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| IPHS > SEC Filings for IPHS > Form 10-Q on 4-Nov-2008 | All Recent SEC Filings |
4-Nov-2008
Quarterly Report
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" as contained in our 2007 Annual Report on Form 10-K and "Forward-Looking Statements" sections of that report.
Overview
Innophos is a leading North American producer of specialty phosphates. Most specialty phosphates are highly customized, application-specific compounds that are engineered to meet customer performance requirements. Specialty phosphates are often critical to the taste, texture and performance of foods, beverages, pharmaceuticals, oral care products and other applications. For example, specialty phosphates act as flavor enhancers in beverages, electrolytes in sports drinks, texture additives in cheeses, leavening agents in baked goods, calcium and phosphorus sources for nutritional supplements, pharmaceutical excipients and cleaning agents in toothpaste.
Below is a summary chart of the corporate structure of our direct subsidiaries.
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Recent Trends and Outlook
Market prices of phosphate rock, sulfur and sulfuric acid, the primary raw materials used in the production of specialty phosphates, have increased substantially over the last several quarters, although the market price of sulfur began to decrease rapidly in the fourth quarter of 2008. Innophos purchases phosphate rock, sulfur, and sulfuric acid directly and has other long term raw material supply contracts whose pricing is determined in part by phosphate rock and sulfur market prices. If current raw material market price levels for phosphate rock and sulfur are sustained throughout 2008 into 2009, Innophos currently estimates that its annual raw material costs will increase on an annualized basis by an amount equivalent to approximately 55% to 65% of 2007 annual sales, or by approximately $320 to $375 million, by the third quarter of 2009 as compared to Innophos' year-end 2007 cost structure. Approximately 35% of this dollar cost increase, or approximately $115 to $135 million, is expected to occur during 2008, with the balance expected to occur in the first and second quarters of 2009.
Historically, Innophos has successfully recovered raw material, energy and other cost increases through price increases. In addition to offsetting raw material cost increases, management's current pricing strategy targets pricing Innophos products at full value. During the fourth quarter of 2007, the Company implemented price increases in all its product lines, most of which became effective January 1, 2008. Innophos also implemented broad price increases in February, April, June and August 2008, and recently announced additional price increases across most products in the U.S. and Canada effective October 15, 2008. Due to oversupply and reduced demand conditions in phosphate fertilizer markets, Innophos expects the price received for its granular triple superphosphate (GTSP) fertilizer co-product to decrease by over 45% from its peak third quarter 2008 levels. Innophos expects its price increases, net of anticipated GTSP price decreases, will result in a revenue increase of 95% to 105% of 2007 annual sales, or approximately $550 to $605 million, on an annualized basis by year-end 2008.
While Innophos cannot guarantee that its pricing actions will succeed, to date marketplace acceptance rates for price increases have been high. Finally, as Innophos raises prices, it is possible that demand for the Company's products may decline to the extent its customers reformulate their products or otherwise reduce purchases.
In the first three quarters of 2008, Innophos experienced negative volume impacts on revenues for STPP and Other Products, which primarily affected the Mexico segment. The underlying causes for this decline are reduced fertilizer demand and oversupply impacting the sales of GTSP, limited reformulation in detergents using STPP, and an increase of competition from China in South America. In addition, Innophos expects to ship minimal amounts of GTSP fertilizer in the fourth quarter due to rapidly decreasing fertilizer market demand and pricing levels disrupting Latin American fertilizer markets. Management anticipates this will result in a shipment volume decline of approximately 30% on a pure tonnage basis for STPP and Other Products for the full year 2008 versus full year 2007. However, Innophos sees continued strong demand in its other product lines as it realizes growth for Specialty Salts & Specialty Acids and stable demand for Purified Phosphoric Acid in both the United States and Mexico.
