27,370)
(5,663)
$ (6,189)
$ 2,345
8,429
1
16,094
26,869
—
—
(26,487)
(26,487)
(4,813)
$ (4,431)
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
The U.S. operations have Federal tax loss carry forwards of $12.4 million, which will expire in approximately 18 years, as of
December 31, 2009. The loss carryforwards include $1.0 million related to windfall tax benefits which will be recorded in paid-in
capital when realized. The Company realized tax benefits of $495 from stock options exercised during 2009.
As of December 31, 2008, the U.S. operations no longer had cumulative losses and, after consideration of the positive and
negative evidence including the sustainability of the positive earnings trend, the Company concluded that it was more likely than not
that the net deferred tax assets will be utilized and as a result a $24.9 million benefit from the reversal of valuation allowances mainly
as the result of the usage of our net operating loss carryforwards had been recorded. The Company still maintains a $5.7 million
valuation allowance primarily related to certain State net operating loss carryforwards as it is more likely than not that these tax
benefits will not be utilized. Pursuant to Section 382 of the Internal Revenue Code, as amended, the annual utilization of the
Company’s U.S. net operating loss carryforwards may be limited, if the Company experiences a change in ownership of more than
50% within a three year period. As a result of the Company’s IPO, the Company’s net operating loss carryforwards available to offset
future taxable income arising before the ownership change may be limited. The Company believes it experienced an ownership
change on April 2, 2007 that limits the utilization of net operating losses to offset future taxable income. However, based on the
Company’s current analysis, all remaining U.S. Federal net operating loss carryforwards will be able to be utilized by 2010.
For the years ended December 31, 2009, 2008 and 2007, income taxes were not provided on unremitted earnings of $6,707,
$130,921 and $23,809, respectively, as these earnings are expected to be permanently reinvested internationally.
In the fourth quarter of 2009, both Mexico and Canada enacted new tax legislation which, among other provisions, modified the
future tax rates in those jurisdictions. As a result, the Company recognized, in the income tax provision, the impact of this change in
tax rates for its deferred tax assets and liabilities as of December 31, 2009.
The Company does not have any material uncertain income tax positions in accordance with ASC 740-10-25 (formerly FIN 48).
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 as part of net interest expense. All of the tax years since the Company’s inception in
2004 are subject to examination by the Canadian, Mexican and United States revenue authorities. Currently, the Company is under
examination, or has been contacted for examination, by certain foreign jurisdictions for its income tax returns for the years 2004
through 2008. As of December 31, 2009, 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. The Company
does not anticipate that total unrecognized tax benefits will significantly change prior to December 31, 2010.
Income taxes paid were $49,705, $64,822 and $7,786 for 2009, 2008 and 2007, respectively.
16. Commitments and Contingencies:
Leases
Under agreements expiring through 2017, the Company leases railcars and other equipment under various operating leases.
Rental expense for 2009, 2008 and 2007 was $5,140, $5,213 and $4,438, respectively. Minimum annual rentals for all operating leases
are:
Year Ending
2010
2011
2012
2013
2014
Thereafter
Lease Payments
$
4,113
3,688
2,824
2,690
2,246
2,979
Purchase Commitments and Supplier Concentration
The Company has two raw material supply contracts, one with an initial term through 2018 with an automatic five-year renewal
term at prices established annually based on a formula and the other through 2010. The minimum annual purchase obligations, at
current prices, approximates $89.8 million for 2010.
66
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Our business activities depend on long-term or renewable contracts to supply materials or products. In particular, we rely to a
significant degree on single-source supply contracts and some of these contractual relationships may be with a relatively limited
number of suppliers. Although most of our supplier relationships are typically the result of multiple contractual arrangements of
varying terms, in any given year, one or more of these contracts may come up for renewal. In addition, from time to time, we enter
into toll manufacturing agreements or other arrangements to produce minimum quantities of product for a certain duration. If we
experience delays in delivering contracted production, we may be subject to contractual liabilities to the buyers to whom we have
promised the products.
Environmental
The Company’s operations are subject to extensive and changing federal and state environmental laws and regulations. The
Company’s manufacturing sites have an extended history of industrial use, and soil and groundwater contamination have or may have
occurred in the past and might occur or be discovered in the future.
Environmental efforts are difficult to assess for numerous reasons, including the discovery of new remedial sites, discovery of
new information and scarcity of reliable information pertaining to certain sites, improvements in technology, changes in
environmental laws and regulations, numerous possible remedial techniques and solutions, difficulty in assessing the involvement of
and the financial capability of other potentially responsible parties and the extended time periods over which remediation occurs.
Other than the items listed below, the Company is not aware of material environmental liabilities which are probable and estimable.
As the Company’s environmental contingencies are more clearly determined, it is reasonably possible that amounts may need to be
accrued. However, management does not believe, based on current information, that environmental remediation requirements will
have a material impact on the Company’s results of operations, financial position or cash flows.
Under the agreements by which the Company acquired the Phosphates Business and related assets, the Company has certain
rights of indemnification from the sellers for breach of representations, warranties, covenants and other agreements. The
indemnification rights relating to undisclosed environmental matters are subject to certain substantial limitations and exclusions and
expired as of August 13, 2009.
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 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 December 31, 2009.
