Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC, 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

 

¨ 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   001-33124   20-1380758

(state or other jurisdiction

of incorporation)

  (Commission File number)  

(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

 

Name of Each Exchange on Which Registered

Common Stock, par value $.001 per share   Nasdaq Global Select Market

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.     ¨   Yes     x   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.     ¨   Yes     x   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.     x   Yes     ¨   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   ¨     No   ¨

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.   x

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   ¨     Accelerated Filer   x     Non-accelerated filer   ¨     Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨   Yes     x   No

The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $549.7 million as of June 30, 2010, the last business day of the Registrant’s most recently completed second quarter (based on the Nasdaq Global Select Market closing price on that date).

As of February 23, 2011, the registrant had 21,492,694 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

 

Document

 

Incorporated By Reference In Part No.

Portions of Innophos Holdings, Inc. Proxy Statement to be filed for its Annual Meeting of Stockholders to be held May 20, 2011

  III (Items 10, 11, 12, 13 and 14)

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I     
Item 1.   Business      5   
Item 1A.   Risk Factors      13   
Item 1B.   Unresolved Staff Comments      17   
Item 2.   Properties      17   
Item 3.   Legal Proceedings      17   
Item 4.   (REMOVED AND RESERVED)      17   
PART II     
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      18   
Item 6.   Selected Financial Data      20   
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk      35   
Item 8.   Financial Statements and Supplementary Data      37   
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      76   
Item 9A.   Controls and Procedures      76   
Item 9B.   Other Information      76   
PART III     
Item 10.   Directors, Executive Officers and Corporate Governance      77   
Item 11.   Executive Compensation      77   
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      77   
Item 13.   Certain Relationships and Related Transactions and Director Independence      77   
Item 14.   Principal Accounting Fees and Services      77   
PART IV     
Item 15.   Exhibits, Financial Statement Schedules      77   
Signatures        81   

 

Page 3 of 90


Table of Contents

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 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.

 

Page 4 of 90


Table of Contents

PART I

 

ITEM 1. BUSINESS

Our Company

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 Global Select 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 Specialty Phosphates product lines: (i) Specialty Ingredients (formerly Specialty Salts and Specialty Acids), (ii) Food and Technical Grade purified phosphoric acid, or PPA, and (iii) Technical Sodium Tripolyphosphate (STPP) & Detergent Grade PPA. Our products serve diverse end-use markets which historically have exhibited stable demand growth.

Specialty Ingredients

Specialty Ingredients (including specialty phosphate salts and specialty phosphoric acids) are the most highly engineered products in our portfolio. There are a wide range of application-specific products for specialty phosphate 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 phosphoric acids are used in industrial applications such as asphalt modification and petrochemical catalysis.

The table below presents a list of the main Specialty Ingredients sold by us in 2010:

 

Product

  

Description/End-Use Application

Sodium Aluminum Phosphate, Acidic and Basic (“SALP”)    Premier leavening agent for baking mixes, cakes, self-rising flours, baking powders, batter & breadings (acidic). Improves melting properties of cheese (basic).
Sodium Acid PyroPhosphate (“SAPP”)    Leavening agent for baking powders, doughnuts, and biscuits; inhibits browning in potatoes; provides moisture and color retention in poultry and meat.
Sodium HexaMetaPhosphate (“SHMP”)    Water treatment applications; anti-microbial and sequestrant in beverages; cheese emulsifier; improves tenderness in meat, seafood and poultry applications.
Monocalcium Phosphate (“MCP”)    Leavening agent in double-acting baking powder; acidulant; buffering agent.
Calcium Acid Pyrophosphate (“CAPP”)    Calcium based, slow acting, multifunctional leavening acid used in a wide variety of baked goods
Dicalcium Phosphate (“DCP”)    Toothpaste abrasive; leavening agent; calcium fortification.
Tricalcium Phosphate (“TCP”)    Calcium and phosphorus fortifier in food and beverage applications (e.g., orange juice, cereals, and cheese); flow aid; additive in expandable polystyrene.
Pharma Calcium Phosphates (“A-Tab ® ”, “Di-Tab ® ”, “Tri-Tab ® ”)    Excipients in vitamins, minerals, nutritional supplements and pharmaceuticals.
Ammonium Phosphates (“MAP”, “DAP”)    High-end fertilizer products for horticultural use; flame retardant; cigarette additives; culture nutrient.

 

Page 5 of 90


Table of Contents

Product

  

Description/End-Use Application

Potassium Phosphates (“TKPP”, “DKP”, “MKP”, “KTPP”)    Water treatment; sports drinks; buffering agent; improves tenderness in meat, seafood and poultry applications; horticulture applications.
Specialty Acids (e.g., Polyacid)    Additive improving performance properties of asphalt.
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, 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 Ingredients is Israel Chemicals Limited, or ICL.

Food and Technical Grade PPA

Food and Technical Grade PPA are high purity forms of PPA, distinct from the agricultural-grade merchant green phosphoric acid, or MGA, 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 Technical Grade 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.

Technical Grade Sodium Tripolyphosphate (STPP) & Detergent Grade PPA

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. Detergent Grade PPA is a lower grade form of PPA used primarily in the production of STPP.

Our major North American STPP competitor is Mexichem, S.A.B. de C.V., or Mexichem, in Mexico. Currently, Mexichem produces STPP at two manufacturing locations in Mexico. We also compete with imports from North Africa, Europe and China.

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. Most detergent manufacturers discontinued 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. Our Mexican operations have historically dedicated a significant portion of their capacity to the production of STPP directly and have sold detergent grade PPA to other producers of STPP. In anticipation of reduced detergent demand for STPP, Innophos Mexico is investing in upgrading the food grade PPA and salts capability of our major Coatzacoalcos facility, and consequently substantially reducing the portion of capacity dedicated to detergent grade products.

 

Page 6 of 90


Table of Contents

GTSP & Other

Granular Triple Super Phosphate, or GTSP, is a fertilizer product line produced at our Coatzacoalcos facility. GTSP is used throughout Latin America for increasing crop yields in a wide range of agricultural sectors. GTSP is made as a co-product of our purified wet acid manufacturing process.

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 Ingredients; (ii) our Company and PCS, in Food and Technical Grade PPA; 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 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, (agricultural grade phosphoric acid), which is then purified through solvent-based extraction into purified phosphoric acid. The conversion of merchant green acid into 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. PPA is reacted with appropriate mineral salts or inorganic compounds to produce various specialty phosphate salts or STPP as required. We currently use PPA manufactured via the wet acid process for all of our Specialty Ingredients manufacturing needs.

Consolidation of producers has been most significant in the Specialty Ingredients 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 PPA 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 three years.

The following are the primary importers of PPA products and derivatives into North America: (i) Prayon SA, or Prayon, and Rotem Amfert Negev Ltd. (a subsidiary of ICL) for PPA, 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.

 

Page 7 of 90


Table of Contents

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.

For the years ended December 31, 2010, 2009 and 2008, we generated net sales of $714.2 million, $666.8 million and $934.8 million, respectively. 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 affected demand in 2009 compared to 2008. We responded with reductions in our own selling prices during 2009. Prices stabilized in the first quarter 2010 and subsequently improved on a sequential basis as we raised prices in anticipation of increasing raw material costs. Volumes also improved significantly across all products and markets. 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 approximately 50% of our sales to food, pharma, beverage and oral care customers in comparison to 33% in 2006.

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. The Company has agreements with three preferred phosphate rock suppliers for 2011 to supply the Coatzacoalcos facility. In addition to these primary sources, the Company has options for other spot suppliers and will continue to qualify and develop additional sources for potential future supply.

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 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 phosphate salt and specialty phosphoric 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 2010 Innophos produced approximately 75% and purchased approximately 25% 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.

 

Page 8 of 90


Table of Contents

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 $2.4 million, $1.9 million and $2.3 million for the years ended December 31, 2010, 2009 and 2008, 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

 

Page 9 of 90


Table of Contents

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.

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, 2010, we had 1,087 employees, of whom 684 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, 2014 at the Chicago Heights facility; International Union of Operating Engineers, Local No. 912 through April 15, 2013 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, Gases, 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 2012.

Executive Officers

The following table and biographical material present information about the persons serving as our executive officers, and key employees:

 

Name

   Age     

Position

Randolph Gress

     55       Chairman of the Board, Chief Executive Officer, President and Director

Neil Salmon

     42       Vice President and Chief Financial Officer

William Farran

     61       Vice President, General Counsel and Corporate Secretary

Charles Brodheim

     47       Corporate Controller

Louis Calvarin

     47       Vice President, Operations

Mark Feuerbach

     51       Vice President, Investor Relations, Treasury, Financial Planning & Analysis

Joseph Golowski

     49       Vice President, Specialty Phosphates

Wilma Harris

     64       Vice President, Human Resources

Russell Kemp

     52       Vice President, Research & Development and Chief Risk Officer

Michael Lovrich

     57       Vice President, Supply Chain

Abraham Shabot

     49       Vice President, Director General, Innophos Latin America

Mark Thurston

     51       Vice President, Corporate Strategy and Worldwide Business Development

Biographical Material

Randolph Gress is Chairman of the Board, Chief Executive Officer, President and Director of Innophos. 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.

 

Page 10 of 90


Table of Contents

Neil Salmon is Vice President and Chief Financial Officer of Innophos. Mr. Salmon joined Innophos in October 2009. Prior to joining Innophos, Mr. Salmon was the Chief Financial Officer of the Adhesives Business Group of Imperial Chemical Industries PLC. The Adhesives Business Group was the largest specialty chemical division representing around 25% of ICI in 2007 with a major presence in North America, Europe, Asia Pacific and Latin America. From 2004 to 2006, Mr. Salmon was the Chief Financial Officer, Asia Pacific for National Starch and Chemical Company, an ICI subsidiary, and from 2001 to 2003, he was the Commercial Finance Director of ICI’s U.S. Specialty Polymers and Adhesives Group in Bridgewater, New Jersey. From 1991 to 2001, Mr. Salmon held various management positions within the ICI Group. Mr. Salmon holds an M.A. in Politics, Philosophy and Economics from Oxford University (1991).

William Farran is Vice President, General Counsel and Corporate Secretary of Innophos. Mr. Farran joined Rhodia in 1987 as Environmental Counsel and held various positions in the Rhodia Legal Department, including Senior Operations Counsel and Assistant General Counsel, providing and managing a wide range of legal services to various Rhodia North American enterprises. In addition to his legal responsibilities, Mr. Farran also led the North American Total Quality Management function and served as Director, Public Affairs and Communications. Prior to joining Rhodia, 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 is Vice President, Investor Relations, Treasury, Financial Planning & Analysis and had previously served as Chief Financial Officer of Innophos from August 2004 through April 2005 and again 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 of the Specialty Phosphates Business of Innophos, appointed to that position in April 2010. Joining Rhodia in 1989 in Market Development, 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 Rare Earths 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. This path brought him to be appointed Vice President of Sales in 2006 and to his current role as Vice President for the Specialty Phosphate Business. Mr. Golowski 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 State University, a M.P.A. degree from Marshall University and Masters Degrees in Theological Studies and Divinity from New Brunswick Theological Seminary.

 

Page 11 of 90


Table of Contents

Russell Kemp is Vice President, Research & Development and Chief Risk Officer 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. Mr. Kemp earned a B.S. 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, leading several supply chain transformation initiatives at the business unit and corporate level. 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 M.B.A. from New York University Stern School of Business. Mr. Lovrich also holds professional certifications in supply chain management and project management.

Abraham Shabot is Vice President and Director General for 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.

Mark Thurston is Vice President, Corporate Strategy and Worldwide Business Development of Innophos. Mr. Thurston joined Rhodia in 1985 working in Fine Organics and has been Vice President of Strategy and Worldwide Business Development since 2009. Previously, he was Vice President of Specialty Chemicals from 2004 to 2008 and Vice President and General Manager of Food Ingredients North America from 2002 to 2004. Prior to that, he 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.

Available Information

The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, 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.

 

Page 12 of 90


Table of Contents
ITEM 1A. RISK FACTORS

Investing in our company involves a significant 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 purchased under supply contracts that vary from long term multi-year supply arrangements to annual agreements. Pricing within contracts is typically set according to predetermined formulae dependent on price indices or market prices with pricing for some shorter term contracts set by negotiation with reference to market conditions. The prices we pay under these contracts will generally lag the underlying market prices of the raw material. Approximately 25% of our supply for 2011 is bought under fixed annual pricing arrangements with the remaining quantities adjusted to quarterly pricing with approximately a three month lag to market prices.

Various market conditions can affect the price and supply of our raw materials. The primary demand for both phosphate rock and sulfur, globally, is for fertilizer production. The costs of these materials are heavily influenced by demand conditions in the fertilizer market and freight costs, which traditionally have been volatile. Prices for both materials escalated rapidly during 2007 and 2008, declined during 2009 and began to increase again during 2010. Increased raw material pricing may adversely affect our margins if we are not able to offset costs with sales price increases as we explain under “Price Competition” below.

Following completion of a two year initiative to qualify alternative sources of phosphate rock for our Coatzacoalcos, Mexico site, we have now successfully processed industrial scale quantities of phosphate rock from five suppliers and, for 2011, we expect the majority of our requirements to be met from three of these suppliers. Previously the Coatzacoalcos facility was supplied exclusively by OCP, S.A., a state-owned mining company in Morocco under a 1992 supply agreement that expired in September 2010. Although the Coatzacoalcos facility has made significant advances in its ability to handle alternative grades of rock without adversely affecting the operating efficiency; further investment will be required to realize the full benefits of improved process flexibility. Accordingly, it remains possible that process efficiency issues will arise as the plant processes new sources of rock over longer time periods, necessitating further investment or a change in rock suppliers to better suit plant processing capability. We cannot be sure that those kinds of efficiency issues will not arise, or if they do, that our existing or other suppliers would be able to supply sufficient additional quantities or grades to meet our full requirements, factors that could significantly affect our phosphate rock availability and may weaken our ability to maintain our existing levels of operations. Although the diversification of our supply base has reduced our dependence on any one supplier, tight demand conditions overall in the fertilizer market would mean that our purchases could be constrained were any of our major suppliers to experience a significant disruption in their ability to supply, for example as a result of capacity constraints, political unrest, or adverse weather conditions in the areas where that supplier operates. We also cannot be sure the annual or other periodic contracts we have in-place will be renewed on similar terms to those currently enjoyed.

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 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.

 

Page 13 of 90


Table of Contents

Price Competition

We face significant competition in each of our markets. 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. In addition, in the specialty chemicals industry, price competition is also based upon a number of other considerations, including product differentiation and innovation, product quality, technical service, and supply reliability. New products or technologies developed by competitors may also have an adverse impact on our price position. Future expansions could also have a negative impact on our price position.

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. 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.

Innophos has experienced more intense pricing pressures in markets, and for applications, where competing producers, particularly those located in China and North Africa, have similar product offerings, established supply relationships, and potential cost advantages. Historically, this has occurred most frequently in markets such as South America where Innophos does not have local production capability and for less specialized products such as detergent grade STPP. Chinese phosphate producers generally utilize the “thermal” method, a process more heavily dependent on energy that may be cost advantaged compared to “wet” method producers (such as Innophos) during periods of low energy prices. Both North African and some Chinese producers are integrated back to phosphate rock, which also may provide cost advantages to them depending on the markets in which they choose to compete. If the relative competitiveness of Chinese and North African producers increases significantly, or they are successful in extending their product lines to more specialized product applications, pricing pressure on Innophos could increase significantly.

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 and product markets. 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.

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, with non-phosphate legislation becoming 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 cannot 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. Changes in composition or permitted-use regulations in domestic or export countries may affect the regulatory status of our finished products and our ability to sell these products into some markets. Such changes may in turn require reformulation or alternative raw material sourcing, potentially incurring additional cost. If these measures are not successful, the available markets for our products may be limited.

 

Page 14 of 90


Table of Contents

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.

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.

International Operations

We have significant production operations in Mexico and Canada, and we continually evaluate business opportunities that may expand our operations to other areas beyond the Americas. We 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, the most notable being currency fluctuations and devaluations, economic and business conditions that differ from U.S. cycles, divergent social and political conditions that may become unsettled or even disruptive, and communication and translation delays and errors due to cultural and language barriers. Among those additional risks potentially affecting our Mexican operations are changes in local economic conditions, currency devaluations, potential disruption from socio-political violence in that country, and difficulty in contract enforcement due to differences in the Mexican legal and regulatory regimes compared to those of the U.S. Risks to our Canadian operations, though generally less than for Mexico, nevertheless include a differing federal and provincial regulatory environment from that in the U.S. and currency fluctuations and devaluations. In the event we establish operations in new regions, our exposures to risks from the noted causes and from other as yet unknown causes may increase.

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 building and starting up local facilities, staffing and managing local workforces, and designing and effecting solutions to manage commercial 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 only those countries where we actually operate facilities, but may extend to areas and regions that supply and service our facilities or are supplied and serviced by them.

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, their subsidiaries 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 whose personnel are not subject to our disciplinary procedures. While we and our subsidiaries are committed to conducting business in a legal and ethical manner wherever we operate, and we communicate and seek to monitor compliance with our policies by 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 or comparable local regulation 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

 

Page 15 of 90


Table of Contents

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.

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, we began an enterprise resource planning, or ERP, system and business process redesign project to upgrade our information technology systems including updated contingency plans with an estimated full scale start-up in mid 2011. We cannot be sure that our plans, intentions or expectations of the business process redesign and information technology systems upgrade will be achieved on the schedules we anticipate or fully in accord with our expectations, as a result of which we may experience business disruptions from implementing our planned upgrade.

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 and policies for avoiding them in the future. For example, after suffering extensive flood damage to our products (substantially all of which was covered by insurance) at a third party Nashville, TN warehouse in May 2010, we have relocated our area warehousing to other facilities on safer ground. 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.

Certain Financial Risks

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. We have maintained that policy and paid dividends continuously since that time. 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 our debt agreements 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 the level of our operations or 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.

 

Page 16 of 90


Table of Contents
ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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 four main product lines: Specialty Ingredients, Food and Technical Grade PPA, STPP & Detergent Grade PPA, and GTSP & 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 when we commenced our independent business in 2004.

 

ITEM 3. LEGAL PROCEEDINGS

The information set forth in Note 16 of Notes to Consolidated Financial Statements, “Commitments and Contingencies,” in “Item 8. Financial Statements and Supplementary Data”.

 

ITEM 4. (REMOVED AND RESERVED)

None.

 

Page 17 of 90


Table of Contents

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 Global Select Market under the symbol “IPHS.”

Stock price comparisons:

 

     2010      2009  

Quarter

   High      Low      Dividends
Paid
Per Share
     High      Low      Dividends
Paid
Per Share
 

First

   $ 28.04       $ 17.79       $ 0.17       $ 19.81       $ 7.80       $ 0.17   

Second

     31.00         25.20         0.17         19.44         11.23         0.17   

Third

     33.10         24.22         0.17         21.10         16.10         0.17   

Fourth

     37.67         32.72         0.17         25.78         18.60         0.17   

The Company paid the $0.17 per share dividend declared in the fourth quarter of 2010 in the first quarter of 2011.

The number of holders of record of our Common Stock at February 15, 2011 was 9,061.

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 2010. Subject to action by the Board of Directors on a quarterly basis, management’s present policy is to recommend 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 or increase the amount of dividends, otherwise modify or repeal the dividend policy or discontinue entirely the payment of dividends.

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 our indebtedness affecting the ability to pay dividends. See Note 9 of Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”.

 

Page 18 of 90


Table of Contents

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

   Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
     Weighted average exercise
price of outstanding
options, warrants and rights
     Number of securities
remaining available for
future issuance under  equity
compensation plans
(excluding securities
reflected in column (a))
 
     (a)      (b) **      (c)  

Equity compensation plans approved by security holders

     1,470,980       $ 15.75         1,972,046 

Equity compensation plans not approved by security holders

     —         $ —           —     
                          

Total

     1,470,980       $ 15.75         1,972,046   
                          

 

* Includes in the total 129,367 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.

 

Page 19 of 90


Table of Contents
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.

 

     (Dollars in thousands, except per share amounts, share amounts or where
otherwise noted)
 
     Year Ended December 31,  
     2010      2009     2008     2007     2006  

Statement of operations data:

           

Net sales

   $ 714,231       $ 666,759      $ 934,758      $ 578,982      $ 541,797   

Cost of goods sold

     556,826         470,780        570,176        474,785        449,516   
                                         

Gross profit

     157,405         195,979        364,582        104,197        92,281   
                                         

Operating expenses:

           

Selling, general and administrative

     59,564         67,151        63,417        54,441        59,598   

Research and development

     2,405         1,938        2,310        2,047        1,734   
                                         

Total operating expenses

     61,969         69,089        65,727        56,488        61,332   
                                         

Operating income

     95,436         126,890        298,855        47,709        30,949   

Interest expense, net

     28,289         23,313        34,193        41,559        58,242   

Foreign exchange (gains) losses, net

     659         (769     2,663        40        (162

Other income, net

     —           —          (386     (299     (228
                                         

Income (loss) before income taxes

     66,488         104,346        262,385        6,409        (26,903

Provision for income taxes

     21,333         41,202        55,202        11,896        5,914   
                                         

Net income (loss)

   $ 45,155       $ 63,144      $ 207,183      $ (5,487   $ (32,817
                                         

Allocation of net income (loss) to common shareholders (a):

           

Class A

     *         *        *        *      $ (26,546

Class L

     *         *        *        *      $ 1,605   

Common

   $ 45,141       $ 63,141      $ 207,150      $ (5,487   $ (7,876

Per share data:

           

Income (loss) per share:

           

Basic

           

Class A

     *         *        *        *      $ (2.77

Class L

     *         *        *        *      $ 0.60   

Common

   $ 2.11       $ 2.97      $ 9.89      $ (0.27   $ (0.39

Diluted

           

Class A

     *         *        *        *      $ (2.77

Class L

     *         *        *        *      $ 0.60   

Common

   $ 2.02       $ 2.87      $ 9.54      $ (0.27   $ (0.39

Weighted average shares outstanding:

           

Basic

           

Class A

     *         *        *        *        9,595,061   

Class L

     *         *        *        *        2,677,648   

Common

     21,421,226         21,258,536        20,956,566        20,676,859        20,270,463   

Diluted

           

Class A

     *         *        *        *        9,595,061   

Class L

     *         *        *        *        2,677,648   

Common

     22,359,447         21,968,904        21,718,537        20,676,859        20,270,463   

 

* Not applicable

 

(a) As a result of the Company’s Class A common stock and Class L common stock being converted into a single class of common stock, the 2006 earnings per share is calculated by allocating the net income on a pro-rata basis to the weighted average number of shares of each class outstanding during the reporting period.

 

Page 20 of 90


Table of Contents
     (Dollars in thousands)  
     Year Ended December 31,  
     2010     2009     2008     2007     2006  

Other data:

          

Cash flows provided from (used in):

          

Operating activities

   $ 75,958      $ 174,100      $ 142,794      $ 43,441      $ 40,937   

Investing activities

     (31,192     (19,609     (18,536     (30,476     (15,577

Financing activities

     (113,511     (147,368     (14,591     (29,064     (55,003

Capital expenditures

     31,192        19,609        18,536        28,356        15,577   

Ratio of earnings to fixed charges (1)

     3.2x        4.6x        8.0x        1.1x        *   

 

* Due to the loss for 2006 the coverage ratio was less than 1:1. Innophos would have had to generate additional earnings of $26,903 for 2006 to achieve a ratio of 1:1.

 

     (Dollars in thousands)  
     Year Ended December 31,  
     2010      2009      2008      2007      2006  

Balance sheet data:

              

Cash and cash equivalents

   $ 63,706       $ 132,451       $ 125,328       $ 15,661       $ 31,760   

Accounts receivable

     74,691         56,345         79,541         60,079         56,316   

Inventories

     123,182         113,636         145,310         78,728         70,569   

Property, plant & equipment, net

     191,625         204,527         230,422         260,563         277,222   

Total assets

     626,890         662,468         728,204         542,699         565,320   

Total debt

     149,000         246,000         382,500         384,500         399,800   

Total stockholders’ equity

   $ 330,716       $ 295,378       $ 242,760       $ 44,704       $ 60,712   

 

(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.

 

Page 21 of 90


Table of Contents

Below is a summary chart of the corporate structure of our subsidiaries at December 31, 2010.

LOGO

2010 Overview

Our financial performance in 2010 was highlighted by:

 

   

Net sales of $714.2 million compared to $666.8 million for 2009, a $47.4 million improvement mostly attributable to higher volume;

 

   

Operating income of $95.4 million compared to $126.9 million for 2009, where 2010 includes a net $21.0 million charge for expected Mexican Comision National del Agua, or CNA, Fresh Water Claims ($41.2 million gross, less a $20.2 million Rhodia indemnity receivable);

 

   

Net interest expense increased $5.0 million due to call premiums and accelerated deferred financing costs of $11.4 million primarily related to the redemption of $190 million Senior Subordinated Notes which was partially offset by lower interest expense for lower outstanding debt levels and the benefits of lower interest rates in the fourth quarter 2010 from a new credit facility;

 

   

Net income of $45.2 million or $2.02 per share (diluted) which included charges of $12.5 million for expected future claims regarding Mexican water duties and $7.1 million for call premiums and accelerated deferred financing charges related to a mid-year refinancing;

 

   

A net decrease in cash of $68.7 million was principally due to repayment of debt;

 

   

A 7.8% increase in net working capital (current assets excluding cash minus current liabilities excluding current portion of long-term debt) to $151.4 million at December 31, 2010 to support higher sales levels and reflecting delays in receiving prepaid tax refunds due to our Mexican subsidiary;

 

   

Capital expenditures of $31.2 million compared to $19.6 million in 2009, with higher spending due to the Company’s enterprise resource planning (ERP) system and business redesign project and manufacturing investments consisting of:

 

   

Port Maitland’s potassium phosphates capability

 

   

Nashville’s calcium phosphates capacity expansion

 

   

Coatzacoalcos’ upgrade of purified phosphoric acid, or PPA to food grade capability and enhanced capability to process multiple grades of phosphate rock;

 

   

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, 2010 for further details.

