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EX-32.2 - EXHIBIT 32.2 - Innophos Holdings, Inc.iphs10q033117ex322.htm
EX-32.1 - EXHIBIT 32.1 - Innophos Holdings, Inc.iphs10q033117ex321.htm
EX-31.2 - EXHIBIT 31.2 - Innophos Holdings, Inc.iphs10q033117ex312.htm
EX-31.1 - EXHIBIT 31.1 - Innophos Holdings, Inc.iphs10q033117ex311.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________________
FORM 10-Q
 ___________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to               .
Commission File Number 001-33124
 ___________________________________________
INNOPHOS HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
 ___________________________________________
 
Delaware
 
20-1380758
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
259 Prospect Plains Road
Cranbury, New Jersey
 
08512
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (609) 495-2495
 ____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
  
Accelerated Filer
o
Non-accelerated filer
o
  
(Do not check if a smaller reporting company)
 
 
 
 
Smaller reporting company
o
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of April 21, 2017, the registrant had 19,476,067 shares of common stock outstanding.
 

Page 1 of 30




TABLE OF CONTENTS
 

Page 2 of 30




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Unless the context requires otherwise, references to “Innophos,” “the Company,” “we,” “us” or “our” in this Quarterly Report on Form 10-Q refer to Innophos Holdings, Inc. and its consolidated subsidiaries.
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” and/or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements.
Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain.
The forward-looking statements in this Quarterly Report on Form 10-Q may include, among other things, statements about our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, the demand for our products and services, the markets in which we compete and other information that is not historical information
You should refer to “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on February 28, 2017, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements.  As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete discussion of all potential risks or uncertainties that may substantially impact our business. Moreover, we operate in a competitive and rapidly changing environment. New factors emerge from time to time and it is not possible to predict the impact of all of these factors on our business, financial condition or results of operations.
Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read this Quarterly Report on Form 10-Q and any documents that we reference in this report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.


Page 3 of 30




PART I - FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share amounts, the number of shares or where otherwise noted)
 
 
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
29,800

 
$
53,487

Accounts receivable, net
84,442

 
77,692

Inventories
137,372

 
128,295

Other current assets
28,276

 
23,894

Total current assets
279,890

 
283,368

Property, plant and equipment, net
206,333

 
205,459

Goodwill
84,373

 
84,373

Intangibles and other assets, net
66,990

 
69,811

Total assets
$
637,586

 
$
643,011

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable, trade and other
$
45,698

 
$
51,611

Other current liabilities
39,907

 
43,605

Total current liabilities
85,605

 
95,216

Long-term debt
189,000

 
185,000

Other long-term liabilities
14,659

 
15,569

Total liabilities
$
289,264

 
$
295,785

Commitments and contingencies (note 12)

 

Common stock, par value $.001 per share; authorized 100,000,000; issued 22,805,686 and 22,777,690; outstanding 19,475,127 and 19,455,011 shares
19

 
19

Paid-in capital
134,509

 
134,694

Common stock held in treasury, at cost (3,330,559 and 3,322,679 shares)
(175,411
)
 
(175,051
)
Retained earnings
390,602

 
389,048

Accumulated other comprehensive loss
(1,397
)
 
(1,484
)
Total stockholders' equity
348,322

 
347,226

Total liabilities and stockholders' equity
$
637,586

 
$
643,011


See notes to condensed consolidated financial statements

Page 4 of 30




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands, except per share amounts, the number of shares or where otherwise noted)
 
 
Three months ended
 
March 31,
2017
 
March 31,
2016
Net sales
$
165,944

 
$
189,630

Cost of goods sold
129,401

 
148,914

Gross profit
36,543

 
40,716

Operating expenses:
 
 
 
Selling, general and administrative
19,308

 
18,235

Research & development expenses
830

 
996

Total operating expenses
20,138

 
19,231

Operating income
16,405

 
21,485

Interest expense, net
1,353

 
1,799

Foreign exchange loss
(57
)
 
(39
)
Income before income taxes
15,109

 
19,725

Provision for income taxes
4,186

 
6,883

Net income
$
10,923

 
$
12,842

Net income attributable to participating common shareholders
$
10,873

 
$
12,793

Per share data (note 2):
 
 
 
Income per participating share:
 
 
 
Basic
$
0.56

 
$
0.67

Diluted
$
0.55

 
$
0.66

Weighted average participating shares outstanding:
 
 
 
Basic
19,376,258

 
19,229,501

Diluted
19,694,751

 
19,430,029

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Change in interest rate swaps, (net of tax of ($56) and $219)
$
92

 
$
(358
)
Change in pension and post-retirement plans, (net of tax of ($10) and $50)
(5
)
 
(142
)
Other comprehensive income (loss), net of tax
$
87

 
$
(500
)
Comprehensive income
$
11,010

 
$
12,342


See notes to condensed consolidated financial statements

Page 5 of 30




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
 
 
Three months ended
 
March 31,
2017
 
March 31,
2016
Cash flows provided from operating activities
 
 
 
Net income
$
10,923

 
$
12,842

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
Depreciation and amortization
9,581

 
9,282

Amortization of deferred financing charges
107

 
168

Gain on sale of building
(153
)
 

Share-based compensation
717

 
9

Changes in assets and liabilities:
 
 
 
Increase in accounts receivable
(6,748
)
 
(12,170
)
(Increase) decrease in inventories
(9,228
)
 
6,072

Increase in other current assets
(4,194
)
 
(7,119
)
(Decrease) increase in accounts payable
(5,973
)
 
6,310

Decrease in other current liabilities
(3,827
)
 
(16,886
)
Changes in other long-term assets and liabilities
(1,884
)
 
(1,582
)
Net cash used in operating activities
(10,679
)
 
(3,074
)
Cash flows used for investing activities:
 
 
 
Capital expenditures
(8,553
)
 
(8,024
)
Proceeds from sale of building
1,028

 

Net cash used for investing activities
(7,525
)
 
(8,024
)
Cash flows (used for) provided by financing activities:
 
 
 
Proceeds from exercise of stock options

 
9

Long-term debt borrowings
14,000

 
23,000

Long-term debt repayments
(10,000
)
 
(5,001
)
Excess tax (deficiency) benefit from exercise of stock options

 
(331
)
Restricted stock forfeitures
(360
)
 

Dividends paid
(9,349
)
 
(9,256
)
Net cash (used for) provided by financing activities
(5,709
)
 
8,421

Effect of foreign exchange rate changes on cash and cash equivalents
226

 
206

Net change in cash
(23,687
)
 
(2,471
)
Cash and cash equivalents at beginning of period
53,487

 
17,905

Cash and cash equivalents at end of period
$
29,800

 
$
15,434


See notes to condensed consolidated financial statements

Page 6 of 30




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Statement of Stockholders’ Equity (Unaudited)
(Dollars and shares in thousands)
 
Number of
Common
Shares
 
Common
Stock
 
Retained
Earnings (Deficit)
 