The U.S. Environmental Protection Agency, or EPA, has indicated that compliance at facilities in the phosphate industry is a
high enforcement priority. After several years of expressing various concerns (without issuing any notice of violation) about aspects of
our Geismar, LA operations, in March 2008, we received a letter from the Department of Justice, or DOJ, indicating that EPA had
referred the case for civil enforcement, contending, among other things, that we do not qualify for certain exemptions we have
claimed, and alleging that we violate the Resource Conservation and Recovery Act (RCRA) at Geismar by failing to manage two
materials appropriately. Although the letter stated that EPA/DOJ intended to seek unspecified penalties and corrective action, it
proposed discussions to explore possible resolution, which we undertook and are pursuing. During the fourth quarter of 2008, the
DOJ/EPA demanded that Innophos and its neighboring interconnected supplier, PCS, undertake certain “interim measures” to address
DOJ/EPA’s chief environmental concerns. We and PCS have initiated joint technical efforts to explore solutions to the government
concerns. Based on our contact with the agencies to date in 2009, we have determined it is probable that one of the process
modifications will need to be undertaken in the next several months, and likewise probable that the capital expenditure and future
operating expense of that modification will not be material, unless the DOJ adds terms and conditions that could result in the parties
not reaching agreement. However, the second measure sought by DOJ/EPA has not yet been fully evaluated from a technological or
cost standpoint. The companies have proposed to DOJ/EPA a schedule for such evaluation, and although the government has not
formally approved the schedule, the companies are proceeding as proposed. Based upon work so far, there appears to be at least one
technically viable approach, but costs of a full scale operation as compared to other approaches are not known at this time. Even
though the companies have begun substantial technical work in an attempt to develop a feasible approach to address DOJ/EPA’s
concerns, we cannot guarantee that our technical efforts will be successful, whether either party would be willing to implement
solutions or, depending on those factors and the agencies’ position, whether this matter will be settled with DOJ/EPA or will require
litigation. Should litigation become necessary to defend our operations at Geismar as compliant with environmental laws and
regulations, no assurance can be given as to its outcome. We have determined that a contingent liability is neither probable nor
estimable at this time, but liability is reasonably possible.
67
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Litigation
OCP Arbitration
In December 2008, Innophos’ Mexican affiliate, Innophos Mexico, initiated binding arbitration with OCP, S.A., or OCP, its sole
supplier of phosphate rock for Mexico, concerning pricing terms for 2008 and 2009 under Innophos Mexico’s agreement with that
supplier. A panel of three arbitrators sitting in Paris, France under auspices of the International Chamber of Commerce was selected to
hear the case, and hearings on the 2008 and 2009 pricing issues were held in November 2009. On February 24, 2010, Innophos
Mexico and OCP entered into agreements fully settling the arbitration, resolving disputes concerning 2008 and 2009 prices and
quantities of phosphate rock, and agreed upon 2010 prices and quantities for phosphate rock purchases and sales until the existing
agreement expires. The terms of the settlement were confidential, and neither OCP nor Innophos Mexico admitted liability, and
entered into the settlement solely in order to avoid the costs and burdens of continued arbitration.
The financial impact of the settlement was a $7.1 million pre-tax expense ($5.0 million net of tax) largely recorded in cost of
goods sold.
In addition, in connection with the settlement, on February 24, 2010, the parties executed an amendment to their existing 1992
supply agreement.
The major features in the amendment, identified as Addendum No. 13 to the 1992 agreement, are the following terms and
conditions:
•
2008 and 2009 final prices for phosphate rock are agreed to be the interim prices already paid by Innophos Mexico;
• 2010 final prices and estimated volumes of phosphate rock (until the end of the 1992 agreement scheduled for
September 10, 2010) are set for Innophos Mexico’s Coatzacoalcos, Veracruz, Mexico plant, together with mutual
minimum volume commitments for each of the two types of phosphate rock to be supplied;
Innophos Mexico is afforded an option to extend the 1992 agreement to December 31, 2010, if the option is exercised by
July 31, 2010, without additional volume commitments; exclusivity of OCP as a supplier would terminate as of
September 10, 2010;
Innophos Mexico receives an option before September 10, 2010 to purchase limited quantities of third party phosphate
rock for testing purposes; and
The 1992 agreement is revised in a number of other respects, including as to its force majeure provisions, limitations of
damages and liquidated damages.
•
•
•
Mexican CNA Water Tax Claims
Nature and Extent. In November 2004, our Mexican subsidiary, Innophos Fosfatados, or Fosfatados, received notice from the
CNA of the Fresh Water Claims relating to water usage at our Coatzacoalcos, Veracruz, Mexico plant. As initially assessed, the claims
extended from 1998-2002, but subsequently the 1998 claim was determined to be beyond the applicable statute of limitations. As now
assessed, the claims through 2002 total approximately $23.6 million (at current exchange rates as of February 18, 2010), including
basic charges of $7.1 million and $16.5 million for interest, inflation and penalties. Management believes that Fosfatados has valid
bases for challenging the Fresh Water Claims, and that matter is being defended vigorously.
Rhodia Indemnity Confirmed. As a result of favorably concluded litigation in New York state courts against Rhodia, S.A. and
affiliates, or the New York Litigation, concerning their indemnification obligation for CNA claims as “taxes” under the agreement by
which we purchased our business from those parties, Innophos is fully indemnified against the Fresh Water Claims, as well as any like
claims pertaining to periods prior to the closing date of purchase, August 13, 2004, were such liabilities to be sustained.
Further Proceedings. The Fresh Water Claims are currently pending reconsideration from appeals in the Mexican fiscal court
system. On October 29, 2009, the Tax Court on remand ruled unfavorably as to all of Fosfatado’s remaining defenses. On January 10,
2010, Fosfatados appealed the decision of the Tax Court on remand. On January 27, 2010, CNA also filed an appeal challenging the
prior decision that the CNA claim as to 1998 is beyond the applicable statute of limitations. The timing of a decision on this round of
appeals is not known.
A final determination of the Fresh Water Claims may require further appeals to the Mexican Supreme Court and remands to the
CNA or to lower courts, a process that might continue for several years. In the event that the appeals were to be decided against us and
Rhodia were then unable to pay on its indemnification obligations, our subsidiary could be required to satisfy a judgment for the entire
amount claimed.
68
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Possible Post-2002 Claims. If the CNA Fresh Water Claims were sustained for the period now at issue, it is possible that the
CNA would seek to claim similar higher duties, fees and other charges for fresh water extraction and usage from 2005 on into the
future (2003 and 2004 are believed to be beyond the statute of limitations), or the Post-2002 Fresh Water Claims. Management
estimates that amounts involved would be approximately $5.8 million of additional basic charges to date at current exchange rates,
$5.9 million relating to interest, inflation, and penalties, and, under current operating conditions, approximately $0.5 million of
additional basic charges per year at current exchange rates. Although not included in our court judgments in the New York Litigation
against Rhodia, we believe Rhodia is required to indemnify us fully for post-closing “losses” caused by breaches of covenants set
forth in the agreement, which could represent the remainder of the Post-2002 Fresh Water Claims exposure. Rhodia has contested
indemnification responsibility for those breaches, but its motion for partial summary judgment to dismiss our claims was denied by the
New York trial court in January 2009. It is possible that the New York Litigation will proceed to trial or involve further motions to
resolve remaining issues.