 

Page 22 of 90


Table of Contents

Recent Trends and Outlook

Net sales for 2010 increased 7% over 2009 on 21% volume growth. Starting in the first quarter 2010, selling prices improved moderately for Specialty Phosphates and significantly for GTSP & Other, but in total were still lower on average compared to 2009. Specialty Phosphates sales of $641 million in 2010 increased 1% versus last year with volumes up 18% and prices down 17% against the 2009 average. The price decline was primarily in comparison to high first half 2009 pricing levels with a reducing impact through the year contributing to improving revenue growth. GTSP & Other sales at $74 million for 2010 were more than double those achieved in 2009, with volumes up 69% and prices up 48%. In addition to strong domestic demand, continued success in developing new markets resulted in a significant increase in export volumes with full year export revenue representing 18% of total Specialty Phosphates revenue, up from 12% in 2009.

In the fourth quarter 2010, Specialty Phosphates year over year volume growth continued resulting in 11% revenue growth. Ongoing volume strength is expected to continue, and, combined with price increases, is expected to result in year over year Specialty Phosphates net sales growth rates for 2011 similar to, or better than, those achieved in the fourth quarter 2010. Specialty Phosphates operating income margin for 2011 is expected to be similar to the full year 2010 average, except during the first quarter 2011, when margins are expected to be somewhat above this level for the reasons outlined below.

GTSP volume is expected to be strong for 2011, with pricing early in the first quarter 2011 trending higher than the fourth quarter level. As in prior years, volumes may vary from quarter to quarter in a wide range depending on shipment timing, with the first quarter typically a seasonally weaker quarter. On average, however, at current pricing levels, GTSP & Other is expected to deliver approximately $25 million revenue per quarter in 2011 at an operating income margin of approximately 15%, except during the first quarter 2011, when margins are expected to be somewhat above this level for the reasons outlined below.

With continued strong demand for phosphate fertilizers, the key Innophos raw materials, phosphate rock and sulfur, have risen steadily in 2010 and further increases in market prices are indicated for the first quarter 2011. At current first quarter 2011 market prices, management’s expectation is for year over year raw material cost increases at the upper end of an expected $10 to $15 million range per quarter. Of this, $3 million was realized in the fourth quarter 2010; a similar increase is expected for the first quarter 2011, and the remaining increase is expected to take effect in the second quarter 2011.

With the business expecting to successfully increase selling prices in line with market changes in raw material costs, but the lagged nature of purchase contracts delaying the catch up of costs of goods sold to market levels, operating income margins are expected to be 1 to 2 percentage points higher in first quarter 2011 than normalized levels, in spite of the impact of a scheduled maintenance turnaround at the Coatzacoalcos site during the first quarter.

Trends in raw material prices are difficult to predict into the second half of 2011; however, further increases are possible and we would expect to be able to increase selling prices further, if required, to cover higher purchase costs.

The Company has successfully reached agreement with three preferred phosphate rock suppliers on major terms for 2011 supply to the Coatzacoalcos facility. In addition to these primary sources, Innophos has options for other spot suppliers and will continue to qualify and develop additional new sources for potential future supply.

Capital expenditures for 2010 were $31 million and expectations are for approximately $40 million of spending in 2011. Investment continues on enhancing Mexico’s capability to process multiple grades of rock consistent with the Company’s supply chain diversification strategy. In support of the continued success of several growth initiatives, including working with food and beverage customers on opportunities to reduce the sodium content in consumer products, Innophos is investing in several debottlenecking investments designed to strengthen the Company’s capability and increase available capacity for the potassium and calcium phosphate product ranges in 2011. In addition, limited investment continues in order to evaluate Innophos’ Mexican phosphate rock concessions. The Company is also continuing to invest in its ERP project, with management anticipating an implementation mid 2011. Depreciation and amortization is expected to decline by $5 million for full year 2011 versus 2010, net of increases for the noted capital expenditures.

Net debt (total debt less cash) improved by $30 million during the quarter to $85 million at the end of the 2010 fourth quarter and strong cash flow generation is expected to continue in 2011. The Company’s available financial resources are expected to allow management to continue with its growth objectives including potential “bolt-on” acquisitions.

 

Page 23 of 90


Table of Contents

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):

 

     Year Ended December 31,  
     2010      2009     2008  
     Amount      %      Amount     %     Amount     %  

Net sales

   $ 714.2         100.0       $ 666.8        100.0      $ 934.8        100.0   

Cost of goods sold

     556.8         78.0         470.8        70.6        570.2        61.0   
                                                  

Gross profit

     157.4         22.0         196.0        29.4        364.6        39.0   

Operating expenses:

              

Selling, general and administrative

     59.6         8.3         67.2        10.1        63.4        6.8   

Research & development

     2.4         0.3         1.9        0.3        2.3        0.2   
                                                  

Income from operations

     95.4         13.4         126.9        19.0        298.9        32.0   

Interest expense, net

     28.3         4.0         23.3        3.5        34.2        3.7   

Foreign exchange losses (gains), net

     0.6         0.1         (0.8     (0.1     2.7        0.3   

Other income

     —           —           —          —          (0.4     (0.0

Provision for income taxes

     21.3         3.0         41.3        6.2        55.2        5.9   
                                                  

Net income

   $ 45.2         6.3       $ 63.1        9.5      $ 207.2        22.2   
                                                  

Year Ended December 31, 2010 compared to the Year Ended December 31, 2009

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, 2010 were $714.2 million, an increase of $47.4 million, or 7.1%, as compared to $666.8 million for the same period in 2009. Selling price decreases had a negative impact on revenue of 13.6% or $90.4 million. GTSP prices increased for the comparable period in line with market prices but were offset by price declines across all other product lines primarily in comparison to higher pricing levels at the beginning of the prior year. Volume effects upon revenue were positive 20.7% or $137.8 million with all major product lines contributing.

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 year ended December 31, 2010 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:

 

     Price     Volume/Mix     Total  

Specialty Phosphates US & Canada

     (16.7 %)      15.6     (1.1 %) 

Specialty Phosphates Mexico

     (17.5 %)      27.6     10.1
                        

Total Specialty Phosphates

     (16.8 %)      18.0     1.2

GTSP & Other

     47.5     69.0     116.5
                        

Total

     (13.6 %)      20.7     7.1
                        

 

Page 24 of 90


Table of Contents

The following table illustrates for the year ended December 31, 2010 the percentage changes for net sales by Specialty Phosphates product lines compared with the prior year, including the effect of price and volume/mix changes:

 

     Price     Volume/Mix     Total  

Specialty Ingredients

     (14.3 )%      16.0     1.7

Food & Technical Grade PPA

     (24.1 )%      25.9     1.8

STPP & Detergent Grade PPA

     (21.3 )%      19.3     (2.0 )% 

Gross Profit

Gross profit represents net sales less cost of goods sold. Gross profit for the year ended December 31, 2010 was $157.4 million, a decrease of $38.6 million, or 19.7%, as compared to $196.0 million for the same period in 2009. Gross profit percentage decreased to 22.0% for the year ended December 31, 2010 versus 29.4% for the same period in 2009. The change in gross profit was negatively affected by a $21.0 million charge for the Mexican CNA Fresh Water Claims, net of the $20.2 million Rhodia indemnity receivable, lower selling prices which had an unfavorable effect of $90.4 million, $3.0 million unfavorable exchange rate impact mostly from Mexican peso based costs, $7.6 million higher cash fixed costs mainly due to the higher operating rates at our Mexico facilities, and $1.1 million expense for the planned maintenance outage at our Geismar, LA manufacturing facility. Favorable impacts to gross profit were sales volume, lower raw material costs, lower depreciation expense, and favorable inventory related variances which resulted in a net favorable effect of $77.5 million. Included in the 2009 results was a charge of approximately $7.0 million as a result of the settlement of the arbitration arising from a phosphate rock supplier dispute.

Operating Expenses and Research and Development

Operating expenses in 2010 consisted primarily of selling, general and administrative and research and development expenses. Operating expenses for the year ended December 31, 2010 were $62.0 million, a decrease of $7.1 million, or 10.3%, as compared to $69.1 million for 2009. The year over year improvement in operating expenses was due to $5.2 million lower ERP project expenses as a result of completing the design phase and capitalizing the build phase and $5.0 million lower legal expenses related to arbitration of a phosphate supply dispute in the prior year partially offset by $1.7 million increased non-cash stock compensation expense and $1.4 million increase in all other costs.

Operating Income

Operating income for the year ended December 31, 2010 was $95.4 million, a decrease of $31.5 million, or 24.8%, as compared to $126.9 million for the same period in 2009. Operating income percentages decreased to 13.4% for 2010 from 19.0% for 2009.

Interest Expense, net

Net interest expense, including deferred financing amortization expense, for the year ended December 31, 2010 was $28.3 million, an increase of $5.0 million, or 21.5% as compared to $23.3 million for the same period in 2009. This increase is primarily due to $5.6 million call premiums and increased accelerated deferred financing costs of $5.8 million related to the redemption of our $190 million Senior Subordinated Notes. This increase was partially offset by lower interest expense from paying off the remaining balance of a term loan from a prior credit facility in the second quarter of 2009, the redemption of the remaining balance of the Company’s 9.5% Senior Unsecured Notes in the second quarter of 2010 and lower interest due to the new capital structure in the fourth quarter of 2010. There was a gain of $3.5 million recorded in the second quarter of 2009 on the retirement of $10.0 million of the 9.5% Senior Unsecured Notes.

Foreign Exchange

Foreign exchange loss for the year ended December 31, 2010 was $0.6 million as compared to a gain of $0.8 million for 2009. 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

The decrease in the effective tax rate from 39.5% in 2009 to 32.1% in 2010 is primarily the result of the net tax effect of CNA Fresh Water Claims reducing our tax rate by 4.9%, an increase in the domestic manufacturing deduction reducing

 

Page 25 of 90


Table of Contents

the rate by 1.4% and an additional tax liability in 2009 under the Mexican alternative minimum tax (“IETU”) rules increasing the tax rate in 2009 by 0.9% as compared to 2010.

Net Income

Net income for the year ended December 31, 2010 was $45.2 million, a decrease of $17.9 million as compared to $63.1 million for the same period in 2009, due to the factors described above.

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 STPP & Detergent Grade PPA were mostly offset by increased prices in Specialty Ingredients. 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 STPP & Detergent Grade PPA in Mexico, where Innophos’ then 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:

 

     Price     Volume/Mix     Total  

Specialty Phosphates US & Canada

     20.8     (25.4 %)      (4.6 %) 

Specialty Phosphates Mexico

     (12.2 %)      (42.6 %)      (54.8 %) 
                        

Total Specialty Phosphates

     9.0     (31.5 %)      (22.5 %) 

GTSP & Other

     (69.1 %)      (2.2 %)      (71.3 %) 
                        

Total

     (0.9 %)      (27.8 %)      (28.7 %) 
                        

The following table illustrates for the year ended December 31, 2009 the percentage changes for net sales by specialty phosphate product lines compared with the prior year, including the effect of price and volume/mix changes:

 

     Price     Volume/Mix     Total  

Specialty Ingredients

     19.3     (20.7 )%      (1.4 )% 

Food & Technical Grade PPA

     1.1     (29.7 )%      (28.6 )% 

STPP & Detergent Grade PPA

     (6.9 )%      (55.2 )%      (62.1 )% 

Gross Profit

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 profit percentage 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 arbitration arising from a phosphate rock supplier dispute and also 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

 

Page 26 of 90


Table of Contents

our ERP project, and $5.0 million increased legal expenses related to arbitration of the phosphate rock supplier dispute, 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 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.

 

Page 27 of 90


Table of Contents

Segment Reporting

Beginning with the second quarter of 2010, the Company reported its core Specialty Phosphates business separately from GTSP and other non-Specialty Phosphate products. The previous reported segments of the United States, Mexico and Canada changed to Specialty Phosphates US & Canada, Specialty Phosphates Mexico and GTSP & Other. Specialty Phosphates consists of the products lines Specialty Ingredients, Food & Technical Grade PPA and STPP & Detergent Grade PPA. GTSP & Other includes fertilizer co-product GTSP and other non-Specialty Phosphate products. The primary performance indicators for the chief operating decision maker are sales and operating income. The following table sets forth the historical results of these indicators by segment:

 

     2010     2009     2008  

Segment Net Sales

      

Specialty Phosphates US & Canada

   $ 495,473      $ 500,995      $ 525,012   

Specialty Phosphates Mexico

     145,078        131,731        291,267   
                        

Total Specialty Phosphates

     640,551        632,726        816,279   
                        

GTSP & Other

     73,680        34,033        118,479   
                        

Total

   $ 714,231      $ 666,759      $ 934,758   
                        

Net Sales % Growth

      

Specialty Phosphates US & Canada

     (1.1 )%      (4.6 )%   

Specialty Phosphates Mexico

     10.1     (54.8 )%   
                  

Total Specialty Phosphates

     1.2     (22.5 )%   
                  

GTSP & Other

     116.5     (71.3 )%   
                  

Total

     7.1     (28.7 )%   
                  

Segment Operating Income

      

Specialty Phosphates US & Canada

   $ 101,286      $ 126,080      $ 115,269   

Specialty Phosphates Mexico

     9,739        12,956        112,270   
                        

Total Specialty Phosphates

     111,025        139,036        227,539   
                        

GTSP & Other (a)

     (15,589     (12,146     71,316   
                        

Total

   $ 95,436      $ 126,890      $ 298,855   
                        

Segment Operating Income % of net sales

      

Specialty Phosphates US & Canada

     20.4     25.2     22.0

Specialty Phosphates Mexico

     6.7     9.8     38.5
                        

Total Specialty Phosphates

     17.3     22.0     27.9
                        

GTSP & Other (a)

     (21.2 )%      (35.7 )%      60.2
                        

Total

     13.4     19.0     32.0
                        

Depreciation and amortization expense

      

Specialty Phosphates US & Canada

   $ 28,367      $ 30,495      $ 32,513   

Specialty Phosphates Mexico

     15,721        16,531        15,752   
                        

Total Specialty Phosphates

   $ 44,088        47,026        48,265   
                        

GTSP & Other

     5,383        4,161        4,242   
                        

Total

   $ 49,471      $ 51,187      $ 52,507   
                        

 

(a) The year ended December 31, 2010, includes a net $21.0 million charge to earnings for expected CNA Fresh Water Claims.

 

Page 28 of 90


Table of Contents

Segment Net Sales:

Specialty Phosphates US & Canada net sales decreased 1.1% for the year ended December 31, 2010 when compared with the same period in 2009. Volumes increased 15.6% with success in food and beverage markets driving strong specialty salts sales and recovery of industrial markets benefiting PPA. Selling prices decreased 16.7% primarily in comparison to higher pricing levels at the beginning of the prior year. In 2009 net sales decreased 4.6% when compared with 2008. Selling prices increased sales 20.8% with increases across all product lines, most notably in Specialty Ingredients. Volumes decreased 25.4%, with decreases across all product lines.

Specialty Phosphates Mexico net sales increased 10.1% for the year ended December 31, 2010 when compared with the same period in 2009. Volumes increased 27.6% as Mexico was able to increase operating rates after securing competitive phosphate rock supply. Selling prices decreased 17.5% primarily in comparison to higher pricing levels at the beginning of the prior year. In 2009 net sales decreased 54.8% when compared with 2008. Selling prices decreased sales 12.2% with decreases across all product lines. Volumes decreased 42.6% which occurred across all product lines, most notably in Detergent Grade PPA, where Innophos’ largest customer reduced volumes due to a permanent shutdown of their largest plant in the first quarter of 2009. In addition, the terms of the Company’s former rock supply contract, having been favorable to market in 2008, became significantly unfavorable to market in 2009, rendering Specialty Phosphates Mexico uncompetitive in most market segments and leading to substantially reduced production rates in 2009.

GTSP & Other net sales increased 116.5% for the year ended December 31, 2010 when compared with the same period in 2009 on 69.0% higher volumes and 47.5% higher selling prices which improved in line with market. In 2009 net sales decreased 71.3% when compared with 2008, primarily on selling price declines of 69.1% due to lower prices for GTSP fertilizer co-product sales. Volumes were also unfavorable, partly offset by favorable mix to give a net volume/mix decline of 2.2%.

Segment Operating Income Percentage of Net Sales:

The 4.8% decrease in Specialty Phosphates US & Canada for the year ended December 31, 2010 compared with the same period in 2009 is mainly due to decreased selling prices partially offset by lower raw material costs and decreased manufacturing, depreciation and operating expenses. The 3.2% increase in the Specialty Phosphates US & Canada 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 volumes, higher raw material costs and higher manufacturing costs.

The 3.1% decrease in Specialty Phosphates Mexico for the year ended December 31, 2010 compared with the same period in 2009 is mainly due to decreased selling prices, higher manufacturing costs due to higher operating rates and higher logistics costs related to third quarter weather disruption partially offset by lower legal fees and lower raw material costs. Included in the 2009 results were $2.0 million Mexican workforce reorganization costs. The 28.7% decrease in Specialty Phosphates Mexico from 2008 to 2009 was due to unfavorable selling prices, unfavorable volumes, increased cost of goods sold as a result of disadvantaged raw material costs to market and legal fees and settlement charges related to a phosphate rock supplier dispute.

The 14.5% increase in GTSP & Other for the year ended December 31, 2010 compared with the same period in 2009 is primarily due to significantly higher selling prices and lower raw material costs partially offset by a $21.0 million charge for the Mexican CNA Fresh Water Claims, net of the Rhodia indemnity receivable of $20.2 million. The 95.9% decrease in GTSP & Other from 2008 to 2009 was mainly due to unfavorable selling prices.

 

Page 29 of 90


Table of Contents

Liquidity and Capital Resources

The following table sets forth a summary of the Company’s cash flows for the periods indicated.

 

(Dollars in millions)    Year Ended December 31,  
     2010     2009     2008  

Operating Activities

   $ 76.0      $ 174.1      $ 142.8   

Investing Activities

     (31.2     (19.6     (18.5

Financing Activities

     (113.5     (147.4     (14.6

Year Ended December 31, 2010 compared to the Year Ended December 31, 2009

Net cash provided by operating activities was $76.0 million for the year ended December 31, 2010 as compared to $174.1 million for 2009, a decrease of $98.1 million. The decrease in operating activities cash resulted primarily from unfavorable changes of $76.1 million in working capital and $17.9 million in net income as described earlier.

The change in working capital is a use of cash of $19.2 million in 2010 compared to a source in 2009 of $56.9 million, a decrease in cash of $76.1 million. The change in working capital is mainly due to increases in other current assets, accounts receivable and inventory to support higher sales levels and increased operating rates in Mexico. Other current assets include a $20.2 million receivable from Rhodia for indemnity of the pre-2002 CNA Fresh Water Claims and $15.9 million of tax refunds due to our Mexican subsidiary. This was partially offset by higher accounts payable and other current liabilities due to recording a $41.6 million liability for both the pre-2002 and expected post-2002 CNA Fresh Water Claims.

Total inventories increased $9.5 million from December 2009 levels. However, days of inventory on hand decreased five days. The following chart shows its historical performance:

 

     2010      2009      2008  

Inventory Days on Hand

     84         89         93   

Net cash used for investing activities was $31.2 million for the year ended December 31, 2010, compared to $19.6 million for 2009, an increase in the use of cash of $11.6 million which was mainly due to higher capital spending for the Company’s ERP project and several manufacturing expansion projects.

In the second quarter of 2009 the Company launched an ERP project to upgrade its systems technology and to improve its position as a reliable specialty phosphate supplier. To date the Company has spent approximately $24.7 million on this project, of which approximately $17.0 million was capitalized as of December 31, 2010. Management anticipates implementation in mid 2011.

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 such as the recently announced $4.5 million calcium leavening agents project at its Nashville, TN plant. The Company also has a smaller investment in its Port Maitland, Canada facility to manufacture potassium phosphates. Additionally, in conjunction with the investment in the Coatzacoalcos facility to more than double its existing food grade PPA capacity which was completed in the first quarter 2010, the site personnel have conducted successful production tests of several additional food grade specialty salts to enable a shift in focus from detergency to the multiple food market segments served by specialty salts and food grade PPA.

Innophos currently estimates that full exploration costs to a proven reserves standard for its Santo Domingo mining concession deposit could require expenditures of $10 to $15 million over a period, currently estimated at three to five years, inclusive of expenditures to date. This estimate includes mineral rights payments, taxes, mineral resource measurement, beneficiation process design and completion of feasibility studies. Full expenditures would only occur if interim milestone goals were successfully attained. 2010 expenditures on the exploration of the Baja California Sur concession deposits were approximately $1.0 million. It is estimated that 2011 overall concession-related expenditures will be approximately $1.0 million to $4.5 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.

 

Page 30 of 90


Table of Contents

Net cash used for financing activities for the year ended December 31, 2010, was a use of $113.5 million, compared to a use of $147.4 million in 2009, a decrease in the use of cash of $33.9 million. This was mainly due to funds received from the new 2010 bank Credit Agreement in the form of a $100 million term loan and a $70 million revolver draw, of which $20 million was subsequently repaid during 2010. These funds along with $20 million of on-hand cash were used to redeem the $190 million Senior Subordinated Notes due 2014. In the second quarter of 2010, there was a net $49.5 million decrease in cash for the redemption of the remaining balance of the 9.5% Senior Unsecured Notes due 2012. In 2009, there were $126.5 million of term loan principal payments under a previous credit facility entered into in 2004.

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 change 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, a change in working capital of $80.2 million mainly due to decreases in inventory attributable to lower operating rates.

Total inventories decreased $31.7 million from December 2008 levels. Days of inventory on hand decreased four days as a result. The following chart shows its historical performance:

 

     2009      2008      2007  

Inventory Days on Hand

     89         93         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. As of December 31, 2009, the Company had 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 were expected to total approximately $12 to $14 million by the end of 2010, with the majority of this spending anticipated as capital expenditures.

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 9.5% 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.

Indebtedness

Total debt was $149.0 million as of December 31, 2010. Short term and long term debt net of cash was $85.2 million as of December 31, 2010, a decrease of $28.3 million, or 24.9% from December 31, 2009.

On September 27, 2010, the Company redeemed for cash all of the $190.0 million Senior Subordinated Notes due 2014. The Company paid $197.6 million, including a call premium of approximately $5.6 million and accrued interest of approximately $2.0 million. In connection with the redemption of the Senior Subordinated Notes, the Company charged to earnings accelerated deferred financing charges of approximately $4.5 million.

 

Page 31 of 90


Table of Contents

On August 27, 2010, Innophos Holdings, Inc. and our wholly owned subsidiaries, Innophos Investments Holdings, Inc. and Innophos, Inc. entered into a Credit Agreement with a group of lenders. The Credit Agreement provides the Companies with a term loan of $100.0 million and a revolving line of credit from the Lenders of up to $125.0 million, including a $20.0 million letter of credit sub-facility, all maturing on August 26, 2015. Prepayments of term loan are required at the rate of 1% of original principal amount (or $1 million) per quarter beginning on December 31, 2010. As of December 31, 2010, $99.0 million was outstanding under the Term Loan and $50.0 million was outstanding under the revolving line of credit with total availability at $73.7 million, taking into account $1.3 million in face amount of letters of credit issued under the sub-facility. As a result of this refinancing, annual consolidated net interest expense is estimated to be reduced by approximately $11.5 million. Refer to Note 9 of Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”.

Prior to the 2010 credit facility, Innophos, Inc. and its subsidiary, Innophos Canada, Inc. entered into a Loan and Security Agreement on May 22, 2009 which replaced a Credit Agreement dated as of August 13, 2004.

In the third quarter of 2010 the Company entered into an interest rate swap with an original notional amount of $100 million adjusting quarterly consistent with the 2010 term loan, with a fixed rate of 1.994% plus the applicable margin on the debt expiring in August 2015. The Company has the right to cancel the swap with no fee on September 28, 2012 and anytime thereafter. The fair value of this interest rate swap is an asset of approximately $0.4 million as of December 31, 2010.

In April 2009, the Company purchased $10.0 million of the 9.5% Senior Unsecured Notes due 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.

The Company redeemed for cash all remaining $56.0 million of the 9.5% Senior Unsecured Notes in April 2010. The redemption price for the Notes was 100% of the principal amount plus accrued interest of $2.7 million to the date of redemption. Accelerated deferred financing charges in connection with the redemption of $0.6 million were recorded in the second quarter of 2010.

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.

As indicated elsewhere, the Company pays a quarterly dividend on its 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.

The Company’s available financial resources allow for the continuation of dividend payments, pursuit of several “bolt-on” acquisition projects and further geographic expansion initiatives. We further believe that on-hand cash combined with cash generated from operations, including our Mexican operations, and availability under our revolving line of credit, will be sufficient to meet our obligations such as debt service, tax payments, capital expenditures and working capital requirements for at least the next twelve months. We expect to fund all these obligations through our existing cash and our future operating cash flows. 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.

We are subject to Rhodia’s ability to perform its obligations under our 2004 acquisition agreement, primarily to indemnify us against CNA Fresh Water Claims currently estimated at $25.5 million for the periods through 2002. Such indemnification rights have been confirmed by court judgments.

Since the CNA Fresh Water Claims were upheld for the periods through 2002, 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). In 2010, the Company recorded in cost of goods sold a charge of $16.1 million (including estimated inflation, interest and penalties) and an income tax benefit of $3.3 million in 2010 resulting in a $12.8 million net charge. Although not included in our court judgments in ongoing litigation against Rhodia, we believe Rhodia is required to indemnify us fully for post-closing “losses” caused by breaches of covenants set forth in our 2004 acquisition agreement. Rhodia has contested indemnification responsibility for those breaches. Refer to Note 16 of Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”.

