Innophos has cut debt over 50% since IPO, is 'very comfortable' with 1.0 times leverage

By Paul Deckelman

New York, Aug. 15 - The Innophos Holdings, Inc. of today "is very different than the company launched on the Nasdaq stock exchange almost seven years ago," chairman, president and chief executive officer Randolph E. Gress declared on Thursday in detailing the financial progress the company has made since its origins as an independent company in the early 2000s.

Among the milestones that Gress outlined during a presentation at the Jefferies 2013 Global Industrials Conference in New York was the fact that "[the company] rapidly paid down the heavy debt load that it inherited from our private equity days," leaving its leverage ratio of net debt as a multiple of 12-month trailing adjusted EBITDA at "a very comfortable" 1.0 times level.

The Cranbury, N.J.-based specialty chemicals manufacturer, which produces edible compounds from phosphates used as additives in the food, beverage, pharmaceutical, water treatment and nutritional supplement industries, was spun off from French chemicals giant Rhodia SA.

Rhodia sold its North American phosphate chemical operation to Bain Capital in the summer of 2004 for $550 million. The purchase was largely funded by new debt, including $190 million of 8 7/8% senior subordinated notes due 2014 and a $270 million credit facility consisting of $220 million of term loan debt priced at 225 basis points over Libor and a $50 million revolving credit line at Libor plus 275 bps.

Bain took the company public in 2006 and had completely sold its stake by 2009.

Debt levels come down

Innophos ended 2007 - a year after its initial public offering - with its balance sheet showing gross debt of $385 million and a relatively small cash balance, producing a net debt figure of $369 million.

But a series of bolt-on acquisitions over the next several years generated robust enough cash flows to allow for both a continuing paydown of the total debt load, as well as an ever-increasing spread between the gross debt and net debt figures.

According to materials prepared by the company to accompany the CEO's presentation at the Jefferies conference, gross debt had fallen to $246 million by the end of 2009, and net debt had declined even further to $114 million.

The debt cutting continued through 2010, reaching the all-time low levels for both measures since the original spin-off - $149 million of gross debt at year-end and $85 million of net debt.

In 2010, the company used cash on hand as well as a new $225 million five-year credit facility to take out $246 million of relatively high-coupon debt - the $190 million of 8 7/8% notes issued in 2004 and the $56 million of 9½% notes due 2012 that remained outstanding from the $66 million the company sold in 2007. That refinancing allowed Innophos to cut its annualized interest expense by $17 million, or 47 cents per share, by the end of 2010.

From the lowered debt levels of 2010, leverage moved back up in 2011 and again in 2012 to fund expansion, including acquisitions, but the year-end 2012 gross debt figure of $176 million and net debt of $149 million still stood at less than half of what they had been back in 2007.

Gress said that after the "substantial progress" the company had made in reducing net debt while improving investors' returns on capital - from a 6% ROIC figure in 2007 to around an 18% to 20% average between 2009 and 2011 - "2012 saw the balance sheet being deployed to support growth," which caused the ROIC to fall to 14%.

Gress noted: "Two acquisitions during the year, an increased dividend and a stepped-up capital program were almost fully funded by operating cash flow, with only a $30 million increase in net debt required, leaving us at a very comfortable debt level."

Credit terms improved

He further noted that during the 2012 fourth quarter, the company and its lenders amended and extended its credit facility, increasing overall capacity by $100 million, to $325 million, extending the maturity by an additional two years to 2017 and cutting the interest rate on its borrowings by 75 bps. The facility also includes a $50 million accordion feature.

At the same time, Innophos was also able to swap out its Libor exposure on $100 million of floating-rate debt for a five-year fixed rate of 0.9475%, the CEO added. "less than 1%."

According to the company's most recent 10-Q quarterly filing with the Securities and Exchange Commission, as of the end of the 2013 second quarter on June 30, the company had $32.385 million of cash and equivalents on its balance sheet and $168 million of total debt, comprised of $164 million long-term and $4 million current portion.

The debt consisted of $98 million of term loan debt and $70 million of borrowings under its $225 million revolver, both due in 2017. The revolver includes a $20 million letters of credit subfacility.

The current weighted average interest rate for all debt is 2.5%.

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