Based upon advice of counsel and our review of the CNA Fresh Water Claims and the Post-2002 Fresh Water Claims, the facts
and applicable law, management has determined that liability is reasonably possible, but is neither probable nor reasonably estimable.
Accordingly, we did not establish a liability on the balance sheet as of December 31, 2009. As additional information is gained,
management will reassess the potential liability and establish any loss reserve as appropriate. The ultimate liability amount could be
material to our results of operations and financial condition. Furthermore, given Rhodia’s financial condition, we cannot be sure we
will ultimately collect amounts due from Rhodia under our indemnification rights, even though they have been confirmed by court
judgments.
Mexican Water Discharge Duties
On August 18, 2009, Fosfatados was served with four resolutions from the CNA seeking water discharge duties, fees and other
charges relating to the Company’s Coatzacoalcos, Veracruz, Mexico plant for the period 2002-2005 and amounting to a total of $2.5
million at current exchange rates. The resolutions affirmed that the plant has complied with the relevant parameters in its discharge
permits, or CPDs, but asserted that Fosfatados did not meet a different set of discharge standards in general duties tables that limit the
discharge of various contaminants and set fees payable for exceeding those limits.
On October 21, 2009, Fosfatados filed an annulment proceeding in the Mexican fiscal court system seeking to void the
resolutions. On January 21, 2010, the Tax Court issued resolutions annulling the CNA resolutions. As the time for appeal has elapsed
and CNA did not file an appeal, management regards this matter as resolved favorably.
Other Legal Matters
In June 2005, our subsidiary, Innophos Canada, Inc., was contacted by representatives of The Mosaic Company (a division of
Cargill Corporation), or Mosaic, seeking a meeting to discuss the status of an ongoing remedial investigation and clean-up Mosaic is
conducting at its former fertilizer manufacturing site located north of Innophos’ Pt. Maitland, Ontario Canada plant site. The
remediation is being overseen by the Provincial Ministry of Environment, or MOE. Mosaic stated that, in its view, we and Rhodia (our
predecessor in interest prior to August 2004) were responsible for some phosphorus compound contamination at a rail yard between
the Innophos and Mosaic sites, and will be asked to participate in the clean-up. We have determined that this contingent liability is
neither probable nor estimable at this time, but liability is reasonably possible. We have notified Rhodia of the Mosaic claim, and we
will seek all appropriate indemnification.
In March 2008, Sudamfos S.A., or Sudamfos, an Argentine phosphate producer, filed a request for arbitration before the ICC
International Court of Arbitration, Paris, France, or ICC, of a commercial dispute with Mexicana. Sudamfos claimed Mexicana agreed
to sell Sudamfos certain quantities of phosphoric acid for delivery in 2007 and 2008, and sought an order requiring Mexicana to sell
approximately 12,500 metric tons during 2008 in accordance with the claimed agreement. Subsequently, Sudamfos withdrew the
request for arbitration. In October 2008, Mexicana filed a lawsuit in Mexico against Sudamfos to collect approximately $1.2 million
representing the contract price for prior deliveries of acid that Sudamfos had refused to pay. In October 2009, Sudamfos answered the
suit and counterclaimed for $3.0 million based upon the agreement alleged in the arbitration request to sell additional acid, which
agreement Mexicana denies. Management has determined that the outstanding receivable is fully collectible, and that the contingent
liability from the Sudamfos counterclaim is remote, and therefore no accrual is required.
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 not believe that these matters represent probable 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.
69
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
17. Financial Instruments and Concentration of Credit Risks:
The carrying value of our Senior Subordinated Notes and our Senior Unsecured Notes are $190.0 million and $56.0 million,
respectively. The fair values at December 31, 2009 (excluding accrued interest) are approximately $192.9 million and $56.8 million,
respectively.
The Company believes that its 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. The ten largest customers accounted for 40%, 40% and
39%, respectively, of net sales for 2009, 2008 and 2007. During 2008 a single customer represented 11% of our sales, otherwise, no
other customer accounted for more than 10% of our sales in the last 3 years.
18. Valuation Allowances:
Valuation allowances as of December 31, 2009, 2008 and 2007, and the changes in the valuation allowances for the year ended
December 31, 2009, 2008 and 2007 are as follows:
Deferred taxes valuation allowances
Allowance for doubtful accounts
Deferred taxes valuation allowances
Allowance for doubtful accounts
Deferred taxes valuation allowances
Allowance for doubtful accounts
Balance,
January 1,
2009
$ 4,813
—
Balance,
January 1,
2008
$ 26,929
—
Charged/
(credited)
to costs
and
expenses
$ 850
—
Charged/
(credited)
to costs
and
expenses
$(22,116 )
—
Charged/
(credited)
to costs
and
expenses
$10,372
—
Balance,
January 1,
2007
$16,557
1,318
Deductions
(Bad debts)
$ —
—
(Credited)
to Goodwill
$ —
—
Deductions
(Bad debts)
$ —
—
(Credited)
to Goodwill
$ —
—
Deductions
(Bad debts)
$ —
(1,318)
(Credited)
to Goodwill
$ —
—
Balance,
December 31,
2009
5,663
$
—
Balance,
December 31,
2008
4,813
—
$
Balance,
December 31,
2007
$ 26,929
—
70
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
19. 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 reports its operations in three reporting segments—United States, Mexico and Canada, each of which
sells the entire portfolio of products.