 

Page 32 of 90


Table of Contents

Capital Expenditures and Maintenance Expense

We spent $31.2 million in 2010 on projects that were capitalized. Additionally, we spent $30.8 million in 2010 on maintenance projects that were expensed during the year, including $1.1 million for the planned maintenance outage at our Geismar, LA manufacturing facility. These amounts compare to $19.6 million of 2009 capitalized projects and $23.3 million of maintenance projects that were expensed during 2009. There were no planned major non-annual maintenance expenses in 2009. Management projects total 2011 capital expenditures to approximate $40 million.

Contractual Obligations and Commercial Commitments

The following table sets forth our long-term contractual cash obligations as of December 31, 2010 (dollars in thousands):

 

     Years ending December 31,  

Contractual Obligations

   Total      2011      2012      2013      2014      2015      Thereafter  

Term loan and revolver borrowings (1)

     149,000         4,000         4,000         4,000         4,000         133,000         —     

Future Service Pension Benefits

     10,451         620         727         820         900         999         6,385   

Other (2)

     533,088         106,060         61,004         61,004         61,004         61,004         183,012   

Operating Leases

     20,689         5,178         4,369         3,662         2,597         2,317         2,566   
                                                              

Total contractual cash obligations

   $ 713,228       $ 115,858       $ 70,100       $ 69,486       $ 68,501       $ 197,320       $ 191,963   
                                                              

 

(1) Amounts exclude interest payments.

 

(2) Represents minimum annual purchase commitments to buy raw materials from suppliers.

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 our financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates, including those related to allowance for bad debts, the recoverability of long-lived assets, including amortizable intangible assets, goodwill, 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.

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 the section entitled “Commitments and Contingencies” in Note 16 of Item 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 the section entitled “Income Taxes” (contained in Note 15) of Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for additional information regarding deferred taxes.

 

Page 33 of 90


Table of Contents

Goodwill

Goodwill represents the excess of the acquisition cost over the fair value of net assets of the businesses acquired. Accounting Standards Codification (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, 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. 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.

Our market capitalization during fourth quarter of 2010 exceeded the book value of our equity.

Our reporting units for goodwill purposes are Specialty Phosphates United States, Specialty Phosphates Canada, Specialty Phosphates Mexico and GTSP & Other. As of December 31, 2010, the fair values of our reporting units were substantially greater than their carrying values.

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.

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 multi-year future average return on performance parameters selected in advance 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 and distributed.

 

   

Annual stock retainer grants, which entitle independent members of the Board of Directors to receive a number of shares of the Company’s common stock equal to a fixed retainer value.

 

Page 34 of 90


Table of Contents

The fair value of the options granted during 2010, 2009 and 2008 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

   Year Ended
December 31,
2010
    Year Ended
December 31,
2009
    Year Ended
December 31,
2008
 

Expected volatility

     57.5     61.4     36.8

Dividend yield

     3.6     5.0     4.6

Risk-free interest rate

     2.8     2.7     3.4

Expected term

     6 years        6 years        6 years   

Weighted average grant date fair value of stock options

   $ 10.46      $ 6.19      $ 4.52   

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 prior to 2009 was based on peer group historical volatility data equaling the expected term. In 2009 and 2010, the Company had chosen a blended volatility which consists of 50% historical volatility average of a peer group and 50% historical volatility average of Innophos. The increase in the expected volatility in 2009 and 2010 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 its stock options. These stock options qualify as “plain vanilla” stock options in accordance with SAB 110. The dividend yield is the expected annual dividend payments divided by the average stock price up to the date of grant. The risk-free interest rates are derived from the U.S. Treasury securities in effect on the date of grant whose maturity period equals the options expected term. The Company applies an expected forfeiture rate to stock-based compensation expense. The estimate of the forfeiture rate is based primarily upon historical experience of employee turnover. As actual forfeitures become known, stock-based compensation expense is adjusted accordingly.

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 began participating 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 $61. A 1% decrease in our expected rate of return on plan assets would increase our pension plan expense by $151.

Recently Issued Accounting Standards

New accounting standards effective in 2010 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

 

Page 35 of 90


Table of Contents

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, 2010, we had $99.0 million principal amount of variable-rate debt and a $125.0 million revolving credit facility, of which $50.0 million was outstanding, both of which approximate fair value. Total remaining availability was $73.7 million, taking into account $1.3 million in face amount of letters of credit issued under the sub-facility. In the third quarter of 2010 we entered into an interest rate swap with an original notional amount of $100 million adjusting quarterly consistent with the Term Loan, with a fixed rate of 1.994% plus the applicable margin on the debt, expiring in August 2015. The Company has the right to cancel the swap with no fee on September 28, 2012 and anytime thereafter.

Changes in economic conditions could result in higher interest rates, thereby increasing our interest expense on our revolving line of credit. Changes in economic conditions may also result in lower operating income, reducing our funds available for capital investment, operations or other purposes. In addition, a substantial portion of our cash flow has been used to service debt and fund working capital needs, which may affect our ability to make future acquisitions or capital expenditures. We may from time to time use interest rate protection agreements to minimize our exposure to interest rate fluctuation. Regardless of hedges, we may experience economic loss and a negative impact on earnings or net assets as a result of interest rate fluctuations.

In the second quarter of 2010, we purchased forward natural gas price cap contracts which allow us to purchase a portion of our monthly natural gas usage requirements at a fixed price if prevailing market prices are greater than the contractual fixed price amount. These contracts are for periods expiring through April 2011, and apply to our U.S., Canadian and Mexican facilities.

We do not currently, but may from time to time, hedge our currency rate risks.

We believe that our concentration of credit risk related to trade accounts receivable is limited since these receivables are spread among a number of customers and are geographically dispersed. Our largest customer in 2008 represented 11% of that year’s sales, otherwise, no other customer accounted for more than 10% of our sales in the last 3 years.

Foreign Currency Exchange Rates

The U.S. Dollar is the functional currency of the Canadian and Mexican operations. Accordingly, these operations’ monetary assets and liabilities are translated at current exchange rates, non-monetary assets and liabilities are translated at historical exchange rates, and revenue and expenses are translated at average exchange rates and at historical exchange rates for the related revenue and expenses of non-monetary assets and liabilities. All transaction gains and losses are included in net income.

Our principal source of exchange rate exposure in our foreign operations consists of expenses, such as labor expenses, which are denominated in the foreign currency of the country in which we operate. A decline in the value of the U.S. Dollar relative to the local currency would generally cause our operational expenses (particularly labor costs) to increase (conversely, a decline in the value of the foreign currency relative to the U.S. Dollar would cause these expenses to decrease). We believe that normal exchange rate fluctuations consistent with recent historical trends would have a modest impact on our expenses, and would not materially affect our financial condition or results of operations. Nearly all of our sales are denominated in U.S. Dollars and our exchange rate exposure in terms of sales revenues is minimal.

Inflation and changing prices

Our costs and expenses will be subject to inflation and price fluctuations. Significant price fluctuations in raw materials, freight, and energy costs, if not compensated for by cost savings from production efficiencies or price increases passed on to customers could have a material effect on our financial condition and results of operations. 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.

 

Page 36 of 90


Table of Contents
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

 

     Page  

Consolidated Financial Statements

  

Report of Independent Registered Public Accounting Firm

     38   

Balance Sheets at December 31, 2010 and December 31, 2009

     39   

Statements of Operations for each of the three years ended December 31, 2010

     40   

Statements of Stockholders’ Equity and Other Comprehensive Income (Loss) for each of the three years ended December 31, 2010

     41   

Statements of Cash Flows for each of the three years ended December 31, 2010

     42   

Notes to Consolidated Financial Statements

     43   

 

Page 37 of 90


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders 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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 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 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, 2010, 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

February 25, 2011

 

Page 38 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

     December 31,  
     2010     2009  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 63,706      $ 132,451   

Restricted cash

     —          1,749   

Accounts receivable, net

     74,691        56,345   

Inventories

     123,182        113,636   

Other current assets

     75,898        49,865   
                

Total current assets

     337,477        354,046   

Property, plant and equipment, net

     191,625        204,527   

Goodwill

     51,706        51,706   

Intangibles and other assets, net

     46,082        52,189   
                

Total assets

   $ 626,890      $ 662,468   
                

LIABILITIES AND STOCKHOLDERS' EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 4,000      $ —     

Accounts payable, trade and other

     38,095        21,379   

Other current liabilities

     84,239        59,696   
                

Total current liabilities

     126,334        81,075   

Long-term debt

     145,000        246,000   

Other long-term liabilities

     24,840        40,015   
                

Total liabilities

   $ 296,174      $ 367,090   
                

Commitments and contingencies (note 16)

    

Common stock, par value $.001 per share; authorized 100,000,000 shares; issued and outstanding 21,463,934 and 21,333,940 shares

     21        21   

Paid-in capital

     106,032        100,066   

Retained earnings

     227,752        197,541   

Accumulated other comprehensive loss

     (3,089     (2,250
                

Total stockholders' equity

     330,716        295,378   
                

Total liabilities and stockholders' equity

   $ 626,890      $ 662,468   
                

See notes to consolidated financial statements

 

Page 39 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

     Year Ended December 31,  
     2010      2009     2008  

Net sales

   $ 714,231       $ 666,759      $ 934,758   

Cost of goods sold

     556,826         470,780        570,176   
                         

Gross profit

     157,405         195,979        364,582   
                         

Operating expenses:

       

Selling, general and administrative

     59,564         67,151        63,417   

Research & Development Expenses

     2,405         1,938        2,310   
                         

Total operating expenses

     61,969         69,089        65,727   
                         

Operating income

     95,436         126,890        298,855   

Interest expense, net

     28,289         23,313        34,193   

Foreign exchange losses/(gains)

     659         (769     2,663   

Other income, net

     —           —          (386
                         

Income before income taxes

     66,488         104,346        262,385   

Provision for income taxes

     21,333         41,202        55,202   
                         

Net income

   $ 45,155         63,144        207,183   
                         

Net income attributable to common shareholders

   $ 45,141       $ 63,141      $ 207,150   
                         

Per share data (see Note 12):

       

Income per share:

       

Basic

   $ 2.11       $ 2.97      $ 9.89   

Diluted

   $ 2.02       $ 2.87      $ 9.54   

Weighted average
shares outstanding:

       

Basic

     21,421,226         21,258,536        20,956,566   

Diluted

     22,359,447         21,968,904        21,718,537   

See notes to consolidated financial statements

 

Page 40 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Statements of Stockholders’ Equity and Other Comprehensive Income (Loss)

(Dollars and shares in thousands)

 

     Number of
Common
Shares
     Common
Stock
     Retained
Earnings
(Deficit)
    Paid-in
Capital
    Accumulated
Other
Comprehensive
Income/(Loss)
    Total
Shareholders'
Equity
 

Balance, December 31, 2007

     20,867       $ 21       $ (50,775   $ 97,729      $ (2,271   $ 44,704   

Net income

           207,183            207,183   

Change in pension and post-retirement plans, (net of tax $144)

               247        247   
                    

Other comprehensive income, net of tax

                 207,430   

Proceeds from exercise of stock options and restricted stock

     207              542          542   

Issuance of annual retainer stock to external Board of Directors

     17                  —     

Share-based compensation

             3,467          3,467   

Excess tax benefits from exercise of stock options

             1,108          1,108   

Dividends declared ($0.68 per share)

           (7,216     (7,275       (14,491
                                                  

Balance, December 31, 2008

     21,091       $ 21       $ 149,192      $ 95,571      $ (2,024   $ 242,760   
                                                  

Net income

           63,144            63,144   

Change in pension and post-retirement plans, (net of tax $109)

               (226     (226
                    

Other comprehensive income, net of tax

                 62,918   

Proceeds from exercise of stock options and restricted stock

     224              633          633   

Issuance of annual retainer stock to external Board of Directors

     19                  —     

Share-based compensation

             3,367          3,367   

Excess tax benefits from exercise of stock options

             495          495   

Dividends declared ($0.68 per share)

           (14,795         (14,795
                                                  

Balance, December 31, 2009

     21,334       $ 21       $ 197,541      $ 100,066      $ (2,250   $ 295,378   
                                                  

Net income

           45,155            45,155   

Change in interest rate swaps, (net of tax $136)

               223        223   

Change in pension and post-retirement plans, (net of tax $140)

               (1,062     (1,062
                    

Other comprehensive income, net of tax

                 44,316   

Proceeds from exercise of stock options and restricted stock

     119              236          236   

Issuance of annual retainer stock to external Board of Directors

     11                  —     

Share-based compensation

             5,090          5,090   

Excess tax benefits from exercise of stock options

             640          640   

Dividends declared ($0.68 per share)

           (14,944         (14,944
                                                  

Balance, December 31, 2010

     21,464       $ 21       $ 227,752      $ 106,032      $ (3,089   $ 330,716   
                                                  

See notes to consolidated financial statements

 

Page 41 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in thousands)

 

     Year Ended December 31,  
     2010     2009     2008  

Cash flows from operating activities

      

Net income

   $ 45,155      $ 63,144      $ 207,183   

Adjustments to reconcile net income to net cash provided from operating activities:

      

Depreciation and amortization

     49,471        51,186        52,507   

Amortization of deferred financing charges

     7,150        3,130        2,726   

Deferred income tax (benefit) provision

     (6,680     1,867        (12,105

Deferred profit sharing

     (2,064     (756     (3,258

Stock based compensation

     5,090        3,367        3,467   

Gain on retirement of bonds

     —          (3,500     —     

Changes in assets and liabilities:

      

Decrease (increase) in restricted cash

     1,749        (1,749     —     

(Increase) decrease in accounts receivable

     (18,346     23,196        (19,462

(Increase) decrease in inventories

     (9,546     31,674        (66,582

Increase in other current assets

     (34,270     (6,433     (11,116

Increase (decrease) in accounts payable

     16,716        (4,980     (10,085

Increase (decrease) in other current liabilities

     24,522        15,172        (934

Changes in other long-term assets and liabilities

     (2,989     (1,218     453   
                        

Net cash provided from operating activities

     75,958        174,100        142,794   
                        

Cash flows used for investing activities:

      

Capital expenditures

     (31,192     (19,609     (18,536
                        

Net cash used for investing activities

     (31,192     (19,609     (18,536
                        

Cash flows from financing activities:

      

Proceeds from exercise of stock options

     236        633        542   

Proceeds from term-loan due 2015

     100,000        —          —     

Revolver proceeds

     70,000        —          —     

Revolver repayments

     (20,000     —          —     

Principal repayment of senior subordinated notes

     (190,000     —          —     

Principal repayment of senior unsecured notes

     (56,000     (6,500     —     

Principal repayment of term-loan due 2015

     (1,000     —          —     

Principal payments of term-loan due 2010

     —          (126,500     (2,000

Deferred financing costs

     (2,828     (1,050     —     

Excess tax benefits from exercise of stock options

     640        495        1,108   

Dividends paid

     (14,559     (14,446     (14,241
                        

Net cash used for financing activities

     (113,511     (147,368     (14,591
                        

Net change in cash

     (68,745     7,123        109,667   

Cash and cash equivalents at beginning of period

     132,451        125,328        15,661   
                        

Cash and cash equivalents at end of period

   $ 63,706      $ 132,451      $ 125,328   
                        

See notes to consolidated financial statements

 

Page 42 of 90


Table of Contents

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.

Certain prior year balances have been restated to conform to current year presentation.

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

 

Page 43 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

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.

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 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.

 

Page 44 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

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.

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 ASC 712, Compensation – Nonretirement Post employment 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 an accrued obligation for post-employment benefits for U.S. and Canadian operations when the amounts are probable and 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, 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. For 2010, 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, 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. 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. 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, 2010, 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 currently does not anticipate that total unrecognized tax benefits will significantly change prior to December 31, 2011.

 

Page 45 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

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.

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, Comprehensive Income, the Company has identified and reported other comprehensive income (loss) 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, 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, 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.

In June 2009, the FASB issued an amendment to ASC topic 860 Transfers and Servicing. 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 did not have a material impact on the Company’s consolidated financial position and results of operations.

 

Page 46 of 90


Table of Contents

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 Consolidation. 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 did not have a material impact on the Company’s consolidated financial position and results of operations.

In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force (EITF), which 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 were disbursed to the third party in accordance with the settlement terms.

3. Inventories:

Inventories consist of the following:

 

     2010      2009  

Raw materials

   $ 32,844       $ 31,770   

Finished products

     82,961         73,924   

Spare parts

     7,377         7,942   
                 
   $ 123,182       $ 113,636   
                 

Inventory reserves for excess quantities, obsolescence or shelf-life expiration as of December 31, 2010 and December 31, 2009 were $8,473 and $13,189, respectively.

4. Other Current Assets:

Other current assets consist of the following:

 

     2010      2009  

Rhodia indemnity receivable for CNA water tax claims (see note 16)

   $ 20,177       $ —     

Creditable taxes (value added taxes)

     15,868       $ 4,028   

Prepaid income taxes

     14,002         10,435   

Other prepaids

     11,392         13,110   

Deferred income taxes

     7,782         16,019   

Other

     6,677         6,273   
                 
   $ 75,898       $ 49,865   
                 

 

Page 47 of 90


Table of Contents

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:

 

     2010      2009  

Land and buildings

   $ 92,173       $ 90,384   

Machinery and equipment

     329,901         322,523   

Construction-in-progress

     29,898         10,799   
                 
     451,972         423,706   

Less accumulated depreciation

     260,347         219,179   
                 
   $ 191,625       $ 204,527   
                 

Depreciation expense, excluding depreciation expense in changes of inventory, was $43,056, $45,837 and $45,904 in 2010, 2009 and 2008, respectively. Construction-in-progress includes $17.0 million and $5.0 million as of December 31, 2010 and 2009, respectively for the Company’s enterprise resource planning (ERP) system and business redesign project.

 

Page 48 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

6. Goodwill:

Beginning with the second quarter of 2010, the Company realigned the reportable segments to better reflect the core businesses in which Innophos operates and how it is managed (see note 19). The prior-year figures for the goodwill of the reporting segments have been restated accordingly.

 

     Specialty
Phosphates
US
     Specialty
Phosphates
Canada
     Specialty
Phosphates
Mexico
     GTSP &
Other
     Total  

Balance, December 31, 2010, 2009 and 2008

   $ 7,237       $ 2,530       $ 38,584       $ 3,355       $ 51,706   
                                            

7. Intangibles and Other Assets, net:

Intangibles and other assets consist of the following:

 

     Useful life
(years)
     2010      2009  

Developed technology and application patents, net of accumulated amortization of $12,057 for 2010 and $10,168 for 2009

     10-20         24,543         26,432   

Customer relationships, net of accumulated amortization of $4,909 for 2010 and $3,961 for 2009

     5-15         6,421         7,369   

Tradenames and license agreements, net of accumulated amortization of $3,815 for 2010 and $3,401 for 2009

     5-20         5,545         5,959   

Capitalized software, net of accumulated amortization of $2,642 for 2010and $2,279 for 2009

     3-5         323         700   

Non-compete agreement, net of accumulated amortization of $441 for 2010 and $315 for 2009

     5         189         315   
                    

Total Intangibles

      $ 37,021       $ 40,775   
                    

Deferred financing costs, net of accumulated amortization of $229 for 2010 and $7,473 for 2009 (see note 9)

      $ 2,599       $ 6,921   

Deferred income taxes

        3,421         1,409   

Other Assets

        3,041         3,084   
                    

Total other assets

      $ 9,061       $ 11,414   
                    
      $ 46,082       $ 52,189   
                    

Amortization expense for intangibles was $3,752, $4,312 and $4,312 in 2010, 2009 and 2008, respectively. Anticipated amortization expense for the next five years related to intangibles is as follows:

 

     2011      2012      2013      2014      2015  

Intangible amortization expense

   $ 3,574       $ 3,286       $ 3,081       $ 3,000       $ 2,947   
                                            

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.

 

Page 49 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

8. Other Current Liabilities:

Other current liabilities consist of the following:

 

     2010      2009  

CNA water tax claims (see Note 16)

   $ 41,573       $ —     

Payroll related

     15,787         13,480   

Taxes

     7,761         8,984   

Benefits and pensions

     6,070         5,104   

Freight and rebates

     4,107         3,794   

Dividends payable

     3,648         3,627   

Legal

     577         2,820   

Interest

     104         7,505   

Other

     4,612         14,382   
                 
   $ 84,239       $ 59,696   
                 

9. Short-term Borrowings, Long-Term Debt, and Interest Expense:

Short-term borrowings and long-term debt consist of the following:

 

     2010      2009  

Term loan due 2015

   $ 99,000       $ —     

Revolver borrowings under the credit facility

     50,000         —     

Senior subordinated notes

     —           190,000   

Senior unsecured notes

     —           56,000   
                 
   $ 149,000       $ 246,000   

Less current portion

     4,000         —     
                 
   $ 145,000       $ 246,000   
                 

On August 27, 2010, Innophos Holdings, Inc. and our wholly owned subsidiaries, Innophos Investments Holdings, Inc. and Innophos, Inc. (collectively, the “Companies”) entered into its Credit Agreement (the “Credit Agreement”) with a group of lenders (collectively, the “Lenders”). The Credit Agreement provides the Companies with a term loan of $100.0 million and a revolving line of credit from the Lenders of up to $125.0 million, including a $20.0 million letter of credit sub-facility, all maturing on August 26, 2015. Prepayments of term loan are required at the rate of 1% of original principal amount per quarter beginning on December 31, 2010. Interest accruing on amounts borrowed under the term loan and revolving line is based on an applicable margin over LIBOR (London Interbank Offered Rate) or bank base rate, ranging from 225 to 300 basis points for LIBOR and 125 to 200 basis points for base rate loans, in each case with loan period and interest alternative as chosen by the Companies, which margin is adjusted quarterly depending on a total leverage ratio (as computed under the Credit Agreement) for the period in question. Commitment fees on the unused revolving line range from 25 to 50 basis points, depending on total leverage ratio (as computed under the Credit Agreement) for the period in question. The initial applicable margin for LIBOR based loans, base rate loans and the commitment fee were 250, 150 and 37.5 basis points, respectively.

The Credit Agreement also provides for possible additional revolving indebtedness under an incremental facility of up to $50.0 million (i.e. an aggregate of revolving capacity up to $175.0 million) upon future request by Innophos Holdings, Inc. 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, for interest rates than those in effect for the original revolving commitments under the Credit Agreement.

The obligations of the Companies under the Credit Agreement are secured by first priority liens on substantially all the United States assets of the Companies, as well as a pledge of 65% of the voting equity of entities holding the Companies’ foreign subsidiaries.

 

Page 50 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

The Credit Agreement contains representations given to the Lenders about the nature and status of the Companies’ business that serve as conditions to future borrowings, and affirmative, as well as negative, covenants typical of senior facilities of this kind that prohibit or limit a variety of actions by the Companies and their subsidiaries generally without the Lenders’ approval. These include covenants that affect the ability of those entities, among other things, to (a) incur or guarantee indebtedness, (b) create liens, (c) enter into mergers, recapitalizations or assets purchases or sales, (d) change names, (e) make certain changes to their business, (f) make restricted payments that include dividends, purchases and redemptions of equity (g) make advances, investments or loans, (h) effect sales and leasebacks or (i) enter into transactions with affiliates, (j) allow negative pledges or limitations on the repayment abilities of subsidiaries or (k) amend subordinated debt. However, subject to continued compliance with the overall leverage restrictions described in more detail below, the Companies retain flexibility under the Credit Agreement to develop their business and achieve strategic goals by, among other things, being permitted to take on additional debt, pay dividends (as long as the Total Leverage Ratio shall be .25 less than the then applicable level described below), re-acquire equity and make domestic acquisitions. Foreign acquisitions and investments are also permitted up to a fixed limit which is set initially at $100.0 million and can increase with ongoing cash generation up to as high as $250.0 million.

Among its affirmative covenants, the Credit Agreement requires the Companies 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 the following:

Through and including December 31, 2011 of 2.50 to 1.00, January 1, 2012 through and including December 31, 2012 of 2.25 to 1.00 and January 1, 2013 and thereafter of 2.00 to 1.00.

(b) “Senior Leverage Ratio” less than or equal to the following:

Through and including December 31, 2011 of 2.00 to 1.00, January 1, 2012 through and including December 31, 2012 of 1.75 to 1.00 and January 1, 2013 and thereafter 1.50 to 1.00.

(c) “Fixed Charge Coverage Ratio” greater than or equal to 1.50 to 1.00.

As of December 31, 2010, the Total Leverage Ratio, Senior Leverage Ratio, and Fixed Charge Coverage Ratio calculated in accordance with the agreement were 0.88, 0.88 and 3.03, respectively.

The Credit Agreement provides for “Events of Default” that, unless waived, can or will lead to acceleration of obligations upon the occurrence, continuation and/or notice, as applicable, of specified events typical of senior facilities of this kind. These include (a) failures to pay interest or principal on loans, (b) misrepresentations, (c) failures to observe covenants, (d) cross defaults of other indebtedness in excess of $20.0 million, (e) uninsured and unsatisfied judgments in excess of $20.0 million or certain orders or injunctions, (f) bankruptcy and insolvency events, (g) events leading to aggregate liability under the Employee Retirement Income Security Act of 1974 (ERISA) in excess of $20.0 million, (h) changes of control, (i) invalidity of credit support /security agreements, and (i) certain disadvantageous changes in Credit Agreement debt compared to subordinated debt.

Fees and expenses incurred with the execution of the Credit Agreement were approximately $2.8 million. This amount was recorded as deferred financing costs and will be amortized over the term of the Credit Agreement using the effective interest method.

As of December 31, 2010, $99.0 million was outstanding under the Term Loan and $50.0 million was outstanding under the revolving line of credit with total availability at $73.7 million, taking into account $1.3 million in face amount of letters of credit issued under the sub-facility.

