10-K 1 iphs10k123113.htm 10-K IPHS 10K 12/31/13
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC, 20549
_______________________________________________________________________________________________ 
FORM 10-K
_______________________________________________________________________________________________ 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
 _______________________________________________________________________________________________ 
INNOPHOS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 _______________________________________________________________________________________________ 
Delaware
(state or other jurisdiction
 of incorporation)
 
001-33124
(Commission File number)
 
20-1380758
(IRS Employer
Identification No.)
259 Prospect Plains Road
Cranbury, New Jersey 08512
(Address of Principal Executive Officer, including Zip Code)
(609) 495-2495
(Registrants’ Telephone Number, Including Area Code)
Not Applicable
(Former name or former address, if changed since last report)
_______________________________________________________________________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
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.    ý  Yes    ¨  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    ý  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.    ý  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  ý    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.  ý
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  ý    Accelerated Filer  ¨    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    ý  No
The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $1.0 billion as of June 28, 2013, 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 4, 2014, the registrant had 22,348,092 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, 2014
 
III (Items 10, 11, 12, 13 and 14)
 



TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
 
 
 
Item 15.
 
 
 
 
 


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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.



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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 international producer of performance-critical and nutritional specialty ingredients with applications in food, beverage, dietary supplements, pharmaceutical, oral care and industrial end markets. Innophos combines more than a century of experience in specialty phosphate manufacturing with a growing capability in a broad range of other specialty ingredients to supply a product range produced to stringent regulatory manufacturing standards and the quality demanded by customers worldwide. Many of Innophos' products are application-specific compounds engineered to meet customer performance requirements and are often critical to the taste, texture, performance or nutritional content of foods, beverages, pharmaceuticals, oral care products and other applications. For example, Innophos products act as flavor enhancers in beverages, electrolytes in sports drinks, texture additives in cheeses, leavening agents in baked goods, pharmaceutical excipients, cleaning agents in toothpaste and provide a wide range of nutritional fortification solutions for food, beverage and nutritional supplement manufacturers.
The Company has made recent acquisitions in the bioactive mineral ingredients sector. Bioactive mineral ingredients are mineral based ingredients for food, beverage and dietary supplement end markets that are manufactured to be readily digestible. Historically, Innophos has enjoyed a strong position in “macronutrients,” minerals such as calcium, magnesium and potassium that are required in relatively large amounts for a balanced diet. Through these acquisitions, the company now also has a strong position in "micronutrients" such as chromium, selenium, zinc and iron, small quantities of which are also essential to the human diet. The company's third acquisition was in the botanical and enzyme based specialty nutritional ingredients sector. As with the bioactive mineral ingredients, botanical and enzyme based ingredients are important to our customers for their nutritional value and mineral, botanical and specialty phosphate ingredients are often formulated together. The acquisitions described below together with Innophos' existing strength in specialty phosphates has created a strong position for Innophos in the attractive and high growth specialty nutritional ingredients market.
In October 2011, Innophos acquired 100% of the stock of Kelatron's holding company, KI Acquisition, Inc., for a purchase price of approximately $21 million, subject to specified adjustments. Founded in 1975 and based in Ogden, Utah, Kelatron is a leading producer of technically advanced bioactive mineral ingredients, with a high quality base of customers in the dietary supplement and sports nutrition markets.
In July 2012, Innophos acquired100% of the equity of AMT Labs, Inc. ("AMT") and an affiliated real estate company holding all AMT real property for $27 million, with $19.5 million being allocated to the AMT purchase and $7.5 million being allocated to the real estate entity. Located in North Salt Lake, Utah, AMT has been manufacturing high quality bioactive mineral ingredients for the food, beverage, confectionary and dietary supplement industries for more than 20 years. AMT has two manufacturing facilities and land available for further expansion.
In December 2012, Innophos purchased all of the assets of Triarco Industries, Inc., ("Triarco"), for $45 million in cash plus $1 million in shares of Innophos Holdings, Inc. Common Stock. Triarco, a privately held company based in New Jersey, has been manufacturing high quality custom ingredients for the food, beverage and dietary supplement industries for more than 30 years. Triarco specializes in botanical and enzyme based ingredients that provide important nutritional benefits and are often formulated with bioactive minerals and specialty phosphates.
In October 2013, Innophos purchased all of the assets of Chelated Minerals International, Inc., (CMI), for $5 million in cash. CMI, a privately held company based in Salt Lake City, Utah, has significant know-how in the manufacture and science of chelated minerals supplied to the human nutrition market.
The combined businesses of Kelatron, AMT, Triarco and CMI generate annual revenues in excess of $50 million with attractive positions in high growth end markets.

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Key Product Lines
We have four principal product lines: (i) Specialty Ingredients, (ii) Food and Technical Grade purified phosphoric acid, or PPA, (iii) Technical Grade Sodium Tripolyphosphate (STPP) & Detergent Grade PPA and iv) GTSP & Other . The first three product lines comprise our Specialty Phosphates reporting segments for US/Canada and Mexico, with GTSP & Other reported separately in a third reporting segment.
Specialty Ingredients
Specialty Ingredients (including specialty phosphate salts, specialty phosphoric acids and a range of other mineral and botanical based specialty ingredients) are the most highly engineered products in our portfolio. They have a wide range of applications such as flavor enhancers in beverages, electrolytes in sports drinks, texture modifiers in cheeses, leavening agents in baked goods, mineral and botanical 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.

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The table below presents a list of the main Specialty Ingredients sold by us in 2013:
 
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.
 
 
 
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.
 
 
 
Organic Mineral salts and blends including calcium, chromium, copper, iron, lithium, magnesium, manganese, phosphorous, potassium, selenium, strontium, vanadium, and zinc

 
Bioactive mineral nutrients used in a wide variety of fortified foods, beverages and dietary supplements.

 
 
Plant based botanical, enzyme and mineral nutrients
 
Fortification for food, beverage and sports nutrition.

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.

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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. We also compete with imports from China, Belgium and Israel.
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 industrial and institutional cleaners and automatic dishwashing detergents and consumer laundry detergents outside the U.S. 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, Russia 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. STPP use was all but eliminated in consumer automatic dishwashing applications in the U.S. and Canada in 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.
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 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 during the last decade. 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.

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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.
Innophos also produces a wide range of botanical, enzyme and mineral based nutrients through a variety of production processes customized to meet customer requirements through spray drying, roller compactions, fine grinding, wet granulations, solvent extractions and custom blending resulting in more than 2,000 product formulations, which include both chelated and custom processed ingredients, manufactured to enhance the nutritional benefit of the ingredient after digestion. The mineral industry is less consolidated than the specialty phosphates industry with Albion Minerals and Jost considered the leading competitors in mineral ingredients and Naturex and BI Nutraceuticals the leading competitors in botanical and enzyme ingredients, alongside a number of smaller producers.
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 European, Chinese, and Israeli specialty phosphate manufacturers such as Chemische Fabrik Budenheim, Hubei Xingfa, Jiangyin Chengxing, Guangxi Mingli and BK Giulini Chemie GmbH & Co. (a subsidiary of ICL) for specialty salts and STPP.
Our Customers
Our customer base is principally composed of consumer goods manufacturers, distributors and specialty chemical manufacturers. Our customers manufacture products such as soft drinks, sports drinks and juices, various food products, toothpaste and other dental products, petroleum and petrochemical products, and various cleaners and detergents. Our customers include major consumer goods manufacturers with global market recognition in the food, beverage, pharmaceutical and cleaning product markets. We have maintained long-term relationships with the majority of our key customers, with the average customer relationship having lasted over 15 years, and some relationships spanning many decades. 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, 2013, 2012 and 2011, we generated net sales of $844.1 million, $862.4 million and $810.5 million, respectively.
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 an important 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 two preferred phosphate rock suppliers for 2014 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

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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 2013, Innophos produced approximately three quarters and purchased approximately one quarter 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. Though we did not do so in 2013, in 2012 we did enter into an economic hedge for approximately 75% of our US & Canada natural gas requirements. We also seek to increase the energy efficiencies of our facilities and reduce costs through investments and ongoing continuous improvement projects.
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 and other mineral and botanical based specialty ingredients based on our existing product line and identified or anticipated customer needs;
creating new phosphate products to be used in new applications or to serve new markets;
providing customers with premier technical services as they integrate our ingredients 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 $3.9 million, $3.1 million and $2.9 million for the years ended December 31, 2013, 2012 and 2011, 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, similar regulatory controls of foreign jurisdictions where we operate, as well as good manufacturing practices and 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 that now extend to Canada, Mexico and China. 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

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discussions with regulatory agencies, the liability of third parties, potential natural resource damage, and insurance coverage. Liabilities for environmental matters are recorded in the accounting period in which our responsibility is established and the cost can be reasonably estimated. Due to the uncertainties associated with environmental investigations and cleanups and the ongoing nature of the investigations and cleanups at our sites, we are unable to predict precisely the nature, cost and timing of our future remedial obligations with respect to our sites and, as a result, our actual environmental costs and liabilities could significantly exceed our accruals.
Further information, including the current status of significant environmental matters and the financial impact incurred for the remediation of such environmental matters, is included in Note 16, Commitments and Contingencies, of the Notes to Financial Statements in “Item 8. Financial Statements and Supplementary Data,” and in “Item 1A. Risk Factors”.
Intellectual Property
We rely on a combination of patent, copyright and trademark laws to protect certain key intellectual aspects of our business. In addition, our pool of proprietary information, consisting of manufacturing know-how, trade secrets and unregistered copyrights relating to the design and operation of our facilities and systems, is considered particularly important and valuable. Accordingly, we protect proprietary information through all legal means practicable. However, monitoring the
unauthorized use of our intellectual property is difficult, and the steps we have taken may not prevent all unauthorized use by others. While we consider our copyrights and trademarks to be important to our business, ultimately our established reputation and the products and service we provide to the end-customer are more important.
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. Where appropriate for the protection of our property, we also require others with whom we do business to provide certain coverages for our benefit. We believe that we are appropriately insured for the insurable risks associated with our business.
Employees
As of December 31, 2013, we had 1,427 employees, of whom 762 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, 2017 at the Chicago Heights facility; International Union of Operating Engineers, Local No. 912 through April 21, 2016 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, 2014 at the Chicago (Waterway) facility; the United Steelworkers, Local No. 6304 through April 30, 2014 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 2014.