Paid-in
Capital / Treasury Stock
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Total
Shareholders'
Equity
Balance, December 31, 2015
19,290

 
$
19

 
$
378,321

 
$
(42,286
)
 
$
(2,794
)
 
$
333,260

Net income
 
 
 
 
47,971

 
 
 
 
 
47,971

Other comprehensive income, (net of tax $(725))
 
 
 
 
 
 
 
 
1,310

 
1,310

Proceeds from stock award exercises and issuances
192

 
 
 
 
 
(1,428
)
 
 
 
(1,428
)
Share-based compensation
 
 
 
 
 
 
3,732

 
 
 
3,732

Excess tax deficiency from exercise of stock options
 
 
 
 
 
 
(9
)
 
 
 
(9
)
Restricted stock forfeitures
(27
)
 
 
 
 
 
(366
)
 
 
 
(366
)
Dividends declared
 
 
 
 
(37,244
)
 
 
 
 
 
(37,244
)
Balance, December 31, 2016
19,455

 
$
19

 
$
389,048

 
$
(40,357
)
 
$
(1,484
)
 
$
347,226

Net income
 
 
 
 
10,923

 
 
 
 
 
10,923

Other comprehensive income, (net of tax ($46))
 
 
 
 
 
 
 
 
87

 
87

Proceeds from stock award exercises and issuances
28

 
 
 
 
 
(902
)
 
 
 
(902
)
Share-based compensation
 
 
 
 
 
 
717

 
 
 
717

Restricted stock forfeitures
(8
)
 
 
 
 
 
(360
)
 
 
 
(360
)
Dividends declared
 
 
 
 
(9,369
)
 
 
 
 
 
(9,369
)
Balance, March 31, 2017
19,475

 
$
19

 
$
390,602

 
$
(40,902
)
 
$
(1,397
)
 
$
348,322


See notes to condensed consolidated financial statements

Page 7 of 30




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

1. Basis of Statement Presentation
Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Innophos have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP) for interim financial reporting and do not include all disclosures required by US GAAP for annual financial reporting, and should be read in conjunction with the audited consolidated and combined financial statements of the Company at December 31, 2016 and for the three years then ended.
The accompanying unaudited condensed consolidated financial statements of the Company reflect all adjustments which management considers necessary for a fair statement of the results of operations for the interim periods and is subject to year-end adjustments. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The December 31, 2016 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by US GAAP.
Recently Issued Accounting Standards
Adopted
In July 2015, the FASB issued guidance which requires entities to measure most inventory “at the lower of cost and net realizable value (“NRV”),” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. Under the new guidance, inventory is “measured at the lower of cost and net realizable value,” which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” The guidance is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early application is permitted. The adoption of this standard did not have a material impact on our financial position, results of operations and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation.  ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The adoption of this standard did not have a material impact on our financial position, results of operations and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We have elected to early adopt for testing dates after January 1, 2017 and the adoption of this standard did not have a material impact on our financial position, results of operations and related disclosures.
Issued but not yet adopted
In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In July 2015, the FASB approved the deferral of the effective date of this guidance by one year (with an option to early adopt at the original effective date), making it effective for the interim and annual periods beginning on or after December 15, 2017. As a result, this guidance will be effective for the Company beginning in fiscal year 2018, with an option to early adopt in fiscal year 2017. The guidance permits the use of

Page 8 of 30



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

either a retrospective or modified retrospective transition method. We will adopt the standard using the modified retrospective transition method on January 1, 2018 and are currently evaluating the impact of the amended guidance on our consolidated financial position, results of operations and related disclosures. Our ongoing evaluation of the impact of the guidance includes the revenue recognition of certain free on board destination point sales across all of our businesses.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. We are currently in the process of evaluating the impact of adoption of the ASU on our financial position, results of operations and related disclosures.
In March 2016, the FASB issued ASU 2016-15, Clarification on Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows. ASU 2016-15 clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. This amendment should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. There are no new disclosure requirements. This ASU is effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted in the first interim period of 2017. The adoption of this guidance is not expected to have a significant effect on our financial position, results of operations and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the ASU, changes in restricted cash and restricted cash equivalents would be included along with those of cash and cash equivalents in the statement of cash flows. As a result, entities would no longer present transfers between cash/equivalents and restricted cash/equivalents in the statement of cash flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance sheet includes more than one line item for cash/equivalents and restricted cash/equivalents. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We do not anticipate the adoption of the new accounting rules will have a material impact on our financial position, results of operations and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. The standard also narrows the definition of outputs. The definition of a business affects areas of accounting such as acquisitions, disposals and goodwill. Under the new guidance, fewer acquired sets are expected to be considered businesses. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We would apply this guidance to applicable transactions after the adoption date.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that only the service cost component of net periodic benefit costs be recorded as compensation cost in the operating expense section of the income statement. All other components of net periodic benefit cost (interest cost, expected return on plan assets and amortization of net loss) will be presented in other income - net. This standard update is effective beginning with the first quarter 2018 and must be applied retrospectively. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.


Page 9 of 30



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

2. Earnings per Share (EPS)
The Company accounts for earnings per share in accordance with ASC 260, which requires two calculations of earnings per share (EPS) to be disclosed: basic EPS and diluted EPS. Under ASC Subtopic 260-10-45, as of January 1, 2009 unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock, are considered participating securities for purposes of calculating EPS. Under the two-class method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock, as shown in the table below.
The numerator for basic and diluted earnings per share is net earnings attributable to shareholders reduced by dividends attributable to unvested shares. The denominator for basic earnings per share is the weighted average number of common stock outstanding during the period. The denominator for diluted earnings per share is weighted average shares outstanding adjusted for the effect of dilutive outstanding stock options, performance share awards and restricted stock awards.
The following is a reconciliation of the weighted average basic number of common shares outstanding to the diluted number of common and common stock equivalent shares outstanding and the calculation of earnings per share using the two-class method:
 
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
Net income
$
10,923

 
$
12,842

Less: earnings attributable to unvested shares
(50
)
 
(49
)
Net income available to participating common shareholders
$
10,873

 
$
12,793

Weighted average number of participating common and potential common shares outstanding:
 
 
 
Basic number of participating common shares outstanding
19,376,258

 
19,229,501

Dilutive effect of stock equivalents
318,493

 
200,528

Diluted number of weighted average participating common shares outstanding
19,694,751

 
19,430,029

Earnings per participating common share:
 
 
 
Earnings per participating common share—Basic
$
0.56

 
$
0.67

Earnings per participating common share—Diluted
$
0.55

 
$
0.66

 
 
 
 
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
347,354

 
437,241


Page 10 of 30



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



3. Dividends
The following is the dividend activity for the three months ended March 31, 2017 and March 31, 2016: 
 
Three Months Ended
 
March 31
 
2017

2016
Dividends declared – per share
$
0.48

 
$
0.48

Dividends declared – aggregate
9,349

 
9,256

Dividends paid – per share
0.48

 
0.48

Dividends paid – aggregate
9,349

 
9,256


Innophos Holdings, Inc. is a holding company that does not conduct any business operations of its own. As a result, it is dependent upon cash dividends, distributions and other transfers from its subsidiaries, most directly Innophos, Inc., its primary operating subsidiary, and Innophos Investments Holdings, Inc., a direct, wholly-owned subsidiary of Innophos Holdings, Inc. and the parent of Innophos, Inc., to make dividend payments on its common stock.