Simultaneously with the execution of the above Credit Agreement, the Loan and Security Agreement (the “2009 Loan Agreement”) entered into in the second quarter of 2009 by Innophos, Inc. and its wholly owned subsidiary, Innophos Canada, Inc. (the “Borrowers”) was terminated. No borrowings were outstanding under the 2009 Loan Agreement when terminated and letters of credit aggregating $1.3 million were rolled over into the sub-facility provided under the Credit Agreement. In connection with the termination of the 2009 Loan Agreement, the Company charged to earnings accelerated deferred financing charges of approximately $0.7 million.

 

Page 51 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

In connection with the termination of a previous credit facility dated as of August 13, 2004 in the second quarter of 2009, the Company paid the $72.7 million of outstanding term loan balance (principal and accrued interest) from cash on hand. 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 loan, the Company made a $53.6 million excess cash flow payment in the first quarter of 2009 which resulted in an approximate $0.4 million charge to earnings for the acceleration of deferred financing charges.

In the third quarter of 2010 the Company entered into an interest rate swap with an original notional amount of $100 million adjusting quarterly consistent with the Term Loan, with a fixed rate of 1.994% plus the applicable margin on the debt expiring in August 2015. The Company has the right to cancel the swap with no fee on September 28, 2012 and anytime thereafter. The fair value of this interest rate swap is an asset of approximately $0.4 million as of December 31, 2010.

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.

2004 Senior Subordinated Notes

On September 27, 2010, the Company redeemed all of Innophos Inc.’s $190.0 million Senior Subordinated Notes using proceeds from the $100.0 million term loan and an initial drawing of $70.0 million under the revolving line plus on hand cash of $20.0 million. The Company paid $197.6 million, including a call premium of approximately $5.6 million and interest of approximately $2.0 million. In connection with the redemption of the Senior Subordinated Notes, the Company charged to earnings accelerated deferred financing charges of approximately $4.5 million.

Senior Unsecured Notes

The Innophos Holdings, Inc. 9.5% Senior Unsecured Notes due 2012 accrued interest from the issue date at a rate of 9.5% per annum, payable semi-annually in arrears on April 15 and October 15 of each year. On April 13, 2009 the Company purchased $10.0 million of the 9.5% Senior Unsecured Notes due 2012 for $6.5 million. The $3.5 million retirement gain is 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.

The Company redeemed for cash all remaining $56.0 million of the 9.5% Senior Unsecured Notes due 2012 on April 15, 2010, the Redemption Date. The redemption price for the Notes was 100% of the principal amount plus accrued and unpaid interest to the Redemption Date. Accelerated deferred financing charges of $0.6 million were recorded in the second quarter of 2010.

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.

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 2010, 2009 and 2008 was $29,709, $24,761 and $33,136.

As of December 31, 2010, the Company was in full compliance with all debt covenant requirements.

 

Page 52 of 90


Table of Contents

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:

 

     Year Ended December 31,  
     2010     2009     2008  

Interest expense

   $ 22,309        24,455        33,170   

Deferred financing cost

     7,150        3,130        2,726   

Interest income

     (329     (541     (1,372

Gain on retirement of bonds

     —          (3,500     —     

Less: amount capitalized for capital projects

     (841     (231     (331
                        

Total interest expense, net

   $ 28,289      $ 23,313      $ 34,193   
                        

10. Other Long-Term Liabilities:

Other long-term liabilities consist of the following:

 

     2010      2009  

Deferred income taxes

   $ 10,989       $ 23,617   

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

     5,823         5,240   

Environmental liabilities

     1,100         1,100   

Profit sharing liabilities

     286         2,350   

Other Liabilities

     6,642         7,708   
                 
   $ 24,840       $ 40,015   
                 

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 multi-year future average return on performance parameters selected in advance 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 and distributed.

 

   

Annual stock retainer grants, which entitle independent members of the Board of Directors to receive a number of shares of the Company’s common stock equal to a fixed retainer value.

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.

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. The compensation expense is amortized on a straight-line basis over the requisite service period, adjusted for forfeiture assumptions.

 

Page 53 of 90


Table of Contents

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 per share. 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. As of December 31, 2009 all shares have vested.

There were a total of 6,700 restricted shares granted in the first quarter of 2009 and the first quarter of 2010 with a fair value of $88. 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 and $27.55 for the 2009 and 2010 grants, respectively. 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. 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.

On March 11, 2010 the Company granted 169,150 non-qualified stock options at an exercise price of $25.68 per share to certain employees with a fair value of $1.7 million. 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. Declared dividends will accrue on the performance shares and will vest over the same period. On December 31, 2010, all outstanding performance share awards and dividends granted on October 22, 2007 vested.

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. Declared dividends will accrue on the

 

Page 54 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

performance shares and will vest over the same period. On December 31, 2010, all outstanding performance share awards and dividends granted on December 19, 2007 vested.

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. On December 31, 2010, all outstanding performance share awards and dividends granted on April 25, 2008 vested.

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. 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 a certain employee with a fair value of less than $0.1 million. The performance share awards vest at the end of the three year service period. 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.

On March 11, 2010 the Company granted 79,500 performance share awards to certain employees with a fair value of $1.8 million. The performance share awards vest at the end of the three year service period. Declared dividends will accrue on the performance shares and will vest over the same period.

At December 31, 2010, assuming all performance share grants are at maximum, there were approximately 2.0 million shares available for future grants under the 2009 Plan.

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.

In July 2010 the six external members of the Board of Directors were each granted 1,871 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.

The following table summarizes the components of stock-based compensation expense, all of which has been classified as selling, general and administrative expense:

 

     Year Ended December 31,  
     2010      2009      2008  

Stock options

   $ 1,969       $ 937       $ 644   

Restricted stock

     62         20         926   

Performance shares

     2,759         2,110         1,647   

Stock grants

     300         300         250   
                          

Total stock-based compensation expense

   $ 5,090       $ 3,367       $ 3,467   
                          

 

Page 55 of 90


Table of Contents

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, 2010, is presented below:

 

     Number of
Options
    Weighted
Average
Exercise
Price
 

Outstanding at January 1, 2008

     922,058      $ 6.58   

Granted

     248,550        18.38   

Forfeited / Surrendered

     (351     15.20   

Exercised

     (207,763     2.62   
                

Outstanding at December 31, 2008

     962,494      $ 10.48   
                

Exercisable at December 31, 2008

     484,323      $ 5.53   
                

Outstanding at January 1, 2009

     962,494      $ 10.48   

Granted

     221,500        14.57   

Forfeited / Surrendered

     (46,503     16.77   

Exercised

     (218,405     3.12   
                

Outstanding at December 31, 2009

     919,086      $ 12.89   
                

Exercisable at December 31, 2009

     473,716      $ 10.10   
                

Outstanding at January 1, 2010

     919,086      $ 12.89   

Granted

     169,150        25.68   

Forfeited / Surrendered

     (49,702     15.59   

Exercised

     (117,568     7.61   
                

Outstanding at December 31, 2010

     920,966      $ 15.77   
                

Exercisable at December 31, 2010

     537,317      $ 12.64   
                

The fair value of the options granted during 2010, 2009 and 2008 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

   Year Ended
December 31,
2010
    Year Ended
December 31,
2009
    Year Ended
December 31,
2008
 

Expected volatility

     57.5     61.4     36.8

Dividend yield

     3.6     5.0     4.6

Risk-free interest rate

     2.8     2.7     3.4

Expected term

     6 years        6 years        6 years   

Weighted average grant date fair value of stock options

   $ 10.46      $ 6.19      $ 4.52   

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 solely on peer group historical volatility data equaling the expected term. In 2009 and 2010, the Company had chosen a blended volatility which consists of 50% historical volatility average of a peer group and 50% historical volatility of Innophos. The increase in the expected volatility in 2009 and 2010 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 in accordance with SAB 110. The dividend yield is the expected annual dividend payments divided by the average stock price up to the date of grant. The risk-free interest rates are derived from the U.S. Treasury securities in effect on the date of grant whose maturity period equals the options expected term. The Company applies an expected forfeiture rate to stock-based compensation expense. The estimate of the forfeiture rate is based primarily upon historical experience of employee turnover. As actual forfeitures become known, stock-based compensation expense is adjusted accordingly.

 

Page 56 of 90


Table of Contents

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:

 

     Number
of Shares
    Weighted
Average
Grant
Date Fair
Value
 

Outstanding at January 1, 2008

     75,250      $ 13.28   

Granted (at targeted return on invested capital)

     82,340        18.38   

Forfeited

     —          —     

Vested

     —          —     

Adjustment to estimate of shares to be earned

     157,590        15.95   
                

Outstanding at December 31, 2008

     315,180      $ 15.95   
                

Outstanding at January 1, 2009

     315,180      $ 15.95   

Granted (at targeted return on invested capital)

     96,217        14.67   

Forfeited

     (28,000     16.02   

Vested

     —          —     

Adjustment to estimate of shares to be earned

     96,217        14.67   
                

Outstanding at December 31, 2009

     479,614      $ 15.43   
                

Outstanding at January 1, 2010

     479,614      $ 15.43   

Granted (at targeted return on invested capital)

     79,500        25.68   

Forfeited

     (9,100     15.65   

Vested

     (281,180     15.94   

Adjustment to estimate of shares to be earned

     —          —     
                

Outstanding at December 31, 2010

     268,834      $ 17.92   
                

The total intrinsic value of options exercised and stock grants during 2010, 2009 and 2008 was $2.2 million, $2.7 million and $5.1 million, respectively. The aggregate intrinsic value of stock options outstanding and exercisable at December 31, 2010 was $18.7 million and $12.6 million, respectively. The total remaining unrecognized compensation expense related to share-based payments is as follows:

 

Unrecognized Compensation Expense

   Restricted
Stock
     Stock
Options
     Performance
Based
 

Amount

   $ 6       $ 1,546       $ 2,553   

Weighted-average years to be recognized

     0.1 years         1.5 years         1.7 years   

12. Earnings per share (EPS)

The Company accounts for earnings per share in accordance with ASC 260 and related guidance, which requires two calculations of earnings per share (EPS) to be disclosed: basic EPS and diluted EPS. Under ASC Subtopic 260-10-45, as of January 1, 2009 unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock, are considered participating securities for purposes of calculating EPS. Under the two-class method, a portion of net income is allocated to these participating securities and therefore is excluded from the calculation of EPS allocated to common stock, as shown in the table below. 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.

 

Page 57 of 90


Table of Contents

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:

 

     Year Ended December 31,  
     2010     2009     2008  

Net income

     45,155        63,144        207,183   

Less: earnings attributable to unvested shares

     (14     (3     (33
                        

Net income available to common shareholders

   $ 45,141      $ 63,141      $ 207,150   
                        

Weighted average number of common and potential common shares outstanding:

      

Basic number of common shares outstanding

     21,421,226        21,258,536        20,956,566   

Dilutive effect of stock equivalents

     938,221        710,368        761,971   
                        

Diluted number of weighted average common shares outstanding

     22,359,447        21,968,904        21,718,537   
                        

Earnings per common share:

      

Earnings per common share—Basic

   $ 2.11      $ 2.97      $ 9.88   

Earnings per common share—Diluted

   $ 2.02      $ 2.87      $ 9.54   

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 532,759, 688,332 and 486,877 for the years ended 2010, 2009 and 2008, respectively.

 

Page 58 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

13. Dividends

The following is the dividend activity for 2010, 2009 and 2008:

 

     2010  
     Quarters ended  
     March 31      June 30      September 30      December 31      Total  

Dividends declared – per share

   $ 0.17       $ 0.17       $ —         $ 0.34       $ 0.68   

Dividends declared – aggregate

     3,640         3,641         —           7,293         14,574   

Dividends paid – per share

     0.17         0.17         0.17         0.17         0.68   

Dividends paid – aggregate

     3,633         3,640         3,641         3,645         14,559   
     2009  
     Quarters ended  
     March 31      June 30      September 30      December 31      Total  

Dividends declared – per share

   $ 0.17       $ 0.17       $ 0.17       $ 0.17       $ 0.68   

Dividends declared – aggregate

     3,611         3,622         3,623         3,627         14,483   

Dividends paid – per share

     0.17         0.17         0.17         0.17         0.68   

Dividends paid – aggregate

     3,590         3,611         3,622         3,623         14,446   
     2008  
     Quarters ended  
     March 31      June 30      September 30      December 31      Total  

Dividends declared – per share

   $ 0.17       $ 0.17       $ —         $ 0.34       $ 0.68   

Dividends declared – aggregate

     3,551         3,563         —           7,166         14,280   

Dividends paid – per share

     0.17         0.17         0.17         0.17         0.68   

Dividends paid – aggregate

     3,549         3,551         3,563         3,578         14,241   

We are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends, distributions and other transfers from our subsidiaries, most directly Innophos, Inc., our primary operating subsidiary, and Innophos Investments Holdings, Inc., its parent, to make dividend payments on our Common Stock.

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.

 

Page 59 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

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 $61. A 1% decrease in our expected rate of return on plan assets would increase our pension plan expense by $151.

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 2011 are as follows:

 

     Pension      Other
Benefits
    Total  

Prior service cost

   $ 106       $ 198      $ 304   

Net actuarial loss/(gain)

     163         (30     133   

Transition obligation

     —           31        31   

The changes in benefit obligations recognized in other comprehensive loss during 2010 and 2009 are as follows:

 

     Pension Benefits     Other Benefits     Total  
     2010     2009     2010     2009     2010     2009  

Change in accumulated other comprehensive income

            

Amortization of net gain

   $ (87   $ (75   $ 77      $ 90      $ (10   $ 15   

Amortization of prior service cost

     (102     (93     (269     (289     (371     (382

Prior service cost arising during period from amendments

     —          —          (475     —          (475     —     

Net loss arising during period

     1,511        504        267        198        1,778        702   
                                                

Total change in accumulated other comprehensive income

     1,322        336        (400     (1     922        335   
                                                

Deferred taxes

     (100     (114     240        6        140        (108
                                                

Net amount recognized

   $ 1,222      $ 222      $ (160   $ 5      $ 1,062      $ 227   
                                                

 

Page 60 of 90


Table of Contents

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

Obligations and Funded Status—U.S. Plans At December 31

 

     Pension Benefits     Other Benefits  
     2010     2009     2010     2009  

Accumulated benefit obligation

   $ 2,143      $ 1,928      $ 3,348      $ 3,402   
                                

Change in Projected Benefit Obligation

        

Projected Benefit Obligation at Beginning of Year

   $ 1,928      $ 1,898      $ 3,402      $ 2,992   

Service cost

     —          —          338        342   

Interest cost

     109        104        164        161   

Actuarial (Gain)/Loss

     122        (64     (62     (36

Actual Benefits Paid

     (16     (10     (57     (57

Plan Amendments

       —          (437     —     
                                

Projected Benefit Obligation at End of Year

   $ 2,143      $ 1,928      $ 3,348      $ 3,402   
                                

Change in Plan Assets

        

Fair Value of Trust Assets at Beginning of Year

   $ 1,185      $ 982      $ —        $ —     

Actual Return on Plan Assets

     33        130        —          —     

Employer Contributions

     50        83        57        57   

Actual Benefits Paid

     (16     (10     (57     (57
                                

Fair Value of Trust Assets at End of Year

   $ 1,252      $ 1,185      $ —        $ —     
                                

Funded Status of the Plan

   $ (891   $ (743   $ (3,348   $ (3,402
                                

Amounts Recognized in the Consolidated Balance Sheets

        

Noncurrent Assets

   $ —        $ —        $ —        $ —     

Current Liabilities

     —          —          (118     (119

Noncurrent Liabilities

     (891     (743     (3,230     (3,283
                                

Net Amounts Recognized

   $ (891   $ (743   $ (3,348   $ (3,402
                                

Amounts Recognized in Accumulated Other Comprehensive Income

        

Net Transition (Asset)/Obligation

   $ —        $ —        $ —        $ —     

Prior Service Cost/(Credit)

     —          —          598        1,311   

Net Actuarial (Gain)/Loss

     190        8        (878     (981
                                

Total Amount Recognized

   $ 190      $ 8      $ (280   $ 330   
                                

Deferred Taxes

     (72     (3     106        (127
                                

Net Amount Recognized

     118        5        (174     203   
                                

 

Page 61 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

     Pension Benefits     Other Benefits  
     2010     2009     2008     2010     2009     2008  

Components of Net Periodic Benefit Cost

            

Service cost

   $ —        $ —        $ —        $ 338      $ 342      $ 323   

Interest cost

     109        104        100        164        161        142   

Expected Return on Assets

     (86     (109     (100     —          —          —     

Amortization of

            

Prior Service Cost

     —          —          —          239        262        261   

Actuarial (Gain)/Loss

     (7     (7     (41     (97     (95     (115

Curtailment Expense

     —          —          —          —          —          —     
                                                

Net Periodic Cost

   $ 16      $ (12   $ (41   $ 644      $ 670      $ 611   
                                                

Weighted Average Assumptions for Balance Sheet Liability at End of Year

            

Discount Rate

     5.25     5.75     5.50     5.00     5.50     5.50

Expected Long-Term Rate of Return

     5.00     6.00     8.00     NA        NA        NA   

Rate of Compensation Increase

     NA        NA        NA        3.00     3.00     3.00

Weighted Average Assumptions for Net Periodic Benefit Cost at Beginning of Year

            

Discount Rate

     5.75     5.50     6.00     5.50     5.50     5.75

Expected Long-Term Rate of Return

     6.00     8.00     8.00     NA        NA        NA   

Rate of Compensation Increase

     NA        NA        NA        3.00     3.00     3.00

 

Estimated Future Benefit Payments

   Pension Benefits      Other Benefits  

Fiscal 2011

   $ 47       $ 118   

Fiscal 2012

     62         178   

Fiscal 2013

     76         224   

Fiscal 2014

     89         262   

Fiscal 2015

     103         296   

Fiscal Years 2016-2020

     675         1,990   

Innophos expects to contribute approximately $0.1 million to its U.S. defined benefit pension plan in 2011.

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 2011 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 2011 fiscal year are ($69), $198 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.

 

Page 62 of 90


Table of Contents

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

The investment policy for the Company’s defined benefit pension plan is designed to achieve long-term objectives of return, while mitigating against downside risk and considering expected cash flow. Innophos, Inc.’s defined benefit pension plan invests in mutual funds and commercial paper and the weighted-average asset allocations at December 31, 2010 and 2009 by asset category are as follows:

 

     Plan Assets at
December  31
 
     2010     2009  

Asset Category

    

Equity securities

     14.7     35.8

Fixed income securities

     85.3        61.5   

Other

     —          2.7   
                

Total

     100.0     100.0
                

The fair values of Innophos, Inc.’s pension plan assets at December 31, 2010 by asset category are as follows:

 

     Total      Level 1      Level 2      Level 3  

Equity securities

   $ 184       $ 184       $ —         $ —     

Fixed income securities

     1,068         1,068         —           —     

Other

     —           —           —           —     
                                   
   $ 1,252       $ 1,252       $ —         $ —     
                                   

Defined Contribution Plan—U.S.

Innophos Inc.’s expense for the defined contribution plan was $3.2 million, $2.7 million and $2.9 million for 2010, 2009 and 2008, respectively.

 

Page 63 of 90


Table of Contents

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

 

     Pension Benefits     Other Benefits  
     2010     2009     2010     2009  

Accumulated benefit obligation

   $ 10,224      $ 8,175      $ 1,650      $ 1,254   
                                

Projected Change in Benefit Obligation

        

Projected Benefit Obligation at Beginning of Year

   $ 8,175      $ 5,852      $ 1,254      $ 853   

Service cost

     211        157        54        40   

Interest cost

     543        473        85        71   

Plan Amendments

     —          —          —          —     

Actuarial (Gain)/Loss

     1,222        915        226        158   

Actual Benefits Paid

     (378     (301     (40     (29

Exchange Rate Changes

     451        1,079        71        161   
                                

Projected Benefit Obligation at End of Year

   $ 10,224      $ 8,175      $ 1,650      $ 1,254   
                                

Change in Plan Assets

        

Fair Value of Trust Assets at Beginning of Year

   $ 10,941      $ 6,837      $ —        $ —     

Actual Return on Plan Assets

     903        1,353        —          —     

Employer Contributions

     898        1,637        40        29   

Actual Benefits Paid

     (378     (301     (40     (29

Exchange Rate Changes

     582        1,415        —          —     
                                

Fair Value of Trust Assets at End of Year

   $ 12,946      $ 10,941      $ —        $ —     
                                

Funded Status of the Plan

   $ 2,723      $ 2,766      $ (1,651   $ (1,254
                                

Amounts Recognized in the Consolidated Balance Sheets

        

Noncurrent Assets

   $ 2,723      $ 2,766      $ —        $ —     

Current Liabilities

     —          —          (39     (40

Noncurrent Liabilities

     —          —          (1,612     (1,214
                                

Net Amounts Recognized

   $ 2,723      $ 2,766      $ (1,651   $ (1,254
                                

Amounts Recognized in Accumulated Other Comprehensive Income

        

Net Transition (Asset)/Obligation

   $ —        $ —        $ 260      $ 277   

Prior Service Cost/(Credit)

     106        201        —          —     

Net Actuarial (Gain)/Loss

     3,579        2,344        546        319   
                                

Total Amount Recognized

   $ 3,685      $ 2,545      $ 806      $ 596   

Deferred Taxes

     (921     (890     (202     (209
                                

Net Amount Recognized

     2,764        1,655        604        387   
                                

 

Page 64 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

     Pension Benefits     Other Benefits  
     2010     2009     2008     2010     2009     2008  

Components of Net Periodic Benefit Cost

            

Service cost

   $ 211      $ 157      $ 218      $ 54      $ 40      $ 55   

Interest cost

     543        473        446        85        71        54   

Expected Return on Assets

     (861     (667     (660     —          —          —     

Amortization of

            

Actuarial (Gain)/Loss

     93        82        80        21        5        7   

Prior Service Cost

     102        93        —          —          —          —     

Net Transition Obligation

     —          —          —          30        27        33   
                                                

Net Periodic Cost

   $ 88      $ 138      $ 84      $ 190      $ 143      $ 149   
                                                

Weighted Average Assumptions for Balance Sheet Liability at End of Year

            

Discount Rate

     5.50     6.50     7.50     5.50     6.50     7.50

Rate of Compensation Increase

     NA        NA        NA        NA        NA        NA   

Weighted Average Assumptions for Net Periodic Benefit Cost at End of Year

            

Discount Rate

     6.50     7.50     5.50     6.50     7.50     5.50

Expected Long-Term Rate of Return

     7.00     7.00     7.00     0.00     0.00     0.00

Rate of Compensation Increase

     NA        NA        NA        NA        NA        NA   

Accrued Health Care Cost Trend Rates at End of Year

            

Health Care Cost Trend Rate Assumed for Next Year (Initial Rate)

           10     10     9

Rate to which the Cost Trend Rate is Assumed to Decline (Ultimate Rate)

           5     5     5

Year that the Rate Reaches the Ultimate Rate

           2019        2019        2016   

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:

 

     Other Benefits  
     2010     2009  

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

   $ 29      $ 22   

Postretirement Benefit Obligation

   $ 283      $ 194   

Effect of a 1% Decrease On

    

Total of Service Cost and Interest Cost

   $ (23   $ (18

Postretirement Benefit Obligation

   $ (226   $ (157

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 2011 fiscal year are $163, $106 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 2011 fiscal year are $39, $0 and $31, respectively.

 

Page 65 of 90


Table of Contents

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, 2010 and 2009 by asset category are as follows:

 

     2010     2009  

Asset Category

    

Equity securities

     60.5     57.6

Debt securities

     39.5        41.7   

Other

     —          0.7   
                

Total

     100.0     100.0
                

The fair values of Innophos Canada, Inc.’s pension plan assets at December 31, 2010 by asset category are as follows:

 

     Total      Level 1      Level 2      Level 3  

Equity securities

   $ 7,831       $ 7,831       $ —         $ —     

Fixed income securities

     5,109         5,109         —           —     

Other

     6         6         —           —     
                                   
   $ 12,946       $ 12,946       $ —         $ —     
                                   

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 $0.8 million to its pension plan in 2010.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

 

Estimated Future Benefit Payments

   Pension Benefits      Other Benefits  

Fiscal 2011

   $ 416       $ 39   

Fiscal 2012

     448         39   

Fiscal 2013

     475         45   

Fiscal 2014

     489         60   

Fiscal 2015

     532         68   

Fiscal Years 2016-2020

     3,199         521   

Innophos plans to contribute approximately $0.9 million to its Canadian pension plan in 2011.

Defined Contribution Plans—Canada

Innophos Canada Inc.’s expense for the defined contribution plans was approximately $0.1 million for 2010, 2009 and 2008, 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.