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Executive Officers
The following table and biographical material present information about the persons serving as our executive officers:
 
Name
 
Age
 
Position
Randolph Gress
 
58

 
Chairman of the Board, Chief Executive Officer, President and Director
Mark Feuerbach
 
54

 
Vice President, Chief Financial Officer, Investor Relations, Treasury, Financial Planning & Analysis
William Farran
 
64

 
Vice President, General Counsel and Corporate Secretary
Iris Alvarado
 
43

 
Vice President of Purchasing, Logistics & Distribution
Charles Brodheim
 
50

 
Vice President and Corporate Controller
Louis Calvarin
 
50

 
Vice President, Operations
Joseph Golowski
 
52

 
Vice President, Specialty Phosphates
Gail Holler
 
55

 
Vice President, Human Resources
Russell Kemp
 
55

 
Vice President, Research & Development and Chief Risk Officer
Michael Lovrich
 
60

 
Vice President, Planning and Customer Service
Abraham Shabot
 
52

 
Vice President, Director General, Innophos Latin America
Mark Thurston
 
54

 
Vice President, Corporate Strategy and Worldwide Business Development
Susan Turner
 
60

 
Vice President, Quality and Regulatory
Biographical Material
Randolph Gress is Chairman of the Board, Chief Executive Officer, President and Director of Innophos. Mr. Gress joined Innophos as Chief Executive Officer and Director at the Company's inception in 2004. Previously, Mr. Gress joined Rhodia in 1997 and held various positions including Global President of Rhodia's Specialty Phosphates business and Vice President and General Manager of the Sulfuric Acid business. Prior to joining Rhodia, Mr. Gress spent fourteen years at FMC Corporation where he worked in various managerial capacities in Strategic Planning, Business, Operations and Supply Chain. 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. Mr. Gress currently serves on the Board of Directors for Coeur Mining, Inc.
Mark Feuerbach is Vice President, Investor Relations, Treasury, Financial Planning & Analysis and is currently serving as Chief Financial Officer of Innophos after having previously served that role 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.
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.
Iris Alvarado is Vice President of Purchasing, Logistics & Distribution of Innophos. She joined Albright & Wilson in 1996 working in the Logistics Department and she has since held progressive positions in the areas of Purchasing, Logistics and Distribution. Ms. Alvarado was Manager of Purchasing of Raw Materials, MRO, Logistics and Packaging for Rhodia Mexico from 2000 through 2002 and Corporate Purchasing Manager in 2003. After her next positions as Innophos’ Supply Chain Director from 2004 to 2008 and Global Director of Strategic Sourcing of Raw Materials & Energy from 2009 to October

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2010, Ms. Alvarado was appointed interim Vice President of Supply Chain from November 2010 to January 2012. She studied Political Science from 1991 to 1992 in the Eberhard Karls University of Tübingen in Germany. Ms. Alvarado earned a B.B.A degree in International Relations from the University of the Americas-Puebla, Mexico and holds an M.A in Business Administration from Instituto Tecnológico y de Estudios Superiores de Monterrey.
Charles Brodheim is Vice President and 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.
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.
Gail Holler is Vice President, Human Resources of Innophos. Ms. Holler joined Innophos in December of 2010 as Senior Director Human Resources and was elected Vice President, Human Resources in May 2011. She has 30 years of experience working in Human Resources for global as well as multi-national organizations in both corporate and operational environments, including pharmaceutical, medical device, biotech, and IT companies. Prior to joining Innophos, Ms. Holler worked for Tata Consultancy Services, a $7 billion corporation headquartered in India from May 2009 to December 2010. Previous to that, she was Vice President Human Resources for LifeCell, a $500 million regenerative medicine (biotech) company located in central New Jersey. She also worked for Sanofi-Aventis (and its legacy organizations) for 14 years, with her last position as Vice President Human Resources for the Global Dermatology Division. Ms. Holler earned her BA in Business Communication from the University of Delaware.
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, Planning and Customer Service of Innophos. Mr. Lovrich joined Innophos in August 2007 as Vice President, Supply Chain and served in that capacity until 2012. Prior to joining Innophos, Mr. Lovrich served as Vice President, Supply Chain from 2004 through 2007 for Coach, Inc., the specialty leather and women’s accessories manufacturer. Previous to that, 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 and operations 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 and also leads the management teams for the recently acquired Kelatron, AMT and Triarco businesses. 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

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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.
Susan Turner is Vice President, Quality and Regulatory of Innophos. Ms. Turner joined Stauffer Chemical in 1980 and has since held progressive roles in the areas of Engineering, Manufacturing, Maintenance, Project Management, and Human Resources. From 2009 to 2012, Ms. Turner served as Process Integration Lead for the ERP business systems redesign and then assumed leadership of the project post go-live through the stabilization period. From 2005 to 2009, Ms. Turner served as Plant Manager of the Chicago Heights and Waterway manufacturing facilities. Prior to that, her experience included assignment in Mexico and France. Ms. Turner earned a B.S. in Mechanical Engineering from Utah State University.
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., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Innophos also makes available free of charge through its website (www.innophos.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.

ITEM 1A.
RISK FACTORS
Investing in our company involves a 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 of these principal raw materials is bought under fixed annual pricing arrangements. Pricing for our remaining supply of raw materials typically adjusts in line with changes in market prices or with approximately a three month lag to market price changes. As a general matter, we cannot be sure that the annual or other periodic contracts we have in place for our raw materials can be renewed on similar terms to those currently enjoyed.
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 historically have been volatile. Prices for both materials escalated rapidly during 2007 and 2008, declined during 2009, began to increase again through 2011 and subsequently declined again through 2013. 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.
We import phosphate rock for our Coatzacoalcos, Mexico site from multiple global suppliers. We are currently capable of successfully processing industrial scale quantities of phosphate rock from five separate suppliers and, for 2014, we expect the majority of our requirements to be met from two 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 operating efficiency, further investment may be required to realize the full benefits of improved process flexibility. Accordingly, process efficiency issues may arise over longer time periods as the plant processes

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new sources of rock, necessitating further investment or changes in rock suppliers to maintain and improve our current plant processing capabilities. We cannot be sure that 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. which 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 should any major supplier experience a significant disruption in its ability to supply, for example, as a result of capacity constraints, political unrest, or adverse weather conditions in the areas where that supplier operates.
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 quality, or to overcome unanticipated interruptions in their own sources of supply due to their supplier’s supplier performance failures or from force majeure conditions, such as disaster, 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.
 Price Competition
We face significant competition in each of our markets. In some markets, our products are subject to price pressure due to factors such as competition from low-cost producers, import competition and regulation, excess industry capacity and consolidation among our customers and competitors. These developments, and particularly future expansions by one or more competitors, could have a negative effect on our pricing abilities. 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. Thus, new products or technologies developed by competitors may also have an adverse impact on our pricing capability. While we have a number of product quality improvement and product enhancement initiatives underway, we cannot assure that our efforts in maintaining differentiation will be successful.
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, focus on higher margin products 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, including the mix between our high margin and low margin products. If we are not able to offset price pressure when it arises through improved operating efficiencies, reduced expenditures, improved product margin mix 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, 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

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U.S. Environmental Protection Agency, or EPA, and the FDA, as well as other regulatory authorities and those with jurisdiction over our foreign operations and product markets. Moreover, as we increase operations in other jurisdictions, such as China where a new facility was completed in 2012, we will be subject to additional licensing tests for our facilities and operations and a regulatory environment with which we have little previous experience. 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 Canada countrywide have moved 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. In addition, the European Union recently enacted legislation to effectively ban phosphates in consumer detergents with a first phase beginning 2013, and in Australia an industry-led voluntary phosphate ban will take effect in 2014. These trends and related changes in consumer preferences have 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. Furthermore, although phosphates are still permitted for consumer detergent applications in many Latin American countries and other parts of the world, we cannot be sure that similar bans may not be implemented in some or all of these markets in the future. Additional demand restrictions may arise from producers reformulating to reduce or eliminate phosphate content, as was announced in early 2014 by a major Consumer Packaged Goods manufacturer.
Additional laws, regulations or distribution policies focused on reduced use of other phosphate-based products could occur in the future. For example, some jurisdictions have increased restrictions or banned the use of polyphosphoric acid in asphalt road construction while others have eased restrictions or are in the process of allowing its use. 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. Since then Nebraska and Colorado have reinstituted the restrictions. In 2012, Georgia approved the use of polyphosphoric acid in asphalt road construction and other states are evaluating its allowance. If restrictions are instituted in multiple jurisdictions or throughout the U.S. and Canada, a significant impact on our business could occur.
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 us to reformulate or establish alternative raw material sourcing, potentially incurring additional cost. If these measures are not successful, the available markets for our products may be limited.
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 which we might acquire or 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 in 2012 we completed construction of our blending operation for food ingredients at a new facility in China which became operational in 2013. We continually evaluate business opportunities that may expand our operations to other areas beyond our current operations. 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, communication and translation delays and errors due to cultural and language barriers and less predictable outcomes from differing legal and judicial systems. Until we gain familiarity with the risk environment on an ongoing basis, our risks in those regards are likely to be greatest as we implement our new business startup in China. Among the additional risks

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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 functional or fortification 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, or from excessive temperature variations. Our products may also be susceptible to non-conformance resulting from our raw materials. To mitigate this risk, we conduct extensive diligence and testing protocols regarding our raw material suppliers. Historically, we have not been subject to material product liability claims, and no material claims are outstanding. However, because our products are used in manufacturing a wide variety of our customers' products, including those ingested by humans, and we have concentrated the recent growth of our business in those areas, we cannot be sure we will not be subject to material product liability or recall claims in the future.
Production Facility Operating Hazards
Our production facilities are subject to hazards associated with the manufacturing, handling, storage, and transportation of chemical materials and products, including failure of pipeline integrity, explosions, fires, inclement weather and natural disasters, terrorist attacks, mechanical failures, unscheduled downtime, transportation or utility 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 enhance safety and 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 on a worldwide basis. 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, particularly in an international context, or that we can defend ourselves successfully or cost-effectively against the assertion of rights by others.