For the year ended December 31, 2009
Sales
Intersegment sales
Total sales
Operating income
United States
$ 463,286
64,427
527,713
$ 111,647
Total
$ 666,759
—
666,759
$ 126,890
Eliminations
$
—
(160,820)
(160,820)
—
Canada
$ 38,204
75,153
113,357
$ 14,629
Mexico
$165,269
21,240
186,509
614
$
Other data
Capital expenditures
Long-lived assets
Total assets
Reconciliation of total assets to reported assets
Total assets
Eliminations
Reported assets
For the year ended December 31, 2008
Sales
Intersegment sales
Total sales
Operating income
Other data
Capital expenditures
Long-lived assets
Total assets
Reconciliation of total assets to reported assets
Total assets
Eliminations
Reported assets
For the year ended December 31, 2007
Sales
Intersegment sales
Total sales
Operating income
Other data
Capital expenditures
Long-lived assets
Total assets
Reconciliation of total assets to reported assets
Total assets
Eliminations
Reported assets
$
13,208
99,844
878,008
$ 5,513
89,585
260,687
$ 878,008
(524,933)
$ 353,075
United States
$ 486,186
28,999
515,185
$ 108,743
$260,687
(6,841)
$253,846
Mexico
$409,745
29,965
439,710
$183,587
$
11,574
111,349
870,038
$ 4,779
102,912
312,297
$ 870,038
(492,357)
$ 377,681
United States
$ 326,882
26,239
353,121
3,299
$
$312,297
—
$312,297
Mexico
$222,699
24,560
247,259
$ 39,819
$
7,275
125,914
588,025
$ 18,999
118,423
222,839
$ 588,025
(301,711)
$ 286,314
$222,839
(902)
$221,937
71
$
888
15,098
297,423
$ 297,423
(241,876)
$ 55,547
Canada
$ 38,827
63,820
102,647
6,525
$
$
2,183
16,161
205,398
$ 205,398
(167,172)
$ 38,226
Canada
$ 29,401
57,002
86,403
4,591
$
$
2,082
16,226
137,777
$ 137,777
(103,329)
$ 34,448
$
$
$
—
—
—
—
—
—
Eliminations
—
$
(122,784)
(122,784)
—
$
$
$
—
—
—
—
—
—
Eliminations
$
—
(107,801)
(107,801)
—
$
$
$
—
—
—
—
—
—
$
19,609
204,527
1,436,118
$ 1,436,118
(773,650)
$ 662,468
Total
$ 934,758
—
934,758
$ 298,855
$
18,536
230,422
1,387,733
$ 1,387,733
(659,529)
$ 728,204
Total
$ 578,982
—
578,982
47,709
$
$
28,356
260,563
948,641
$ 948,641
(405,942)
$ 542,699
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)
Product Revenues
Purified Phosphoric Acid
Specialty Salts and Acids
STPP & Other Products
Total
Geographic Revenues
US
Mexico
Canada
Other foreign countries
Total
Year Ended December 31,
2008
$ 251,656
449,878
233,224
$ 934,758
2007
$ 128,882
293,389
156,711
$ 578,982
2009
$ 121,328
443,112
102,319
$ 666,759
Year Ended December 31,
2008
$ 451,082
250,034
39,669
193,973
$ 934,758
2007
$ 303,941
131,811
31,109
112,121
$ 578,982
2009
$ 385,037
144,168
38,258
99,296
$ 666,759
Revenues for the geographic information are attributed to geographic areas based on the destination of the sale.
Intersegment sales are recorded based on established transfer price.
Long-lived assets include property, plant and equipment.
The United States had depreciation and amortization of $28.5 million, $30.3 million, and $28.4 million in 2009, 2008, and 2007,
respectively. Canada had depreciation and amortization of $2.0 million, $2.2 million, and $1.5 million in 2009, 2008 and 2007,
respectively. Mexico had depreciation and amortization of $20.7 million, $20.0 million, and $17.5 million in 2009, 2008, and 2007,
respectively.
20. Quarterly information (unaudited):
Net sales
Gross profit
Net income
Per share data:
Income per share:
Basic
Diluted
Net sales
Gross profit
Net income
Per share data:
Income per share:
March 31
$190,817
69,793
30,244
June 30
$166,766
49,395
17,609 (a)
2009
Quarters ended
September 30
$ 161,934
47,730
15,133
December 31,
$ 147,242
29,061 (b)
158 (b)
Total
$ 666,759
195,979
63,144
$
$
1.43
1.39
$
$
0.83 (a)
0.81 (a)
$
$
0.71
0.69
$
$
0.01 (b)
0.01 (b)
March 31
$162,538
40,707
9,256
June 30
$264,000
107,865
59,287
2008
Quarters ended
September 30
$ 291,772
126,583
79,652
December 31,
$ 216,448
89,427 (c)
58,988 (d)
Total
$ 934,758
364,582
207,183
Basic
Diluted
(a)
$
$
2.84
2.74
0.44
0.43
$
$
Includes a $3.5 million, $2.3 million after tax, gain on the retirement of $10.0 million of the 9.5% Senior Unsecured Notes due
April 2012.
Includes an approximate $7.0 million, $5.0 million after tax, charge for the settlement of the OCP arbitration matter.
Includes a $3.9 million, $2.5 million after tax, out of period benefit for certain adjustments related to deferred Mexican
employee statutory profit sharing.
Includes a $14.4 million benefit from the reversal of valuation allowances against U.S. Federal net deferred tax assets mainly as
the result of the usage of our net operating loss carryforwards and a $2.5 million after tax out of period benefit related to
deferred Mexican employee statutory profit sharing and deferred income taxes.
2.80 (d)
2.71 (d)
3.79
3.62
$
$
$
$
(b)
(c)
(d)
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. 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 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. The
Chief Executive Officer and Chief Financial Officer, with the participation of management, concluded that the Company’s disclosure
controls and procedures are effective.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s
internal control framework and processes are designed to provide reasonable assurance to management and the Board of Directors
regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements in accordance
with United States generally accepted accounting principles.