 

Page 66 of 90


Table of Contents

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:

 

     Year Ended December 31,  
     2010     2009      2008  
     Income
before
income taxes
    Income tax
expense
    Income
before
income taxes
     Income
tax expense/
(benefit)
     Income
(loss) before
income taxes
     Income tax
expense/
(benefit)
 

US

   $ 85,687      $ 22,462      $ 89,827       $ 33,390       $ 80,184       $ 3,922   

Canada/Mexico

     (19,199     (1,129     14,519         7,812         182,201         51,280   
                                                   

Total

   $ 66,488      $ 21,333      $ 104,346       $ 41,202       $ 262,385       $ 55,202   
                                                   

Current income taxes

     $ 28,013         $ 39,335          $ 67,307   

Deferred income taxes

       (6,680        1,867            (12,105
                                 

Total

     $ 21,333         $ 41,202          $ 55,202   
                                 

 

     Year Ended December 31,  
     2010     2009     2008  

Income tax expense at the U.S. statutory rate

   $ 23,270      $ 36,520      $ 91,835   

State income taxes (net of federal tax effect and

      

State valuation allowance

     1,158        3,182        851   

Domestic manufacturing deduction

     (1,920     (1,542     (399

CNA matter related non-deductible permanent items

     (3,253     —          —     

Foreign tax rate differential

     1,050        (243     (12,380

Change in Federal U.S. valuation allowance

     —          —          (24,858

Permanent book / tax differences

     1,028        3,285        153   
                        

Provision for income taxes

   $ 21,333      $ 41,202      $ 55,202   
                        

Net deferred tax assets were reflected on the consolidated balance sheets as follows:

 

     Year Ended December 31,  
     2010     2009  

Net current deferred tax assets

   $ 7,782      $ 16,019   

Net noncurrent deferred tax assets

     3,421        1,409   

Net current deferred tax liabilities

     —          —     

Net noncurrent deferred tax liabilities

     (10,989     (23,617
                

Net deferred tax assets (liabilities)

   $ 214      $ (6,189
                

 

Page 67 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

The components of the Company’s deferred tax assets/ (liabilities) were as follows:

 

     Year Ended December 31,  
     2010     2009  

Deferred tax assets:

    

Inventories

   $ 3,142      $ 4,536   

Accrued liabilities

     19,047        12,229   

Tax losses

     5,901        10,079   
                

Total deferred tax assets

     28,090        26,844   
                

Deferred tax liabilities:

    

Gain on bond retirement

     (1,325     (1,345

Intangibles

     (1,046     (514

Fixed assets

     (19,645     (25,511
                

Total deferred tax liabilities

     (22,016     (27,370
                

Total valuation allowances

     (5,860     (5,663
                

Net deferred tax assets (liabilities)

   $ 214      $ (6,189
                

The U.S. operations do not have any Federal tax loss carry forwards as of December 31, 2010. The Company realized tax benefits of $640 and $495 from stock options exercised in 2010 and 2009, respectively.

The Company maintained a $5.9 million and $5.7 million valuation allowance at December 31, 2010 and 2009, respectively, primarily related to certain State net operating loss carryforwards as it is more likely than not that these tax benefits will not be realized. The State net operating losses will expire in the years 2012 through 2030.

As of December 31, 2010, taxes have not been provided on approximately $142.1 million of accumulated foreign unremitted earnings that are expected to remain invested indefinitely. Due to complexities in the tax laws and the assumptions that would have to be made, it is not practicable to estimate the amounts of income taxes that would have to be provided.

The Company does not have any material uncertain income tax positions in accordance with ASC 740-10-25. If any material uncertain tax positions did arise, the Company’s policy is to accrue associated penalties in selling, general and administrative expenses and to accrue interest in net interest expense. Currently, the Company is under examination, or has been contacted for examination, by certain foreign jurisdictions for its income tax returns for the years 2004 through 2008. As of December 31, 2010, 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, 2011.

Income taxes paid were $33,618, $49,705 and $64,822 for 2010, 2009 and 2008, respectively.

 

Page 68 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

16. Commitments and Contingencies:

Leases

Under agreements expiring through 2020, the Company leases railcars and other equipment under various operating leases. Rental expense for 2010, 2009 and 2008 was $4,919, $5,140 and $5,213, respectively. Minimum annual rentals for all operating leases are:

 

Year Ending

   Lease Payments  

2011

   $ 5,178   

2012

     4,369   

2013

     3,662   

2014

     2,597   

2015

     2,317   

Thereafter

     2,566   

Purchase Commitments and Supplier Concentration

The Company has multiple raw material supply contracts one of which with an initial term through 2018 with an automatic five-year renewal term at prices established annually based on a formula. The minimum annual purchase obligation for several of these raw material supply contracts, at current prices, approximates $106.1 million for 2011.

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.

 

Page 69 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

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, 2010.

Litigation

2008 RCRA Civil Enforcement – Geismar, Louisiana plant

Following several inspections by EPA at our Geismar, LA purified phosphoric acid, or PPA, plant and related submissions we made to support claimed exemptions from the federal Resource, Conservation and Recovery Act, or RCRA, in March 2008, EPA referred our case to the Department of Justice, or DOJ, for civil enforcement. Although no citations were ever issued or formal proceedings instituted, the agencies claim we violate RCRA by failing to manage two materials appropriately, which DOJ/EPA allege are hazardous wastes. Those materials are: (i) Filter Material from an enclosed intermediate filtration step to further process green phosphoric acid we receive as raw material via pipeline from the adjacent site operated by an affiliate of Potash Corporation of Saskatchewan, or PCS; and (ii) Raffinate, a co-product we provide to PCS under a long-term contract we have with PCS.

Since referral of the case to DOJ, we and PCS have engaged in periodic discussions with DOJ/EPA and the Louisiana Department of Environmental Quality (LDEQ), collectively the Government Parties, in order to resolve the matter. In addition to asserting that the two materials in question are not hazardous wastes, we have also sought to demonstrate that both the nature and character of the materials as well as their use, handling and disposition were detailed in a solid waste permit amendment application filed in 1989 by PCS’s predecessor, when our plant was first constructed, and approved by the Louisiana Department of Environmental Quality under the state RCRA program.

In the course of discussions with the Government Parties, the DOJ/EPA has required that we undertake as an interim measure the construction of a new filter unit that would replace the existing closed system and allow the removal and separate handling of the Filter Material. We built that unit, which is ready for commissioning and operation once appropriate agreements are reached with the Government Parties.

We and PCS also have initiated joint efforts to explore possible technical solutions to remaining government concerns, including Raffinate treatment. To date, treatment techniques for Raffinate have not yet been fully evaluated from a technological or cost standpoint. The companies have proposed to DOJ/EPA a schedule for such evaluation, and although the government has not formally approved the schedule, the companies are continuing with it. Based upon work so far, there appears to be at least one technically viable approach, but costs of a full scale operation, as well as full evaluation of the ability to return the treated stream to PCS and other technologies, 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 at what cost allocation or, depending on those factors and the Government Parties’ position, whether this matter will be settled with the Government Parties and/or between the companies, or will require litigation. Should litigation become necessary to defend our operations at Geismar as compliant with environmental laws and regulations or with PCS as to cost responsibility, no assurance can be given as to its outcome.

Based upon advice of our environmental counsel, we have determined that the risk of an effort by the Government Parties to shut down our Geismar plant or PCS’s Geismar plant from which we obtain the green acid raw material is remote. In addition, we have concluded that the contingent liability arising from compliance costs for this matter as discussed above is neither remote nor probable, but is reasonably possible.

Mexican CNA Water Tax Claims

On October 6, 2010 the Mexican Supreme Court upheld claims by the Mexican Comision National del Agua, or CNA, for higher water duties payable by our Mexican subsidiary, Innophos Fosfatados S.A. de C.V, or Fosfatados, relating to water usage at our Coatzacoalcos, Veracruz, Mexico plant. The claims are for the period 1999 through 2002 and total approximately $25.5 million (at current exchange rates), including basic charges of $7.4 million and $18.1 million for interest, inflation and penalties.

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 CNA, as well as any like claims pertaining to periods prior to the closing date of purchase, August 13, 2004, in the event those liabilities are incurred.

 

Page 70 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

Fosfatados believes payment of the CNA claims will become due as soon as revised resolutions relating to it are issued by the CNA and become effective. Representatives of Innophos and the Rhodia companies are coordinating efforts for timely payment of the CNA liabilities and indemnity for these claims.

As a result of the latest court determination and indemnification obligation, Innophos recorded in cost of goods sold a charge of $25.5 million (including estimated inflation, interest and penalties) and a corresponding benefit for the Rhodia indemnity receivable of $20.2 million, and an income tax benefit of $5.3 million, resulting in no net charge to Innophos for the 1999-2002 CNA claims, most of which was recorded in the third quarter of 2010.

Probable Post-2002 Claims. Now that the 1999-2002 CNA claims have been sustained, Innophos believes it is likely the CNA will seek to claim similar higher duties, fees and other charges for fresh water extraction and usage from 2006 on into the future (2003, 2004 and 2005 are believed to be beyond the statute of limitations), or the Post-2002 Fresh Water Claims.

In late June 2010, Fosfatados received a CNA notice of audit and request for documents concerning fresh water usage for the period 2005-2009. 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 cover the remainder of the Post-2002 Fresh Water Claims exposure and additional resulting losses. 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 now likely that the New York Litigation will proceed to trial and involve further motions to resolve remaining issues. Upon receipt of the June 2010 CNA notice, we renewed our claim for indemnification and defense support from Rhodia, which was declined. As a result, Fosfatados is defending the matter with its own choice of counsel.

Based upon review of the Post-2002 Fresh Water Claims, the advice of counsel, and the facts and applicable law in the context of the recent Mexican Supreme Court decision, management concluded that liability for those claims had become probable. Accordingly, Innophos recorded in cost of goods sold a charge of $16.1 million (including estimated inflation, interest and penalties) and an income tax benefit of $3.3 million in 2010 resulting in a $12.8 million net charge to Innophos for post-2002 claims. The Company is accruing at the higher water rates, increasing our annual pre-tax expenses for water at Coatzacoalcos by approximately $1.0 to 2.0 million (at current exchange rates), depending on capacity utilization.

Other Legal Matters

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. In June 2010, Mexico’s trial court ruled in favor of Mexicana’s claim and denied Sudamfos’ counterclaim. In July 2010, Sudamfos appealed that ruling. In October 2010, the appellate court ruled that Sudamfos should be allowed discovery of documents as to its claims, which ruling Mexicana is contesting. The timing of a decision on the discovery issue is not known. 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.

17. Financial Instruments and Concentration of Credit Risks:

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

 

Page 71 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

for 31%, 40% and 40%, respectively, of net sales for 2010, 2009 and 2008. 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, 2010, 2009 and 2008, and the changes in the valuation allowances for the year ended December 31, 2010, 2009 and 2008 are as follows:

 

     Balance,
January 1,
2010
     Charged/
(credited)
to costs
and
expenses
    Deductions
(Bad debts)
     (Credited)
to Goodwill
     Balance,
December 31,
2010
 

Deferred taxes valuation allowances

   $ 5,663       $ 197      $ —         $ —         $ 5,860   
     Balance,
January 1,
2009
     Charged/
(credited)
to costs
and
expenses
    Deductions
(Bad debts)
     (Credited)
to Goodwill
     Balance,
December 31,
2009
 

Deferred taxes valuation allowances

   $ 4,813       $ 850      $ —         $ —         $ 5,663   
     Balance,
January 1,
2008
     Charged/
(credited)
to costs
and
expenses
    Deductions
(Bad debts)
     (Credited)
to Goodwill
     Balance,
December 31,
2008
 

Deferred taxes valuation allowances

   $ 26,929       $ (22,116   $ —         $ —         $ 4,813   

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.

Beginning with the second quarter of 2010, the Company realigned the reportable segments to better reflect the core businesses in which Innophos operates and how it is managed. The Company will report its core specialty phosphates business separately from granular triple super-phosphate, or GTSP, and other non-specialty phosphate products. The previous reported segments of the United States, Mexico and Canada changed to Specialty Phosphates US & Canada, Specialty Phosphates Mexico and GTSP & Other. Specialty Phosphates consists of the products lines Specialty Ingredients (formerly Specialty Salts and Specialty Acids), Food & Technical Grade PPA, and STPP & Detergent Grade PPA. GTSP & Other includes fertilizer co-product GTSP and other non-specialty phosphate products. The Company has restated all corresponding items of segment information for earlier periods.

 

Page 72 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

For the year ended December 31, 2010

   Specialty
Phosphates
US & Canada
    Specialty
Phosphates
Mexico
    GTSP &
Other
    Eliminations     Total  

Sales

   $ 495,473      $ 145,078      $ 73,680      $ —        $ 714,231   

Intersegment sales

     2,794        36,056        135        (38,985     —     
                                        

Total sales

     498,267        181,134        73,815        (38,985     714,231   
                                        

Operating income (a)

   $ 101,286      $ 9,739      $ (15,589     —        $ 95,436   
                                        

Depreciation and amortization expense

   $ 28,367      $ 15,721      $ 5,383      $ —        $ 49,471   

Other data

                              

Capital expenditures

   $ 26,174      $ 5,000      $ 18      $ —        $ 31,192   

Long-lived assets

     117,630        72,318        1,677        —          191,625   

Total assets

     555,550        270,866        1,677        —          828,093   

Reconciliation of total assets to reported assets

                              

Total assets

   $ 555,550      $ 270,866      $ 1,677      $ —        $ 828,093   

Eliminations

     (195,823     (5,380     —          —          (201,203
                                        

Reported assets (b)

   $ 359,727      $ 265,486      $ 1,677      $ —        $ 626,890   
                                        

For the year ended December 31, 2009

   Specialty
Phosphates
US & Canada
    Specialty
Phosphates
Mexico
    GTSP &
Other
    Eliminations     Total  

Sales

   $ 500,995      $ 131,731      $ 34,033      $ —        $ 666,759   

Intersegment sales

     27,464        20,912        328        (48,704     —     
                                        

Total sales

     528,459        152,643        34,361        (48,704     666,759   
                                        

Operating income

   $ 126,080      $ 12,956      $ (12,146     —        $ 126,890   
                                        

Depreciation and amortization expense

   $ 30,495      $ 16,531      $ 4,161      $ —        $ 51,187   

Other data

                              

Capital expenditures

   $ 14,096      $ 5,368      $ 145      $ —        $ 19,609   

Long-lived assets

     114,942        87,193        2,392        —          204,527   

Total assets

     632,855        258,295        2,392        —          893,542   

Reconciliation of total assets to reported assets

                              

Total assets

   $ 632,855      $ 258,295      $ 2,392      $ —        $ 893,542   

Eliminations

     (224,233     (6,841     —          —          (231,074
                                        

Reported assets (b)

   $ 408,622      $ 251,454      $ 2,392      $ —        $ 662,468   
                                        

 

Page 73 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

For the year ended December 31, 2008

   Specialty
Phosphates
US & Canada
    Specialty
Phosphates
Mexico
     GTSP &
Other
     Eliminations     Total  

Sales

   $ 525,012      $ 291,267       $ 118,479       $ —        $ 934,758   

Intersegment sales

     696        29,965         —           (30,661     —     
                                          

Total sales

     525,708        321,232         118,479         (30,661     934,758   
                                          

Operating income

   $ 115,269      $ 112,270       $ 71,316         —        $ 298,855   
                                          

Depreciation and amortization expense

   $ 32,513      $ 15,752       $ 4,242       $ —        $ 52,507   

Other data

                                

Capital expenditures

   $ 13,757      $ 4,579       $ 200       $ —        $ 18,536   

Long-lived assets

     127,510        99,943         2,969         —          230,422   

Total assets

     689,426        309,328         2,969         —          1,001,723   

Reconciliation of total assets to reported assets

                                

Total assets

   $ 689,426      $ 309,328       $ 2,969       $ —        $ 1,001,723   

Eliminations

     (273,519     —           —           —          (273,519
                                          

Reported assets (b)

   $ 415,907      $ 309,328       $ 2,969       $ —        $ 728,204   
                                          

 

(a) The year ended December 31, 2010, includes a $21.0 million charge to earnings for the CNA Fresh Water Claims in GTSP & Other.

 

(b) GTSP & Other reflects only direct assets. All Mexico indirect assets are included in Specialty Phosphates Mexico.

 

     Year Ended December 31,  

Product Revenues

   2010      2009      2008  

Specialty Ingredients

   $ 450,923       $ 443,416       $ 449,878   

Food & Technical Grade PPA

     109,334         107,405         150,428   

STPP & Detergent Grade PPA

     80,294         81,905         215,973   

GTSP & Other

     73,680         34,033         118,479   
                          

Total

   $ 714,231       $ 666,759       $ 934,758   
                          
     Year Ended December 31,  

Geographic Revenues

   2010      2009      2008  

US

   $ 409,903       $ 385,037       $ 451,082   

Mexico

     108,281         144,168         250,034   

Canada

     37,467         38,258         39,669   

Other foreign countries

     158,580         99,296         193,973   
                          

Total

   $ 714,231       $ 666,759       $ 934,758   
                          

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.

 

Page 74 of 90


Table of Contents

INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts, share amounts or where otherwise noted)

 

20. Quarterly information (unaudited):

 

     2010  
     Quarters ended  
     March 31      June 30     September 30     December 31,     Total  

Net sales

   $ 169,007       $ 184,032      $ 168,976      $ 192,216      $ 714,231   

Gross profit

     36,706         47,061        24,952   (a)      48,686        157,405   

Net income (loss)

     10,350         17,623        (2,080 ) (b)      19,262        45,155   

Per share data:

           

Income (loss) per share:

           

Basic

   $ 0.48       $ 0.82      $ (0.10 ) (b)    $ 0.90     

Diluted

   $ 0.47       $ 0.79      $ (0.10 ) (b)    $ 0.86     
     2009  
     Quarters ended  
     March 31      June 30     September 30     December 31,     Total  

Net sales

   $ 190,817       $ 166,766      $ 161,934      $ 147,242      $ 666,759   

Gross profit

     69,793         49,395        47,730        29,061  (d)      195,979   

Net income

     30,244         17,609  (c)      15,133        158  (d)      63,144   

Per share data:

           

Income per share:

           

Basic

   $ 1.43       $ 0.83  (c)    $ 0.71      $ 0.01  (d)   

Diluted

   $ 1.39       $ 0.81  (c)    $ 0.69      $ 0.01  (d)   

 

(a) Includes a $20.0 million charge for the CNA Fresh Water Claims.

 

(b) Includes an $11.7 million after tax charge for the CNA Fresh Water Claims and a $7.1 million after tax charge for the debt refinancing.

 

(c) 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.

 

(d) Includes an approximate $7.0 million, $5.0 million after tax, charge for the settlement of the phosphate rock supplier dispute.

21. Related Party Transactions:

In 2009, Innophos Holdings, Inc. elected an independent director who also is the Chief Operating Officer of an Innophos customer. Pursuant to an existing sales agreement, in-place prior to the election of this director, the Company had sales to this customer of approximately $10.3 million and $12.9 million in the fiscal years ended December 31, 2010 and 2009, respectively.

 

Page 75 of 90


Table of Contents
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 Principal Executive Officer and Principal Financial Officer, with the participation of management, concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level as of December 31, 2010.

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, 2010, 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, 2010, 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.

PricewaterhouseCoopers LLP an independent registered public accounting firm, has audited the Company’s financial statements included in this report on Form 10-K and issued its report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, which is included in “Item 8. Financial Statements and Supplementary Data”.

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 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

None.

 

Page 76 of 90


Table of Contents

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 2011 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.

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Exhibits . The following exhibits are filed as part of this 10-K.

See the attached Exhibit Index.

(b) Financial Statement Schedules .

Schedule I—Condensed Financial Information of the Registrant.

 

Page 77 of 90


Table of Contents

CONDENSED FINANCIAL STATEMENTS OF INNOPHOS HOLDINGS, INC.

INNOPHOS HOLDINGS, INC.

Condensed Balance Sheets

(Dollars in thousands)

 

     December 31,  
     2010      2009  

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 562       $ 213   

Accounts receivable due from affiliates

     3,848         6,916   

Inventories

     —           —     

Other current assets

     1,558         1,558   
                 

Total current assets

     5,968         8,687   

Property, plant and equipment, net

     —           —     

Goodwill

     —           —     

Investment in subsidiaries

     329,174         347,242   

Intangibles and other assets, net

     —           706   
                 

Total assets

   $ 335,142       $ 356,635   
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Current portion of long-term debt

   $ —         $ —     

Accounts payable

     —           —     

Other current liabilities

     4,222         4,735   
                 

Total current liabilities

     4,222         4,735   

Long-term debt

     —           56,000   

Other long-term liabilities

     312         522   
                 

Total liabilities

     4,534         61,257   

Commitments and contingencies

     

Stockholders’ equity

     330,608         295,378   
                 

Total stockholders’ equity

     330,608         295,378   
                 

Total liabilities and stockholder’s equity

   $ 335,142       $ 356,635   
                 

 

Page 78 of 90


Table of Contents

INNOPHOS HOLDINGS, INC.

Condensed Statements of Operations

(Dollars in thousands)

 

     Year Ended December 31,  
     2010     2009     2008  

Net sales

   $ —        $ —        $ —     

Cost of goods sold

     —          —          —     
                        

Gross profit

     —          —          —     
                        

Operating expenses:

      

Selling, general and administrative

     3        6        232   

Research & development expenses

       —          —     
                        

Total operating expenses

     3        6        232   
                        

Operating loss

     (3     (6     (232

Interest expense, net

     2,256        2,574        6,624   

Foreign exchange (gains) losses

     —          —          —     

Equity (income) loss

     (46,624     (63,596     (210,081
                        

Income before income taxes

     44,365        61,016        203,225   

Benefit for income taxes

     (790     (2,128     (3,958
                        

Net income

   $ 45,155      $ 63,144      $ 207,183   
                        

INNOPHOS HOLDINGS, INC.

Condensed Statements of Cash Flows

(Dollars in thousands)

 

     Year Ended December 31,  
     2010     2009     2008  

Cash flows from operating activities

      

Net income

   $ 45,155      $ 63,144      $ 207,183   

Adjustments to reconcile net income to net cash used for operating activities:

      

Amortization of deferred financing charges

     706        489        363   

Gain on retirement of bonds

     —          (3,500     —     

Equity income

     (46,624     (63,596     (210,081

Changes in assets and liabilities:

      

Decrease (increase) in accounts receivable

     3,068        (922     (5,994

(Decrease) increase in accounts payable

     —          (17     17   

Decrease in other current liabilities

     (534     (199     (1,558

Changes in other long-term assets and liabilities

     (211     308        214   
                        

Net cash used for operating activities

     1,560        (4,293     (9,856
                        

Cash flows provided from investing activities:

      

Investment in subsidiaries

     71,940        24,143        24,169   
                        

Net cash provided from investing activities

     71,940        24,143        24,169   
                        

Cash flows (used for) provided from financing activities:

      

Capital contribution

     236        635        542   

Principal repayment of senior unsecured notes

     (56,000     (6,500     —     

Deferred financing costs

     (2,828     —          —     

Dividends paid

     (14,559     (14,446     (14,241
                        

Net cash used for financing activities

     (73,151     (20,311     (13,699
                        

Net change in cash

     349        (461     614   

Cash and cash equivalents at beginning of period

     213        674        60   
                        

Cash and cash equivalents at end of period

   $ 562      $ 213      $ 674   
                        

 

Page 79 of 90


Table of Contents

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 13, 2009 the Company purchased $10.0 million of the 9.5% Senior Unsecured Notes due April 2012 for $6.5 million. The Company redeemed for cash all remaining $56.0 million of the 9.5% Senior Unsecured Notes due April 2012 on April 15, 2010.

On April 16, 2007, Innophos Holdings, Inc. issued 9.5% Senior Unsecured Notes due April 2012 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”.

Dividends

We are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends, distributions and other transfers from our subsidiaries, most directly Innophos, Inc., our primary operating subsidiary, and Innophos Investments Holdings, Inc., its parent, to make dividend payments on our Common Stock.

Income Taxes

The Company is a member of a U.S. consolidated income tax return. The Company generated 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 and 2010 is the result of net operating losses which are 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”.

 

Page 80 of 90


Table of Contents

SIGNATURES

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 28th day of February, 2011.

 

INNOPHOS HOLDINGS, INC.

By:

 

/ S / R ANDOLPH G RESS

  Randolph Gress
 

Chief Executive Officer

(Principal Executive Officer)

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.

 

Signatures

  

Title

 

Dates

/S/ R ANDOLPH G RESS

Randolph Gress

  

Chief Executive Officer and Director

(Principal Executive Officer)

  February 28, 2011

/S/ N EIL I. S ALMON

Neil I. Salmon

  

Vice President and Chief Financial Officer

(Principal Financial Officer)

  February 28, 2011

/S/ C HARLES B RODHEIM

Charles Brodheim

  

Corporate Controller

(Principal Accounting Officer)

  February 28, 2011

/S/ G ARY C APPELINE

Gary Cappeline

   Director   February 28, 2011

/S/ A MADO C AVAZOS

Amado Cavazos

   Director   February 28, 2011

/S/ L INDA M YRICK

Linda Myrick

   Director   February 28, 2011

/S/ K AREN O SAR

Karen Osar

   Director   February 28, 2011

/S/ J OHN S TEITZ

John Steitz

   Director   February 28, 2011

/S/ S TEPHEN Z IDE

Stephen Zide

   Director   February 28, 2011

 

Page 81 of 90


Table of Contents

EXHIBIT INDEX

 

Exhibit No.