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Contingency Planning
We operate a number of manufacturing facilities in the US, Canada, China 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.
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 completely prevented. 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 and the associated supply chains to reduce the likelihood and consequences of disasters. We also have adopted certain contingency plans to guide operation in the event of disruption. Furthermore, we maintain insurance for our facilities (and in maintaining our supply chain require insurance to be maintained by others) against casualties, including extended business interruption, and we continually evaluate our risks and develop new and revised contingency plans for dealing with them and policies for avoiding them in the future. 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
After our Common Stock became publicly traded in 2006, our Board of Directors initiated a policy of paying regular quarterly cash dividends, 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, making payments that we believed were prudent and promoted stockholder value. 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 its intermediate parent or parents, to make dividend payments on our Common Stock. The amounts available to us to pay cash dividends are restricted by provisions of Delaware law and historically, and we expect for the future, also by limitations in our debt facilities. 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, increase dividends, or pay any dividends at all, or that continued payment of dividends will remain prudent for our business in the future judgment of our Board of Directors.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
 


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ITEM 2.
PROPERTIES
Our headquarters are located in Cranbury, New Jersey, with manufacturing facilities strategically located throughout the United States, Canada, Mexico and China. We do not own and are not responsible for any closed U.S. or Canadian elemental phosphorus or phosphate production sites.
Facility Type
 
Location
 
Owned or Leased
Corporate Headquarters / Research & Development
 
Cranbury, NJ
 
Leased
Manufacturing
 
Coatzacoalcos, Mexico
 
Owned
Manufacturing
 
Chicago Heights, IL
 
Owned
Manufacturing
 
Nashville, TN
 
Owned
Manufacturing
 
Port Maitland, Canada
 
Owned
Manufacturing
 
Geismar, LA
 
Owned
Manufacturing
 
Ogden, UT
 
Leased
Manufacturing / Research & Development / Administrative
 
North Salt Lake, UT
 
Owned
Manufacturing
 
Salt Lake City, UT
 
Owned
Manufacturing
 
Green Pond, SC
 
Owned
Manufacturing
 
Paterson, NJ
 
Leased
Manufacturing
 
Chicago (Waterway), IL
 
Owned
Manufacturing
 
Mission Hills, Mexico
 
Leased
Manufacturing
 
Taicang City, China
 
Leased
Warehouse
 
Chicago, IL
 
Owned
Administrative
 
Mexico City, Mexico
 
Leased
Administrative
 
Mississauga, Canada
 
Leased
Administrative / Research & Development
 
Ogden, UT
 
Owned
Administrative / Research & Development
 
Clifton, NJ
 
Leased
Administrative
 
Sao Paulo, Brazil
 
Leased

 
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.
MINE SAFETY DISCLOSURES
None.

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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:
 
 
 
2013
 
2012
Quarter
 
High
 
Low
 
Dividends
Paid
Per Share
 
High
 
Low
 
Dividends
Paid
Per Share
First
 
$
55.43

 
$
46.50

 
$
0.35

 
$
51.85

 
$
45.25

 
$
0.25

Second
 
54.68

 
47.17

 
0.35

 
56.46

 
47.07

 
0.27

Third
 
52.78

 
47.63

 
0.35

 
58.01

 
46.60

 
0.27

Fourth
 
56.75

 
46.00

 
0.40

 
49.71

 
43.93

 
0.35


The Company declared a $0.40 per share dividend in the first quarter of 2014.
The number of holders of record of our Common Stock at February 11, 2014 was 8,450.
Dividends

Consistent with the determination our Board of Directors made in December 2006, we continue to declare and pay quarterly dividends. Prior to 2011, the quarterly dividend was $0.17 per share of common stock which increased to $0.25 per share of Common Stock in 2011. Subsequently, the quarterly dividend was increased to $0.27 per share of Common Stock starting with the first quarter of 2012, $0.35 per share in October 2012 and $0.40 per share in October 2013. Subject to action by the Board of Directors 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”.
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.



Page 19 of 82




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
 
700,525

 
$
26.60

 
1,597,363

Equity compensation plans not approved by security holders
 

 
$

 

 
Total
 
700,525

 
$
26.60

 
1,597,363

 
 ______________________
*
Includes in the total 176,930 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.
Issuer Purchases of Equity Securities
During 2011 the Board of Directors authorized a repurchase program for Company common stock of up to $50 million. Under the program, shares will be repurchased from time to time at management’s discretion, either through open market transactions, block purchases, private transactions or other means and will be funded through existing liquidity and cash from operations. A five year time limit has been set for the expiration of the program as initially structured. The timing of repurchases and the exact number of shares of common stock to be purchased will depend upon market conditions and other factors. However, annual repurchase amounts are expected at a minimum to be sufficient to reduce significantly, or eliminate, earnings per share dilution caused by shares issued upon the exercise of stock options and in connection with other equity based compensation plans. Treasury stock is recognized at the cost to reacquire the shares. During the third quarter of 2011, the Company repurchased 150,000 shares of its common stock on the open market at an average price of $40.93 per share or $6.1 million. During the third quarter of 2012, the Company repurchased 150,000 shares of its common stock on the open market at an average price of $48.36 per share or $7.3 million. During the fourth quarter of 2013, the Company repurchased 150,000 shares of its common stock on the open market at an average price of $47.45 per share or $7.1 million. As of December 31, 2013, there is a balance of $29.5 million remaining under the repurchase program.

Page 20 of 82






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,
 
2013
 
2012
 
2011
 
2010
 
2009
Statement of operations data:
 
 
 
 
 
 
 
 
 
Net sales
$
844,129

 
$
862,399

 
$
810,487

 
$
714,231

 
$
666,759

Cost of goods sold
685,830

 
684,979

 
605,172

 
556,826

 
470,780

Gross profit
158,299

 
177,420

 
205,315

 
157,405

 
195,979

Operating expenses:

 
 
 
 
 
 
 
 
Selling, general and administrative
70,501

 
64,320

 
65,380

 
59,564

 
67,151

Research and development
3,928

 
3,107

 
2,923

 
2,405

 
1,938

Total operating expenses
74,429

 
67,427

 
68,303

 
61,969

 
69,089

Operating income
83,870

 
109,993

 
137,012

 
95,436

 
126,890

Interest expense, net
4,426

 
5,977

 
5,726

 
28,289

 
23,313

Foreign exchange losses (gains), net
3,197

 
(1,957
)
 
875

 
659

 
(769
)
Income before income taxes
76,247

 
105,973

 
130,411

 
66,488

 
104,346

Provision for income taxes
26,741

 
31,783

 
43,889

 
21,333

 
41,202

Net income
$
49,506

 
$
74,190

 
$
86,522

 
$
45,155

 
$
63,144

Allocation of net income to common shareholders
$
49,442

 
$
74,150

 
$
86,522

 
$
45,141

 
$
63,141

Per share data:

 
 
 
 
 
 
 
 
Income (loss) per share:

 
 
 
 
 
 
 
 
Basic
$
2.25

 
$
3.40

 
$
3.99

 
$
2.11

 
$
2.97

Diluted
$
2.21

 
$
3.30

 
$
3.83

 
$
2.02

 
$
2.87

Cash dividends declared
$
1.45

 
$
0.89

 
$
1.00

 
$
0.68

 
$
0.68

Weighted average shares outstanding:

 
 
 
 
 
 
 
 
Basic
21,933,843

 
21,795,155

 
21,694,453

 
21,421,226

 
21,258,536

Diluted
22,345,980

 
22,475,881

 
22,578,567

 
22,359,447

 
21,968,904

 
(Dollars in thousands)
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
Other data:
 
 
 
 
 
 
 
 
 
Cash flows provided from (used in):
 
 
 
 
 
 
 
 
 
Operating activities
$
91,299

 
$
101,405

 
$
46,346

 
$
75,958

 
$
174,100

Investing activities
(37,840
)
 
(104,766
)
 
(54,728
)
 
(31,192
)
 
(19,609
)
Financing activities
(47,519
)
 
(5,066
)
 
(20,082
)
 
(113,511
)
 
(147,368
)
Capital expenditures
33,415

 
33,060

 
34,195

 
31,192

 
19,609

Ratio of earnings to fixed charges (1)
11.1x

 
14.1x

 
17.7x

 
3.2x

 
4.6x

  ______________________

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(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.
 
(Dollars in thousands)
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
Balance sheet data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
32,755

 
$
26,815

 
$
35,242

 
$
63,706

 
$
132,451

Accounts receivable
88,434

 
94,033

 
104,421

 
74,691

 
56,345

Inventories
181,467

 
163,606

 
169,728

 
123,182

 
113,636

Property, plant & equipment, net
201,985

 
195,723

 
187,421

 
191,948

 
205,227

Total assets
745,177

 
736,266

 
687,015

 
626,890

 
662,468

Total debt
163,009

 
176,000

 
152,000

 
149,000

 
246,000

Total stockholders’ equity
$
463,419

 
$
444,323

 
$
393,208

 
$
330,716

 
$
295,378

Items included in the preceding tables which had a significant impact on results are summarized as follows:
2013 included the acquisition of CMI increasing investing activities by approximately $5.0 million; an after tax benefit of $5.4 million ($7.2 million before tax) for the settlement of the CNA Fresh Water Claims. 2012 included the acquisitions of AMT and Triarco increasing investing activities by approximately $72 million; an after tax benefit of $7.2 million ($7.1 million before tax) for the settlement with Rhodia on their liability for the charges to be paid the CNA for the Fresh Water Claims. 2011 included the acquisition of Kelatron increasing investing activities by approximately $21 million. 2010 included an $11.7 million after tax charge ($20.0 million before tax) for the CNA Fresh Water Claims and a $7.1 million after tax charge ($10.8 million before tax) related to our debt refinancing. 2009 included a $5.0 million after tax charge ($7.0 million before tax) for the settlement of the phosphate rock supplier dispute.

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 international producer of performance-critical and nutritional specialty ingredients, with applications in food, beverage, dietary supplements, pharmaceutical, oral care and industrial end markets. Innophos combines more than a century of experience in specialty phosphate manufacturing with a growing capability in a broad range of other specialty ingredients to supply a product range produced to stringent regulatory manufacturing standards and the quality demanded by customers worldwide. Many of Innophos' products are application-specific compounds engineered to meet customer performance requirements and are often critical to the taste, texture and performance of foods, beverages, pharmaceuticals, oral care products and other applications. For example, Innophos products act as flavor enhancers in beverages, electrolytes in sports drinks, texture additives in cheeses, leavening agents in baked goods, pharmaceutical excipients, cleaning agents in toothpaste and provide a wide range of nutritional fortification solutions for food, beverage and nutritional supplement manufacturers.