4. Stockholders’ Equity / Stock-Based Compensation
The following table summarizes the components of stock-based compensation expense, all of which has been classified as selling, general and administrative expense:
 
 
Three Months Ended
 
March 31,
2017
 
March 31,
2016
Stock options
$
305

 
$
(226
)
Restricted stock
440

 
(170
)
Performance shares
(28
)
 
405

Total share-based compensation expense (a)
$
717

 
$
9

(a) The three months ended March 31, 2016 includes a benefit of $524 for a change in estimate due to restructuring activities.

5. Inventories
Inventories consist of the following:
 
 
March 31,
2017
 
December 31,
2016
Raw materials
$
35,225

 
$
33,185

Finished products
88,178

 
81,369

Spare parts
13,969

 
13,741

 
$
137,372

 
$
128,295


Inventory reserves for excess quantities, obsolescence or shelf-life expiration as of March 31, 2017 and December 31, 2016 were $12,574 and $13,422, respectively.

Page 11 of 30



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


6. Other Current Assets
Other current assets consist of the following:
 
 
March 31,
2017
 
December 31,
2016
Creditable taxes (value added taxes)
$
8,809

 
$
9,722

Vendor inventory deposits (prepaid)
10,000

 
3,750

Prepaid income taxes
4,867

 
4,659

Prepaid insurance
1,480

 
2,248

Other
3,120

 
3,515

 
$
28,276

 
$
23,894



7. Intangibles and Other Assets, net
Intangibles and other assets consist of the following:
 
 
Useful life
(years)
 
March 31,
2017
 
December 31,
2016
Developed technology and application patents, net of accumulated amortization of $28,513 for 2017 and $27,778 for 2016
7-20
 
$
17,762

 
$
18,497

Customer relationships, net of accumulated amortization of $19,259 for 2017 and $18,569 for 2016
5-15
 
19,553

 
20,243

Trade names and license agreements, net of accumulated amortization of $10,657 for 2017 and $10,315 for 2016
5-20
 
7,004

 
7,346

Non-compete agreements, net of accumulated amortization of $1,274 for 2017 and $1,268 for 2016
3-10
 
59

 
65

Total intangibles
 
 
$
44,378

 
$
46,151

Deferred income taxes
 
 
$
18,432

 
$
18,432

Deferred financing costs, net of accumulated amortization of $3,580 for 2017 and $3,473 for 2016 (see note 9)
 
 
2,043

 
2,150

Other tax assets
 
 

 
997

Other assets
 
 
2,137

 
2,081

Total other assets
 
 
$
22,612

 
$
23,660

 
 
 
$
66,990

 
$
69,811


8. Other Current Liabilities
Other current liabilities consist of the following:
 
 
March 31,
2017
 
December 31,
2016
Payroll related
$
8,941

 
$
11,852

Taxes other than income taxes
2,408

 
2,624

Benefits and pensions
3,262

 
5,419

Freight and rebates
4,077

 
3,579

Income taxes
8,677

 
9,278

Restructuring and management transition reserve
3,729

 
4,737

Other
8,813

 
6,116

 
$
39,907

 
$
43,605


Page 12 of 30



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



9. Short-Term Borrowings, Long-Term Debt, and Interest Expense
Short-term borrowings and long-term debt consist of the following:
 
 
March 31,
2017
 
December 31,
2016
Revolver borrowings under the credit facility due 2022
$
189,000

 
$
185,000

Total borrowings
$
189,000

 
$
185,000

Less current portion

 

Long-term debt
$
189,000

 
$
185,000


The Company's credit facility includes a revolving line of credit from the lenders of up to $450.0 million, including a $20.0 million letter of credit sub-facility and a $20.0 million swingline loan facility, all maturing on December 22, 2022. The Credit Agreement also provides for possible additional revolving indebtedness under an incremental facility of up to $150.0 million (for an aggregate of revolving capacity up to $600.0 million) upon future request by the Company to existing Lenders (and depending on their consent) or from other willing financial institutions invited by the Company and reasonably acceptable to the administrative agent to join in the Credit Agreement. This revolving credit facility increase, if implemented, may provide for higher applicable margins to either the increased portion or possibly the entire revolving credit facility, with limitations, than those in effect for the original revolving commitments under the Credit Agreement.
As of March 31, 2017, $189.0 million was outstanding under the revolving line of credit, which approximates fair value (determined using level 2 inputs within the fair value hierarchy) with total availability at $260.0 million, taking into account $1.0 million in face amount of letters of credit issued under the sub-facility. The current weighted average interest rate for all debt is 2.3%.
Among its affirmative covenants, the credit agreement governing this credit facility requires the Company to maintain the following consolidated ratios (as defined and calculated according to the credit agreement) as of the end of each fiscal quarter:
(a) “Total Leverage Ratio” less than or equal to 3.50 to 1.00.
(b) “Interest Coverage Ratio” greater than or equal to 3.00 to 1.00.

As of March 31, 2017, the Company was in full compliance with all debt covenant requirements.
In December 2012, Innophos entered into an interest rate swap, swapping the LIBOR exposure on $100.0 million floating rate debt, which is currently outstanding under the Credit Agreement, to a fixed rate to maturity obligation of 0.9475% expiring in December 2017. This interest rate swap has been designated as a cashflow hedge (Level 2) with the changes in value recorded through other comprehensive income. The fair value of this interest rate swap of approximately $0.2 million is recorded in other long-term assets as of March 31, 2017. Based on $89.0 million outstanding borrowings as floating rate debt (amount not covered by the swap), an immediate increase of one percentage point would cause an increase to interest expense of approximately $0.9 million per year.
We manage our interest rate risk by balancing the amount of fixed-rate and floating-rate debt to the extent practicable consistent with our credit status.
Total interest paid by the Company for all indebtedness for the three months ended March 31, 2017 and March 31, 2016 was $1.3 million and $1.7 million, respectively.
 