  

Description

2.1

   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

3.1

   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

3.2

   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

4.1

   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

4.2

   Credit Agreement dated August 27, 2010 by and among Registrant, Innophos Investments Holdings, Inc., and Innophos, Inc., as Borrowers, a group of Lenders, Wells Fargo Bank, National Association, as Administrative, and Bank of America, as Syndication Agent, incorporated by reference to Exhibit 99.1 of Form 8-K of Innophos Holdings, Inc. filed August 31, 2010

10.1

   Supply Agreement (Sulphuric Acid) dated as of August 13, 2004 between Rhodia, Inc. and Innophos, Inc. (filed in redacted form per confidential treatment order) 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

10.2

  

Assignment, Assumption, and Consent to be effective May 1, 2009 concerning the Purchase and Sale Agreement of Anhydrous Ammonia, filed herewith

10.3

   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 in redacted form per confidential treatment order) filed February 14, 2006

10.4

   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 in redacted form per confidential treatment order) filed February 14, 2006

10.5

   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 in redacted form per confidential treatment order) filed February 14, 2006

10.6

   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. (filed in redacted form per confidential treatment order) 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

10.7

  

Sulfur Supply Contract dated as of January 1, 2011 by and Between Pemex Gas Y Petroquimica Basica and Innophos Fosfatados de Mexico, S. de R.L. de C.V. (filed in redacted form per confidential treatment order), filed herewith

10.8

   Supply Agreement dated as of June 18, 1998 by and among Colgate Palmolive Company,

 

Page 82 of 90


Table of Contents
   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 in redacted form per confidential treatment order) filed November 23, 2005

10.9

   Operations Agreement made as of June 18, 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 in redacted form per confidential treatment order) filed November 23, 2005

10.10

   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 in redacted form per confidential treatment order) filed February 5, 2009

10.11

   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

10.12

   Form of Executive Employment Agreement by and between Innophos Holdings, Inc. and executive officers incorporated by reference to Exhibit 99.13 of Form 8-K of Innophos Holdings, Inc. filed May 1, 2008

10.13

   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 Holdings, Inc. filed October 30, 2006

10.14

   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

10.15

   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

10.16

   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

10.17

   Form of Award Agreement under Long Term Incentive Plans incorporated by reference to Exhibit 4.5 of Form S-8 of Innophos Holdings, Inc. filed June 15, 2009

10.18

   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

10.19

   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 in redacted form per confidential treatment order) filed February 26, 2010

10.20

   Innophos, Inc. 2010 Executive, Management and Sales Incentive Plan effective January 1, 2010, incorporated by reference to Exhibit 99.1 of Form 8-K of Innophos Holdings, Inc. filed June 17, 2010

12.1

   Statement re: Calculation of Ratio of Earnings to Fixed Charges, filed herewith

21.1

   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

23.1

   Consent of PricewaterhouseCoopers LLP, filed herewith

 

Page 83 of 90


Table of Contents

31.1

   Certification of Principal Executive Officer dated February 28, 2011 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith

31.2

   Certification of Principal Executive Officer dated February 28, 2011 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith

32.1

   Certification of Principal Executive Officer dated February 28, 2011 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 filed herewith

32.2

   Certification of Principal Executive Officer dated February 28, 2011 pursuant to Section 302 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% 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.

 

Page 84 of 90

Exhibit 10.2

INNOPHOS FOSFATADOS DE MEXICO S DE RL DE CV

LOGO

Mexico City, Mexico. April 22, 2009

PEMEX PETROQUÍMICA

MARINA NACIONAL 329

TORRE EJECUTIVA PISO 27

COL. HUASTECA

C.P. 11311, MÉXICO D.F.

TEL. +52 5519448189

ATENCIÓN: Ing. Jorge A Carrillo Careaga

GERENTE DE COMERCIALIZACIÓN

REFERENCE: Assignment of Rights and Obligations on Anhydrous Ammonia Supply Agreement Executed on February 15, 2008

Dear Mr. Carrillo:

I, in a capacity as legal attorney-in-fact of Innophos Fosfatados de Mexico, S. de R.L. de C.V. (“I Fosfatados”), hereby inform and request from you, in accordance with section 14.2 of above-mentioned agreement, the following:

Innophos Fosfatados de Mexico, S. de R.L. de C.V. is kindly requesting PEMEX Petroquimica’s (“PEMEX”) consent for the assignment of the rights and obligations arising out of aforementioned agreement to Innophos Mexicana, S.A. de C.V. (“I Mexicana”), in the understanding that all obligations provided in said agreement will be assumed and fulfilled by I Mexicana.

That both parties intend that the transfer of rights and obligations arising out of the agreement to take place on May 1, 2009. Consequently, and prior consent by PEMEX, the anhydrous ammonia volumes will be supplied to I Mexicana beginning on that day, under the terms of above-mentioned agreement.

Therefore, we are requesting you carry out any legal proceedings and actions needed to put into effect, as soon as possible, the assignment of rights and obligations among I Mexicana, PEMEX and I Fosfatados.

Should you have any question or require additional information, please do not hesitate to contact us.

VERY TRULY YOURS

Lic. Hector Serrano Saucedo

Legal Attorney-in-Fact

Innophos Fosfatados de Mexico S de RL de CV

Innophos Mexicana SA de CV

 

 

Innophos Fosfatados, S. de R. L. de C. V.

Domicilio Conocido S/N.

Complejo Industrial Pajaritos.

Coatzacoalcos, Ver. C. P. 96380

Tel. (921) 21 155 00


INNOPHOS MEXICANA SA DE CV

LOGO

Mexico City, Mexico. May 21, 2009

PEMEX PETROQUÍMICA

MARINA NACIONAL 329

TORRE EJECUTIVA PISO 27

COL. HUASTECA

C.P. 11311, MÉXICO D.F.

TEL. 5519448189

ATTENTION: Ing. Jorge A Carrillo Careaga

GERENTE DE COMERCIALIZACIÓN

REFERENCE: Liability of Innophos Mexicana for all debts assumed by Innophos Fosfatados

Dear Mr. Carrillo:

I, in my capacity as legal attorney-in-fact of Innophos Mexicana S.A. de C.V., hereby confirm that my principal is fully assuming any liability arising out of present or future debts incurred by Innophos Fosfatados de Mexico S de R L de CV, and related with anhydrous ammonia purchased from PEMEX Petroquímica, as soon as the assignment of rights made by Innophos Fosfatados de Mexico S. de R.L. de C.V. to Innophos Mexicana S.A. de C.V. on the ammonia supply agreement currently in effect has been acknowledged.

We also wish to ratify the following contact persons for notices for Innophos Mexicana S.A. de C.V.

Legal Representative.

Lic. Héctor Luis Serrano Saucedo

Tel. +52 (55) 5322-4868 fax:

E-mail: hector.serrano@innophos.com.mx

Business Contact

Ing. Francisco Javier Candia Curiel

Tel. +52 (921) 2115558 fax: +52 (921) 2180138

E-mail: francisco.candia@innophos.com.mx

Should you have any question or require additional information, please do not hesitate to contact us.

SINCERELY YOURS,

Héctor Serrano Saucedo, Esq.

Legal Attorney-in-Fact

Innophos Fosfatados de Mexico S de RL de CV

Innophos Mexicana SA de CV

 

 

Innophos Fosfatados, S. de R. L. de C. V.

Domicilio Conocido S/N.

Complejo Industrial Pajaritos.

Coatzacoalcos, Ver. C. P. 96380

Tel. (921) 21 155 00


LOGO

SUBMITTAL OF FILE GATHERED BY THE OFFICE OF THE MARKETING MANAGER FOR A CREDIT FACILITY TRANSFER PROCEDURE RELATED TO CUSTOMER:

Innophos Fosfatados de México, S. de R.L. de C.V.

Resolution CXCI-004

Based on submitted file and once it was verified that provisions set forth in the Guidelines for Credit Processing, in the Bases to Establish, Perform and Dissolve the Credit Institutional Committee, and Receivables for Customers of Pemex Petroquímica have been met, and once a validation by the Office of the General Counsel has been issued, this Committee has unanimously determined that the Procedure for a Credit Facility Transfer from customer Innophos Fosfatados de México, S.de R.L. de C.V. to Innophos Mexicanas S.A. de C.V. is admissible, consequently the matter has been forwarded to the Credit Department to execute applicable procedures.

Salvador Martínez Vega

Subgerencia Comercial

Pemex Petroquímica

Piso 27, Torre Ejec. Pemex

Marina Nacional #329

Col. Huasteca, CP 11311

Deleg. Miguel Hgo.

México, D.F.

Tel. 19448189

Conm. 19442500 Ext.57919

Exhibit 10.7

CONFIDENTIAL TREATMENT REQUESTED UNDER

C.F.R SECTIONS 200.80(b)(4), 200.83, 230.406 AND

5 U.S.C.A. § 522(b)(4).

**** INDICATES OMITTED MATERIAL THAT IS THE

SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST

FILED SEPARATELY WITH THE COMMISSION.

THE OMITTED MATERIAL HAS BEEN FILED

SEPARATELY WITH THE COMMISSION.

SULFUR SUPPLY AGREEMENT entered into by and between PEMEX GAS Y PETROQUIMICA BASICA (“Seller”), represented herein by ****, acting as **** for Basic Petrochemical Products, that is assigned to the Underdirectorate of Liquefied Gas and Basic Petrochemicals, and INNOPHOS FOSFATADOS DE MEXICO, S. DE R.L. DE C.V. (“Purchaser”), represented herein by Messrs. Pablo Gerardo Lopez Sanchez and Jose Ramon Gonzalez de Salceda y Urbina, both acting as Legal Representatives, pursuant to the following Representations and Sections:

R E C I T A L S

Seller represents as follows:

I. That it is a decentralized public entity of the Government-Controlled Public Administration of the United Mexican States Federal Government with a technical, industrial and business nature, with own legal capacity and property, and with a legal capacity to enter into this Agreement pursuant to the Organic Law of Petroleos Mexicanos y Organismos Subsidiarios which was published in the Federal Official Gazette on July 16, 1992;

II. That in the capacity of a government-controlled entity its purpose is processing natural gas, natural gas and artificial gas liquids, storing, transporting, distributing and marketing those hydrocarbons, as well as any derivatives capable of serving as basic industrial raw materials;

III. That it wishes to sell and deliver Sulfur to Purchaser under the terms and conditions set forth herein;

IV. That it has the organization, technical capacity and elements, and financial, commercial and legal capacity to perform the obligations provided herein;

V. To this day the representative’s powers of attorney have not been revoked, limited or modified in any way, therefore he has the legal capacity to executed this contract, as evidenced in Public Instrument No. 114,365 dated August 29, 2007 granted before and certified by Mr. Eduardo Garcia Villegas, Notary Public No. 15 in and for Mexico City, Federal District

VI. That its fiscal domicile is Av. Marina Nacional, Numero 329, Edificio 1917 (B-1) 10o Piso Colonia Huasteca, Delegacion Miguel Hidalgo, Mexico City Federal District, Codigo postal 11311 and Taxpayers’ Identification No. PGP-920716-MT6.


Purchaser represents the following:

I. That it is a Business Corporation, duly incorporated and existing pursuant to the United Mexican States law, in accordance with Public Instrument No. 22,607 dated December 15, 1987, containing the Articles of Incorporation and By-laws, that was granted before and certified by Mr. Jose Manuel del Campo Lopez, Esq., Notary Public No. 136 in and for Mexico City, Federal District, duly registered in the Public Commercial Registry under No. 103, 384.

II. That through public instrument No. 83,289 dated July 23, 1992 and notarized by Mr. Alberto T. Sanchez Colin, Notary Public No. 83 in and for Mexico City, Federal District, that was duly registered at the Commercial Public Registry under No. 103,384 it was agreed to change corporate name to Troy Industrias, S.A. de C.V.

III. That through public instrument No. 34,108 notarized on December 26, 1994 by Mr. Eduardo Flores Castro Altamirano, Esq., Notary Public No. 33 in and for Mexico City, Federal District, that was duly registered at the Commercial Public Registry under No. 103,384, it was agreed to change corporate name to Albright & Wilson Troy de México, S.A. de C.V.

IV. That through public instrument No. 65,786 notarized on July 6, 2000 by Mr. Carlos de Pablo Serna, Esq., Notary Public No. 137 in and for Mexico City, Federal District, that was duly registered at the Commercial Public Registry under No. 103,384, it was agreed to change corporate name to Rhodia Fosfatados de México, S.A. de C.V.

V. That through public instrument No. 15,232 issued on August 17, 2004 notarized by Mr. Arturo Talavera Autrique, Esq., Notary Public No. 122 in and for Mexico City, Federal District, that was duly registered at the Commercial Public Registry under No. 103,384, it was agreed to change corporate name to Innophos Fosfatados de México, S. de R.L. de C.V.

VI. That its corporate purpose is, among other things, produce, manufacture, recover, refine, assemble, process and industrialize, through any chemical or physical process, any product of the chemical industry and all other industry, consequently Sulfur supply is required therefor.

VII. That it wishes to purchase and receive Sulfur from Seller, pursuant to the terms and conditions set forth herein;

VIII. That it has the organization, technical capacity and elements, and the financial, commercial and legal capacity to perform its obligations referred to herein, including capacity to handle, carry, store and/or process Sulfur; that it is aware of risks resulting out of handling, carrying, storing and processing Sulfur, and that it has the capacity to face any responsibility related with accidents in such handling, carrying and processing; that it fully knows the provisions and requirements set forth in the laws, regulations, guidelines and any legal provision for handling Sulfur;

IX. That Mr. Abraham Shabot Saade’s legal capacity to sign this agreement is evidenced through public instrument No. 29,931 dated October 30, 2009 granted before and certified by Mr. Arturo Talavera Autrique, Esq., Notary Public No. 122 in and for


Mexico City, Federal District, which instrument has been duly registered at the Commercial Public registry under No. 103384 on February 18, 2010.

X. That its fiscal address is at Domicilio Conocido S/N Km. 5.5 Carretera Federal Coatzacoalcos-Villahermosa, Coatzacoalcos, Ver.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, the parties hereby agree as follows:

S E C T I O N S

SECTION 1. DEFINITIONS; HEADINGS AND REFERENCES

1.1 Definitions: For any purposes hereof, the following terms shall have the following meanings:

“Affiliate”: regarding any person or entity, means any other person or entity controlling or controlled thereby or that is under common control together therewith;

“Year”: calendar year; for past due interest computation purposes, 360 days are considered;

“Shipping Center”: any filling premise located at the Gas Processing Centers of Seller or at Pemex Refinacion Refineries as detailed in Exhibit 1, wherein Seller produces Sulfur to be delivered to Purchaser;

Institutional Credit Committee: A collegiate body responsible for authorizing credits, extensions, reductions, guaranty release, as well as for establishing credit policies applicable to both Pemex Gas and Petroquímica Básica customers”;

“Agreement”: This Sulfur Supply Agreement including all Exhibits attached thereto; as well as any amendments, changes, supplements or Exhibits that may be prepared or attached to Agreement during its term;

“Day”: A calendar day;

“Business Day”: a business day in accordance with work schedule and with labor contract of Petróleos Mexicanos y Organismos Subsidiarios;

“Corporate Finance Department”: Administrative unit responsible for coordinating financial activities of Petróleos Mexicanos, its Subsidiary Agencies and Affiliates, and for establishing regulations to regulate performance thereof;

“Payment Guaranty”: a payment commitment by a third party to pay for obligations agreed upon herein, which commitment covers risk for purchases on credit by Purchaser.

“Past due Interest”: failure by Purchaser to make payments in due time and proper form shall give rise to past due interests payable thereby to accrue. Those past due interests that shall be computed over past due outstanding balances, beginning on maturity date and continuing during all time the debt due and payable remains outstanding and up until paid in full;


“Month”: calendar month;

“Plant”: Any of Purchaser or Seller plants inside the United Mexican States where: Purchaser uses Sulfur received from Seller under this agreement for mixing, storing, distributing and/or processing purposes, or where Seller manufactures the Product.

“Product”: Sulfur in accordance with specifications set forth in Exhibit 2;

“Final Delivery Schedule”: Regarding any month, the final delivery schedule of Product as determined in accordance with Section 3.4;

“Proposed Delivery Schedule”: Proposed delivery schedule of Product as determined in accordance with section 3.2; requested by customer.

“Operating Reasons”: Including but without limitation, those reasons or causes applicable to Plant such as processes and processing equipment-related problems in general, such as leaks in pipelines, tanks, deviations from operation in that same equipment, electric power failures, industrial safety and production handling in Plant.

“SPEUA”: Payment method as determined by Banco de Mexico (Central Bank), called Electronic payment system for wide use”.

“T.I.I.E.”: The interbank equilibrium interest rate published by the Central Bank in the Federal Official Gazette.

“Metric Ton”: Unit of weight equal to one thousand kilograms;

“Contractual Volume”: Regarding any Month, means Product volume that Seller is obliged to sell and Purchaser is obliged to buy pursuant hereof which volume is computed based on provisions in Section 3;

“Base Contractual Volume”: **** monthly metric Tons which volume Seller is obligated to sell and Purchaser is obligated to buy.

1.2 Headings and references: Headings included in this Agreement shall not affect construction hereof. Except for any provision to the contrary, any and all references to Sections and Exhibits are included in regard to the Sections hereof and the Exhibits hereto.

SECTION 2. PURPOSE.

Subject to the terms and conditions hereof, Purchaser undertakes to buy Product from Seller and Seller undertakes to sell Product to Purchaser.

SECTION 3. DELIVERY VOLUME AND SCHEDULING

3.1 Contractual Volume: Subject to the terms and conditions hereof, Product volume to be sold by Seller and bought by Purchaser in any Month (the “Contractual Volume” for such Month) shall be the one between (i) Base Contractual Volume and (ii) volume ordered by Purchaser, and confirmed in Final Delivery Schedule. Determination of


Contractual Volume between that base and ordered amount, and volume confirmed in Final Delivery Schedule, for any Month, and of applicable delivery schedule, shall be made in accordance with following provisions in this Section 3.

3.2 Proposed Schedule by Purchaser: Purchaser shall deliver to Seller, no later than on the fifth Day of each month:

(i) a proposed delivery schedule related with subsequent Month, pursuant to provisions in No. I, Exhibit 3, whereby Purchaser shall notify Seller the Product volume it wishes to receive in that Month, approximate dates and Shipping Center(s) where Purchaser wishes the Product to be loaded, and carriage shall be Purchaser’s responsibility; and

(ii) an estimate of Product volume Purchaser plans to order for two (2) subsequent Months.

3.3 Determination of Contractual Volume: Seller shall provide an answer to schedule proposed by Purchaser for subsequent Month no later than the 25 th day of each month (prior to month product has been ordered for), through document mentioned under No. II, Exhibit 3, in the understanding that:

(i) if Base Contractual Volume is the volume ordered by Purchaser for any Month, Seller shall supply the ordered volume, and that volume shall comprise the Contractual Volume for such Month;

(ii) if volume ordered by Purchaser for any Month exceeds Base Contractual Volume, Seller may, at its discretion, supply any volume between the ordered volume and Base Contractual Volume, and volume so determined by Seller shall comprise the Contractual Volume for said Month; and

(iii) if volume ordered by Purchaser for any Month is smaller than Base Contractual Volume, Seller shall supply ordered volume and volume so determined by Seller shall comprise the Contractual Volume for said Month.

(iv) if Purchaser fails to deliver a proposed schedule to Seller, the Base Contractual Volume shall be deemed as the Contractual Volume for said Month.

Contractual Volume for such Month shall be considered in applying provisions in Section 3.5, and operating flexibility provided in Section 3.6.

A document delivered to Purchaser by Seller pursuant to this Section 3.3 shall comprise the “Final Delivery Schedule”, and Contractual Volume for any applicable Month may also be established therein, consequently, the Product Volume to be delivered during such Month and the Shipping Center(s) wherein Seller shall make deliveries shall be specified therein (dates, volumes and Shipping Center(s), different from those dates, volumes and Shipping Centers proposed by Purchaser in schedule thereof, may be specified in that document), in the understanding that, except as otherwise agreed upon or because of regular maintenance activities in Shipping Center(s) different from those proposed by Purchaser or because of repair of premises, deliveries shall be made in a relatively uniform manner during the applicable Month.


Notwithstanding any agreements in final delivery schedule pursuant to prior paragraphs, the parties agree that they may agree on additional volumes to those established in final delivery schedule, which volumes shall be deemed as amending Contractual Volume only for that month.

3.4 Final Delivery Schedule: Seller shall send a confirmation regarding deliveries to be made in any applicable Month no later than the 25 th day of prior Month, pursuant to provisions in No. III, Exhibit 3. In said confirmation, the Proposed Delivery Schedule regarding Product Volume to be delivered during that Month, as well as the Shipping Center(s) where deliveries are to be made may be changed by Seller, provided however that this right of Seller may not affect its obligation (i) to fully deliver the Contractual Volume in any applicable Month, and (ii) to make deliveries in relatively regular manner during that Month, except as otherwise agreed upon or as for regular maintenance reasons in Shipping Center(s) different from those proposed by Purchaser in schedule thereof, or as for repairs to premises. Delivery schedules so confirmed by Seller for any Month shall comprise the “Final Delivery Schedule”. It is expressly agreed upon that deliveries to be made in accordance with Final Delivery Schedules shall be subject to provisions set forth in Exhibit 3.

3.5 Contractual Volume, final obligation:

3.5.1 In order to secure regular Product supply, and for both parties to have ideal conditions in planning their relative activities, the parties agree that Contractual Volume shall be final, except if parties agree to change Contractual Volume, or in the event of force majeure or Acts of God.

3.5.2. In the event Purchaser, due to an cause attributable thereto, withdraws a volume smaller than the Contractual Volume applicable to **** months during a six-month period, Seller shall be entitled to (i) reduce Contractual Volume applicable to all subsequent months in a volume equal ****, and said reduction shall be notified to Purchaser within fifteen (15) days following last Day of that **** period wherein Purchaser had received smaller volumes than Contractual Volume, and new Base Contractual Volume shall remain in effect as from the Month detailed in notice date; or (ii) rescind Agreement which rescission shall become immediately effective, without requiring a court order, by personally notifying Purchaser which notice shall be given within 60 days following last day of the six-month period wherein such breach takes place, priorly complying with rescission proceedings provided for in section 29.

In the event the right to reduce Contractual Volume or to terminate the Agreement shall not be exercised by Seller, Purchaser’s obligation to receive the agreed upon Contractual Volume in each Month shall continue with full force and effect.

3.6 Flexibility for operating reasons; stoppage due to maintenance:

3.6.1 The parties shall not incur any liability whatsoever if in any Month they supply or receive, if applicable, a volume smaller than Contractual Volume, provided that:

As to Purchaser

 

  (i) it is due to operating reasons, and such reduction does not exceed in any case 5% of applicable Contractual Volume for said Month.


Regarding Seller

 

  (i) if due to operating reasons.

3.6.2. Each party shall be entitled to suspend purchases or sales of Product, for one or more Days, and not exceeding in the aggregate thirty (30) days per Year that are equivalent to Base Contractual Volume, provided that:

 

  (i) those suspensions are strictly caused by a stoppage due to maintenance reasons at any Shipping Center(s) different from the one(s) proposed by Purchaser within proposed schedule or of any other Seller’s production center or Plant, if any; and

 

  (ii) volume of not supplied or not received product, if any, does not exceed in any Year the monthly average of Contractual Volume during the applicable Year.

Any party wishing to suspend purchase or sale of Product in accordance with the aforementioned shall as soon as possible notify the other party the scheduled dates therefor, but at least thirty (30) Days before the first Day of that suspension, except for those cases where interruption is due to remedial maintenance, in which case the parties shall notify thereof in writing on same day when the event is taking place, in accordance with Section 21 “Notices” of the Agreement.

3.7 Schedule coordination: In order to coordinate delivery schedules, each party shall appoint an area operating agent, who shall be essentially responsible for coordinating operating details related with Product delivery under this Agreement.

SECTION 4. VOLUME MEASUREMENT

4.1 Volume: Volume for each delivery shall be determined by Seller’s staff using the weighing machines installed at the applicable Shipping Center, and carrier’s vehicle shall be weighed before and after the loading operation. Purchaser shall be entitled to appoint an agent to witness weighing process of loaded Product, as well as to be present when weighing machines are gauged, and in the event any non-reconciling differences arise, opinion of an independent inspector shall be requested (which fees shall be paid in equal proportion by both Purchaser and Seller) “selected by the parties” from among those inspectors detailed in Exhibit 4 hereto in order to confirm those measurements. Seller undertakes to show Purchaser, upon request and at any moment, evidences that the maintenance and gauging schedule for weighing machines has been fulfilled in accordance with regulations then effective established by the competent authority in that field.

4.2 Effects: Volume measurements performed as above-mentioned shall be final and binding for both parties, except in the event of an evident error. However, and without prejudice to any subsequent right of the parties to prove an evident error in those measurements, determination of volume as aforementioned shall prevail for billing purposes and for obligation by Purchaser to make applicable payment in accordance with what is provided in Section 9.

SECTION 5. QUALITY.


5.1 Specifications: Product to be sold under this Agreement shall fulfill those specifications set forth in Exhibit 2 hereto.

5.2 Determining quality. Seller shall test quality of Product to be supplied out of storage tanks in accordance with those methods set forth in Exhibit 2 hereto, and Seller shall prepare any applicable quality certificates related therewith. Purchaser shall be entitled to request Seller the Product quality certificates, and also that an independent inspector selected from those inspectors detailed in Exhibit 4 hereto takes part in the event of any disagreement, and that independent inspector shall confirm at Seller’s laboratories that product covered by those certificates do meet minimum required features detailed in Exhibit 2. Final results of any quality analysis performed in accordance with this Section 5.2 shall be final and binding to all parties except in the event of an evident error.

The independent inspector’s fees shall be at the expense of any party making the error, that is, if minimum required quality is confirmed by inspector, fees shall be at the expense of Purchaser, and if a determination is made that minimum required quality is not fulfilled those fees shall be at the expense of Seller.

5.3 No warranty provisions on product quality: Seller solely warrants that Product sold under this Agreement shall fulfill, at any applicable Shipping Center, specifications expressly set forth in Exhibit 2. Seller does not grant any other warranty, either express or implicit. Purchaser hereby relieves Seller of any other warranty, including but without limitation, any implicit warranty of enforceability or a warranty of fitness for a particular purpose, and specifically regarding sale of Product pursuant to this Agreement.

SECTION 6. DELIVERY

6.1 Delivery method, transfer of title. All Product deliveries shall be made to carriage vehicles supplied by Purchaser at any applicable Shipping Center (in the understanding that Purchaser shall be liable for any and all Product shipping expenses,) in accordance with the following terms of this Section 6. Transfer of title from Seller to Purchaser shall be deemed executed upon the time Product may be loaded into any applicable carrier vehicle. As from that time, liability of Seller regarding the Product shall terminate and Purchaser shall assume all risks for loss, damages, reduction, contamination or evaporation as well as any and all risks intrinsic to Product handling, carriage, storing and processing. Any loss or damage caused to any of Seller’s property or to any third party’s property during loading and carriage operations, attributable to carrier or to any driver thereof shall be at the expense of Purchaser. The above-mentioned provisions are in accordance with Exhibit 3.