Page 22 of 82




2013 Overview
Our financial performance in 2013 was highlighted by:
Net sales of $844.1 million compared to $862.4 million for 2012, a decrease of $18.3 million mostly attributable to lower fertilizer market demand and selling prices which resulted in a $38.1 million decline for our GTSP & Other business. Specialty Phosphates grew $19.8 million primarily from acquisition benefits that exceeded a 1% decline in core business volumes resulting from first half 2013 production issues in Coatzacoalcos, Mexico and demand in some markets;
Net income of $49.5 million or $2.21 per share (diluted);
Improved phosphoric acid yields each quarter after significant first half maintenance expense in Coatzacoalcos, with fourth quarter performance at 490 basis points higher than the first quarter low point;
Commissioned a new higher grade food and beverage purified phosphoric acid operation in Coatzacoalcos, Mexico to support our US and Canada network and add strength to our product mix in Latin America;
Established new monthly and annual production records on the Coatzacoalcos Specialty Ingredients unit;
Grew export sales out of the US and Canada by 9% compared to 2012;
Completed our fourth acquisition in the high growth nutritional ingredients space with the acquisition of Chelated Minerals International (CMI) in October for $5 million;
Completed the permitting and startup of a blending facility and laboratory in Taicang, China;
Reached settlement on amounts owed for 2005-2008 Mexican water duties resulting in a net reduced liability of $5.4 million;
Net cash provided from operations of $91.3 million which was invested in growth, through capital expenditures and the acquisition of CMI, and returns to stockholders through increased dividends and share repurchases;
Capital expenditures of $33.4 million with the focus on manufacturing investments consisting of:
restoring Coatzacoalcos capacity, reliability and efficiency after premature equipment failures in the first half;
capacity enhancements for US / Canada and Mexico Specialty Ingredients facilities to support growth objectives;
enhancing Mexico's capability to process multiple grades of rock consistent with the Company's supply chain diversification strategy;
Increased the quarterly dividend rate by 14% to $0.40/share for the fourth quarter payment leading to total year dividends of $1.45/share paid on the Common Stock in 2013, an increase of 27% over the $1.14/share paid in 2012; and
150,000 shares of common stock repurchased for $7.1 million;

Recent Trends and Outlook

Specialty Phosphates overall volume was flat in the fourth quarter 2013 compared to the prior year, with a 3% benefit from acquisitions offset by a 3% decline in the core business primarily resulting from Mexico’s increased intercompany sales to replenish US inventories. Specialty Ingredients volumes were up 4%, but declines in lower margin STPP and PPA sales from Mexico led to the overall 3% decline in core business volumes. Export sales out of the US were up 12% year-over-year with strong growth recorded in Asia Pacific.

At this time, the company is confirming its previously announced 2014 outlook of 3-5% volume growth for Specialty Phosphates. This is based on the improved operations at our Coatzacoalcos facility, low double-digit growth expectations for our nutrition business and expected asphalt market demand recovery which detracted 90 basis points from our 2013 volume growth rates.

Specialty Phosphates operating income margins were 15% for the fourth quarter 2013, slightly above expectations, due to higher average selling prices achieved. We still expect to deliver 14-15% operating income margins for 2014. The first quarter is expected to be the lowest margin quarter of the year, at approximately 100 basis points below the full year average, due to some higher cost PPA in inventory and some unexpected fourth quarter purchase price variances from our Merchant Grade Acid supplier for phosphate rock consumption variances at their facility which have since been rectified.

Page 23 of 82





Market prices for the key raw materials of phosphate rock and sulfur both declined approximately 20% in the fourth quarter compared to the third quarter 2013, consistent with a drop in market fertilizer prices during that period. Fertilizer prices have since rebounded by approximately 20% when comparing the end of January 2014 prices to mid-December 2013. Raw material prices are therefore expected to rebound as well in the first quarter 2014, with sulfur costs increasing by nearly 50%, putting those costs somewhere between second and third quarter 2013 levels, and phosphate rock likely to increase as well. Although we have seen some resistance on selling prices in recent quarters, we have been able to maintain fairly stable pricing overall, and are prepared to respond with selling price increases should raw material costs increase.

GTSP & Other profitability remained at a $4 million operating loss for the fourth quarter 2013 due to weak market demand and selling prices that reached lows last recorded in early 2010. As usual, the outlook for GTSP & Other is not as clear as with Specialty Phosphates, but an indicated operating loss of between $2-3 million represents our best view for the first quarter 2014, based on business that has already transacted. We expect break-even operating income for the second quarter 2014 based on February market price indications and the expectation that market prices will continue to increase for the remainder of the first quarter.

Net debt (total long-term debt (including any current portion) less cash and cash equivalents) increased sequentially by $4 million in the fourth quarter 2013 to $130 million as the Company repurchased 150,000 shares for $7.1 million.
 
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,
 
2013
 
2012
 
2011
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Net sales
$
844.1

 
100.0

 
862.4

 
100.0

 
810.5

 
100.0

Cost of goods sold
685.8

 
81.2

 
685.0

 
79.4

 
605.2

 
74.7

Gross profit
158.3

 
18.8

 
177.4

 
20.6

 
205.3

 
25.3

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
70.5

 
8.4

 
64.3

 
7.5

 
65.4

 
8.1

Research & development
3.9

 
0.5

 
3.1

 
0.4

 
2.9

 
0.4

Income from operations
83.9

 
9.9

 
110.0

 
12.8

 
137.0

 
16.9

Interest expense, net
4.4

 
0.5

 
6.0

 
0.7

 
5.7

 
0.7

Foreign exchange losses (gains), net
3.3

 
0.4

 
(2.0
)
 
(0.2
)
 
0.9

 
0.1

Other income

 

 

 

 

 

Provision for income taxes
26.7

 
3.2

 
31.8

 
3.7

 
43.9

 
5.4

Net income
$
49.5

 
5.9

 
$
74.2

 
8.6

 
86.5

 
10.7


Year Ended December 31, 2013 compared to the Year Ended December 31, 2012
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, 2013 were $844.1 million, a decrease of $18.3 million, or 2.1%, as compared to $862.4 million for the same period in 2012. Selling price had a negative effect on revenue of 2.0% or $17.0 million and volumes decreased 0.1% or $1.3 million. GTSP & Other sales had 25.3% lower volumes and 11.1% lower prices due to soft fertilizer market conditions and market prices that reached lows last recorded in early 2010. Specialty Phosphates volumes were 3.3% higher with a 4.3% benefit from acquisitions and a 1.0% decline in our core business primarily resulting from first half 2013 operating issues in Mexico. Specialty Phosphates average selling prices were 0.7% lower primarily due to unfavorable sales mix in the US/Canada business and a price reset on a long-term customer contract in Mexico.
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

Page 24 of 82




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, 2013 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
(0.3
)%
 
6.9
 %
 
6.6
 %
Specialty Phosphates Mexico
(1.9
)%
 
(7.6
)%
 
(9.5
)%
Total Specialty Phosphates
(0.7
)%
 
3.3
 %
 
2.6
 %
GTSP & Other
(11.1
)%
 
(25.3
)%
 
(36.4
)%
Total
(2.0
)%
 
(0.1
)%
 
(2.1
)%
Note: Included within Specialty Phosphates US & Canada and Total Specialty Phosphates volume/mix variances were benefits of 5.8% and 4.4%, respectively, from the AMT business acquired in the third quarter of 2012 and the Triarco business acquired in December 2012.
The following table illustrates for the year ended December 31, 2013 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
(1.1
)%
 
9.2
 %
 
8.1
 %
Food & Technical Grade PPA
0.2
 %
 
(4.1
)%
 
(3.9
)%
STPP & Detergent Grade PPA
(0.2
)%
 
(17.2
)%
 
(17.4
)%
Note: Included within Specialty Ingredients volume/mix was a 6.5% benefit from the AMT business acquired in the third quarter of 2012 and the Triarco business acquired in December 2012.

Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the year ended December 31, 2013 was $158.3 million, a decrease of $19.1 million, or 10.8%, as compared to $177.4 million for the same period in 2012. Gross profit percentage decreased to 18.8% for the year ended December 31, 2013 versus 20.6% for the same period in 2012. Gross profit in 2013 was unfavorably affected by $17.0 million for lower selling prices, $4.4 million higher fixed costs mainly from higher maintenance expense, a $1.6 million lower of cost or market reserve recorded in the current period for GTSP, $1.2 million unfavorable exchange rate mostly from Mexican peso based costs, and $15.4 million in elevated cost of goods sold for the first half 2013, of which $7.9 million related to Mexico manufacturing issues, $2.1 million related to a revision of estimates for phosphate rock inventories in Mexico, $2.3 million related to an out of period adjustment related to a long term supply agreement, $2.4 million related to demurrage on raw material purchases and other inventory related costs, and $0.7 million related to acquisition related fair value adjustments. The $39.6 million total of unfavorable effects were partially offset by $7.2 million margin benefit from acquisitions, $9.2 million for lower depreciation in our core business as the assets acquired with the creation of Innophos are nearing the end of their useful lives, $0.6 million higher sales volumes, $0.5 million lower raw material costs, and $2.4 million of expense in the second quarter 2012 for adjustments made to cost of goods sold, including amounts for prior periods. Included in 2012 was $0.6 million for acquisition related fair value adjustments. Both periods included a benefit of approximately $7 million as we made progress in reducing the amounts required to be paid to settle historical water duty claims by the Mexican authorities.
Operating Expenses and Research and Development
Operating expenses consist primarily of selling, general and administrative and research and development expenses. Operating expenses for the year ended December 31, 2013 were $74.4 million, an increase of $7.0 million, or 10.4%, as compared to $67.4 million for 2012. The increase was primarily due to $4.7 million increase from the acquired businesses, a $2.7 million increase in focus on quality, research & development and business improvement programs and a $0.4 million net decrease in all other costs.
Operating Income
Operating income for the year ended December 31, 2013 was $83.9 million, a decrease of $26.1 million, or 23.7%, as compared to $110.0 million for the same period in 2012. Operating income percentages decreased to 9.9% for 2013 from 12.8% for 2012.