Page 13 of 30



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


Interest expense, net consists of the following:
 
 
Three months ended
 
March 31,
2017
 
March 31,
2016
Interest expense
$
1,315

 
$
1,711

Deferred financing cost
107

 
168

Interest income
(9
)
 
(14
)
Less: amount capitalized for capital projects
(60
)
 
(66
)
Total interest expense, net
$
1,353

 
$
1,799



10. Other Long-Term Liabilities
Other long-term liabilities consist of the following:
 
 
March 31,
2017
 
December 31,
2016
Deferred income taxes
$
1,420

 
$
1,282

Pension and post retirement liabilities
8,150

 
7,689

Restructuring and management transition reserve
210

 
1,618

Uncertain tax positions
1,974

 
1,974

Environmental liabilities
1,100

 
1,100

Other liabilities
1,805

 
1,906

 
$
14,659

 
$
15,569


11. Income Taxes
The effective income tax rate on income before taxes was approximately 28% for the three months ended March 31, 2017 compared to approximately 35% for the comparable period in 2016. The change in the components of the effective tax rate are primarily due to the adoption of a new accounting pronouncement changing the accounting for tax benefits from stock option exercises and vesting of restricted stock and performance awards, which decreased the effective tax rate by 5%, a permanent adjustment attributable to an inventory obsolescence reserve in Mexico, which increased the effective tax rate by 1% in the prior year and increased income in lower tax rate jurisdictions, which decreased the effective tax rate by 1% in the current year.
Business is conducted in various countries throughout the world and is subject to tax in numerous jurisdictions. A significant number of tax returns are filed and subject to examination by various federal, state and local tax authorities. Tax examinations are often complex, as tax authorities may disagree with the treatment of items reported requiring several years to resolve. As such, the Company maintains liabilities for possible assessments by tax authorities resulting from known tax exposures for uncertain income tax positions. The Company’s policy is to accrue associated penalties in selling, general and administrative expenses and to accrue interest in net interest expense. Currently, the Company is under examination, or has been contacted for examination on income tax returns, for the years 2009 through 2013. Also, certain state income tax assessments are under protest and the Company believes its financial position is sustainable. The Company estimates the liability for unrecognized tax benefits may decrease by approximately $0.7 million during the next twelve months as a result of possible settlements of income tax authority examinations. Other than the items mentioned above, as of March 31, 2017, no material adjustments have been proposed to the Company's tax positions and the Company currently does not anticipate any adjustments that would result in a material change to its financial position during the next twelve months.
Income taxes paid were $5.4 million and $20.0 million for the three months ended March 31, 2017 and March 31, 2016, respectively.

Page 14 of 30



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


12. Commitments and Contingencies
Environmental
The Company's operations are subject to extensive and changing federal, state, local and international environmental laws, rules 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.
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 therein, previously acquired from a third party, which reportedly had housed, but no longer does, a fertilizer and pesticide manufacturing facility. We have an estimated liability with a range of $0.9 million-$1.3 million. The remedial action plan for that site has yet to be finalized, and as such, the Company has recorded a liability, which represents the Company's best estimate, of $1.1 million as of March 31, 2017.
Litigation
2008 RCRA Civil Enforcement - Geismar, Louisiana plant
On January 12, 2017, the Company entered into a settlement with the United States Environmental Protection Agency, or EPA, and the Louisiana Department of Environmental Quality, or LDEQ, with respect to certain manufacturing processes at the Company’s Geismar, Louisiana plant, including the Company’s handling of (i) filter material from an enclosed intermediate filtration step to further process merchant green phosphoric acid, or MGA, that the Company receives as raw material via pipeline from the adjacent site operated by PCS and (ii) the Company’s raffinate co-product that is separated in connection with its PPA production at the plant. The EPA and LDEQ, collectively with the United States Department of Justice, or DOJ, are collectively referred to as the Government Parties. This settlement resulted from years of negotiations between the Company and the Government Parties following several inspections of the plant by the Government Parties in which they raised certain violations of the federal Resource, Conservation and Recovery Act. Prior to this settlement, in the course of discussions with the Government Parties, the EPA and the DOJ required that the Company undertake, as an interim measure, the construction of a new filter unit to replace the enclosed system and allow the removal and separate handling of the filter material. The Company built that unit, which has been operating since 2012. As part of the settlement, Innophos is implementing a deep well injection system, a solution approved by the EPA and LDEQ to handle the raffinate separated at the plant. Such system is expected to be completed by early 2018. The Company previously returned the raffinate to PCS under a long-term contract it has with PCS and can continue to do so until there is a resolution of the deep well system. In connection with this settlement, the Company will pay a $1.4 million civil penalty, which is accrued in other current liabilities. The settlement is currently pending in the United States District Court for the Middle District of Louisiana.
Other Legal Matters
In July 2013, Innophos, Inc. was assessed approximately $1.2 million of sales/use taxes by the State of Louisiana and Ascension Parish. This tax assessment covers certain raw materials used in the production of Phosphoric Acid. The Company contested both tax assessments. This assessment covers periods 2004 to 2010 for the Parish and 2007 to 2010 for the State. The Company and the respective governmental jurisdictions have reached a settlement in the amount of $0.1 million during the first quarter of 2017.
In addition, we are party to legal proceedings and contractual disputes that arise in the ordinary course of our business. Except as to the matters specifically discussed, management believes the likelihood that the ultimate disposition of these matters will have a material adverse effect on our business, results of operations, financial condition and/or cash flows is

Page 15 of 30



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

remote. However, these matters cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on our business, results of operations, financial condition, and/or cash flows.

13. Pension Plans and Postretirement Benefits

Net periodic benefit expense for the United States plans:

For the three months ended March 31, 2017
 
For the three months ended March 31, 2016
 
Pension benefits
 
Other benefits
 
Total
 
Pension benefits
 
Other benefits
 
Total
Service cost
$

 
$
34

 
$
34

 
$

 
$
46

 
$
46

Interest cost
25

 
31

 
56

 
29

 
44

 
73

Expected return on assets
(35
)
 

 
(35
)
 
(36
)
 

 
(36
)
Amortization of
 
 
 
 
 
 
 
 
 
 
 
prior service cost

 

 

 

 

 

unrecognized (gain) loss

 
(50
)
 
(50
)
 
2

 
(13
)
 
(11
)
net transition obligation

 

 

 


 


 

Net periodic cost
$
(10
)
 
$
15

 
$
5

 
$
(5
)
 
$
77

 
$
72

 
 
 
 
 
 
 
 
 
 
 
 


Innophos has no minimum contribution requirements and does not plan to make cash contributions for its US defined benefit pension plan in 2017.
Innophos made its entire cash contribution of $2.9 million for the US defined contribution plan during the first quarter of 2017 for the plan year 2016.

Net periodic benefit expense for the Canadian plans:
 
For the three months ended March 31, 2017
 
For the three months ended March 31, 2016
 
Pension benefits
 
Other benefits
 
Total
 
Pension benefits
 
Other benefits
 
Total
Service cost
$
94

 
$
13

 
$
107

 
$
87

 
$
12

 
$
99

Interest cost
127

 
13

 
140

 
118

 
12

 
130

Expected return on assets
(201
)
 

 
(201
)
 
(185
)
 

 
(185
)
Amortization of
 
 
 
 
 
 
 
 
 
 
 
actuarial loss (gain)
43

 

 
43

 
50

 

 
50

prior service cost
27

 

 
27

 
25

 

 
25

net transition obligation

 
6

 
6

 

 
6

 
6

Exchange rate changes
(48
)
 
14

 
(34
)
 
(288
)
 
78

 
(210
)
Net periodic cost
$
42

 
$
46

 
$
88

 
$
(193
)
 
$
108

 
$
(85
)
 
 
 
 
 
 
 
 
 
 
 
 
Innophos Canada, Inc. plans to make cash contributions to its Canadian defined benefit plan of approximately $0.5 million in 2017.