6.2 Statement that Purchaser knows Shipping Centers, general procedures. Purchaser certifies that it fully knows conditions, procedures and premises at Shipping Centers and manufacturers, including those conditions, procedures and premises for Product delivery. Conditions, procedures and premises at Shipping Centers and manufacturers may be changed at any moment in which case Seller shall timely notify Purchaser. Also, Purchaser hereby acknowledges that general procedures currently established in Shipping Centers and manufactures related at any moment, among other aspects, with volume determination and safety measures for loading operations, shall be supplementary to (provided that they are not infringing) those procedures established herein. Notwithstanding the above-mentioned, it is expressly agreed that all deliveries to


be made shall be performed pursuant to provisions in paragraphs IV and V, Exhibit 3 hereto.

SECTION 7. NOTICE OF CLAIMS.

7.1 Volume and quality. Any claim that Purchaser might have regarding this Agreement as to Product volume or quality shall be notified, pursuant to Section 21 hereof to Seller within three (3) Days from the delivery date, but in any case, prior to Product unloading by Purchaser at the Plant. Without prejudice to the above provided, Purchaser may notify by telephone any intended claim to be submitted, to the field operating agent appointed by Seller, so that Seller may timely take any action deemed proper, the above in the understanding that said notice by telephone shall be confirmed in writing, through telefax, courier or electronic mail. The field operating agents appointed by the parties shall try to mutually solve said claim. In the event claim is not solved by those agents, Purchaser shall confirm its claim to Seller within a ten (10) Day period following date when initial notice of claim had been delivered through telefax, courier or electronic mail by Purchaser to Seller.

7.2 Other claims: Any other claim Purchaser might have related with this Agreement shall be notified to Seller following method set forth in Section 7.1 within thirty (30) days from the date the events giving rise to claim took place, and that claim shall be decided in accordance with terms similar to those set forth herein.

7.3 Disclaimer of liability by Seller: Seller shall not be liable whatsoever with Purchaser (and Purchaser shall be deemed to have waived thereto) regarding any claim that may not be notified by the Purchaser to Seller as provided in Sections 7.1 and 7.2

SECTION 8. PRICE

Product price shall be monthly computed by Seller in accordance with a formula authorized by the Ministry of Finance and Public Credit.

Any amendment to formula shall be notified in accordance with Section 21.

Price application criteria are included in Exhibit 5 hereto.

SECTION 9. TERMS OF PAYMENT

9.1 Currency, payment time and place, default in payment: Purchaser shall make all payments provided herein in Mexican Pesos, without any discount or deduction whatsoever, to the account and bank notified thereto by Seller, through any of the following methods: (a) bank deposit submitted at a teller’s window, b) bank wire transfer c) SPEUA. Purchaser shall fulfill bank guidelines and policies in place regarding acceptance of checks; Purchaser shall also fulfill regulations in effect. Al payments of sold Product on credit and delivered shall be made no later than **** days from any applicable delivery date. All other payments made to Seller shall be performed within **** days following submittal by Seller of a payment demand in writing wherein indebtedness concept, amount and type of obligation is detailed. In the event any payment pursuant to this Agreement becomes due payable in a Day where banks remain closed, said payment may be made on the immediately following day when banks are open for business. Purchaser undertakes to reimburse Seller any bank fee improperly applied by banks to Seller for


transactions performed by Purchaser. Assuming that Purchaser defaults in payment, Purchaser undertakes to pay Seller past due interest as from the day following the maturity date and all along that amount remains outstanding (Principal and VAT) and until payment is made in full pursuant to the following:

 

   

Past due interest rate applicable to past due outstanding balance, shall be that resulting from applying the monthly average of the equilibrium interbank interest rate (“TIEE RATE”) as determined by the Central Bank and published in the Federal Official Gazette applicable to a 28 day term.

 

   

To compute the monthly average of the “TIIE” RATE, the sum of known and effective “TIIE” rates shall be considered from the first calendar day and until third business day before end of immediately prior month to month when rate is applied, divided by number of calendar Days considered in arithmetic sum and the result thereof shall be divided by twelve and multiplied by a 2.5 factor.

 

   

The amount of past due interest shall be that resulting out of multiplying the outstanding balance (principal and VAT) of past due debt by a quotient resulting out of dividing monthly past due rate by 30 and multiplying thereof by number of past due days in the month including the day when payment is made.

 

   

If impossible to determine at any time the TIIE RATE, the applicable rate shall that, if any, replacing thereof as officially determined.

In the event the aforementioned is amended by the Corporate Finance Department, the parties agree to enter into an applicable agreement to update that amendment.

Any payments made by Purchaser to Seller to comply with obligations thereof shall be applied on a due date chronological order beginning with oldest owing amount and up to most recent owing amount, in the first place to payment of past due interests, financing interests, value added tax on interests, payment of principal and, lastly to collection expenses, if applicable.

In the event any cheque is returned for any cause, Purchaser undertakes to pay Seller the following items: amount of returned cheque, a 20% on returned cheque amount for damages and a 20% VAT on returned cheque, past due interest, VAT on past due interests, VAT on past due interests, fees and expenses applied by applicable banking institutions plus applicable VAT, in the event they have been charged to Seller, in the understanding that the aforementioned shall be without prejudice to application of any other provision or any other legal remedy applicable to Seller, either stemming out of this agreement or of any other source (including, without limitation, what is provided in paragraph 9.5, Section 9).

Recovery of owing amounts shall be applied in the first place to payment of 20% on any returned cheque, bank fees and expenses charged by the applicable bank, past due interest of document and VAT of each item and in the second place to paying the returned cheque amount.

If for any reason, any invoice(s) of sold and delivered Product is not registered by the bank institution through which collection is performed, Purchaser shall pay the applicable


amount, in accordance with pricing structure applied on the date Product is delivered, in the understanding that for such instances, due date of any applicable invoice shall not be affected.

9.2 Exemption, renewal or reduction of guaranty for selling product on credit. Seller reserves the right to grant a guaranty disclaimer for selling Product on credit, in accordance with guidelines authorized by the Board of Administration of Pemex Gas y Petroquímica Básica and applied by its Institutional Credit Committee, as well as to cancel Purchaser said disclaimer or to determine any reduction in amount of guaranty submitted or renewal thereof, in accordance with resolutions by said Committee, for any breach to requirements then in effect for a guaranty disclaimer or that presumptions for reduction thereof take place.

9.3 Payment Guaranty. In the event Purchaser has no guaranty disclaimer granted by Seller, Seller may demand from Purchaser to guarantee payment of supplied Product pursuant to this Agreement through letters of credit, granting of a suretyship or any other manner of Payment Guaranty as selected by Seller. The letter of credit or suretyship shall be (i) issued by a bank o a bonding company legally authorized to operate in the Mexican Republic, as applicable, acceptable to Seller, (ii) in an unconditional and irrevocable manner, (iii) for a term acceptable to Seller, (iv) payable based on a first out-of-court demand by Seller to issuer, notwithstanding any opposition by Purchaser; and (v) in an amount reasonably determined by Seller. In the event Seller demands Purchaser to guarantee Product payment in accordance with aforementioned, and Purchaser shall fail to do so within five (5) Days following the date of demand, Seller may terminate this Agreement and termination shall become immediately effective (without needing a court order), through personal notice to Purchaser. Payment guaranties shall be issued pursuant to suretyship and letter of credit models delivered therefor by Seller.

Payment Guaranty shall be delivered directly to Seller by guarantor institution no later than two business days before first day of product delivery, and including therein full address for guaranty delivery.

In any case, and to remain in payment on credit plan, Purchaser shall maintain Payment Guaranty by making any required renewals or substitutions, otherwise, Seller shall proceed to suspend deliveries or product sale on credit.

If Purchaser chooses to submit a letter of credit and in order for Seller to deem it valid, Purchaser shall renew or substitute it for another with any applicable term, at least sixty Days before its due day.

Whenever Purchaser changes corporate name or is transformed, or merged into o spun-off, Purchaser shall update any applicable Payment Guaranty.

9.4 Payment costs: Purchaser shall pay all bank charges and fees related with payments to be made to Seller pursuant hereof, including but without limitation, any cost to establish the letter of credit and the guaranties set forth in Section 9.3.

9.5 Non-compliance of payment: In the event Purchaser default any payment that shall be made pursuant hereof, Seller (without prejudice to any other right or legal remedy arising out hereof or of any other source) shall be entitled at its sole discretion (i) to demand payment of past due interests applicable based on a rate then effective as determined by the Corporate Finance Entity as agreed upon herein, and therefor a grace


period for making payment of up to 10 Days following that due date shall be granted, (ii) in the event invoice and interests may not be settled within that additional margin as aforementioned, on the 11 th day following maturity date further Product deliveries shall be suspended until Purchaser pays any owing amounts and any interests derived from those amounts, and if otherwise, the applicable guaranty claim shall be processed or if any, legal proceedings shall be filed and (iii) except if Purchaser makes payments within the ten (10) Days following the day when payment would have become immediately due and payable, to rescind this agreement with such rescission immediately becoming effective (without the need of a court order) through personal notice to Purchaser given at any time before full payment by Purchaser of all owed amounts and applicable interests, and priorly complying with rescission proceeding provided in Article 29.

Payment Guaranty shall be executed to recover the owing amount plus any accrued past due interests and/or financial interests, or if any, in the total amount of the letter of credit, given the type of this Agreement.

SECTION 10. BAN TO SETOFF

Without prejudice to the right of Purchaser to subsequently submit any claims Purchaser might have regarding this Agreement through a judicial proceeding filed in accordance with provisions in Section 24, all payments Purchaser shall have to make pursuant hereof shall be timely made and without any setoff nor deduction of any type for any claim that Purchaser or any other person might have at present or in the future against Seller or any Affiliate thereof. Purchaser hereby relieves and waives each and every right related with claims arising against Seller or any Affiliate thereof regarding sale and purchase of Product made prior to execution hereof that Purchaser has not notified in writing to Seller before entering into this Agreement.

SECTION 11. OTHER REPRESENTATIONS AND WARRANTIES BY PURCHASER

Purchaser represents and warrants that:

 

  (a) this Agreement has been duly authorized and that all corporate acts and acts of any other type required therefor have been executed;

 

  (b) this Agreement is valid, legally binding therefor and enforceable in accordance with the terms thereof;

 

  (c) it has, directly o through third parties, proper equipment and duly trained staff to handle, carry, store and/or process Sulfur, as well as to deal with any emergency resulting out of said handling, carriage, storing and processing;

 

  (d) it has obtained any required permits to handle, carry, store and process Sulfur, and that third Parties hired thereby for carriage of product have in turn obtained any permits required therefor, and all those events the permits that must be issued by applicable government authorities, and that those permits are in force (in the understanding that Purchaser shall immediately notify Seller if any such permit has been cancelled, revoked, annulled or terminated);


  (e) knows and undertakes to fulfill any safety rules and requirements existing for Shipping Centers to be used to execute any acts the purpose hereof;

 

  (f) Product to be purchased pursuant hereof is solely to manufacture and market oil-derived products.

 

  (g) it is holder of a valid insurance policy issued by an insurance company duly authorized to operate in Mexico, which policy is broad enough to cover for losses, damages to individuals and Seller’s and third parties’ property that may arise for acts or omissions related with this Agreement, and that any third parties hired for carriage of Product are holders of policies covering any of the above casualties;

 

  (h) it shall pay any tax obligations arising out hereof, pursuant to any laws providing thereof;

 

  (i) likewise, it shall prefer Seller for purchasing the Product;

 

  (j) each above-mentioned representation and warranty is true and valid on the day this Agreement becomes effective and shall continue to be true and valid on each delivery date of Product under hereof, as if those representations and warranties had been made on each delivery date.

SECTION 12. LABOR RELATIONS

Purchaser in a capacity as businessperson and employer of any hired staff thereby for the purpose hereof, is solely responsible for any obligations arising out of legal provisions and any other stipulations as to labor and social security matters with its workers, and Seller under no circumstance shall become a surrogate employer as to said staff. Consequently, Purchaser shall defend and hold harmless Seller, Petróleos Mexicanos and/or any other Subsidiary Entity thereof, of any claims that may be filed by Purchaser’s workers, and Seller shall be relieved of any responsibility and shall be indemnified for any amount that may be incurred thereby to that regard.

SECTION 13. TERMINATION OF CONTRACT

The parties may terminate this agreement for any reason as provided for herein and additionally for the following events:

 

   

When term expires pursuant to Section 25 hereof.

 

   

Seller may terminate this agreement at any time without any liability whatsoever, by giving notice in writing to Purchaser 3 months prior to date when termination shall become effective.

 

   

The parties may agree an early termination hereof in the event of force majeure or acts of God pursuant to provisions in Section 17.

 

   

Due to rescission of agreement for any cause attributable to Purchaser, for which purpose Seller shall enforce those guaranties set forth herein for any amount owing applicable thereto.


Termination or rescission hereof pursuant to provisions in Sections 13, 14, 25, 29 or for any other reason as set forth herein shall cause payment obligations payable by Purchaser and subject to enforceable terms to become immediately due and payable from the time said rescission or termination becomes effective and Purchaser shall not be relieved from making any payment Purchaser may be obliged to in accordance hereof.

In the event any balance exists to Purchaser at termination hereof, a certificate of settlement may be issued by Seller to reimburse that balance.

SECTION 14. SPECIAL RESCISSION EVENTS

14.1 Rescission Events: Seller (without prejudice to any other right or legal remedy stemming out of this Agreement or of any other source) may rescind this Agreement which rescission shall become immediately effective (without any court order being required), by giving notice in writing and personally to Purchaser, priorly fulfilling procedure established in Section 29, in the event:

 

  (a) Purchaser files proceedings for bankruptcy ( concurso mercantil ), or any reorganization is requested thereby or determined thereupon decided through any court order, or requests the benefit of any legislation to release debtors, to make an assignment for the benefit of creditors due to its inability to pay its obligations with them, or if Purchaser admits in writing its inability to pay its debts as they mature, or performs any other act generally recognized as insolvency, or bankruptcy is declared upon Purchaser.

 

  (b) any court order or resolution is issued declaring Purchaser in bankruptcy, a petition requesting reorganization thereof is approved, or a petition requesting application of any law to release its debtors is approved, appointment of a custodian, receiver shall occur, or that dissolution or liquidation of Purchaser shall have been ordered.

 

  (c) any permit to Purchaser to handle, carry, store and process Sulfur or permit to any third party signed up thereby for carriage of Product, including, in both cases, any required permit related with said Product, has been cancelled, revoked or in any manner annulled or terminated, and not renewed or regularized within a thirty (30) day term, in the understanding that during said term Seller shall be entitled to suspend, at its sole discretion and without any liability therefor whatsoever, Product deliveries until said permit is renewed or regularized.

 

  (d) any representation made by Purchaser to Seller under this Agreement turns out to be false or untrue on the day this Agreement shall become effective or on the date of any Product delivery hereunder; or

 

  (e) Purchaser breaches any obligation hereunder.

14.2 Effects of rescission of Agreement: Purchaser shall not be relieved of making any payment Purchaser is obliged to under this agreement and to paying loss and damages because of rescission hereof as provided in Section 14.1 or for any other reason.


SECTION 15. CONFIDENTIALITY

The parties agree that this Agreement as well as all information related therewith obtained by the other party through any officer, including executive officers, employees or other agents (the Agreement and said information the “Information” for the purpose of Section 15) shall be considered as confidential property, and may not be revealed without express consent of the other party. Notwithstanding the aforementioned, any party may reveal the Information in accordance with government, administrative or court demands, to which that party may be subject to, provided however that disclosing of information is compulsory for said party, and if failing to do so that party shall incur in any civil or criminal liability. If presuming that any party has revealed any Information breaching provision in this Section 15, the other party shall be entitled, without prejudice to any other right or legal remedy arising out of this Agreement or of any other source, to terminate this Agreement which termination shall become immediately effective (without a court order being required) by giving notice in writing to the other party. This confidentiality obligation shall be permanent and shall not terminate if this Agreement is expired, cancelled, terminated or rescinded.

Seller may reveal both information on the Agreement, and that related therewith, in accordance with requirements by Guarantor Institutions for collection of offered guaranties, as well as to Petroleos Mexicanos y Organismos Subsidiarios without consent in writing by Purchaser being required.

SECTION 16. NO STIPULATION FOR THE BENEFIT OF THIRD PARTIES; ASSIGNMENTS.

16.1 No stipulation for the benefit of third parties; No provision herein is aimed at nor construed as granting any person or entity any right under this Agreement as a provision benefiting third parties.

16.2 Assignment by Purchaser: Purchaser may not assign to any person any right or interest herein nor delegate any obligation without the prior consent in writing by Seller. In the event Purchaser tries to make any assignment or delegation, without consent in writing by Seller, Seller may be entitled, without prejudice to any other right or legal remedy arising out of this Agreement or of any other source, to terminate this Agreement which termination shall immediately becoming effective (without any court order being required) by notice given in writing to Purchaser.

16.3 Assignment by Seller: Except for the right to receive payment for supplied Product pursuant hereof (which right may be freely assigned by Seller) and for what is provided in the following sentence, Seller may not assign to any person any right or interest herein nor delegate any duty without the prior consent in writing by Purchaser. Seller may, freely, assign its rights and delegate its duties stemming out hereof to any Affiliate thereof. In the event any assignment is made by Seller pursuant to the terms of Section 16.3, Seller shall be relieved of any liability hereunder regarding any delegated duties.

SECTION 17. RELIEF OF LIABILITY

17.1 Force majeure or Acts of God. Except as otherwise provided herein, pursuant to the terms in fraction V, articles 2017, and article 2111 of the Federal Civil Code, no


party shall be obliged to or subject to any liability for losses, damages arising out of force majeure or acts of God, provided however that party has not caused or aided therefor.

Any financial or commercial event shall be expressly excluded from force majeure or acts of God.

Any party alleging force majeure or acts of God shall make all reasonable efforts and expenses to mitigate or remedy any effects of said force majeure or acts of God. No party shall be relieved of any duties that due to their nature were not affected by those events.

Notwithstanding what is provided above, the parties agree that non-recoverable costs that may be incurred to fulfill any duties arising hereof, by the party to whom notice is given until the time any invoked force majeure or act of God is proven, those costs shall be reimbursed thereto by any party invoking force majeure or an act of God within three Business days from the time so demanded in writing, in the understanding that any aforementioned costs shall be duly proven.

For any party to be relieved of a liability for any force majeure or act of God, the required conditions for any party invoking thereof shall be:

 

  a) That situation is notified pursuant to Section 17.2 even if occurrence of that event is in the public domain;

 

  b) Prove through an expert examination, within 5 business days following applicable notice, that a force majeure or act of God exists, as well as inability to fulfill duties thereof; both parties shall agree that if otherwise done, any invoked force majeure or act of God shall not deemed as such.

Duties of the parties pursuant to this Agreement shall be suspended during the period any inability to fulfill them remains for any force majeure or act of God. In the event said term extends for an additional sixty (60) day term, any party shall be entitled to terminate the Agreement by giving notice personally to the other party at least thirty (30) days in advance.

17.2 Notice: Any party alleging force majeure or an act of God shall notify, pursuant to provisions in Section 21, the other party(i) that event has taken place and (ii) the time that event stops from preventing that party to perform hereof. In both cases, notice shall be made as soon as reasonably possible, however at no time after three (3) business days following date when the applicable party had known of the event, or when that party should have become knowledgeable of events detailed in above paragraphs (i) and (ii). Notwithstanding above provisions, if force majeure or act of God has obstructed communications in such a way it has not been possible to give notice within terms herein stipulated, the party alleging force majeure or an act of God shall give that notice as soon as practical and once communications are reestablished. If any party fails to give the above notice within the term set forth, that party shall not be entitled to allege a force majeure or an act of God.

17.3 Payment of sold and delivered Product: Purchaser shall not be relieved by any provision set forth in this Section 17 of any duty to fully pay the price for any sold and delivered Product or to pay any amount owing to Seller pursuant hereof.


17.4 No duty for a pro-rata to be imposed. If as a consequence of force majeure or an act of God, Product is not at any time sufficiently available to be supplied by Seller to Purchaser as hereunder, and to all other customers under undertakings executed by Seller therewith, Seller shall not be obliged to prorate any available Product among its customers, included Purchaser, and Seller may distribute, without any liability, any available Product as deemed advisable thereby; in the understanding that, if any event constituting force majeure or an act of God takes place, Seller shall not be obliged, for any reason, to purchase the Product from any third party to be able to sell it to Purchaser.

17.5 Other relief of liability events: The parties agree that this agreement with all effects thereof shall be temporarily annulled, and at the option of Seller, the term thereof extended for a period equal to that said annulment lasts, whenever production thereof must be annulled due to force majeure or an act of God. If due to said force majeure or act of God production is only reduced, the agreed upon volume herein shall be reduced in a proportion similar to that in which production is reduced, and contracted volume shall be increased, as selected by Seller, to compensate for any non-supplied volume, in this event for the price in effect on the day that compensation is applied.

In any such events, the party the suspension is notified to may early terminate this Agreement, without any court order being needed, and without any liability whatsoever to any of them, except for what has been agreed upon herein.

SECTION 18. LIMITATION OF LIABILITY

If due to any unlawful or misleading conduct whereby any guilt may be inferred as to any party, and any such conduct being: any intentional or willful conduct or unintentional conduct due to negligence, a casualty takes place whether due to a legal or illegal act and a loss and/or damage is caused to the other party in accordance with terms in article 1913 of the Federal Civil Code, causing any loss and/or damage to the other party, the guilty party shall incur civil liabilities, therefore that party shall be obliged to indemnify the other damaged party in accordance with terms in article 1915 of the Federal Civil Code.

Pursuant to article 2110 of the Federal Civil Code, liability for both parties to pay loss and damages shall be applied to loss and damages being directly and immediately consequence of their behavior either legal or illegal, and without any liability exclusion existing.

SECTION 19. CHANGE OF CIRCUMSTANCES

The terms and conditions in this Agreement have been agreed upon taking into account commercial situations existing when the agreement was entered into. In the event a material change of circumstances adversely and materially affecting any party of the agreement in meeting its duties pursuant hereof takes place, that party may request any or more sections hereof or Exhibits hereto be negotiated again specifying the change that took place and serving as a basis for the renegotiation request. Upon receiving that request, the parties shall meet and negotiate in good faith during a term not to exceed thirty (30) Days following date of request, to determine if they may or may not agree on amending this Agreement. If the parties fail to agree on said amendments within aforementioned term, any party may terminate this Agreement at the end of any Month by giving notice to the other party at least thirty (30) days in advance. During the term from


the notice of termination to the day when termination becomes effective, any duties of the parties under this Agreement shall remain with full force and effect.

Likewise, in the event amendments to regulations are issued or administrative provisions regarding Product Direct Sales are brought out by competent authorities which change or amend fulfillment of provisions set forth herein, or in any other agreements executed hereunder, any party hereto shall be entitled to early terminate the Agreement without any liability whatsoever or to request any amendment, prior notice given in writing to the other party, and no court resolution shall be required therefor, in the understanding that the obligations arising out of this Agreement shall remain with full force and effect until the day said termination or amendment becomes effective.

SECTION 20. SATISFACTORY DOCUMENTS.

Purchaser shall provide in time to Seller a listing of authorized individuals to act on behalf of Purchaser in any dealings with Seller, which individuals shall have those powers and authority determined by the Purchaser at its sole responsibility, as well as any power of representation or power of attorney evidencing thereof. Purchaser shall keep updated at all times said listing and shall provide Seller any other information or documents that may be reasonably requested thereby regarding financial or corporate situation of Purchaser during term hereof.

SECTION 21. NOTICES

Except as provided otherwise herein, all notices and communications between the parties shall be made in writing and shall become effective when received by the addressee at the address or telefax as indicated below:

 

If to Seller:  

PEMEX GAS Y PETROQUÍMICA BÁSICA

Av. Marina Nacional No. 329

Edificio 1917 (B-1), 10o Piso

Col. Huasteca, 11311.

México, D.F.

Telefax:

Attention:

 

19-44-53-23

****

If to Purchaser:  

INNOPHOS FOSFATADOS DE MEXICO, S. DE R.L. DE C.V.

Domicilio Conocido S/N Km. 5.5 Carretera Federal

Coatzacoalcos – Villahermosa

Complejo Industrial Pajaritos C.P. 96380

Pajaritos, Coatzacoalcos Ver.

Telefax:

Attention:

 

53 22 48 00

Señores Pablo Gerardo López Sanchez and José Ramón González de Salceda y Urbina

or to any other address, electronic mail or telefax notified by any party as above-mentioned.

Purchaser undertakes to notify any change of address, in the understanding that if failing to do so, the initial indicated address shall apply for all purpose hereof, and shall suffice


that any document intended to be notified to Purchaser may be delivered in that address by a notary public, and for all legal purposes it shall be deemed as made in person.

SECTION 22. SEVERABILITY OF PROVISIONS.

Invalidity, illegality of unenforceability of any one provision hereof shall in no way impair the validity and enforceability of any of the other clauses herein, except for the purpose hereof.

SECTION 23. AMENDMENTS

Any amendment to Agreement shall be made through an agreement in writing between the parties.

SECTION 24. GOVERNING LAW AND JURISDICTION

This Agreement shall be governed by and construed in accordance with the federal laws of Mexico. The parties expressly submit to exclusive jurisdiction of the Federal Courts of Mexico City, Federal District, and Purchaser expressly waives any other jurisdiction that might correspond thereto by reason of its present or future domiciles, or otherwise, regarding any dispute that may arise from or that may be related with this Agreement and that may not be solved between the parties.