Page 25 of 82




Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the year ended December 31, 2013 was $4.4 million, a decrease of $1.6 million, or 26.7% as compared to $6.0 million for the same period in 2012. The $1.4 million decrease was mainly due to $1.0 million interest income received on Mexican income tax refunds and $1.4 million lower interest expense on our term loan partially offset by $0.9 million interest expense for income tax audits in the US and $0.3 million increased interest expense on our revolving line of credit. There was $0.3 million accelerated deferred financing expense from the refinancing of our credit facility in the fourth quarter 2012.
Foreign Exchange
Foreign exchange for the year ended December 31, 2013 was a loss of $3.3 million as compared to a gain of $2.0 million for 2012, primarily due to weakening of the peso against the U.S. Dollar, combined with higher monetary asset positions, in the 2013 period, versus a strengthening of the peso against the U.S. Dollar in the 2012 period. The U.S. Dollar is the functional currency of our Mexican and Canadian operations. Consequently, foreign exchange gain or loss is recorded on remeasurement of non-U.S. dollar denominated monetary assets and liabilities. Such gains and losses fluctuate from period to period as the foreign currencies strengthen or weaken against the U.S. dollar and the amount of non-U.S. dollar denominated assets and liabilities increases or decreases.
Provision for Income Taxes
The income tax rate was 35% for the year ended December 31, 2013 compared to 30% for the same period in 2012. The variance in the income tax rate is primarily due to the non-taxable indemnification from the Rhodia settlement related to the Mexican CNA Water Tax Claims which lowered the income tax rate 3% and the reversal of valuation allowances on certain state net operating loss carry-forwards which lowered the income tax rate 2%, both occurring in 2012.
Net Income
Net income for the year ended December 31, 2013 was $49.5 million, a decrease of $24.7 million as compared to $74.2 million for the same period in 2012, due to the factors described above.

Year Ended December 31, 2012 compared to the Year Ended December 31, 2011
Net Sales
Net sales represent the selling price of the products, net of any customer-related rebates, plus freight and any other items invoiced to customers. Net sales for the year ended December 31, 2012 were $862.4 million, an increase of $51.9 million, or 6.4%, as compared to $810.5 million for the same period in 2011. Selling price increases had a positive effect on revenue of 2.9% or $23.5 million with Specialty Phosphates up 5.1% on positive trends in all product lines, partially offset by lower pricing in GTSP & Other with fertilizer market prices well below 2011 levels. Volumes increased 3.5% or $28.4 million due to the effects of acquisitions on Specialty Phosphates and higher fertilizer sales.
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, 2012 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
4.8
 %
 
3.6
 %
 
8.4
%
Specialty Phosphates Mexico
6.1
 %
 
(5.3
)%
 
0.8
%
Total Specialty Phosphates
5.1
 %
 
1.3
 %
 
6.4
%
GTSP & Other
(13.2
)%
 
19.5
 %
 
6.3
%
Total
2.9
 %
 
3.5
 %
 
6.4
%
Note: Included within Specialty Phosphates US & Canada and Total Specialty Phosphates volume/mix variances were benefits of 3.6% and 2.7%, respectively, from the Kelatron business acquired in the fourth quarter of 2011 and the AMT business acquired in the third quarter of 2012.

Page 26 of 82




The following table illustrates for the year ended December 31, 2012 the percentage changes for net sales by Specialty Phosphates product lines compared with the prior year, including the effect of price and volume/mix changes:
 
 
Price
 
Volume/Mix
 
Total
Specialty Ingredients
4.8
%
 
1.0
 %
 
5.8
 %
Food & Technical Grade PPA
6.4
%
 
7.2
 %
 
13.6
 %
STPP & Detergent Grade PPA
4.8
%
 
(5.4
)%
 
(0.6
)%
Note: Included within Specialty Ingredients volume/mix was a 3.9% benefit from the Kelatron business acquired in the fourth quarter of 2011 and the AMT business acquired in the third quarter of 2012.

Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the year ended December 31, 2012 was $177.4 million, a decrease of $27.9 million, or 13.6%, as compared to $205.3 million for the same period in 2011. Gross profit percentage decreased to 20.6% for the year ended December 31, 2012 versus 25.3% for the same period in 2011. Gross profit was unfavorably affected by higher raw material costs slightly offset by the benefit from acquisitions which had a combined unfavorable impact of $57.5 million. The increase in raw material costs related primarily to inflation in market raw material prices experienced in 2011 and in response to which price increases were achieved in earlier time periods but with the full effect of raw material increases only evident in cost of goods sold from the second quarter of 2012. There was a $0.5 million unfavorable impact for a planned maintenance outage at our Geismar facility, and there was $2.4 million of out of period cost in Mexico. Gross profit was favorably affected $23.5 million for higher selling prices, $7.1 million due to the recording of a settlement with Rhodia on their liability for the charges to be paid to the Mexican water authority (CNA), $2.6 million favorable exchange rate impact mostly from Mexican peso based costs, and $3.3 million lower depreciation. Included in 2012 was $0.6 million for acquisition related fair value adjustments and in 2011 there was $3.4 million income for updates to the provision for the Mexican CNA Water Tax Claims.
Operating Expenses and Research and Development
Operating expenses consist primarily of selling, general and administrative and research and development expenses. Operating expenses for the year ended December 31, 2012 were $67.4 million, a decrease of $0.9 million, or 1.3%, as compared to $68.3 million for 2011. The decrease was due to $4.3 million lower non-cash stock compensation, $1.1 million lower short term incentive accruals, and a $0.4 million decrease in all other costs partially offset by $2.9 million increase for the Kelatron and AMT businesses and $2.0 million higher depreciation for the ERP system that was put into service in the third quarter of 2011.
Operating Income
Operating income for the year ended December 31, 2012 was $110.0 million, a decrease of $27.0 million, or 19.7%, as compared to $137.0 million for the same period in 2011. Operating income percentages decreased to 12.8% for 2012 from 16.9% for 2011.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the year ended December 31, 2012 was $6.0 million, an increase of $0.3 million, or 5.3% as compared to $5.7 million for the same period in 2011. The $0.3 million increase was due to accelerated deferred financing from the refinancing of our credit facility in the fourth quarter 2012.
Foreign Exchange
Foreign exchange gain for the year ended December 31, 2012 was $2.0 million as compared to a loss of $0.9 million for 2011. The U.S. Dollar is the functional currency of our Mexican and Canadian operations. Consequently, foreign exchange gain or loss is recorded on remeasurement of non-U.S. dollar denominated monetary assets and liabilities. Such gains and losses fluctuate from period to period as the foreign currencies strengthen or weaken against the U.S. dollar and the amount of non-U.S. dollar denominated assets and liabilities increases or decreases.
Provision for Income Taxes
The income tax rate was 30% for the year ended December 31, 2012 compared to 34% for the same period in 2011. The variance in the income tax rate is primarily due to the non-taxable indemnification from the Rhodia settlement related to the Mexican CNA Water Tax Claims which lowered the income tax rate 3%, the reversal of valuation allowances on certain state

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net operating loss carry-forwards which lowered the income tax rate 2%, partially offset by increases in tax contingency reserves which increased the income tax rate 1%.
Net Income
Net income for the year ended December 31, 2012 was $74.2 million, a decrease of $12.3 million as compared to $86.5 million for the same period in 2011, due to the factors described above.

Segment Reporting
The Company reports its core Specialty Phosphates business separately from GTSP & Other. Specialty Phosphates consists of the products lines Specialty Ingredients, Food & Technical Grade PPA and STPP & Detergent Grade PPA. Kelatron, AMT, Triarco and CMI are included in the Specialty Phosphates US & Canada segment and in the Specialty Ingredients product line. GTSP & Other includes fertilizer co-product GTSP and other non-Specialty Phosphate products. The primary performance indicators for the chief operating decision maker are sales and operating income. The following table sets forth the historical results of these indicators by segment:
 
 
2013
 
2012
 
2011
Segment Net Sales
 
 
 
 
 
Specialty Phosphates US & Canada
$
607,578

 
$
569,816

 
$
525,662

Specialty Phosphates Mexico
169,851

 
187,743

 
186,211

Total Specialty Phosphates
777,429

 
757,559

 
711,873

GTSP & Other
66,700

 
104,840

 
98,614

Total
$
844,129

 
$
862,399

 
$
810,487

Net Sales % Growth
 
 
 
 
 
Specialty Phosphates US & Canada
6.6
 %
 
8.4
%
 
 
Specialty Phosphates Mexico
(9.5
)%
 
0.8
%
 
 
Total Specialty Phosphates
2.6
 %
 
6.4
%
 
 
GTSP & Other
(36.4
)%
 
6.3
%
 
 
Total
(2.1
)%
 
6.4
%
 
 
Segment Operating Income
 
 
 
 
 
Specialty Phosphates US & Canada
$
76,802

 
$
86,002

 
$
94,055

Specialty Phosphates Mexico
11,677

 
21,913

 
21,948

Total Specialty Phosphates
88,479

 
107,915

 
116,003

GTSP & Other (a) (b) (c)
(4,609
)
 
2,078

 
21,009

Total
$
83,870

 
$
109,993

 
$
137,012

Segment Operating Income % of net sales
 
 
 
 
 
Specialty Phosphates US & Canada
12.6
 %
 
15.1
%
 
17.9
%
Specialty Phosphates Mexico
6.9
 %
 
11.7
%
 
11.8
%
Total Specialty Phosphates
11.4
 %
 
14.2
%
 
16.3
%
GTSP & Other (a) (b) (c)
(6.9
)%
 
2.0
%
 
21.3
%
Total
9.9
 %
 
12.8
%
 
16.9
%
Depreciation and amortization expense
 
 
 
 
 
Specialty Phosphates US & Canada
$
26,537

 
$
23,214

 
$
19,808

Specialty Phosphates Mexico
7,200

 
14,578

 
18,050

Total Specialty Phosphates
$
33,737

 
37,792

 
37,858

GTSP & Other
1,724

 
4,542

 
5,818

Total
$
35,461

 
$
42,334

 
$
43,676


(a)
The year ended December 31, 2013, includes a $7.2 million benefit to earnings for the settlement of the Mexican CNA Water Tax Claims and a $2.3 million charge to earnings for out of period costs in the US.