As of December 31, 2009, management conducted an assessment of the Company’s internal control over financial reporting
based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control
— Integrated Framework. Based on the assessment, management concluded that, as of December 31, 2009, the Company’s internal
control over financial reporting is effective at the reasonable assurance level.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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 fourth quarter of 2009
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
73
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item relating to Directors and Corporate Governance is set forth under the captions “The Board
of Directors and its Committees—Board Committees”, “The Board of Directors and its Committees—Audit Committee”,
“Proposals—Election of Board Members”, “The Board of Directors and its Committees—Other Corporate Governance Matters”, “The
Board of Directors and its Committees—Nominating and Corporate Governance Committee”, “Policy on Communications from
Security Holders and Interested Parties” and “Section 16(a) Beneficial Ownership Compliance” in the registrant’s Proxy Statement to
be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the 2010 Annual Meeting of
Stockholders (the “Proxy Statement”) and is incorporated herein by reference.
The information required by this item relating to Executive Officers is set forth in Item 1 under the caption “Executive Officers”
and is herein incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the caption “Executive Compensation”, “The Board of Directors and its
Committees—Compensation of Directors” and “The Board of Directors and its Committees—Compensation Committee Interlocks
and Insider Participation” in the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item is set forth under the captions “Security Ownership of Directors and Executive Officers”
and “Security Ownership of Certain Beneficial Owners” in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item is set forth under the caption “The Board of Directors and its Committees—Director
Independence”, “Executive Compensation—Certain Transactions” and “Policy With Respect to Related Person Transactions” in the
Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is set forth under the caption “Information Regarding the Independence of the
Independent Registered Public Accounting Firm” in the Proxy Statement and is incorporated herein by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following exhibits are filed as part of this 10-K.
PART IV
See the attached Exhibit Index.
(b) Financial Statement Schedules.
Schedule I—Condensed Financial Information of the Registrant.
74
CONDENSED FINANCIAL STATEMENTS OF INNOPHOS HOLDINGS, INC.
INNOPHOS HOLDINGS, INC.
Condensed Balance Sheets
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable due from affiliates
Inventories
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Investment in subsidiaries
Intangibles and other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable
Other current liabilities
Total current liabilites
Long-term debt
Other long-term liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity
Total stockholders’ equity
Total liabilities and stockholder’s equity
December 31,
2009
2008
$
213
6,916
—
1,558
8,687
—
—
347,242
706
$
674
5,994
—
1,558
8,226
—
—
304,462
1,195
$ 356,635
$ 313,883
$ —
—
4,735
4,735
56,000
522
$ —
17
4,892
4,909
66,000
214
61,257
71,123
295,378
242,760
295,378
242,760
$ 356,635
$ 313,883
75
Year Ended December 31,
2008
$ —
—
2007
$ —
—
—
—
232
—
232
(232)
6,624
—
—
(210,081)
203,225
(3,958)
284
—
284
(284)
4,471
—
—
732
(5,487)
—
$ 207,183
$ (5,487)
2009
$ —
—
—
6
—
6
(6)
2,574
—
—
(63,596)
61,016
(2,128)
$ 63,144
INNOPHOS HOLDINGS, INC.
Condensed Statements of Operations
(Dollars in thousands)
Net sales
Cost of goods sold
Gross profit
Operating expenses:
Selling, general and administrative
Research & development expenses
Total operating expenses
Operating loss
Interest expense, net
Foreign exchange (gains)/losses
Other expense (income), net
Equity (income) loss
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
76
INNOPHOS HOLDINGS, INC.
Condensed Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Amortization of deferred financing charges
Gain on retirement of bonds
Equity (income) loss
Changes in assets and liabilities:
Increase in accounts receivable
(Decrease)/increase in accounts payable
(Decrease)/increase in other current assets and liabilities
Changes in other long-term assets and liabilities
Net cash used for operating activities
Cash flows provided from (used for) investing activities:
Investment in subsidiaries
Net cash provided from (used for) investing activities
Cash flows (used for) provided from financing activities:
Capital contribution
Proceeds from issuance of senior unsecured notes
Principal repayment of senior unsecured notes
Deferred financing costs
Dividends paid
Net cash (used for) provided from financing activities
Net change in cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended December 31,
2008
2007
2009
$ 63,144
$ 207,183
$ (5,487)
489
(3,500)
(63,596)
363
—
(210,081)
257
—
732
(922)
(17)
(199)
308
(4,293)
24,143
24,143
635
—
(6,500)
—
(14,446)
(5,994)
17
(1,558)
214
(9,856)
—
(17)
1,306
(107)
(3,316)
24,169
(51,002)
24,169
(51,002)
542
—
—
—
(14,241)
950
66,000
—
(1,815)
(12,899)
(20,311)
(13,699)
52,236
(461)
674
213
$
$
614
60
674
(2,082)
2,142
$
60
77
Basis of Presentation
Innophos Holdings, Inc.(“Company”) is a holding company that conducts substantially all of its business operations through its
subsidiaries.
There are significant restrictions on the Company’s ability to obtain funds from any of its subsidiaries through dividends, loans
or advances. Accordingly, the condensed financial statements have been presented on a “parent-only” basis. Under a parent-only
presentation, the Company’s investments in its consolidated subsidiaries are presented under the equity method of accounting. These
parent-only financial statements should be read in conjunction with Innophos Holdings, Inc. audited consolidated financial statements
included elsewhere herein.
Debt
On April 16, 2007, Innophos Holdings, Inc. issued Senior Unsecured Notes for the purpose of redeeming Innophos Investments
Holdings, Inc. Floating Rate Senior Notes. Innophos Holdings, Inc. subsidiaries also have debt. For a discussion of the debt
obligations of Innophos Holdings, Inc.’s subsidiaries, see Note 9 of Notes to Consolidated Financial Statements in “Item 8. Financial
Statements and Supplementary Data”.
Income Taxes
The Company is a member of a U.S. consolidated income tax return. The Company generates net operating losses which can be
used by Innophos, Inc. in the U.S. consolidated income tax return. Therefore, the benefit recorded for income taxes in 2009 includes
the reversal of the valuation allowance attributable to net operating losses which will be realizable by Innophos, Inc. The tax amounts
established for the use of these losses are recorded through intercompany accounts which will cash settle.
Commitments and Contingencies
Innophos Holdings, Inc. has no direct commitments and contingencies, but its subsidiaries have direct commitments and
contingencies. For a discussion of the commitments and contingencies of Innophos Holdings, Inc.’s subsidiaries, see Note 16 of Notes
to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”.