Page 16 of 30



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



14. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by Component:
For the three months ended March 31, 2017
Pension and Other Postretirement Adjustments
 
Changes in Fair Value of Effective Cash Flow Hedges
 
Total
Balance at December 31, 2016
$
(1,493
)
 
$
9

 
$
(1,484
)
Other comprehensive (loss) income before reclassifications
(5
)
 
92

 
87

Amounts reclassified from accumulated other comprehensive income

 

 

Net current period other comprehensive (loss) income
(5
)
 
92

 
87

Balance at March 31, 2017
$
(1,498
)
 
$
101

 
$
(1,397
)
 
 
 
 
 
 
For the three months ended March 31, 2016
Pension and Other Postretirement Adjustments
 
Changes in Fair Value of Effective Cash Flow Hedges
 
Total
Balance at December 31, 2015
$
(2,842
)
 
$
48

 
$
(2,794
)
Other comprehensive loss before reclassifications
(142
)
 
(358
)
 
(500
)
Amounts reclassified from accumulated other comprehensive income

 

 

Net current period other comprehensive loss
(142
)
 
(358
)
 
(500
)
Balance at March 31, 2016
$
(2,984
)
 
$
(310
)
 
$
(3,294
)
 
 
 
 
 
 



Page 17 of 30



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



15. Restructuring Costs
During 2015 management evaluated several initiatives to improve the overall operating efficiency of the organization. As a result of this evaluation we launched an initiative to reduce our cost structure by implementing various staff reduction actions during the third quarter of 2015.
In addition, during the fourth quarter of 2015, the Company experienced a management transition of certain high-level positions, most notably the Chief Executive Officer and the Chief Financial Officer.
The following table summarizes the fiscal year 2017 activities related to these restructuring initiatives for severance and benefits:
For the three months ended March 31, 2017
Restructuring Costs
Balance at December 31, 2016
$
6,356

Expense recorded

Payments made
(2,417
)
Balance at March 31, 2017
$
3,939


16. 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 EBITDA (defined as net income (loss) before interest, income taxes, depreciation and amortization). All references to sales in this Quarterly Report on Form 10-Q are recognized when title and risk of loss passes to the customer, which occurs either upon shipment or delivery, depending upon the agreed sales terms with customers.
The Company's chief executive officer is the chief operating decision maker and, as of the first quarter of 2017, has determined to assess the Company's performance and allocate the appropriate resources based on the following operating segments: (1) Food, Health and Nutrition, (2) Industrial Specialties and (3) Other. The new reporting segments accurately reflect the underlying business dynamics and align with the strategic direction of the Company. Prior to the first quarter of 2017, the reporting segments were (1) Specialty Phosphates US & Canada, (2) Specialty Phosphates Mexico and (3) GTSP & Other, versus the current market driven view.
For the three months ended March 31, 2017
 
Food, Health & Nutrition
 
Industrial Specialties
 
Other
 
Total
Sales
 
$
91,083


$
63,672


$
11,189


$
165,944

EBITDA
 
$
15,624


$
9,521


$
898


$
26,043

Depreciation and amortization expense
 
$
5,722


$
3,372


$
487


$
9,581

 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2016
 
Food, Health & Nutrition
 
Industrial Specialties
 
Other
 
Total
Sales
 
$
98,412

 
$
74,555

 
$
16,663

 
$
189,630

EBITDA
 
$
19,933

 
$
9,561

 
$
1,312

 
$
30,806

Depreciation and amortization expense
 
$
4,791

 
$
3,059

 
$
1,432

 
$
9,282

 
 
 
 
 
 
 
 
 

Page 18 of 30



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

A reconciliation of net income to EBITDA follows:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
Net income
 
$
10,923

 
$
12,842

Provision for income taxes
 
4,186

 
6,883

Interest expense, net
 
1,353

 
1,799

Depreciation and amortization
 
9,581

 
9,282

EBITDA
 
$
26,043

 
$
30,806

 
 
 
 
 

Page 19 of 30



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


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Innophos is a leading international producer of specialty ingredient solutions that deliver versatile benefits for the food, health, nutrition and industrial markets. Innophos combines more than a century of experience in specialty phosphate manufacturing with a broad range of other specialty nutritional ingredients. Many of Innophos' products are application-specific compounds engineered to meet customer performance requirements and are often critical to the taste, texture and performance of foods, beverages, pharmaceuticals, oral care products and other applications. For example, Innophos products act as flavor enhancers in beverages, electrolytes in sports drinks, texture additives in cheeses, leavening agents in baked goods, pharmaceutical excipients, cleaning agents in toothpaste, and they also provide a wide range of nutritional fortification solutions for food, beverage and nutritional supplement manufacturers.

Recent Trends and Outlook
Q2 2017
Sales comparables in Q2 are expected to improve sequentially, but still be down approximately 5% year-over-year, due primarily to portfolio pruning of lower margin, less differentiated applications, which did not take full effect until the second half of 2016. External factors impacting sales into Venezuela and China are expected to continue into the second quarter.
Earnings in the second quarter are forecast to be impacted by the remainder of consulting fees for the implementation of Phase 2 of Operational Excellence initiatives, which are estimated to be approximately $3 million.
Input costs and operating costs in Q2, with the notable exception of the aforementioned fees, are expected to be in line with Q1.
The favorable Q1 tax rate of 28% was significantly helped by the adoption of a new accounting pronouncement changing the accounting for tax benefits from stock option exercises and vesting of restricted stock and performance awards. Excluding this discrete item, the effective tax rate for the current quarter would have been 33%. The Company anticipates that the tax rate will return to the more normalized level of approximately 33% beginning in the second quarter.
Full Year
On a full year basis, overall market conditions and the competitive landscape for 2017 are expected to be similar to 2016. Volume headwinds are expected to remain through the balance of the year due to the strong US dollar and pricing headwinds. Pruning effects are expected to improve in the second half of the year.
On a full year basis, the Company anticipates that the Phase 2 Operational Excellence fees incurred in the first half of the year will be more than offset by the Phase 2 savings, of which $5 million is estimated to take effect in the second half of 2017.
As a result of these factors, the Company continues to expect full year revenues to be down by 4% compared with 2016. Full year earnings are expected to be broadly in line with 2016, reflecting the impact of management’s focus on cost actions and productivity initiatives given the challenging market conditions.