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(b)
The year ended December 31, 2012, includes a $7.1 million benefit to earnings primarily for the settlement with Rhodia on their liability for the charges to be paid the CNA for the CNA Fresh Water Claims and a $2.4 million charge to earnings for out of period costs in Mexico.
(c)
The year ended December 31, 2011, includes a $3.4 million benefit to earnings related to updates to the provision for the CNA Fresh Water Claims.
Segment Net Sales:
Specialty Phosphates US & Canada net sales increased 6.6% for the year ended December 31, 2013 when compared with the same period in 2012. Volumes increased 6.9% due to a benefit of 5.8% from the AMT and Triarco acquisitions and 1.1% growth in the core business, with actual volumes shipped up 3.1% but mix down 2.0%. The unfavorable mix primarily occurred in our INNOVALT® product line for asphalt markets that were significantly affected by low government spending and a number of weather related events. Selling price decreased 0.3% primarily due to sales mix. In 2012 net sales increased 8.4% for the year ended December 31, 2012 when compared with the same period in 2011. Selling price increased 4.8% primarily in Specialty Ingredients and Food & Technical Grade PPA. Volumes increased 3.6% due entirely to the Kelatron and AMT acquisitions as market demand for the base business was flat to slightly negative.
Specialty Phosphates Mexico net sales decreased 9.5% for the year ended December 31, 2013 when compared with the same period in 2012. Volumes decreased 7.6% as the business experienced operating issues from premature equipment failure in the first half of 2013 which limited production and therefore sales. Selling prices decreased 1.9% primarily from a price reset upon the renewal of a long term contract. In 2012 net sales increased 0.8% for the year ended December 31, 2012 when compared with the same period in 2011. Selling prices increased 6.1% with increases in all product lines. Volumes decreased 5.3% driven by lower market demand that was partially offset by our increased focus on, and broader offering of, Food Grade PPA.
GTSP & Other net sales decreased 36.4% for the year ended December 31, 2013 when compared with the same period in 2012. Volumes decreased 25.3% and selling prices decreased 11.1% due to weak fertilizer market demand which resulted in a sharp decline in 2013 market selling prices to levels last recorded in early 2010. In 2012 net sales increased 6.3% for the year ended December 31, 2012 when compared with the same period in 2011 with 19.5% higher volume partially offset by 13.2% lower selling prices.
Segment Operating Income Percentage of Net Sales:
The 250 basis point decrease in Specialty Phosphates US & Canada for the year ended December 31, 2013 compared with the same period in 2012 is primarily due to increased costs of goods sold in 2013 compared to an inventory lag benefit in the first quarter 2012 which decreased margins by 220 basis points, elevated cost of goods sold in the first quarter 2013 for revisions in inventory accounting estimates, an out of period adjustment related to a long term supply agreement, demurrage on raw material purchases and acquisition accounting expenses which decreased margins by 100 basis points, and lower selling prices which decreased margins by 30 basis points. Lower fixed costs in the core business increased margins by 50 basis points and higher volumes increased margins by 50 basis points. The 280 basis point decrease in Specialty Phosphates US & Canada for the year ended December 31, 2012 compared with the same period in 2011 is mainly due to increases in raw material costs and a maintenance outage in the current year which combined for a 660 basis point decrease in margins. Partially offsetting was increased selling prices which increased margins by 380 basis points.
The 480 basis point decrease in Specialty Phosphates Mexico for the year ended December 31, 2013 compared with the same period in 2012 is primarily due to higher cost of goods sold for first half 2013 manufacturing issues and a revision of estimates for phosphate rock inventories which decreased margins by 400 basis points, lower selling prices which decreased margins by 170 basis points, lower sales volume which decreased margins by 20 basis points, increased fixed costs which decreased margins by 630 basis points, and increased turnaround cost at our Coatzacoalcos manufacturing facility decreased margins by 20 basis points. Lower raw material costs increased margins by 370 basis points and lower depreciation increased margins by 390 basis points. The 10 basis point decrease in Specialty Phosphates Mexico for the year ended December 31, 2012 compared with the same period in 2011 is mainly due to higher phosphate rock and sulfur raw material costs partially offset by lower depreciation and lower operating expenses which combined for a 510 basis point decrease in margins. Increased selling prices increased margins by 500 basis points.
The 890 basis point decrease in GTSP & Other for the year ended December 31, 2013 compared with the same period in 2012 is primarily due to lower selling prices which decreased margin by 1,220 basis points, a lower of cost or market reserve which decreased margins by 150 basis points, lower sales volumes which decreased margins by 340 basis points, and increased turnaround cost at our Coatzacoalcos manufacturing facility decreased margins by 20 basis points. Lower raw material costs, mainly from lower rock and sulfur market prices, increased margins by 520 basis points, lower depreciation added 270 basis

Page 29 of 82




points, and lower fixed costs increased margins by 50 basis points. The 1,930 basis point decrease in GTSP & Other for the year ended December 31, 2012 compared with the same period in 2011 is primarily due to lower selling prices which decreased margins by 1,190 basis points. Higher raw material costs which exceeded lower depreciation contributed an 850 basis point decrease in margins. The net effect of the 2012 versus 2011 benefit of $3.7 million for the settlement with Rhodia on their liability for the charges to be paid to the CNA increased margins by 380 basis points. Out of period costs in the 2012 period decreased margins by 270 basis points.

Liquidity and Capital Resources
The following table sets forth a summary of the Company’s cash flows for the periods indicated.
 
(Dollars in millions)
Year Ended December 31,
 
2013
 
2012
 
2011
Operating Activities
$
91.3

 
$
101.4

 
$
46.3

Investing Activities
(37.8
)
 
(104.7
)
 
(54.7
)
Financing Activities
(47.5
)
 
(5.1
)
 
(20.1
)

Year Ended December 31, 2013 compared to the Year Ended December 31, 2012
Net cash provided by operating activities was $91.3 million for the year ended December 31, 2013 as compared to $101.4 million for 2012, a decrease of $10.1 million. The decrease in operating activities cash resulted primarily from unfavorable changes of $24.7 million in net income, as described earlier, and $6.9 million lower depreciation, mostly offset by favorable changes of $18.8 million in working capital, $1.4 million in other long term assets and liabilities and $1.3 million in non-cash adjustments to income.
The favorable change in working capital is derived from it being a source of cash of $4.9 million in 2013 compared to a use of cash of $14.7 million in 2012, an increase in cash of $19.6 million. Collections improved on the backlog of value added tax, or VAT, refunds due the Company from the Mexican government; however, this was offset by an inventory build due to increased requirements in Mexico to support improved production performance. Accounts receivable was a $5.9 million source of cash in 2013 compared to a $13.0 million source of cash in 2012, and remained at a consistent trend as a percent of quarterly sales, when adjusted for GTSP open accounts receivable of $1.3 million, $1.0 million, $1.6 million, $15.3 million and $4.3 million as of December 31, 2013, September 30, 2013, June 30, 2013, March 31, 2013 and December 31, 2012, respectively. In October 2013, our Mexican subsidiary received their 2012 income tax refund of approximately $8.7 million.
Total inventories increased $18.4 million from December 2012 levels resulting in days of inventory on hand increasing to 95 days. The following chart shows its historical performance:
 
 
2013
 
2012
 
2011
Inventory Days on Hand
95

 
86

 
102


Net cash used for investing activities was $37.8 million for the year ended December 31, 2013, compared to $104.7 million for 2012, a decrease in the use of cash of $66.9 million which was mainly due to the acquisitions of CMI in 2013 when compared with the acquisitions of AMT and Triarco in 2012. Capital spending was $0.4 million higher than 2012. This is mainly explained by higher capital spending at our Coatzacoalcos, Mexico facility partially offset by decreased spending at our China blending facility.

In July 2012, Innophos, Inc. purchased for cash 100% of the equity of AMT Labs, Inc. and an affiliated real estate company holding all AMT real property, including unused land and buildings to support future expansion. The combined purchase price was $26.9 million, with $19.4 million being allocated to the AMT purchase and $7.5 million being allocated to the real estate entity. The price was funded from our revolving line of credit as well as cash from operations.

In December 2012, Innophos, Inc. purchased the assets of Triarco Industries, Inc. for $44.8 million in cash and $1.0 million in shares of Innophos Holdings, Inc. common stock. The cash portion of the purchase price was financed by borrowings under the company's senior credit facility. The acquisition includes potential for contingent incentive compensation upon success in delivering growth objectives over the next two years. The Company currently estimates the contingent incentive compensation to be zero.

Page 30 of 82




In October 2013, Innophos purchased all of the assets of Chelated Minerals International, Inc., (CMI), for $5 million in cash. CMI, a privately held company based in Salt Lake City, Utah, has significant knowhow in the manufacture and science of chelated minerals supplied to the human nutrition market.

Innophos currently estimates that full exploration costs to a proven reserves standard for its Baja California mining concessions could require expenditures of $10 to $15 million over a period, currently estimated at three to five years, inclusive of expenditures to date. This estimate includes mineral rights payments, taxes, mineral resource measurement, beneficiation process design and completion of feasibility studies. Full expenditures would only occur if interim milestone goals were successfully attained. Combined 2010 through 2013 expenditures on the exploration of the Baja California Sur concession deposits were approximately $3.8 million, and management currently expects to spend an additional $1-2 million in 2014 on evaluations of its Santo Domingo concession. Innophos intends to seek one or more partners for these efforts, but anticipates no difficulties in completing the exploration phase without a partnership.
Net cash from financing activities for the year ended December 31, 2013, was a use of $47.5 million, compared to a use of $5.1 million in 2012, a decrease in cash of $42.4 million. This was mainly due to a $37.0 million decrease in net borrowing activity, $7.0 million increased dividend payments, and $2.3 million lower excess tax benefits from exercise of stock options, partially offset by $1.1 million increased stock option exercises and $1.5 million deferred financing cost from the refinancing of our credit agreement in 2012.
On February 27, 2012 the Company's Board of Directors declared an increase to its dividend from $0.25 per share to $0.27 per share to holders of record on April 16, 2012. On October 26, 2012 the Company's Board of Directors declared an increase to its dividend from $0.27 per share to $0.35 per share to holders of record on November 16, 2012. On October 25, 2013 the Company's Board of Directors declared an increase to its dividend from $0.35 per share to $0.40 per share to holders of record on November 15, 2013.
In August 2011, the Company announced a share repurchase program for Company common stock of up to $50 million. Under the program, shares will be repurchased from time to time at management's discretion, either through open market transactions, block purchases, private transactions or other means and will be funded through existing liquidity and cash from operations. A five year time limit has been set for the expiration of the program as initially structured. The timing of repurchases and the exact number of shares of common stock to be purchased will depend upon market conditions and other factors. However, annual repurchase amounts are expected at a minimum to be sufficient to reduce significantly, or eliminate, earnings per share dilution caused by shares issued upon the exercise of stock options and in connection with other equity based compensation plans. Treasury stock is recognized at the cost to reacquire the shares. During the third quarter of 2011, the Company repurchased 150,000 shares of its common stock on the open market at an average price of $40.93 per share or $6.1 million. During the third quarter of 2012, the Company repurchased 150,000 shares of its common stock on the open market at an average price of $48.36 per share or $7.3 million. During the fourth quarter of 2013, the Company repurchased 150,000 shares of its common stock on the open market at an average price of $47.45 per share or $7.1 million. As of December 31, 2013, there is a balance of $29.5 million remaining under the repurchase program.
Year Ended December 31, 2012 compared to the Year Ended December 31, 2011
Net cash provided by operating activities was $101.4 million for the year ended December 31, 2012 as compared to $46.3 million for 2011, an increase of $55.1 million. The increase in operating activities cash resulted primarily from favorable changes of $75.9 million in working capital and $1.8 million in other long term assets and liabilities partially offset by unfavorable changes of $10.3 million in non-cash adjustments to income and $12.3 million in net income as described earlier.
The change in working capital is a use of cash of $14.6 million in 2012 compared to a use in 2011 of $90.5 million, a change in cash of $75.9 million. The change in working capital is mainly due to focused efforts to reduce accounts receivable and inventory levels in 2012 after experiencing increased levels in 2011, partially offset by higher tax receivable balances for our Mexico entities and reduced current liabilities resulting from the payment of Mexican water duties for all years except the 2005-2008 disputed period. The higher creditable tax balances are due to required prepayments of income taxes and the backlog of value added tax, or VAT, refunds due the Company from the Mexican government.
Total inventories decreased $12.2 million from December 2011 levels resulting in days of inventory on hand decreasing to 86 days. The following chart shows its historical performance:
 
 
2012
 
2011
 
2010
Inventory Days on Hand
86

 
102

 
84



Page 31 of 82




Net cash used for investing activities was $104.8 million for the year ended December 31, 2012, compared to $54.7 million for 2011, an increase in the use of cash of $50.1 million which was mainly due to the acquisitions of AMT and Triarco in 2012 compared with the Kelatron acquisition in 2011. Capital spending was $1.1 million lower than 2011. Lower capital spending on the company's ERP project and expansion project at Nashville, TN was mostly offset by increased project spending at the Coatzacoalcos Mexico plant and the China blending facility.