78
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Innophos Holdings, Inc. has duly
caused this report to be signed on its behalf by the undersigned, thereto duly authorized on the 8th day of March, 2010.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of Innophos Holdings, Inc. and in the capacities and on the dates indicated.
INNOPHOS HOLDINGS, INC.
By:
/S/ RANDOLPH GRESS
Randolph Gress
Chief Executive Officer
(Principal Executive Officer)
Signatures
Title
/S/ RANDOLPH GRESS
Randolph Gress
/S/ NEIL I. SALMON
Neil I. Salmon
Chief Executive Officer and Director
(Principal Executive Officer)
Vice President and Chief Financial Officer
(Principal Financial Officer)
/S/ CHARLES BRODHEIM
Charles Brodheim
Corporate Controller
(Principal Accounting Officer)
/S/ GARY CAPPELINE
Gary Cappeline
/S/ AMADO CAVAZOS
Amado Cavazos
/S/ LINDA MYRICK
Linda Myrick
/S/ KAREN OSAR
Karen Osar
/S/ JOHN STEITZ
John Steitz
/S/ STEPHEN ZIDE
Stephen Zide
Director
Director
Director
Director
Director
Director
Dates
March 8, 2010
March 8, 2010
March 8, 2010
March 8, 2010
March 8, 2010
March 8, 2010
March 8, 2010
March 8, 2010
March 8, 2010
79
Exhibit No.
Description
EXHIBIT INDEX
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
10.4
10.5
Purchase Agreement dated June 10, 2004 among Rhodia, Inc., Rhodia Canada Inc., Rhodia de Mexico, S.A. de C.V.,
Rhodia Overseas Limited, Rhodia Consumer Specialties Limited, Rhodia, S.A. and Innophos, Inc. (f/k/a Phosphates
Acquisition, Inc.), incorporated by reference to Exhibit 2.1 of Registration Statement 333-129951 on Form S-4 of
Innophos, Inc. filed November 23, 2005
Second Amended and Restated Certificate of Incorporation of Innophos Holdings, Inc. incorporated by reference to
Exhibit 3.1 of Amendment No. 4 to Registration Statement 333-135851 on Form S-1 of Innophos Holdings, Inc. filed
October 30, 2006
Amended and Restated By-Laws of Innophos Holdings, Inc. as of November 30, 2007 incorporated by reference to
Exhibit 99.1/99.2B of Form 8-K of Innophos Holdings, Inc. filed December 6, 2007
Form of Common Stock certificate incorporated by reference to Exhibit 4.1 of Amendment No. 4 to Registration
Statement 333-135851 on Form S-1 of Innophos Holdings, Inc. filed October 30, 2006
Registration Rights Agreement dated as of August 13, 2004 by and between Innophos Holdings, Inc., the entities set
forth on Schedule I attached thereto and the other individuals signatory thereto incorporated by reference to Exhibit 4.2
of Registration Statement No. 333-129951 on Form S-4 of Innophos, Inc. filed November 23, 2005
Indenture by and between Innophos Holdings, Inc. and U.S. Bank National Association, as Trustee dated as of April
16, 2007 relating to 9 1/2 % Senior Unsecured Notes Due 2012 incorporated by reference to Exhibit 4.1 of Form 8-K of
Innophos Holdings, Inc. filed April 17, 2007
Purchase Agreement dated April 11, 2007 between Innophos Holdings, Inc. and Credit Suisse Securities (USA) LLC
incorporated by reference to Exhibit 4.2 of Form 8-K of Innophos Holdings, Inc. filed April 17, 2007
Indenture by and between Innophos, Inc., and Wachovia Bank, National Association, dated as of August 13, 2004
incorporated by reference to Exhibit 4.1 of Registration Statement 333-129951 on Form S-4 of Innophos, Inc. filed
November 23, 2005
Guarantee dated as of August 13, 2004 among Innophos, Inc., Innophos Mexico Holdings, LLC and Wachovia Bank,
National Association incorporated by reference to Exhibit 10.3 of Registration Statement 333-129951 on Form S-4 of
Innophos, Inc. filed November 23, 2005
Loan and Security Agreement dated May 22, 2009 by and among Innophos, Inc. and Innophos Canada, Inc., as
Borrowers, and Wachovia Bank, National Association, TD Bank, N.A. and Israel Discount Bank, Wachovia Bank,
National Association, as Administrative and Collateral Agent for Lenders, and Wachovia Capital Markets LLC, as
Syndication Agent, Lead Arranger and Lead Bookrunner, incorporated by reference to Exhibit 99.1 of Form 8-K of
Innophos Holdings, Inc. filed May 27, 2009.
Supply Agreement (Sulphuric Acid) dated as of August 13, 2004 between Rhodia, Inc. and Innophos, Inc. incorporated
by reference to Exhibit 10.3 of Annual Report on Form 10-K of Innophos Holdings, Inc. for the year ended December
31, 2007
Agreement dated as of September 10, 1992 by and between Office Cherifien Des Phosphates and Troy Industrias S.A.