Page 20 of 30




Results of Operations
The following table sets forth a summary of the Company’s operations and their percentages of total revenue for the periods indicated (dollars in millions):
 
 
Three Months Ended
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
Amount
 
%
 
Amount
 
%
Net sales
$
165.9

 
100.0

 
$
189.6

 
100.0

Cost of goods sold
129.4

 
78.0

 
148.9

 
78.5

Gross profit
36.5

 
22.0

 
40.7

 
21.5

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
19.3

 
11.6

 
18.2

 
9.6

Research & development
0.8

 
0.5

 
1.0

 
0.5

Income from operations
16.4

 
9.9

 
21.5

 
11.3

Interest expense, net
1.4

 
0.8

 
1.8

 
0.9

Foreign exchange losses, net
(0.1
)
 
(0.1
)
 

 

Provision for income taxes
4.2

 
2.5

 
6.9

 
3.6

Net income
$
10.9

 
6.6

 
$
12.8

 
6.8



Three months ended March 31, 2017 compared to the three months ended March 31, 2016
Net Sales
Net sales represent the selling price of the products, net of any customer-related rebates, plus freight and any other items invoiced to customers. Net sales for the three months ended March 31, 2017 were $165.9 million, a decrease of $23.7 million, or 12.5%, as compared to $189.6 million for the same period in 2016, with volumes down 7.3% and prices down 5.2%. Food, Health & Nutrition sales were down 7.4%, or $7.3 million, with volumes lower by 4.5%, or $4.4 million, and selling prices lower by 2.9%, or $2.9 million. Industrial Specialties sales were down 14.6%, or $10.9 million, with volumes lower by 7.6%, or $5.7 million, and selling prices lower by 7.0%, or $5.2 million. Other sales were lower by 32.7%, or $5.5 million, with volumes lower by 21.9%, or $3.7 million, and prices lower by 10.8%, or $1.8 million.
The Company calculates pure selling price dollar variances as the selling price for the current year to date period minus the selling price for the prior year to date period, and then multiplies the resulting selling price difference by the prior year to date period volume. Volume variance is calculated as the total sales variance minus the selling price variance and refers to the revenue effect of changes in tons sold at the relative prices applicable to the variation in tons, otherwise known as volume/mix.
The following table illustrates for the three months ended March 31, 2017 the percentage changes in net sales by reportable segment compared with the same period of the prior year, including the effect of price and volume/mix changes upon revenue:
 
 
Price
 
Volume/Mix
 
Total
Food, Health & Nutrition
(2.9
)%
 
(4.5
)%
 
(7.4
)%
Industrial Specialties
(7.0
)%
 
(7.6
)%
 
(14.6
)%
Other
(10.8
)%
 
(22.1
)%
 
(32.9
)%
Total
(5.2
)%
 
(7.3
)%
 
(12.5
)%

Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the three months ended March 31, 2017 was $36.5 million, a decrease of $4.2 million, or 10.3%, as compared to $40.7 million for the same period in 2016. Gross profit percentage of net sales increased to 22.0% for the three months ended March 31, 2017 versus 21.5% for the same period in 2016 due to improving mix into higher value products. Gross profit in 2017 was unfavorably affected by $9.9 million lower selling prices, $5.6 million lower sales volumes, and $0.3 million higher depreciation. These unfavorable effects were partially offset by $9.8 million lower raw material costs, mainly phosphate rock and MGA, $0.3 million lower manufacturing costs, and

Page 21 of 30




$0.6 million favorable exchange rates mostly from our Mexican peso based costs. Included in 2016 gross profit was a $0.9 million charge for a GTSP lower of cost or market reserve.
Operating Expenses and Research and Development
Operating expenses consist primarily of selling, general and administrative expenses and research and development expenses. Operating expenses for the three months ended March 31, 2017 were $20.1 million, an increase of $0.9 million, or 4.7%, as compared to $19.2 million for the same period in 2016. The increase was due to $0.8 million higher severance costs.
Operating Income
Operating income for the three months ended March 31, 2017 was $16.4 million, a decrease of $5.1 million, or 23.7%, as compared to $21.5 million for the same period in 2016. Operating income as a percentage of net sales decreased to 9.9% versus 11.3% for the same period in 2016, for the reasons noted above.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the three months ended March 31, 2017 was $1.4 million, a decrease of $0.4 million, or 22.2%, as compared to $1.8 million for the same period in 2016. The decrease was primarily due to lower average external loan balances, lower leverage ratios and lower applicable margins in our updated credit facility entered into in December 2016.
Foreign Exchange
Foreign exchange for the three months ended March 31, 2017 was a gain of $0.1 million as compared to $0.0 million for the same period in 2016. The US Dollar is the functional currency of our Mexican and Canadian operations. The Company has greater foreign denominated asset balances (largely Mexican Peso and Canadian Dollar), such as VAT receivables and prepaid income taxes in foreign jurisdictions, than offsetting foreign denominated liability balances. As the US Dollar strengthened throughout the prior year period versus the Mexican Peso and the Canadian Dollar, the remeasurement of the net foreign asset denominated balances contributed to a net foreign exchange loss. Consequently, foreign exchange gain or loss is recorded on remeasurement of non-US Dollar denominated monetary assets and liabilities. Such gains and losses fluctuate from period to period as the foreign currencies strengthen or weaken against the US Dollar and the amount of non-US Dollar denominated assets and liabilities increases or decreases.
Provision for Income Taxes
The effective income tax rate was 28% for the three months ended March 31, 2017 compared to 35% for the same period in 2016. The change in the components of the effective tax rate are primarily due to the adoption of a new accounting pronouncement changing the accounting for tax benefits from stock option exercises and vesting of restricted stock and performance awards, which decreased the effective tax rate by 5%, a permanent adjustment attributable to an inventory obsolescence reserve in Mexico, which increased the effective tax rate by 1% in the prior year and increased income in lower tax rate jurisdictions, which decreased the effective tax rate by 1% in the current year.
Net Income
Net income for the three months ended March 31, 2017 was $10.9 million, a decrease of $1.9 million, as compared to $12.8 million for the same period in 2016, due to the factors described above.