On July 17, 2012, Innophos, Inc. purchased for cash 100% of the equity of AMT Labs, Inc. and an affiliated real estate company holding all AMT real property, including unused land and buildings to support future expansion. The combined purchase price was $26.9 million, with $19.4 million being allocated to the AMT purchase and $7.5 million being allocated to the real estate entity. The price was funded from our revolving line of credit as well as cash from operations.

On December 31, 2012 Innophos, Inc. purchased the assets of Triarco Industries, Inc. for $44.8 million in cash and $1.0 million in shares of Innophos Holdings, Inc. common stock. The cash portion of the purchase price was financed by borrowings under the company's senior credit facility. The acquisition includes potential for contingent incentive compensation upon success in delivering growth objectives over the next two years.
Innophos currently estimates that full exploration costs to a proven reserves standard for its Baja California mining concessions could require expenditures of $10 to $15 million over a period, currently estimated at three to five years, inclusive of expenditures to date. This estimate includes mineral rights payments, taxes, mineral resource measurement, beneficiation process design and completion of feasibility studies. Full expenditures would only occur if interim milestone goals were successfully attained. Combined 2010 through 2012 expenditures on the exploration of the Baja California Sur concession deposits were approximately $3.1 million, and management currently expects to spend an additional $1-2 million in 2013 above the previous annual trend rate to accelerate evaluations of its Santo Domingo concession. Innophos intends to seek one or more partners for these efforts, but anticipates no difficulties in completing the exploration phase without a partnership.
Net cash from financing activities for the year ended December 31, 2012, was a use of $5.1 million, compared to a use of $20.1 million in 2011, a decrease in the use of cash of $15.0 million. This was mainly due to $21.0 million increased borrowings partially offset by $4.9 million increased dividend payments and $1.5 million deferred financing cost from the refinancing of our credit agreement.
On February 27, 2012 the Company's Board of Directors declared an increase to its dividend from $0.25 per share to $0.27 per share to holders of record on April 16, 2012. On October 26, 2012 the Company's Board of Directors declared an increase to its dividend from $0.27 per share to $0.35 per share to holders of record on November 16, 2012.
In August 2011, the Company announced a share repurchase program for Company common stock of up to $50 million. Under the program, shares will be repurchased from time to time at management's discretion, either through open market transactions, block purchases, private transactions or other means and will be funded through existing liquidity and cash from operations. A five year time limit has been set for the expiration of the program as initially structured. The timing of repurchases and the exact number of shares of common stock to be purchased will depend upon market conditions and other factors. However, annual repurchase amounts are expected at a minimum to be sufficient to reduce significantly, or eliminate, earnings per share dilution caused by shares issued upon the exercise of stock options and in connection with other equity based compensation plans. During the third quarter, the Company repurchased 150,000 shares of its common stock on the open market at an average price of $40.93 per share or a total of $6.1 million. During the third quarter of 2012, the Company repurchased 150,000 shares of its common stock on the open market at an average price of $48.36 per share or $7.3 million.
Indebtedness
Total debt was $163.0 million as of December 31, 2013. Short term and long term debt net of cash was $130.2 million as of December 31, 2013, an decrease of $19.0 million, or 12.7% from December 31, 2012.
In August, 2010, Innophos entered into a Credit Agreement (the “Credit Agreement”) with a group of lenders (collectively, the “Lenders”). This agreement was amended and restated on December 21, 2012 increasing the Company's borrowing capacity, reducing interest rates and extending the maturity to December 21, 2017. The Credit Agreement provides Innophos with a term loan of $100.0 million and a revolving line of credit from the Lenders of up to $225.0 million, including a $20.0 million letter of credit sub-facility, all maturing on December 21, 2017. Prepayments of term loan are required at the rate of 1% of original principal amount per quarter beginning on March 31, 2013. Refer to Note 9 of Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”.
Simultaneously with initiating the new senior credit facility, Innophos entered into an interest rate swap with a swap start date of December 31, 2012, swapping the LIBOR exposure on $100.0 million of floating rate debt under the new senior facility

Page 32 of 82




to a fixed rate to maturity obligation of 0.9475% plus the applicable margin on the debt expiring on December 21, 2017. The fair value of this interest rate swap is an asset of approximately $1.2 million as of December 31, 2013.
As indicated elsewhere, the Company has increased the quarterly dividend on its Common Stock to an annual rate of $1.60 per share starting with the fourth quarter 2013 payment. 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.
On December 31, 2013, the Company had cash and cash equivalents outside the United States of $23.1 million, or 70% of the Company's balance. Further, the foreign cash amounts are not restricted by law to be used in other countries. Our current operating plan does not include repatriation of any of the cash and cash equivalents held outside the United States to fund the United States operations. However, in the event we do repatriate cash and cash equivalents held outside of the United States, we may be required to accrue and pay United States taxes to repatriate these funds.
The Company’s available financial resources allow for the continuation of dividend payments, pursuit of 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.
In April 2013, the Company paid $4.4 million to settle the 2005-2008 Mexican CNA Water Tax Claims under an amnesty program governed by the Mexican government.
Capital Expenditures
Capital expenditures were $33 million in 2013. Investment continues to be focused on capacity enhancements for US, Canada and Mexico Specialty Ingredients facilities, and further enhancing Mexico's reliability and efficiency, as well as flexibility, to process multiple grades of phosphate rock, consistent with the Company's supply chain diversification strategy. A new higher grade PPA operation was successfully commissioned in 2013 as part of the long term plant upgrade for Coatzacoalcos. This higher-grade PPA will further support internal needs for the US and Canada network and allow a continued upgrading of the product mix in the Latin America region. Our expectation for 2014 is for capital expenditure in the $45-50 million range.

Contractual Obligations and Commercial Commitments
The following table sets forth our long-term contractual cash obligations as of December 31, 2013 (dollars in thousands):
 
 
 
Years ending December 31,
Contractual Obligations
 
Total
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
Term loan and revolver borrowings (1)
 
$
163,000

 
$
4,000

 
$
4,000

 
$
4,000

 
$
151,000

 
$

 
$

Future Service Pension Benefits
 
11,689

 
760

 
917

 
1,038

 
1,127

 
1,212

 
6,635

Other (2)
 
370,334

 
123,811

 
86,273

 
58,273

 
58,273

 
43,704

 

Operating Leases
 
31,867

 
5,389

 
5,353

 
4,769

 
3,290

 
2,981

 
10,085

Total contractual cash obligations
 
$
576,890

 
$
133,960

 
$
96,543

 
$
68,080

 
$
213,690

 
$
47,897

 
$
16,720

  ______________________
(1)
Amounts exclude interest payments. Interest on the $163.0 million current balance of the term loan and revolver borrowings at current rates would be approximately $3.9 million annually.
(2)
Represents minimum annual purchase commitments to buy raw materials from suppliers.


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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 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.
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 2013 exceeded the book value of our equity.
Our reporting units for goodwill purposes are Specialty Phosphates United States, Specialty Phosphates Canada, Specialty Phosphates Mexico, Kelatron, AMT, Triarco and GTSP & Other. As of December 31, 2013, the fair values of our reporting units were substantially greater than their carrying values.

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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. The review of these long-lived assets is performed at the individual asset level, asset group level, or the product group level depending on the lowest level for which identifiable cash flows are largely independent. The Company’s asset groupings or product groupings vary based on the interrelationship of the long-lived assets and the identifiable cash flows. For example, in certain instances, multiple manufacturing units may work with one another to produce the lowest identifiable cash flows or in other instances a stand-alone unit may produce the lowest level of identifiable cash flows. There are other instances where a stand-alone unit may produce multiple products and the lowest level of identifiable cash flows is at the product group level. 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, asset group or product 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. Amounts equivalent to dividends will accrue over the performance period and are paid on performance share awards when 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.
The fair value of the options granted during 2013, 2012 and 2011 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,
2013
 
Year Ended
December 31,
2012
 
Year Ended
December 31,
2011
Expected volatility
 
50.4
%
 
53.2
%
 
54.4
%
Dividend yield
 
2.8
%
 
2.4
%
 
2.3
%
Risk-free interest rate
 
1.0
%
 
1.3
%
 
2.3
%
Expected term
 
6 years

 
6 years

 
6 years

Weighted average grant date fair value of stock options
 
$
19.99

 
$
20.41

 
$
17.14


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. Since 2009, 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 expected term for the stock options is

Page 35 of 82




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 noncontributory 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 $81 thousand. A 1% decrease in our expected rate of return on plan assets would increase our pension plan expense by $178 thousand.
Recently Issued Accounting Standards
New accounting standards effective in 2013 are described in the Recent Accounting Pronouncements section in Note 1 of Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”.
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks as part of our ongoing business operations. Primary exposures include changes in interest rates, as borrowings under our Loan Agreement will bear interest at floating rates based on LIBOR plus an applicable borrowing margin. We manage our interest rate risk by balancing the amount of fixed-rate and floating-rate debt to
the extent practicable consistent with our credit status. For fixed-rate debt, interest rate changes do not affect earnings or cash flows. Conversely, for floating-rate debt, interest rate changes generally affect our earnings and cash flows, assuming other factors are held constant.
At December 31, 2013, we had $96.0 million principal amount of term loan debt and a $225.0 million revolving credit facility, of which $67.0 million was outstanding, both of which approximate fair value (determined using level 2 inputs within the fair value hierarchy). Total remaining availability was $159.7 million, taking into account $2.3 million in face amount of letters of credit issued under the sub-facility. Simultaneously with initiating the new senior facility in December of 2012, we entered into an interest rate swap with a swap start date of December 31, 2012, swapping the LIBOR exposure on $100 million of floating rate debt under the new senior facility to a fixed rate to maturity obligation of 0.9475% expiring in December 2017. The fair value of this interest rate swap is an asset of approximately $1.2 million as of December 31, 2013.
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.