During 2008 price increases have been achieved ahead of realized cost increases by a material amount. Management currently estimates that the favorable impact of net selling price increases exceeding raw material cost increases, net of the anticipated impact from lower sales volumes in STPP and Other Products, will result in at least a $65 million year over year improvement in operating income during the fourth quarter of 2008. Management believes the buffering provided by the Company's long term raw material contracts will continue in 2009, albeit at a lesser rate than experienced in 2008, and that the trend of net selling price increases exceeding net raw material cost increases by a material amount relative to fourth quarter 2007 levels will continue through 2009.
Historical Performance
Results of Operations
The following table sets forth a summary of the Company's operations and their
percentages of total revenue for the periods indicated.
Three months ended Three months ended
September 30, September 30,
2008 2007
Amount % Amount %
Net sales $ 291.8 100.0 $ 146.4 100.0
Cost of goods sold 165.2 56.6 116.7 79.7
Gross profit 126.6 43.4 29.7 20.3
Operating expenses: Selling, general and
administrative 13.2 4.5 11.2 7.7
Research & Development Expenses 0.5 0.2 0.5 0.3
Operating income 112.9 38.7 18.0 12.3
Interest expense, net 8.9 3.1 9.3 6.4
Foreign exchange (gains) losses, net (0.9 ) (0.3 ) 0.1 0.1
Other expense (income) (0.2 ) (0.1 ) (0.2 ) (0.1 )
Provision for income taxes 25.4 8.7 3.2 2.2
Net income $ 79.7 27.3 $ 5.6 3.8
Nine months ended Nine months ended
September 30, September 30,
2008 2007
Amount % Amount %
Net sales $ 718.3 100.0 $ 435.0 100.0
Cost of goods sold 443.1 61.7 352.3 81.0
Gross profit 275.2 38.3 82.7 19.0
Operating expenses: Selling, general and
administrative 47.3 6.6 39.8 9.1
Research & Development Expenses 1.6 0.2 1.6 0.4
Operating income 226.3 31.5 41.3 9.5
Interest expense, net 26.0 3.6 32.6 7.5
Foreign exchange (gains) losses, net (0.9 ) (0.3 ) - -
Other expense (income) (0.4 ) (0.1 ) (0.2 ) (0.0 )
Provision for income taxes 53.4 7.4 10.5 2.4
Net income (loss) $ 148.2 20.6 $ (1.6 ) (0.4 )
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Three months ended September 30, 2008 compared to the three months ended September 30, 2007
Net Sales
Net sales represent the selling price of the products, net of any customer-related rebates, plus freight and any other items invoiced to customers. Net sales for the three months ended September 30, 2008 were $291.8 million, an increase of $145.4 million, or 99.3%, as compared to $146.4 million for the same period in 2007. Selling price increases had a positive impact on revenue of 112.6% or $164.9 million that occurred across all product lines. Volume and mix impacts upon revenue had a negative impact of 13.3% or $19.5 million that occurred primarily in STPP & Other Products due to reduced demand for our GTSP fertilizer co-product in oversupplied fertilizer markets and limited reformulation in detergents using STPP. Demand was favorable for Specialty Salts and Specialty Acids and stable for Purified Phosphoric Acid in both the United States and Mexico, but U. S. Purified Phosphoric Acid sales volumes declined due to a hurricane-related outage affecting the Geismar, LA plant and the need to rebuild inventories depleted during our second quarter maintenance outage at this facility. On a unit basis, the average selling price for all Innophos products increased by 110.5% year-over-year for the quarter, and the total volume shipped decreased by 5.3%.
The following table illustrates for the three months ended September 30, 2008 the percentage changes in net sales by reportable segment compared with the same period in 2007, including the effect of price and volume/mix impacts upon revenue:
Price Volume/Mix Total
United States 73.4 % 3.2 % 76.6 %
Canada 88.4 % (19.2 )% 69.2 %
Mexico 173.0 % (37.0 )% 136.0 %
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The following table illustrates for the three months ended September 30, 2008 the percentage changes for net sales by major product lines compared with the same period in 2007, including the effect of price and volume/mix impacts upon revenue:
Price Volume/Mix Total
Purified Phosphoric Acid 174.7 % (20.6 )% 154.1 %
Specialty Salts and Specialty Acids 68.0 % 15.4 % 83.4 %
STPP & Other Products 146.3 % (62.1 )% 84.2 %
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Shipped volume for the three months ended September 30, 2008 declined approximately 20% on a pure tonnage basis for STPP & Other Products compared with the same period in 2007.
Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the three months ended September 30, 2008 was $126.6 million, an increase of $96.9 million, or 326.3%, as compared to $29.7 million for the same period in 2007. Gross profit percentage increased to 43.4% for the three months ended September 30, 2008 versus 20.3% for the same period in 2007. The change in gross profit was primarily due to higher selling prices which had a favorable impact of $164.9 million. This was partially offset by unfavorable sales volume and mix impacts upon revenue and higher raw material, energy, freight and manufacturing expenses which had a combined unfavorable impact of $68.0 million.
Operating Expenses and Research and Development
Operating expenses consist primarily of selling, general and administrative, and R&D expenses. For the three months ended September 30, 2008, these costs were $13.7 million, an increase of $2.0 million, or 17.1%, as compared to $11.7 million for the same period in 2007. Operating expenses were negatively affected by $1.0 million for increased commercial efforts, and $0.7 million non-cash share based compensation and an increase of $0.3 million of all other costs.
Operating Income
Operating income for the three months ended September 30, 2008 was $112.9 million, an increase of $94.9 million, or 527.2%, as compared to $18.0 million for the same period in 2007. Operating income as a percentage of net sales increased to 38.7% versus 12.3% for the same period in 2007.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the three months ended September 30, 2008 was $8.9 million, a decrease of $0.4 million, compared to $9.3 million for the same period in 2007. This decrease is primarily due to the lower balance of our Term Loan from 2007 prepayments and lower interest rates. This was partially offset by fees associated with the fourth amendment to our credit facility.
Foreign Exchange
Foreign exchange gain for the three months ended September 30, 2008 was $0.9 million compared to a loss of $0.1 million for the same period in 2007. The U.S. dollar is the functional currency of our Mexican and Canadian operations. Consequently, foreign exchange gain or loss is recorded on re-measurement of non-U.S. dollar denominated monetary assets and liabilities. Such gains and losses fluctuate from period to period as the foreign currencies strengthen or weaken against the U.S. dollar and the amount of non-U.S. dollar denominated assets and liabilities increases or decreases.
Provision for Income Taxes
Provision for income tax expense for the three months ended September 30, 2008 was $25.4 million compared to $3.2 million for the comparable period of 2007. Income earned by our subsidiaries in Mexico and Canada are fully taxable, so increases in their earnings, as we had in the third quarter of 2008, would normally be expected to result in increased income tax expense. Although the U.S. operations has taxable income for the three month period ended September 30, 2008, the income tax provision reflects the use of net operating loss carryforwards and the corresponding decrease in the valuation allowance related to those net operating loss carryforwards. However, the U.S. operations continue to carry a full valuation allowance for its net deferred tax assets.
Although the U.S. operations have been profitable for two consecutive quarters beginning in the second quarter of 2008, the U.S. operations have had significant cumulative losses in recent years. As of September 30, 2008, the Company continues to have a full valuation allowance for all U.S. net deferred tax assets as it believes cumulative losses outweigh available positive evidence at this time. If recent operating results continue, we will no longer be in a cumulative loss position during the fourth quarter of 2008. If this occurs, we will reconsider to what extent we can rely on our income forecasts to support the realization of our net U.S. deferred tax assets. These income forecasts will be used in conjunction with other positive and negative evidence including but not limited to, market conditions, reversal of temporary differences, and other factors, in evaluating the need for a full or partial valuation allowance. If we conclude that that it is more likely than not that some, or all, of the net deferred tax assets in the U.S. are realizable, the resulting reversal of the existing valuation allowance will favorably impact our results of operations in the period of reversal.
Net Income
Net income for the three months ended September 30, 2008 was $79.7 million, an increase of $74.1 million, compared to $5.6 million for the same period in 2007, due to the factors described above.
Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Net Sales
Net sales represent the selling price of the products, net of any customer-related rebates, plus freight and any other items invoiced to customers. Net sales for the nine months ended September 30, 2008 were $718.3 million, an increase of $283.3 million, or 65.1%, as compared to $435.0 million for the same period in 2007. Selling price increases had a positive impact on revenue of 77.9% or $338.9 million that occurred across all product lines. Volume and mix impacts upon revenue had a negative impact of 12.8% or $55.6 million that occurred primarily in STPP & Other Products due to reduced demand for our GTSP fertilizer co-product in oversupplied fertilizer markets and limited reformulation in detergents using STPP. Purified Phosphoric Acid experienced a decrease that was partially attributable to the planned outage at the Geismar, LA acid plant in the second quarter of 2008 and a hurricane-related outage in the third quarter of 2008. Specialty Salts and Specialty Acids volumes increased due to our focus on these products. On a unit basis, the average selling price for all Innophos products increased by 82.0% year-over-year for the first nine months, and the total volume shipped decreased by 9.3%.
The following table illustrates for the nine months ended September 30, 2008 the percentage changes in net sales by reportable segment compared with the same period in 2007, including the effect of price and volume/mix impacts upon revenue:
Price Volume/Mix Total
United States 41.9 % 4.8 % 46.7 %
Canada 44.9 % (14.4 )% 30.5 %
Mexico 133.5 % (37.6 )% 95.9 %
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The following table illustrates for the nine months ended September 30, 2008 the percentage changes for net sales by major product lines compared with the same period in 2007, including the effect of price and volume/mix impacts upon revenue:
Price Volume/Mix Total
Purified Phosphoric Acid 111.3 % (17.2 )% 94.1 %
Specialty Salts and Specialty Acids 38.2 % 13.5 % 51.7 %
STPP & Other Products 122.8 % (57.0 )% 65.8 %
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Shipped volume for the nine months ended September 30, 2008 declined approximately 25% on a pure tonnage basis for STPP & Other Products compared with the same period in 2007.
Gross Profit
Gross profit represents net sales less cost of goods sold. Gross profit for the nine months ended September 30, 2008 was $275.2 million, an increase of $192.5 million, or 232.8%, as compared to $82.7 million for the same period in 2007. Gross profit percentage increased to 38.3% for the nine months ended September 30, 2008 versus 19.0% for the same period in 2007. The change in gross profit was due to higher selling prices which had a favorable impact of $338.9 million, partially offset by unfavorable sales volume and mix impacts upon revenue and higher raw material, energy, freight and manufacturing expenses which had a combined
unfavorable impact of $147.3 million. Gross profit was unfavorable by $1.3 million for a scheduled Geismar, LA plant maintenance outage in the second quarter of 2008, which was lower than anticipated. Gross profit was unfavorable by $1.3 million for the asset impairment expense for two obsolete production units in the second quarter of 2008. Gross profit was favorable by 2007 expenses incurred for $1.5 million of Mexican workforce reorganization costs and $2.0 million for the regularization of Mexican port facilities taxes covering the periods 1996 to 2006.
Operating Expenses and Research and Development
Operating expenses consist primarily of selling, general and administrative, and R&D expenses. For the nine months ended September 30, 2008, these costs were $48.9 million, an increase of $7.5 million, or 18.1%, as compared to $41.4 million for the same period in 2007. Operating expenses increased by $2.0 million for legal and other fees to comply with the DOJ STPP document request subpoena, $3.1 million for professional fees to support growth and other corporate initiatives such as assessing our IT systems, $2.6 million for higher short-term incentive program accruals, $2.1 million for increased commercial efforts, $1.7 million for non-cash share based compensation and $2.8 million for all other costs. The overall increases over prior year were partially offset by $6.8 million for unusual expenses incurred in 2007 primarily in connection with the early cancellation of the company's "pharma" sales agency arrangement with Rhodia, Inc. and the transfer of related assets to Innophos.
Operating Income
Operating income for the nine months ended September 30, 2008 was $226.3 million, an increase of $185.0 million, or 447.9%, as compared to $41.3 million for the same period in 2007. Operating income as a percentage of net sales increased to 31.5% versus 9.5% for the same period in 2007.
Interest Expense, net
Net interest expense, including deferred financing amortization expense, for the nine months ended September 30, 2008 was $26.0 million, a decrease of $6.6 million, compared to $32.6 million for the same period in 2007. This decrease is primarily due to the lower balance of our Term Loan from prepayments made in 2007 along with lower interest rates, and lower bond interest expense from the retirement/refinancing of our Floating Rate Senior Notes in 2007. This was partially offset by fees associated with the fourth amendment to our credit facility.
Foreign Exchange
Foreign exchange gain for the nine months ended September 30, 2008 was $0.9 million compared to a minimal amount for the same period in 2007. The U.S. dollar is the functional currency of our Mexican and Canadian operations. Consequently, foreign exchange gain or loss is recorded on re-measurement of non-U.S. dollar denominated monetary assets and liabilities. Such gains and losses fluctuate from period to period as the foreign currencies strengthen or weaken against the U.S. dollar and the amount of non-U.S. dollar denominated assets and liabilities increases or decreases.
Provision for Income Taxes
Provision for income tax expense for the nine months ended September 30, 2008 was $53.4 million compared to $10.5 million for the comparable period of 2007. Income earned by our subsidiaries in Mexico and Canada are fully taxable, so increases in their earnings, as we had for the nine months ended September 30, 2008, would normally be expected to result in increased income tax expense. Although the U.S. operations have taxable income in 2008, the income tax provision reflects the use of net operating loss carryforwards and the corresponding decrease in the valuation allowance related to those net operating loss carryforwards. However, the U.S. operations continue to carry a full valuation allowance for its net deferred tax assets. The Company anticipates making a significant estimated tax payment in Mexico in the fourth quarter due to the high Mexican income for 2008 as well as an estimated tax payment in the U.S. in the fourth quarter.
Although the U.S. operations have been profitable for two consecutive quarters beginning in the second quarter of 2008, the U.S. operations have had significant cumulative losses in recent years. As of September 30, 2008, the Company continues to have a full valuation allowance for all U.S. net deferred tax assets as it believes cumulative losses outweigh available positive evidence at this time. If recent operating results continue, we will no longer be in a cumulative loss position during the fourth quarter of 2008. If this occurs, we will reconsider to what extent we can rely on our income forecasts to support the realization of our net U.S. deferred tax assets. These income forecasts will be used in conjunction with other positive and negative evidence including but not limited to, market conditions, reversal of temporary differences, and other factors, in evaluating the need for a full or partial valuation allowance. If we conclude that that it is more likely than not that some, or all, of the net deferred tax assets in the U.S. are realizable, the resulting reversal of the existing valuation allowance will favorably impact our results of operations in the period of reversal.
Net Income (Loss)
Net income for the nine months ended September 30, 2008 was $148.2 million, an increase of $149.8 million, compared to a net loss of $1.6 million for the same period in 2007, due to the factors described above.
Segment Reporting
The company reports its operations in three reporting segments-United States,
Mexico and Canada, each of which sells the entire portfolio of products. The
primary performance indicators for the chief operating decision maker are sales
and operating income, with sales on a ship-from basis. The following table sets
forth the historical results of these indicators by segment:
Three months ended Three months ended
September 30, September 30,
2008 2007 Net Sales % Change
Segment Net Sales
United States $ 146,154 $ 82,768 76.6 %
Mexico 133,732 56,659 136.0 %
Canada 11,886 7,024 69.2 %
Total $ 291,772 $ 146,451 99.2 %
Segment Operating Income
United States $ 45,400 $ 4,302
Mexico 62,357 13,318
Canada 5,148 354
Total $ 112,905 $ 17,974
Segment Operating Income % of
net sales
United States 31.1 % 5.2 %
Mexico 46.6 % 23.5 %
Canada 43.3 % 5.0 %
Nine months ended Nine months ended
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