 


Page 22 of 30




Segment Reporting
The Company's chief executive officer is the chief operating decision maker and, as of the first quarter of 2017, has determined to assess the Company's performance and allocate the appropriate resources based on the following operating segments: (1) Food, Health and Nutrition, (2) Industrial Specialties and (3) Other. The new reporting segments accurately reflect the underlying business dynamics and align with the strategic direction of the Company. The primary performance indicators for the chief operating decision maker are sales and EBITDA. The following table sets forth the results of these indicators by segment for the three months ended March 31, 2017 and 2016:
 

Three Months Ended
 
 
 
March 31,
2017
 
March 31,
2016
 
Net Sales % Change
Segment Net Sales
 
 
 
 
 
Food, Health & Nutrition
$
91,083

 
$
98,412

 
(7.4
)%
Industrial Specialties
63,672

 
74,555

 
(14.6
)%
Other
11,189

 
16,663

 
(32.9
)%
Total
$
165,944

 
$
189,630

 
(12.5
)%
 
 
 
 
 
 
Segment EBITDA
 
 
 
 
 
Food, Health & Nutrition
$
15,624

 
$
19,933

 
 
Industrial Specialties
9,521

 
9,561

 
 
Other
898

 
1,312

 
 
Total
$
26,043

 
$
30,806

 
 
 
 
 
 
 
 
Segment EBITDA % of net sales
 
 
 
 
 
Food, Health & Nutrition
17.2
%
 
20.3
%
 
 
Industrial Specialties
15.0
%
 
12.8
%
 
 
Other
8.0
%
 
7.9
%
 
 
Total
15.7
%
 
16.2
%
 
 
 
 
 
 
 
 
Depreciation and amortization expense
 
 
 
 
 
Food, Health & Nutrition
$
5,722

 
$
4,791

 
 
Industrial Specialties
3,372

 
3,059

 
 
Other
487

 
1,432

 
 
Total
$
9,581

 
$
9,282

 
 




Page 23 of 30




A reconciliation of net income to EBITDA follows:
 
 
Three months ended
 
 
March 31,
2017
 
March 31,
2016
Net income
 
$
10,923

 
$
12,842

Provision for income taxes
 
4,186

 
6,883

Interest expense, net
 
1,353

 
1,799

Depreciation and amortization
 
9,581

 
9,282

EBITDA
 
$
26,043

 
$
30,806

Three months ended March 31, 2017 compared to the three months ended March 31, 2016
Segment Net Sales:
Food, Health & Nutrition net sales decreased 7.4% for the three months ended March 31, 2017 compared with the same period in 2016. Average selling prices decreased by 2.9% and volumes decreased 4.5%, primarily driven by external factors, including currency exchange restrictions in Venezuela and increased import tariffs into China. Sales in India saw a slowdown due to generally lower than anticipated growth.
Industrial Specialties net sales decreased 14.6% for the three months ended March 31, 2017 compared with the same period in 2016. Average selling prices decreased 7.0% and volumes decreased 7.6%, primarily due to the year-over-year effect from pruning actions of lower margin, less differentiated applications.
Other net sales decreased 32.9% for the three months ended March 31, 2017 compared with the same period in 2016. Average selling prices decreased 10.8%, due to lower commodity market prices, and volumes decreased 22.1%, mostly due to order patterns in GTSP.
Segment EBITDA Percentage of Net Sales:

The 300 basis point decrease in Food, Health & Nutrition EBITDA margins for the three months ended March 31, 2017 compared with the same period in 2016 is due to higher manufacturing costs which decreased margins by 270 basis points, lower average selling prices which decreased margins by 240 basis points, and lower sales volume/mix which decreased margins by 220 basis points. This decrease was partially offset by decreased raw material costs, mainly phosphate rock and MGA, which increased margins 360 basis points, lower operating cost which increased margins by 40 basis points, and favorable exchange rate effects which increased margins by 30 basis points.

The 210 basis point increase in Industrial Specialties EBITDA margins for the three months ended March 31, 2017 compared with the same period in 2016 is due to lower raw material costs, mainly phosphate rock and MGA, which increased margins by 560 basis points, lower manufacturing cost which increased margins by 270 basis points, favorable exchange rate effects which increased margins by 30 basis points, and higher sales volume/mix which increased margins by 10 basis points. This increase was partially offset by lower average selling prices which decreased margins by 660 basis points.

The 10 basis point increase in Other EBITDA margins for the three months ended March 31, 2017 compared with the same period in 2016 is due to lower raw material costs which increased margins by 1,260 basis points, lower manufacturing costs which increased margins 600 basis points, and favorable exchange rate and translation effects which increased margins by 70 basis points. This increase was mostly offset by lower selling prices which decreased margins 1,120 basis points, higher operating expenses, mostly for strategic projects, which decreased margins by 780 basis points, and lower sales volume/mix which decreased margins by 560 basis points. Included in 2016 was a $0.9 million charge for a GTSP lower of cost or market reserve which increased margins by 540 basis points in 2017.




Page 24 of 30





Liquidity and Capital Resources
Cash Flow Summary
The following table sets forth a summary of the Company’s cash flows for the periods indicated.
 
(Dollars in millions)
Three months ended
 
March 31,
2017
 
March 31,
2016
Operating Activities
$
(10.7
)
 
$
(3.1
)
Investing Activities
(7.5
)
 
(8.0
)
Financing Activities
(5.7
)
 
8.4

Effect of foreign exchange rate changes
0.2

 
0.2


Three months ended March 31, 2017 compared to three months ended March 31, 2016
Net cash used by operating activities was $10.7 million for the three months ended March 31, 2017 as compared to a use of $3.1 million for 2016, a decrease of $7.6 million. The decrease in operating activities cash resulted from unfavorable changes of $1.9 million in net income, as described above, $6.2 million in working capital and $0.3 million in other long term assets and liabilities, partially offset by $0.8 million favorable non-cash adjustments to income.
The change in working capital is derived from it being a use of cash of $29.9 million in 2017 compared to a use of $23.7 million in 2016, a decrease in cash of $6.2 million. The change in working capital was due to unfavorable changes in inventory of $15.3 million, due to seasonal inventory build, and accounts payable of $12.3 million, due to higher cash outlays in the first quarter. These unfavorable effects were partially offset by favorable changes in other current liabilities of $13.1 million, largely due to U.S. income tax payments in the prior year, accounts receivable of $5.4 million, and other current assets of $2.9 million. Accounts receivable has increased as a percent of quarterly sales compared to the last four quarters' average due to competitive pressures on customer payment terms.
Net cash used for investing activities was $7.5 million for the three months ended March 31, 2017, compared to $8.0 million for 2016, a decrease in spending of $0.5 million. The change was due to $1.0 million in cash from the sale of a building partially offset by a $0.5 million increase in capital spending.
Approximately 70% of the 2017 capital spending was for strategic growth initiatives and the remaining 30% was for plant maintenance projects. The majority of the strategic growth investments were focused on the deep well injection system project at our Geismar, LA facility which accounted for half of the Company's capital expenditures in the current quarter. The Company expects to spend $16 million on the project, of which $2.0 million occurred in 2016 and $4.2 million occurred in the first quarter of 2017, with the remaining $9.8 million of projected spending to occur in the remainder of 2017.
Net cash from financing activities for the three months ended March 31, 2017 was a use of $5.7 million, compared to a source of $8.4 million in 2016, a decrease in cash of $14.1 million. This decrease in cash was largely due to $9.0 million decreased loan borrowings and $5.0 million increased loan repayments.
Innophos and its subsidiaries and affiliates may from time to time seek to acquire or otherwise retire outstanding debt through privately negotiated transactions, exchanges or otherwise. Debt repurchases or exchanges, if any, will depend on prevailing market conditions, Company liquidity requirements, restrictive financial covenants and other factors applicable at the time. The amounts involved may be material.
During the three months ended March 31, 2017, the Company spent $2.4 million related to restructuring activities initiated during the third quarter of 2015, and anticipates spending $3.7 million within the next twelve months.