de C.V. incorporated by reference to Exhibit 10.12 to Amendment No. 4 of Registration Statement 333-129951 on
Form S-4 of Innophos, Inc. filed February 14, 2006
Addendum No. 7 dated June 5, 2002 to Agreement dated as of September 10, 1992 by and between Office Cherifien
Des Phosphates and Troy Industrias S.A. de C.V. incorporated by reference to Exhibit 99.1 of Form 8-K of Innophos
Holdings, Inc. filed July 21, 2008
Purchasing Agreement between Innophos, Inc. and Mississippi Lime Company dated March 11, 2008, with redactions
subject to pending confidential treatment request. incorporated by reference to Exhibit 10.5 of Annual Report on Form
10-K of Innophos Holdings, Inc. for the year ended December 31, 2007
Amended and Restated Purified Wet Phosphoric Acid Supply Agreement dated as of March 23, 2000 by and between
Rhodia, Inc. and PCS Purified Phosphates incorporated by reference to Exhibit 10.15 to Amendment No. 4 of
Registration Statement 333-129951 on Form S-4 of Innophos, Inc. filed February 14, 2006
80
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
Amended and Restated Acid Purchase Agreement dated as of March 23, 2000 among Rhodia, Inc., PCS Sales (USA),
Inc. and PCS Nitrogen Fertilizer L.P incorporated by reference to Exhibit 10.16 to Amendment No. 4 of Registration
Statement 333-129951 on Form S-4 of Innophos, Inc. filed February 14, 2006
Base Agreement dated as of September 1, 2003 by and between Pemex-Gas y Petroquimica Basica and Rhodia
Fosfatados De Mexico S.A. de C.V. incorporated by reference to Exhibit 10.17 to Amendment No. 4 of Registration
Statement 333-129951 on Form S-4 of Innophos, Inc. filed February 14, 2006
Purchase and Sale Agreement of Anhydrous Ammonia dated as of February 15, 2008 , by and between Pemex
Petroquimica, and Innophos Fosfatados De Mexico, S. de R.L. de C.V. incorporated by reference to Exhibit 10.8 of
Annual Report on Form 10-K/A of Innophos Holdings, Inc. for the year ended December 31, 2008
Sulfur Supply Contract dated as of August 1, 2007 by and Between Pemex Gas Y Petroquimica Basica and Innophos
Fosfatados de Mexico, S. de R.L. de C.V. incorporated by reference to Exhibit 10.8 of Annual Report on Form 10-K/A
of Innophos Holdings, Inc. for the year ended December 31, 2008
Supply Agreement dated as of June 18, 1998 by and among Colgate Palmolive Company, Inmobiliaria Hills, S.A. de
C.V., and Rhone-Poulenc de Mexico, S.A. de C.V. incorporated by reference to Exhibit 10.21 of Registration Statement
333-129951 on Form S-4 of Innophos, Inc. filed November 23, 2005
Operations Agreement made as of the 18th day of June, 1998 by and among Mission Hills, S.A. de C.V, Inmobiliaria
Hills. S.A. de C.V., and Rhone-Poulenc de Mexico, S.A. de C.V. incorporated by reference to Exhibit 10.22 of
Registration Statement 333-129951 on Form S-4 of Innophos, Inc. filed November 23, 2005
Form of Memorandum of Agreement dated January 30, 2009 by and between Innophos, Inc. and Colgate Palmolive
incorporated by reference to Exhibit 99.1 of Form 8-K of Innophos Holdings, Inc. and Innophos, Inc. filed February 5,
2009
Form of Individual Employment Agreement for executive officers of Innophos Servicios de Mexico, S. de R.L. de
C.V., incorporated by reference to Exhibit 10.24 of Amendment No. 1 to Annual Report on Form 10-K of Innophos
Holdings, Inc. for the year ended December 31, 2007
Form of Executive Employment Agreement by and between Innophos Holdings, Inc. and certain executive officers
incorporated by reference to Exhibit 99.13 of Form 8-K of Innophos Holdings, Inc. filed May 1, 2008
Innophos Holdings, Inc. Amended and Restated 2005 Executive Stock Option Plan incorporated by reference to Exhibit
10.28 to Amendment No. 4 of Registration Statement 333-135851 on Form S-1 of Innophos, Inc. filed October 30,
2006
Innophos, Inc. Executive, Management and Sales Incentive Plan effective January 1, 2007, incorporated by reference to
Exhibit 10.17 of Annual Report on Form 10-K of Innophos Holdings, Inc. for the year ended December 31, 2007
Form of Retention Bonus Agreement dated as of October 18, 2006 by and among Innophos Holdings, Inc., and senior
management employees incorporated by reference to Exhibit 4.6 of Registration Statement No. 333-139623 on Form S-
8 of Innophos Holdings, Inc. filed December 22, 2006
Form of Indemnification Agreement, by and among Innophos Holdings, Inc. and certain Directors and Executive
Officers incorporated by reference to Exhibit 99.2 of Form 8-K of Innophos Holdings, Inc. filed January 31, 2007
Form of 2006 Long-Term Equity Incentive Plan incorporated by reference to Exhibit 10.37 to Amendment No. 4 of
Registration Statement 333-135851 on Form S-1 of Innophos, Inc. filed October 30, 2006
Form of Award Agreement under 2006 Long-Term Equity Incentive Plan, incorporated by reference to Exhibit 10.20 of
Annual Report on Form 10-K/A of Innophos Holdings, Inc. for the year ended December 31, 2008
Form of 2009 Long-Term Incentive Plan (2009 LTIP) incorporated by reference to Exhibit 99.1 of Form 8-K of
Innophos Holdings, Inc. filed June 4, 2009
Form of Award Agreement under the 2009 Long Term Incentive Plan incorporated by reference to Exhibit 4.5 of Form
S-8 of Innophos Holdings, Inc. filed June 15, 2009
Form of Innophos, Inc. Retirement Savings Restoration Plan effective as of January 1, 2006, incorporated by reference
to Exhibit 10.29 of Annual Report on Form 10-K of Innophos Holdings, Inc. for the year ended December 31, 2006.
81
10.24
12.1
21.1
23.1
31.1
31.2
32.1
32.2
Addendum No. 13 dated February 4, 2010 to Agreement dated as of September 10, 1992 by and between OCP, S.A.
and Innophos Mexicana, S.A. de C.V. incorporated by reference to Exhibit 99.1 of Form 8-K of Innophos Holdings,
Inc. filed February 4, 2010 (Filed in redacted form pending request for confidential treatment submitted to the
Securities and Exchange Commission under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.)
Statement re: Calculation of Ratio of Earnings to Fixed Charges, filed herewith
Subsidiaries of Registrant, incorporated by reference to Exhibit 21.1 of Annual Report on Form 10-K/A of Innophos
Holdings, Inc. for the year ended December 31, 2008
Consent of PricewaterhouseCoopers LLP filed herewith
Certification of Principal Executive Officer dated March 8, 2010 pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 filed herewith
Certification of Principal Financial Officer dated March 8, 2010 pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 filed herewith
Certification of Principal Executive Officer dated March 8, 2010 pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 filed herewith
Certification of Principal Financial Officer dated March 8, 2010 pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 filed herewith
Pursuant to rules of the Securities and Exchange Commission, agreements and instruments evidencing the rights of holders of
debt whose total amount does not exceed 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis are
not being filed as exhibits to this report. The registrant has agreed to furnish a copy of such agreements and instruments to the
Commission upon its request.