SECTION 25. TERM

This Agreement shall become effective on the day a banking letter of credit and/or guaranty by a bonding company is submitted by Purchaser at the satisfaction of Seller, as referred to in paragraph 9.3 section 9, subject to termination provisions set forth therein with a term of one year from the day it is executed, in the understanding that once said term has elapsed and if no termination notice is submitted by any part to the other, the Agreement shall be automatically renewed for an indefinite period, and then it may be terminated by any party at the end of any Month by giving notice to the other party at least 3 months in advance and pursuant to provisions in Section 21 hereof, and in all cases the duties of the parties under this Agreement shall remain with full force and effect during the term between said notice date and the day the termination becomes effective.

SECTION 26. TAX OBLIGATIONS

Each party shall fulfill payment of taxes and other tax levies and charges pursuant to federal, state and municipal laws then effective in the United Mexican States or abroad, each party may be obliged to pay during term, performance and fulfillment hereof and exhibits thereto.

SECTION 27. ENTIRE AGREEMENT.

This Agreement contains all rights and obligations arising out of a relation existing between Purchaser and Seller for the purchase and sale of Product, except that if pursuant to any law, rule or guideline an additional obligation has been imposed upon any party; consequently, the Agreement contains the entire agreement and supersedes any other prior contracts or agreements, whether written or oral, between Purchaser and Seller or any Affiliate thereof, regarding purchase and sale of Product subject to becoming


effective pursuant to what is provided in Section 25. No agreement entered into priorly or any negotiation between the parties in carrying out its business, and any representation by any officer, employee, attorney-in-fact or agent of Seller made before this Agreement was entered into subject to this Agreement becoming effective pursuant to provisions in Section 25 shall be admitted in constructing the terms and conditions thereof. Purchaser confirms that no implicit representations have been made by Seller inducing or inviting Purchaser to enter into this Agreement.

SECTION 28. EXHIBITS TO AGREEMENT

The parties agree to consider as the exhibits hereto those listed below, which exhibits duly signed by the parties become an integral part hereof.

 

Exhibit 1    Producing Centers and Shipping Centers
Exhibit 2    Product Specifications
Exhibit 3   

Terms to Establish Delivery Schedules Order Form

Final Delivery Schedule Form

Exhibit 4    Independent Inspectors
Exhibit 5    Price

SECTION 29. RESCISSION PROCEDURES

In the event of any breach by Purchaser to its duties set forth herein or those set forth in Section 14, Seller shall personally notify Purchaser, within fifteen business days following the day when breach has taken place or when breach was made known thereto, the opinion report establishing event based on which the agreement rescission proceeding has been entered.

As from legal notice of opinion whereby a rescission administrative proceeding begins, purchaser shall have a ten business day term to state whatever is applicable thereto regarding beginning of notified rescission proceeding.

Once term granted by Purchaser has elapsed, and if no statement is made by Purchaser to its defense or if once any reasons stated thereby have been analyzed, Seller believes that those reasons are not enough as to justify any incurred breach, any proceeding decision shall be issued.

Any decision issued regarding rescission of agreement shall be personally notified within a fifteen business day term following the day when any authorized term has concluded.

Purchaser shall not be relieved of any amount owing for the benefit of Seller by any rescission of agreement. Beginning on date of notice of beginning of proceeding, Seller may enforce any guaranty to the benefit thereof, notwithstanding whatever provisions in the agreement.


SECTION 30.- EFFECTS OF PRIOR LEGAL RELATIONS

Any oral or written agreement between the parties prior to execution hereof shall be superseded, as from time this agreement becomes effective pursuant to what is provided in section 25, consequently the parties are mutually relieved of any liability arising out of the execution or performance of any above agreements entered by the parties, except for invoices undergoing payment proceedings or claims not decided between the parties.


The parties state that no error, fraud, bad faith or any other vice of consent has taken place to execute this agreement, consequently, they sign this Sulfur Supply Agreement in duplicate and an original copy shall be kept by each party through their legal representatives, in Mexico City, Mexico, on January 1, 2011.

 

“SELLER”

Pemex Gas y Petroquímica Básica

[A signature]

Alfonso González Parra

Attorney-in-fact

Assigned to the Office of the Business Assistant Manager

 

“PURCHASER”

INNOPHOS FOSFATADOS DE MEXICO,

S. DE R.L. DE C.V.

[A signature]

Abraham Shabot Saade

Legal Attorney-in-fact

LEGAL REVIEW

By the Office of the General Counsel

[A signature]

Ms. Silvia Oropeza Querejeta

Legal Manager, Agreements and Contracts

This page bearing signatures becomes an integral part of the Sulfur Supply Agreement

entered into by and between Pemex Gas y Petroquímica Básica, and Innophos

Fosfatados de México, S.A. de C.V. [sic] on January 1, 2011.


EXHIBIT 1

PRODUCING CENTERS AND SHIPPING CENTERS


PRODUCING CENTERS AND SHIPPING CENTERS

Preferential Centers

****

In the understanding that “Purchaser” may withdraw, at its option, said product from the shipping centers proposed by Seller, if due to operating reasons that product may not be supplied, without any liability whatsoever to “Seller.” Shipping centers proposed by Seller are the following:

Alternate Producing Centers

****


EXHIBIT 2

PRODUCT SPECIFICATIONS


SULFUR SPECIFICATIONS

 

TESTS

   UNITS    METHOD      SPECIFICATIONS
      OFFICIAL    ALTERNATE     

PURENESS

   % WEIGHT    BASED ON
DIFFERENCE
      **** MIN.

****

   % WEIGHT    ****      ****       **** MAX.

****

   % WEIGHT    ****       **** MAX.

****

   % WEIGHT    ****      ****       **** MAX.

****

   % WEIGHT    ****      ****       **** MAX.


EXHIBIT 3

TERMS TO ESTABLISH DELIVERY

PROGRAMS

Handbook for Purchaser


TERMS FOR ESTABLISHING DELIVERY SCHEDULES

I. ORDER DELIVERY

In accordance with terms provided in Section 32, Purchaser shall deliver Seller a proposal of delivery schedule regarding following Month through a document named “Order Form” attached herein as Exhibit 3. Purchaser shall deliver that proposed delivery schedule through Fax to telephone 1944-53-62 or through a courier service to the Basic Petrochemical **** or via e-mail.

II. FINAL DELIVERY SCHEDULE

Upon delivery to Purchaser of your order through fax, e-mail or courier service, as established in paragraph I above, Seller subsequently shall deliver or send to Purchaser within agreed upon terms in Section 3.4, a document called “Final Delivery Schedule Form” that is attached hereto as Exhibit 3.

The Final Delivery Schedule Form, in addition to being an order confirmation, is the final delivery schedule for any applicable Month. It shall be prepared based on preliminary balance of Product availability, and shall be used both for Seller to plan its production schedules and its Production activities and for Purchaser to establish prior commitments with shipping companies; in the understanding that, the Product amounts ordered by Purchaser in the order may be amended by Seller in this Final Delivery Schedule under the terms of Section 3.3.

III. CONFIRMING PLACE AND DATE WHERE PRODUCT IS TO BE PICKED UP BY SHIPPING COMPANY

Seller shall send Purchaser a confirmation via fax, courier service o electronic mail at the telephone, address, or e-mail address notified under the terms of Section 21, regarding deliveries to be made in any applicable month and pursuant to provision in paragraph II of this exhibit, specifying approximate volume to be delivered and Days when shipping team receiving deliverable Product shall show up; said schedule, for all purpose hereof, shall be called “Final Delivery Schedule”, in the understanding that, Seller reserves the right to amend the Proposed Delivery Schedule regarding percentage of Contractual Volume to be delivered in any applicable Month based on Product availability at Shipping Centers.

In the event Purchaser disagrees with Final Delivery Schedule, including any adjustments made by Seller to Proposed Delivery Schedule, Purchaser shall indicate thereof in writing as soon as possible, however at all times before beginning of any month when Final Delivery Schedule shall be in effect (otherwise, Final Delivery Schedule shall be deemed as agreed with by Purchaser) requesting any changes deemed advisable as well as any reason therefor to the Basic Petrochemicals ****. That Office shall analyze the details to accept or deny petition and shall proceed thereupon, by delivering any rescheduling, if applicable, to Purchaser.


IV. TEAM AND DOCUMENT DELIVERY AT THE SHIPPING CENTER.

In order to deliver Product, the applicable Shipping Center staff will check the following:

DOCUMENTS

Submittal Letter

Any signed up carrier company shall be required by Purchaser to submit a letter on letterhead, wherein carrier company is authorized to receive scheduled and confirmed Product on behalf of Purchaser. That letter shall be signed by members of Purchaser’s staff holding broad representation powers and any restriction to that granted power shall be mentioned therein. Also, mention should be included that Seller is relieved of any liability due to any event that might occur while carrying the Product.

If Product is collected using a vehicle property of Purchaser, this submittal letter shall be submitted by that vehicle’s driver.

Receipt by Carrier company

For each delivered shipment, the Shipping Center shall require the vehicle driver a receipt signed by a member of Purchaser’s staff holding broad representation powers, preferably on letterhead by Purchaser or by the carrier company:

 

   

Name of carrier company (if vehicles property of Purchaser, the Purchaser’s name shall be detailed.)

 

   

Economic number

 

   

Carrier vehicle license plates

 

   

Driver’s name (driver shall show an ID)

 

   

Name of Product to be loaded

 

   

Name of Purchaser the carrier company was signed up by

 

   

Verification certificate number issued by the Federal Consumer Protection Agency

 

   

Product carried on prior time

 

   

Team Verification Certificate issued by Competent Authority in that field.

Purchaser shall verify that any vehicles collecting load have a capacity as close as possible to any scheduled modules for each product (+/- 10%)


CARRIER VEHICLES

Purchaser shall be responsible for carrier vehicles used to store and transport the Product are in proper mechanical, safety, cleanliness and maintenance conditions for that purpose. In ll cases, those vehicles shall meet technical characteristics set forth in applicable regulations issued by the Ministry of Communications and Transportation. Additionally, Purchaser shall be responsible to verify that all applicable legal provisions have been met, including without limitation those provisions regarding carrier vehicles transporting hazardous waste or materials referred to in Regulations for Land Transportation of Hazardous Materials and Wastes. Without prejudice to the above, Seller may inspect the vehicles, and no liability shall be incurred thereby with that inspection. Before the vehicle is permitted to enter the filling premises, fulfillment by vehicle of Seller’s safety regulations regarding vehicle and driver shall be verified (i.e. spark arresters, extinguisher, grounding, etc.)

V. PRODUCT DELIVERY

Once documents mentioned in prior paragraph have been successfully reviewed, vehicle shall be allowed to enter Seller’s premises to load scheduled Product following the following steps:

 

   

Purchaser shall be responsible for carrier vehicle compliance with mechanical, safety, cleanness and maintenance conditions of vehicle required to transport Product as provided in applicable legal provisions, including without limitation provisions in Regulations for Land Transport of Hazardous Materials and Wastes.

 

   

The access pass shall be checked at the access point.

 

   

The empty carrier vehicle shall be weighed and any determined weight shall be recorded.

 

   

Then vehicle shall be moved to the filling area in order to load Product, however, all internal rules and regulations at Shipping Center related with traffic and safety inside premises shall be carefully followed.

 

   

At the time vehicle reaches the filling area, members of Seller’s staff shall monitor filling operation.

 

   

Vehicle loading shall always be performed at picking point thus guaranteeing safety while shipping Product; once vehicle has been filled up, vehicle shall be weighed again to determine any difference in amount of supplied Product.

 

   

With tare weight, both gross and net, the consignment receipt for delivery of Product shall be filled out using both gross and net tare weight, and driver shall sign acknowledging receipt and a copy shall be delivered thereto, consequently any liability to Seller regarding delivered amount shall terminate, and subsequently the applicable invoice shall be issued in central offices.

 

   

With exit permit shipping, carriage to Purchaser’s Plant shall be authorized and free passage shall be allowed until Seller’s premises exit point.


VI. FAILURES IN RECEIVING OR DELIVERING PRODUCT TO SHIPPING CENTER

 

   

If Purchaser’s vehicle arrive in Shipping Center(s) and/or on date(s) other than that confirmed for Final Delivery Schedule, Seller shall not be obliged to deliver Product.

 

   

If Purchaser sends carrier vehicle on a date other than that confirmed in Final Delivery Schedule, Seller shall not deliver Product, consequently, any delays and other expenses incurred to its carrier vehicle for untimely arrival shall be borne by Purchaser.

 

   

If Purchaser’s carrier vehicle is not submitted on any confirmed date and place, Seller shall not be obliged to reschedule delivery, however, Seller may reschedule, at its sole discretion, based on product availability.

VII. PRODUCT CARRIAGE

Seller shall not be responsible for any problem arising during product carriage.

In view of dangers in handling the Product marketed by Seller, it shall be compulsory for carriage thereof a civil liability insurance is maintained by Purchaser, or if applicable, by carrier company.

Purchaser shall be liable for monitoring and controlling carrier vehicles in transit. However, and in order to prevent that vehicles arrive at customers other than Purchaser, vehicles shall report Seller any deviations determined in order to correct them whenever possible, or for any applicable sanctions to be imposed upon the involved parties.

In the event any carrier vehicle has an accident in transit, notwithstanding any aid that must be provided by company then responsible for the Product, and any aid that may be received by assistance agency, Purchaser shall notify thereof to Seller, and request any available aid.

VIII. RECOMMENDATIONS TO PURCHASER

Upon arrival of vehicles to Plant, driver shall verify the following:

 

   

That product is destined thereto

 

   

That documents are complete

 

   

That Product is as ordered.

 

   

That amount of received Product is that listed in documents.

 

   

That Product amount meets specifications agreed upon by Seller.

Any inconsistency related with aforementioned shall be immediately reported to the applicable department at the Basic Petrochemicals ****.


   

Whenever a product not assigned to Purchaser is accepted thereby, Seller reserves the right to impose any commercial sanctions applicable thereto, since such actions seriously affect any schedule performance, timely recovery of product value and Purchaser’s plant operation as initially scheduled.

 

   

If Purchaser reports to **** having received a shipment destined to a different customer, the **** shall agree with original customer a recovery of shipment, since under no circumstance it shall be allowed that a product sent to a certain customer be received by a different customer, and shall not be unloaded thereby.

 

   

If documents are not complete and Purchaser has any doubts, Purchaser shall call the ****, and any required data shall be provided thereto.

 

   

If product received by Purchaser is not the one requested, **** shall provide technical assistance to identify that product and to determine destination thereof.

 

   

As a service to Purchaser, when determined a portion is missing, the **** may, at the request of Purchaser, verify and aid Purchaser to define any liability therein.

 

   

If the agreed upon quality has not been met by Product, **** shall take part in verifying and determining what caused the problem.


LETTERHEAD OF COMPANY

CORPORATE NAME

TELEPHONE:

FAX:

ORDER REQUEST DATE

REQUESTED PRODUCT

ORDER FOR THE MONTH OF

PRODUCT DESTINATION:

SHIPPING CENTER:

 

1 ST Week

   tue-1-oct      wed-2-oct      thu-3-oct      fri-4-oct      sat-5-oct      sun-6-oct      mon-7-oct      TOTAL  

Scheduled volume

                          0   

 

2 nd Week

   tue-8oct      wed-9-oct      thu-10-oct      fri-11-oct      sat-12-oct      sun-13-oct      mon-14-oct      tue-15-oct      TOTAL  

Scheduled volume

                             0   

 

3 rd Week

   wed-16-oct      Thu-17-oct      fri-18-oct      sat-19-oct      sun-20-oct      mon-21-oct      tue-22-oct      wed-23-oct      TOTAL  

Scheduled volume

                             0   

 

4 th Week

   thu-24-oct      fri-25-oct      sat-26-oct      sun-27-oct      mon-28-oct      tue-29-oct      wed-30-oct      thu-31-oct      TOTAL  

Scheduled volume

                             0   

TOTAL CUSTOMER SCHEDULED

  

     0   

CONSUMPTION FORECAST: (FOR THE NEXT TWO MONTHS)

 

MONTH

 

REQUIRED AMOUNT (TM)

 
 

NAME OF AUTHORIZED PERSON TO PREPARE ORDER

SIGNATURE


FINAL DELIVERY SCHEDULE FORM

AMOUNTS IN MT

CORPORATE NAME

TELEPHONE:

FAX:

ATTENTION:

WE HEREBY INFORM ABOUT THE FINAL DELIVERY SCHEDULE FOR PRODUCT, FOR THE MONTH OF:

PRODUCT

SHIPPING CENTER

 

1 st Week

   tue-1-oct      wed-2-oct      thu-3-oct      fri-4-oct      sat-5-oct      sun-6-oct      mon-7-oct      TOTAL  

Scheduled volume

                          0   

Executed volume

                          0   

 

2 nd Week

   tue-8oct      wed-9-oct      thu-10-oct      fri-11-oct      sat-12-oct      sun-13-oct      mon-14-oct      tue-15-oct      TOTAL  

Scheduled volume

                             0   

Executed volume

                             0   

 

3 rd Week

   wed-16-oct      thu-17-oct      fri-18-oct      sat-19-oct      sun-20-oct      mon-21-oct      tue-22-oct      wed-23-oct      TOTAL  

Scheduled volume

                             0   

Executed volume

                             0   

 

4 th Week

   thu-24-oct      fri-25-oct      sat-26-oct      sun-27-oct      mon-28-oct      tue-29-oct      wed-30-oct      thu-31-oct      TOTAL  

Scheduled volume

                             0   

Executed volume

                             0   

TOTAL CUSTOMER SCHEDULED

  

     0   

TOTAL EXECUTED CUSTOMER

  

     0   

SHOULD YOU HAVE ANY QUESTION, PLEASE DON’T HESITATE TO CONTACT US AT AV. MARINA NACIONAL NO. 329 EDIFICIO B-1 PISO 10, COLONIA HUASTECA, MEXICO, D.F. C.P. 11311 TELEPHONE +52 (55) 1944-5339

SINCERELY YOURS,

NAME AND SIGNATURE


EXHIBIT 4

INDEPENDENT INSPECTORS


INDEPENDENT INSPECTORS

****

****

****

****

****


EXHIBIT 5

PRICE


FORMULA FOR SULFUR PUBLIC PRICING

FORMULA AUTHORIZED BY THE MINISTRY OF FINANCE AND PUBLIC CREDIT

SULFUR FORMULA FOR CONTRACT PRICING (CONSUMPTION>=**** TON/MONTH) (**** Reference)

P.C.= [FCI * (SUGGESTED PRICE * FD) + LOGISTICS ADJUSTMENT ] * T.C.

UNIT COST OF SALE

P.C.= PRICE OF SOLID AND LIQUID SULFUR CONTRACT

SUGGESTED PRICE: CONTRACT PRICE AT **** OR (AVERAGE FOR 3 INITIAL WEEKS OF MONTH Q1 AND LAST MONTH Q2)

FCI MARKETING FACTOR PER SHIPPING CENTER = **** TO ****

FD = DISCOUNT FACTOR AS PER VOLUME BASED DISCOUNT TABLE

SALES UNIT COST = **** PESOS /TON

TC = AVERAGE EXCHANGE RELATED OF **** BUSINESS DAYS PRIOR TO DAY **** OF QUOTATIONS PUBLISHED IN THE FEDERAL OFFICIAL GAZETTE.

**** (REFERENCE) GREEN MARKETS HIGH & LOW AVERAGE

UPDATED DATE ON **** DAY EACH MONTH

SULFUR FORMULA FOR LIST PRICE (CONSUMPTIONS < **** TON/MONTH (**** Reference)

P.L. MAXIMUM OF         [FCI* (SUGGESTED PRICE) + ADJUSTMENT BASED ON LOGISTICS) * TC

+ **** + T.C.

UNIT COST OF SALE

P.L. LIQUID AND SOLID SULFUR LIST PRICE

SUGGESTED PRICE: CONTRACT PRICE IN **** (AVERAGE FOR **** FIRST WEEKS OF MONTH Q1 AND LAST WEEK OF MONTH Q2

FCI: MARKETING FACTOR PER SHIPPING CENTER FROM **** TO ****

UNIT COST OF SALES = **** PESOS / TON

T.C. AVERAGE EXCHANGE RATE FOR **** BUSINESS DAYS PRIOR TO **** DAY OF QUOTATIONS AS PUBLISHED IN THE FEDERAL OFFICIAL GAZETTE

**** (REFERENCE): GREEN MARKETS HIGH AND LOW AVERAGE

UPDATE DATE **** DAY EACH MONTH

NOTE: LOGISTICS ADJUSTMENT IS UPDATED EVERY 6 MONTHS.


DISCOUNTS ON A VOLUME BASIS

 

Monthly consumption

(Ton)

   % Disc    FD
500 – 2,500    ****    ****
2,501 – 5,000    ****    ****
5,001 – 7,500    ****    ****
7,501 – 10,000    ****    ****
10,001 – 15,000    ****    ****
15,001 – 20,000    ****    ****
<20,000    ****    ****

Any change to formula shall be notified pursuant to Section 21 hereof.

CRITERIA FOR APPLYING DISCOUNTS BASED ON VOLUME

 

1. Price shall be assigned during applicable month of product consumption or delivery and that shall be applicable to Monthly Contractual Volume of said month.

 

2. If Purchaser were to withdraw a volume exceeding Monthly Contractual Volume, price to be applied shall be that applicable to volume actually withdrawn for that month.

 

3. If Purchaser takes a volume lower than the Monthly Contractual Volume for reasons attributable thereto, the price to be applied shall be that related to Volume actually taken during said month.

 

4. if Purchaser takes a volume below the Monthly Contractual Volume for reasons attributable to Seller, the price to be applied shall be that related with the Monthly Contractual Volume.

 

5. In Purchaser takes a lower volume not less that **** of its Monthly Contractual Volume and considering these variations in the amount received by Purchaser and supplied by Seller are owing to variations in capabilities of carrier vehicles supplied by Purchaser and/or to product loads (supply) of product manually performed by Seller (without mass measurements), price to be applied shall be that related with the Monthly Contractual Volume.

 

6. If volume taken by Purchaser is below the Monthly Contractual Volume for reasons attributable both to Seller and Purchaser, those reasons shall be analyzed and volume attributable to each party in order to apply the relative price.

 

  6.1 Taken volume at each assigned supply center shall be determined comparing it with volumes confirmed by Purchaser.

 

  6.2 Compliance by each supply center shall be assessed determining any difference between confirmed volume and withdrawn volume.

 

  6.3 Events of default for each determined difference in each supply center shall be analyzed.

 

  64. Using events of default in each supply center, volume attributable to either Purchaser or Pemex Gas y Petroquimica Basica shall be determined

 

  6.5 The following shall be performed to each supply center:


  6.5.1. If default is attributable, in whole o in part, to Purchaser, and to compute volume, the confirmed Volume will be subtracted from not taken volume for a cause attributable to Purchaser.

 

  6.5.2. If default is fully attributable to Seller, Confirmed Volume shall be used to count volume.

 

  6.5.3. In the event the confirmed volume or a volume exceeding thereof is withdrawn by Purchaser, the actually withdrawn amount shall be used in computing volume.

 

  6.6 Addition of computed volumes based on the above-mentioned paragraphs for each supply center, shall be applied to the relative price range.

 

7. In regard to maintenance provided for in section 3.6.2., the following criteria shall be applied:

 

  7.1 If Purchaser or Seller orders maintenance in a thirty day period and that term takes place in that same calendar month, price shall not be applicable since no consumption was made.

 

  7.2 If Purchaser or Seller requests maintenance at irregular intervals, that is, in various periods which periods involve diverse months in a calendar year, the parties agree that price and applicable discount shall be that applicable to Base Contractual Volume on any relative month.

Criteria set forth herein shall be compulsory for the involved parties, and may be amended by Seller, whenever Seller deems advisable.

Exhibit 12.1

Calculation of Ratio of Earnings to Fixed Charges

 

     December 31,  
(dollars in thousands)    2010     2009     2008     2007     2006  

Earnings

          

Income (loss) before provision for income taxes

   $ 66,488      $ 104,346      $ 262,385      $ 6,409      $ (26,904

Plus: fixed charges (1)

     30,258        29,067        37,303        44,345        62,531   
                                        
   $ 96,746      $ 133,413      $ 299,688      $ 50,754      $ 35,627   
                                        

Fixed Charges:

          

Gross interest expense

     28,618        27,354        35,565        42,866        61,019   

Estimate of the interest within operating leases

     1,640        1,713        1,738        1,479        1,512   
                                        
   $ 30,258      $ 29,067      $ 37,303      $ 44,345      $ 62,531   
                                        

Ratio of earnings to fixed charges

     3.2     4.6     8.0     1.1     *   
                                        

 

(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 loss for 2006 the coverage ratio was less than 1:1. Innophos must generate additional earnings of $26,904 for 2006 to achieve a ratio of 1:1 for this period.

 

Page 85 of 90

Exhibit 23.1

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 February 25, 2011 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

 

/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 25, 2011

 

Page 86 of 90

Exhibit 31.1

CERTIFICATIONS

I, Randolph Gress, 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: February 28, 2011     By:  

/S/    R ANDOLPH G RESS        

      Randolph Gress
     

Chief Executive Officer and Director

(Principal Executive Officer)

 

Page 87 of 90

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: February 28, 2011     By:  

/S/    N EIL I. S ALMON        

      Neil I. Salmon
     

Vice President and Chief Financial Officer

(Principal Financial Officer)

 

Page 88 of 90

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, 2010 (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: February 28, 2011

 

/S/    R ANDOLPH G RESS        

Randolph Gress

Chief Executive Officer and Director

(Principal Executive Officer)

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.

 

Page 89 of 90

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, 2010 (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: February 28, 2011

 

/S/    N EIL I. S ALMON        

Neil I. Salmon

Vice President and Chief Financial Officer

(Principal Financial Officer)

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.

 

Page 90 of 90