On March 31, 2017, the Company had cash and cash equivalents outside the United States of $22.0 million, or 74% of the Company's balance. The foreign cash amounts are not restricted by law to be used in other countries. Our current operating plan does not include any other repatriation of any additional cash and cash equivalents held outside the United States to fund the United States operations. However, in the event we do repatriate cash and cash equivalents held outside of the United States, we may be required to accrue and pay United States taxes to repatriate these funds.

The Company’s available financial resources allow for the continuation of dividend payments, pursuit of acquisition

Page 25 of 30




projects and further geographic expansion initiatives. We further believe that on hand cash combined with cash generated from
operations, including our Mexican operations, and availability under our revolving line of credit in the Credit Agreement, 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, our future operating cash flows and our existing revolving line of credit. However, future operating performance for the Company is subject to prevailing
economic and competitive conditions and various other factors that are uncertain. If the cash flows and other capital resources
available to the Company, such as its revolving loan facility, are insufficient to fund our debt and other liquidity needs, the
Company may have to take alternative actions that differ from current operating plans.

Critical Accounting Estimates and Policies
There have been no material changes from the critical accounting estimates previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks as part of our ongoing business operations. Primary exposures include changes in interest rates, as borrowings under our credit agreement will bear interest at floating rates based on LIBOR plus an applicable borrowing margin. We manage our interest rate risk by balancing the amount of fixed-rate and floating-rate debt to the extent practicable consistent with our credit status. For fixed-rate debt, interest rate changes do not affect earnings or cash flows. Conversely, for floating-rate debt, interest rate changes generally affect our earnings and cash flows, assuming other factors are held constant.
At March 31, 2017, we had a $450.0 million revolving credit facility, of which $189.0 million of variable-rate debt was outstanding, which approximates fair value (determined using level 2 inputs within the fair value hierarchy). Total remaining availability was $260.0 million, taking into account $1.0 million in face amount of letters of credit issued under the sub-facility. In December 2012, Innophos entered into an interest rate swap, swapping the LIBOR exposure on $100.0 million of floating rate debt, which is currently outstanding under our current credit agreement, with a fixed rate of 0.9475% plus the applicable margin on the debt expiring in December 2017. This interest rate swap has been designated as a cash flow hedge with the changes in value recorded through other comprehensive income. The fair value of this interest rate swap of approximately $0.2 million (determined using level 2 inputs within the fair value hierarchy) is recorded in other long-term liabilities as of March 31, 2017.
Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense on our revolving line of credit. Changes in economic conditions may also result in lower operating income, reducing our funds available for capital investment, operations or other purposes. In addition, a substantial portion of our operating cash flow and available borrowing capacity on our credit facility has been used to repurchase shares, pay dividends, fund capital expenditures, fund working capital needs and service debt, which may affect our ability to make future acquisitions. We have and may continue from time to time used interest rate protection agreements to minimize our exposure to interest rate fluctuation. Regardless of hedges, we may experience economic loss and a negative impact on earnings or net assets as a result of interest rate fluctuations. Based on $89.0 million outstanding borrowings as floating rate debt (amount not covered by the swap), an immediate increase of one percentage point would cause an increase to interest expense of approximately $0.9 million per year.
We do not currently, but may from time to time, hedge our currency rate and energy risks.
We believe that our concentration of credit risk related to trade accounts receivable is limited since these receivables are spread among a number of customers and are geographically dispersed. No customer accounted for more than 10% of our sales in the last 3 years.

Page 26 of 30




Foreign Currency Exchange Rates
The US Dollar is the functional currency of the Canadian and Mexican operations. Accordingly, these operations’ monetary assets and liabilities are remeasured at current exchange rates, non-monetary assets and liabilities are remeasured at historical exchange rates, and revenue and expenses are remeasured 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 US 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 US 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 US Dollars and our exchange rate exposure in terms of sales revenues is minimal. However, the strength or weakness of the USD versus other currencies can affect our competitiveness in the US and export markets.
Inflation and changing prices
Our costs and expenses will be subject to inflation and price fluctuations. Significant price fluctuations in raw materials, freight and energy costs, if not compensated for by cost savings from production efficiencies or price increases passed on to customers, could have a material effect on our financial condition and results of operations.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance or special purpose entities”, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Control and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be reported in the Company's consolidated financial statements and filings is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission, or SEC, and that such information is accumulated and communicated to the Company's management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.
As of March 31, 2017, the Company completed an evaluation under the supervision and with the participation of the Company's management, including the Company's Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures are effective at the reasonable assurance level.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during or with respect to the first quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Page 27 of 30





PART II - OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
Note 12 of Notes to Consolidated Condensed Financial Statements in “Part I, Item 1. Financial Statements" contained in this Quarterly Report on Form 10-Q is incorporated herein by reference.
 
ITEM 1A.
RISK FACTORS
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not have any share repurchases on the open market during the first quarter of 2017. From time to time, the Company reacquires shares from employees in connection with the vesting, exercise and forfeiture of awards under its equity compensation plans. In the first quarter of 2017, the Company reacquired an aggregate of 6,979 shares at a price of $51.58 per share in connection with the surrender of restricted shares by employees for tax purposes.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.
MINE SAFETY DISCLOSURES
None.

ITEM 5.
OTHER INFORMATION
None.

ITEM 6.
EXHIBITS
a) Exhibits. The following exhibits are filed or furnished as part of this report:
Exhibit No.
 
Description
31.1
 
Certification of Principal Executive Officer dated May 2, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Principal Financial Officer dated May 2, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
 
Certification of Principal Executive Officer dated May 2, 2017 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
 
Certification of Principal Financial Officer dated May 2, 2017 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
*
Not to be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor deemed to be incorporated by reference into any filing under that Act or the Securities Act of 1933.


Page 28 of 30




SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INNOPHOS HOLDINGS, INC.
 
 
 
/s/ Kim Ann Mink
By:
Kim Ann Mink
Its:
Chief Executive Officer, President and Director
 
(Principal Executive Officer)
 
Dated:
May 2, 2017
 
INNOPHOS HOLDINGS, INC.
 
 
 
/s/ Han Kieftenbeld
By:
Han Kieftenbeld
Its:
Senior Vice President and Chief Financial Officer
 
(Principal Financial Officer)
 
Dated:
May 2, 2017


Page 29 of 30




EXHIBIT INDEX
Exhibit No.
 
Description
31.1
 
Certification of Principal Executive Officer dated May 2, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Principal Financial Officer dated May 2, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
 
Certification of Principal Executive Officer dated May 2, 2017 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
 
Certification of Principal Financial Officer dated May 2, 2017 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

*
Not to be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor deemed to be incorporated by reference into any filing under that Act or the Securities Act of 1933.


Page 30 of 30