82
Calculation of Ratio of Earnings to Fixed Charges
(dollars in thousands)
Earnings
Income (loss) before provision for income taxes
Plus: fixed charges (1)
Fixed Charges:
Gross interest expense
Estimate of the interest within operating leases
Ratio of earnings to fixed charges
Exhibit 12.1
2009
2008
December 31,
2007
2006
2005
$ 104,346
29,067
$ 262,385
37,303
$ 6,409
44,345
$ (26,904)
62,531
$ (4,969)
49,766
$ 133,413
$ 299,688
$ 50,754
$ 35,627
$ 44,797
27,354
1,713
35,565
1,738
42,866
1,479
$ 29,067
$ 37,303
4.6 x
8.0 x
$ 44,345
1.1x
61,019
1,512
47,991
1,775
$ 62,531
$ 49,766
*
*
(1) For purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed
charges. Fixed charges consist of interest expense and one-third of operating rental expenses which management believes is
representative of the interest component of rent expense.
Due to the losses for 2006 and 2005 the coverage ratio was less than 1:1. Innophos must generate additional earnings of $26,904
for 2006 and $4,969 for 2005, respectively, to achieve a ratio of 1:1 for those periods.
*
83
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-139623) of Innophos
Holdings, Inc. of our report dated March 8, 2010 relating to the financial statements, financial statement schedule and the
effectiveness of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Florham Park, NJ
March 8, 2010
84
Exhibit 31.1
I, Randolph Gress, certify that:
CERTIFICATIONS
1. I have reviewed this Annual Report on Form 10-K of Innophos Holdings, Inc. (“the registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: March 8, 2010
By:
/S/ RANDOLPH GRESS
Randolph Gress
Chief Executive Officer and Director
(Principal Executive Officer)
85
Exhibit 31.2
I, Neil I. Salmon, certify that:
1. I have reviewed this Annual Report on Form 10-K of Innophos Holdings, Inc. (“the registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: March 8, 2010
By:
/S/ NEIL I. SALMON
Neil I. Salmon
Vice President and Chief Financial Officer
(Principal Financial Officer)
86
Exhibit 32.1
Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)
I, Randolph Gress, certify that:
1. the accompanying Annual Report on Form 10-K for the year ended December 31, 2009 (the “Report”), fully complies with
the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Innophos Holdings, Inc. at the dates and for the periods indicated.
A signed original of this written statement required by Section 906 has been provided Innophos Holdings, Inc. and will be
retained by Innophos Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.
Date: March 8, 2010
The foregoing certification is being furnished solely pursuant to the requirements of 18 U.S.C. § 1350 and is not being filed as a
part of the Report or as a separate disclosure document.
/S/ RANDOLPH GRESS
Randolph Gress
Chief Executive Officer and Director
(Principal Executive Officer)
87
Exhibit 32.2
Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)
I, Neil I. Salmon, certify that:
1. the accompanying Annual Report on Form 10-K for the year ended December 31, 2009 (the “Report”), fully complies with
the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Innophos Holdings, Inc. at the dates and for the periods indicated.
A signed original of this written statement required by Section 906 has been provided Innophos Holdings, Inc. and will be
retained by Innophos Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.
Date: March 8, 2010
The foregoing certification is being furnished solely pursuant to the requirements of 18 U.S.C. § 1350 and is not being filed as a
part of the Report or as a separate disclosure document.
/S/ NEIL I. SALMON
Neil I. Salmon
Vice President and Chief Financial Officer
(Principal Financial Officer)
88
Innophos Officers & Directors
Corporate Information
Innophos Executive Officers
Board of Directors
Transfer Agent and Registrar
Randolph Gress
Chief Executive Officer & President
Charles Brodheim
Corporate Controller
Louis Calvarin
Vice President, Operations
William Farran
Vice President, General Counsel
& Corporate Secretary
Mark Feuerbach
Vice President, Treasury,
Financial Planning & Analysis
Randolph Gress
Chairman of the Board & Director
Gary Cappeline
Lead Independent Director;
Chair, Compensation Committee
Amado Cavazos
Director
Linda Myrick
Director; Chair, Nominating & Corporate
Governance Committee
Karen Osar
Director; Chair, Audit Committee
Joseph Golowski
Vice President, Specialty Phosphates
Business
Wilma Harris
Vice President, Human Resources
John Steitz
Director
Stephen Zide
Director
Russell Kemp
Vice President, Research & Development
and Chief Risk Officer
Michael Lovrich
Vice President, Supply Chain
Neil Salmon
Vice President & Chief Financial Officer
Abraham Shabot
Vice President, General Director,
Innophos Latin America
Mark Thurston
Vice President, Corporate Strategy &
Worldwide Business Development
Wells Fargo
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
Corporate Locations
USA (Corporate Headquarters)
Innophos Holdings, Inc.
259 Prospect Plains Road
Cranbury, NJ 08512-8000 USA
609-495-2495
Mexico
Innophos Mexicana S.A. de C.V.
Bosques de los Ciruelos 186
Piso 11
Colonia Bosques de las Lomas
Delegacion Miguel Hidalgo
11700 Mexico, D.F.
+ (52) 55 5322 48 08
Innophos Manufacturing Facilities
Port Maitland, Ontario, Canada
Chicago Heights, Illinois
Chicago (Waterway), Illinois
Nashville, Tennessee
Geismar, Louisiana
Mission Hills, Guanajuato, Mexico
Coatzacoalcos, Veracruz, Mexico
Investor Relations Contacts
investor.relations@innophos.com
609-366-1299
or
Breakstone Group
646-452-2335
mgedid@breakstone-group.com
Innophos Holdings, Inc.
259 Prospect Plains Road
Cranbury, NJ 08512-8000 USA
www.innophos.com