Page 36 of 82




Regardless of hedges, we may experience economic loss and a negative impact on earnings or net assets as a result of interest rate fluctuations. Based on $67.0 million outstanding borrowings as floating rate debt (not included in the swap) under our revolving credit facility, an immediate increase of one percentage point would cause an increase to interest expense of approximately $0.7 million per year.
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. Though we did not do so in 2013, in 2012 we did enter into an economic hedge for approximately 75% of our 2012 U.S. & Canada natural gas requirements.
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. No customer accounted for more than 10% of our sales in the last 3 years.
Foreign Currency Exchange Rates
The U.S. Dollar is the functional currency of the Canadian and Mexican operations. Accordingly, these operations’ monetary assets and liabilities are translated at current exchange rates, non-monetary assets and liabilities are translated at historical exchange rates, and revenue and expenses are translated at average exchange rates and at historical exchange rates for the related revenue and expenses of non-monetary assets and liabilities. All transaction gains and losses are included in net income.
Our principal source of exchange rate exposure in our foreign operations consists of expenses, such as labor expenses, which are denominated in the foreign currency of the country in which we operate. A decline in the value of the U.S. Dollar relative to the local currency would generally cause our operational expenses (particularly labor costs) to increase (conversely, a decline in the value of the foreign currency relative to the U.S. Dollar would cause these expenses to decrease). We believe that normal exchange rate fluctuations consistent with recent historical trends would have a modest impact on our expenses, and would not materially affect our financial condition or results of operations. Nearly all of our sales are denominated in U.S. Dollars and our exchange rate exposure in terms of sales revenues is minimal.
Inflation and changing prices
Our costs and expenses will be subject to inflation and price fluctuations. Significant price fluctuations in raw materials, freight, and energy costs, if not compensated for by cost savings from production efficiencies or price increases passed on to customers could have a material effect on our financial condition and results of operations. 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.


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ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
 

Page 38 of 82




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, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992 Edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, 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, 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 27, 2014

Page 39 of 82




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts, the number of shares or where otherwise noted)
 
 
December 31,
 
2013
 
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
32,755

 
$
26,815

Accounts receivable, net
88,434

 
94,033

Inventories
181,467

 
162,940

Other current assets
81,472

 
99,944

Total current assets
384,128

 
383,732

Property, plant and equipment, net
201,985

 
195,723

Goodwill
84,373

 
83,108

Intangibles and other assets, net
74,691

 
75,948

Total assets
$
745,177

 
$
738,511

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
4,002

 
$
4,000

Accounts payable, trade and other
38,717

 
36,424

Other current liabilities
34,124

 
46,030

Total current liabilities
76,843

 
86,454

Long-term debt
159,007

 
172,000

Other long-term liabilities
45,908

 
35,734

Total liabilities
$
281,758

 
$
294,188

Commitments and contingencies (note 16)

 

Common stock, par value $.001 per share; authorized 100,000,000; issued 22,327,670 and 22,110,249; outstanding 21,893,137 and 21,830,870 shares
22

 
22

Paid-in capital
120,046

 
115,782

Common stock held in treasury, at cost (434,533 and 279,379 shares)
(19,599
)
 
(12,411
)
Retained earnings
364,515

 
346,866

Accumulated other comprehensive loss
(1,565
)
 
(5,936
)
Total stockholders' equity
463,419

 
444,323

Total liabilities and stockholders' equity
$
745,177

 
$
738,511


See notes to consolidated financial statements

Page 40 of 82




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollars in thousands, except per share amounts, the number of shares or where otherwise noted)
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
Net sales
$
844,129

 
$
862,399

 
$
810,487

Cost of goods sold
685,830

 
684,979

 
605,172

Gross profit
158,299

 
177,420

 
205,315

Operating expenses:
 
 
 
 
 
Selling, general and administrative
70,501

 
64,320

 
65,380

Research & development expenses
3,928

 
3,107

 
2,923

Total operating expenses
74,429

 
67,427

 
68,303

Operating income
83,870

 
109,993

 
137,012

Interest expense, net
4,426

 
5,977

 
5,726

Foreign exchange losses (gains)
3,197

 
(1,957
)
 
875

Income before income taxes
76,247

 
105,973

 
130,411

Provision for income taxes
26,741

 
31,783

 
43,889

Net income
$
49,506

 
74,190

 
86,522

Net income attributable to common shareholders
$
49,442

 
$
74,150

 
$
86,522

Per share data (see Note 12):
 
 
 
 
 
Income per share:
 
 
 
 
 
Basic
$
2.25

 
$
3.40

 
$
3.99

Diluted
$
2.21

 
$
3.30

 
$
3.83

Weighted average shares outstanding:
 
 
 
 
 
Basic
21,933,843

 
21,795,155

 
21,694,453

Diluted
22,345,980

 
22,475,881

 
22,578,567

 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
Change in interest rate swaps, (net of tax ($825), $71 and $448)
$
1,345

 
$
(114
)
 
$
(732
)
Change in pension and post-retirement plans, (net of tax ($1,359), $572 and $388)
3,026

 
(827
)
 
(1,174
)
Other comprehensive (loss) income, net of tax
$
4,371

 
$
(941
)
 
$
(1,906
)
Comprehensive income
$
53,877

 
$
73,249

 
$
84,616


See notes to consolidated financial statements

Page 41 of 82




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

 
$
21

 
$
227,752

 
$
106,032

 
$
(3,089
)
 
$
330,716

Net income
 
 
 
 
86,522

 
 
 
 
 
86,522

Other comprehensive loss, (net of tax $836)
 
 
 
 
 
 
 
 
(1,906
)
 
(1,906
)
Proceeds from stock award exercises and issuances
307

 
1

 
 
 
(2,600
)
 
 
 
(2,599
)
Share-based compensation
 
 
 
 
 
 
6,250

 
 
 
6,250

Excess tax benefits from exercise of stock options
 
 
 
 
 
 
2,511

 
 
 
2,511

Common stock repurchases
(150
)
 
 
 
 
 
(6,139
)
 
 
 
(6,139
)
Restricted stock forfeitures
(1
)
 
 
 
 
 
(17
)
 
 
 
(17
)
Dividends declared
 
 
 
 
(22,130
)
 
 
 
 
 
(22,130
)
Balance, December 31, 2011
21,620

 
$
22

 
$
292,144

 
$
106,037

 
$
(4,995
)
 
$
393,208

Net income
 
 
 
 
74,190

 
 
 
 
 
74,190

Other comprehensive loss, (net of tax $643)
 
 
 
 
 
 
 
 
(941
)
 
(941
)
Proceeds from stock award exercises and issuances
340

 

 
 
 
(2,255
)
 
 
 
(2,255
)
Share-based compensation
 
 
 
 
 
 
1,912

 
 
 
1,912

Excess tax benefits from exercise of stock options
 
 
 
 
 
 
3,931

 
 
 
3,931

Common stock repurchases
(150
)
 
 
 
 
 
(7,254
)
 
 
 
(7,254
)
Treasury stock reissued for acquisition of business
21

 
 
 
 
 
1,000

 
 
 
1,000

Dividends declared
 
 
 
 
(19,468
)
 
 
 
 
 
(19,468
)
Balance, December 31, 2012
21,831

 
$
22

 
$
346,866

 
$
103,371

 
$
(5,936
)
 
$
444,323

Net income
 
 
 
 
49,506

 
 
 
 
 
49,506

Other comprehensive income, (net of tax ($2,184))
 
 
 
 
 
 
 
 
4,371

 
4,371

Proceeds from stock award exercises and issuances
217

 

 
 
 
(759
)
 
 
 
(759
)
Share-based compensation
 
 
 
 
 
 
2,174

 
 
 
2,174

Excess tax benefits from exercise of stock options
 
 
 
 
 
 
2,849

 
 
 
2,849

Common stock repurchases
(150
)
 
 
 
 
 
(7,118
)
 
 
 
(7,118
)
Restricted stock forfeitures
(5
)
 
 
 
 
 
(70
)
 
 
 
(70
)
Dividends declared
 
 
 
 
(31,857
)
 
 
 
 
 
(31,857
)
Balance, December 31, 2013
21,893

 
$
22

 
$
364,515

 
$
100,447

 
$
(1,565
)
 
$
463,419


See notes to consolidated financial statements

Page 42 of 82




INNOPHOS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
Cash flows from operating activities
 
 
 
 
 
Net income
$
49,506

 
$
74,190

 
$
86,522

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
 
 
Depreciation and amortization
35,461

 
42,334

 
43,676

Amortization of deferred financing charges
559

 
884

 
608

Deferred income tax provision
1,484

 
167

 
5,379

Deferred profit sharing

 

 
(286
)
Share-based compensation
2,174

 
1,912

 
6,250

Changes in assets and liabilities:
 
 
 
 
 
Decrease (increase) in accounts receivable
5,898

 
13,017

 
(28,154
)
(Increase) decrease in inventories
(18,402
)
 
12,154

 
(45,021
)
Decrease (increase) in other current assets
27,144

 
(21,283
)
 
3,238

Increase (decrease) in accounts payable
2,224

 
2,059

 
(5,939
)
Decrease in other current liabilities
(11,913
)
 
(20,573
)
 
(14,685
)
Changes in other long-term assets and liabilities
(2,836
)
 
(3,456
)
 
(5,242
)
Net cash provided from operating activities
91,299

 
101,405

 
46,346

Cash flows used for investing activities:
 
 
 
 
 
Capital expenditures
(33,415
)
 
(33,060
)
 
(34,195
)
Acquisition of businesses, net of cash acquired
(4,425
)
 
(71,706
)
 
(20,533
)
Net cash used for investing activities
(37,840
)
 
(104,766
)
 
(54,728
)
Cash flows from financing activities: