Zep Inc. Reports Fiscal Third Quarter 2014 Results

ATLANTA--(BUSINESS WIRE)--

Zep Inc. ZEP, a leading consumable chemical packaged goods company that manufactures a wide variety of high-performance maintenance and cleaning chemicals, today reported financial results for the three and nine-month periods ended May 31, 2014.

“I am proud of what the team has accomplished in terms of bringing in new business. Revenue growth was 0.6% in total, 2.1% on a same number of selling days basis and 4.7% when excluding 2.6% of revenue eliminated as a result of complexity reduction activities implemented late in fiscal 2013,” said John K. Morgan, Chairman, President and Chief Executive Officer of Zep Inc.

Morgan continued, “We are making excellent progress on our business continuity plan execution as we recover from the incident at our aerosol production facility, but realize this will create some uncertainty with respect to our future operational and financial results. We are communicating with our customers and working to minimize disruptions in the supply of aerosol products. We continue to believe our insurance will cover the majority of the costs associated with this incident, including business interruption; however we expect the timing of expenditures and insurance recovery to be misaligned.”

Net sales in the quarter were $187.0 million. The 0.6% increase was the net result of growth in most of our targeted strategic end-markets offset by the expected impact of our complexity reduction initiative, decreases in other institutional and industrial end-markets and one less selling day.

Gross profit margin in the second quarter of fiscal 2014 was 46.5% or 20 basis points lower than the comparable quarter of fiscal 2013 due to increased raw material input costs and channel mix, partially offset by pricing actions. Selling, distribution and administrative expenses were $0.4 million lower than last year on a reported basis and would have been $2.2 million, or 2.9% lower, if not for the addition of $0.5 million of incremental California legal costs in the current period and a favorable $1.4 million legal recovery in the third fiscal quarter of last year. Additionally, unexpected increases in freight impacted selling, distribution and administrative expense in the current quarter.

“While we are encouraged by recent sales results, we believe that continuing sales pipeline success may only partially offset the fire-related sales losses potentially resulting in revenue declines in some or all of the next four quarters,” continued Morgan. “We invested in a number of initiatives over the past year that started to deliver results in the most recent quarter. Had it not been for the incident, we expected these initiatives to continue to gain traction in the fourth quarter and beyond. However, we are now focused on implementing our business continuity plan with an eye on mitigating the impact of disruption, and believe that the returns on recent investments may be delayed as we manage through the recovery period.”

During the third quarter of fiscal 2014, management recorded a non-cash impairment of $5.7 million for the loan to Zep Inc.'s innovation partner as a result of their failure to make a scheduled principal payment and future uncertainty over recoverability of the loan.

A more detailed discussion of the Company's long-term objectives and financial goals may be found in our Forms 10-K and 10-Q filed with the Securities and Exchange Commission ("SEC"). The Forms 10-K and 10-Q are available via the Company's website at www.zepinc.com.

Conference Call

The Company will host a conference call to discuss third quarter 2014 operating results on Thursday, July 10, 2014 at 4:15 p.m. ET. The call and accompanying presentation will be webcast and may be accessed through the Company's website at www.zepinc.com or by dialing in at (412) 317-0797. A replay of the call will be posted to the website within two hours of completion of the conference call.

About Zep Inc.

Zep Inc., with fiscal year 2013 net sales of approximately $690 million, is a leading consumable chemical packaged goods company selling a wide variety of high-performance chemicals that help professionals and prosumers clean, maintain and protect their assets. We are focused on the attractive industry dynamics of the transportation market and the industrial maintenance and repair operation ("MRO") market, which together now comprise approximately 60% of our revenue with the balance derived from sales into the facilities maintenance vertical. We market these products and services under well recognized and established brand names, such as Zep^®, Zep Commercial^®, Zep Professional^®, Enforcer^®, Misty^®, TimeMist^®, TimeWick™, Country Vet^®, Original Bike Spirits^®, Blue Coral^®, Black Magic^®, Rain-X^®, Niagara National™, FC Forward Chemicals^®, Rexodan^®, Mykal™, and a number of private label brands. Founded in 1937, some of Zep Inc.'s brands have been in existence since 1896. Zep Inc. is headquartered in Atlanta, Georgia. Visit our website at www.zepinc.com.

Forward Looking Statements and use of Non-GAAP Information

This release contains, and other written or oral statements made by or on behalf of Zep Inc. may include, forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we or our executive officers on our behalf, may from time to time make forward-looking statements in reports and other documents that are filed with the SEC or in connection with oral statements made to the press, potential investors or others. Specifically, forward-looking statements may include, but are not limited to, statements relating to our future economic performance, business prospects, revenue, income, and financial condition; and statements preceded by, followed by, or that include the words "expects," "believes," "intends," "will," "anticipates," and similar terms that relate to future events, performance, or our results. Examples of forward-looking statements in this press release include, but are not limited to, statements about our ability to implement our business continuity plan to minimize the disruption in the supply of aerosol products to our customers, statements regarding the sufficiency of insurance proceeds to cover our losses from the incident at our aerosol manufacturing facility, including business interruption, statements regarding the timing of our receipt of insurance payments and their misalignment with our expenditures and statements regarding future revenue declines and the delay of returns from sales pipeline activity attributable to the incident.

Our forward-looking statements are subject to certain risks and uncertainties that could cause actual results, expectations, or outcomes to differ materially from our historical experience as well as management's present expectations or projections. These risks and uncertainties include, but are not limited to:

• impact of the fire on financial results;
• economic conditions in general;
• the cost or availability of raw materials;
• pricing;
• competition;
• our ability to realize anticipated benefits from strategic planning and restructuring initiatives and the timing of the benefits of such actions;
• our ability to maintain our customer relationships;
• market demand; and
• litigation and other contingent liabilities, such as environmental matters.

A variety of other risks and uncertainties could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. A number of those risks are discussed in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended August 31, 2013 and in Part II “Item 1A, Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended May 31, 2014. Management believes these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and management undertakes no obligation to update publicly any of them in light of new information or future events.

The unaudited consolidated financial statements presented in accordance with accounting principles generally accepted in the United States ("GAAP") are supplemented by a table that reconciles EBITDA, adjusted EBITDA, adjusted earnings per diluted share and adjusted cash earnings per diluted share, which are non-GAAP financial information that are referenced in this press release, to the nearest GAAP measure. This non-GAAP financial information is provided to enhance the user's overall understanding of our financial performance. Specifically, management believes that EBITDA, adjusted EBITDA, adjusted earnings per diluted share and adjusted cash earnings per diluted share may provide additional information with respect to our performance or ability to meet our future debt service obligations, capital expenditures and working capital requirements. This non-GAAP financial information should be considered in addition to, and not as a substitute for, or superior to, results prepared in accordance with GAAP. Moreover, this non-GAAP information may not be comparable to EBITDA, adjusted EBITDA, adjusted earnings per diluted share or adjusted cash earnings per diluted share reported by other companies because the items that affect net earnings that we exclude when calculating EBITDA, adjusted EBITDA, adjusted earnings per diluted share and adjusted cash earnings per diluted share may differ from the items taken into consideration by other companies.

Zep Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except share and per-share data)
		May 31, 2014				August 31, 2013
ASSETS
Cash and cash equivalents		$	3,278			$	2,402
Accounts receivable, less reserve for doubtful accounts of $4,727 at
May 31, 2014 and $3,941 at August 31, 2013			110,376				104,476
Inventories, net			75,375				68,633
Prepayments and other current assets			13,674				13,051
Deferred income taxes			6,149				8,002
Total Current assets			208,852				196,564
Property, plant and equipment, net of accumulated depreciation of $114,740 at
May 31, 2014 and $108,032 at August 31, 2013			77,130				82,328
Goodwill			121,118				121,102
Identifiable intangible assets, net			123,846				129,929
Other long-term assets			14,457				17,835
Total Assets		$	545,403			$	547,758
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt		$	10,000			$	25,000
Accounts payable			59,477				56,366
Accrued compensation			17,105				25,226
Other accrued liabilities			33,900				41,167
Total Current liabilities			120,482				147,759
Long-term debt, less current maturities			201,812				184,908
Deferred income taxes			15,314				12,782
Other long-term liabilities			17,330				18,340
Total Liabilities			354,938				363,789
Commitments and Contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized;
none issued and outstanding			—				—
Common stock, $0.01 par value; 500,000,000 shares authorized;
22,378,788 issued and outstanding at May 31, 2014, and
22,065,059 issued and outstanding at August 31, 2013			224				221
Paid-in capital			107,516				102,573
Retained earnings			70,204				69,023
Accumulated other comprehensive income			12,521				12,152
Total Stockholders' equity			190,465				183,969
Total Liabilities and Stockholders' equity		$	545,403			$	547,758

Zep Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share data)
		Three Months Ended								Nine Months Ended
		May 31,								May 31,
			2014				2013				2014				2013
Net sales		$	187,023			$	185,988			$	509,667			$	507,400
Cost of products sold			100,144				99,095				269,484				268,105
Gross profit			86,879				86,893				240,183				239,295
Selling, distribution and administrative expenses			74,082				74,479				216,358				210,432
Acquisition and integration costs			60				60				1,091				2,938
Fire related charges, net			1,067			—					1,067			—
Restructuring charges			129			—					129			—
Operating profit			11,541				12,354				21,538				25,925
Other expense (income):
Interest expense, net			2,455				2,963				8,207				6,483
Provision for loan loss			5,670			—					5,670			—
Loss on foreign currency transactions			81				60				251				141
Miscellaneous expense, net			(237	)			(279	)			(50	)			50
Total other expense			7,969				2,744				14,078				6,674
Income before income taxes			3,572				9,610				7,460				19,251
Income tax provision			1,421				3,355				2,894				6,724
Net income		$	2,151			$	6,255			$	4,566			$	12,527
Earnings per share:
Basic earnings per share		$	0.10			$	0.28			$	0.20			$	0.57
Diluted earnings per share		$	0.09			$	0.28			$	0.20			$	0.56
Shares used for computation:
Basic			22,373				22,021				22,282				21,943
Diluted			22,959				22,512				22,896				22,394
Dividend declared per share		$	0.05			$	0.04			$	0.15			$	0.12

Zep Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
		Nine Months Ended
		May 31,
			2014					2013
Operating Activities
Net income		$	4,566				$	12,527
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			16,579					14,475
Provision for loan loss			5,670				—
Fire related charges, net			1,067				—
Gain on disposal of fixed assets		—						(22	)
Excess tax benefits from share-based payments			(201	)				72
Other non-cash charges			2,671					2,812
Deferred income taxes			4,207					4,148
Change in assets and liabilities, net of effect of acquisitions and divestitures:
Accounts receivable			(849	)				(7,347	)
Inventories			(8,569	)				(3,238	)
Prepayments and other current assets			(1,089	)				(4,798	)
Accounts payable			2,055					3,821
Accrued compensation and other current liabilities			(16,069	)				(2,020	)
Self insurance and other long-term liabilities			(1,010	)				(2,998	)
Other assets			(1,530	)				582
Net cash provided by operating activities			7,498					18,014
Investing Activities
Purchases of property, plant, and equipment			(7,384	)				(8,534	)
Acquisitions, net of cash acquired		—						(116,827	)
Principal payment from innovation partner			300				—
Proceeds from sale of property, plant, and equipment			1,325					22
Net cash used in investing activities			(5,759	)				(125,339	)
Financing Activities
Proceeds from credit facility borrowings			253,000					338,608
Repayments of borrowings from credit facility			(251,238	)				(238,438	)
Secured borrowings			(1,518	)				8,001
Employee stock issuances			2,072					1,070
Excess tax benefits from share-based payments			201					(72	)
Dividend payments			(3,385	)				(2,652	)
Net cash provided by (used in) financing activities			(868	)				106,517
Effect of exchange rate changes on cash		5						49
Net change in Cash and cash equivalents			876					(759	)
Cash and cash equivalents – beginning of period			2,402					3,513
Cash and cash equivalents – end of period		$	3,278				$	2,754

Zep Inc.
RECONCILIATION OF NON-GAAP MEASURES
(Unaudited; In thousands)
			Three Months Ended										Nine Months Ended
			May 31,										May 31,
				2014					2013					2014					2013
Net income			$	2,151				$	6,255				$	4,566				$	12,527
Interest expense, net				2,455					2,963					8,207					6,483
Income tax provision				1,421					3,355					2,894					6,724
Depreciation and amortization				5,537					5,407					16,579					14,475
EBITDA			$	11,564				$	17,980				$	32,246				$	40,209
Acquisition and integration costs				60					60					1,091					2,938
Provision for loan loss				5,670				—						5,670				—
Fire related charges, net				1,067				—						1,067				—
Restructuring charges				129				—						129				—
California legal matter				849					391					5,446					1,000
Legal settlement				—					(1,400	)			—						(1,400	)
Contingent consideration adjustment				—				—					—						(1,285	)
Adjusted EBITDA			$	19,339				$	17,031				$	45,649				$	41,462
Adjusted EBITDA margin				10.3	%				9.2	%				9.0	%				8.2	%
			Three Months Ended										Nine Months Ended
			May 31,										May 31,
				2014					2013					2014					2013
Net income			$	2,151				$	6,255				$	4,566				$	12,527
Acquisition and integration costs				60					60					1,091					2,938
Provision for loan loss				5,670					—					5,670				—
Fire related charges, net				1,067					—					1,067				—
Restructuring charges				129					—					129				—
California legal matter				849					391					5,446					1,000
Legal settlement			—						(1,400	)			—						(1,400	)
Contingent consideration adjustment			—						—				—						(1,285	)
Net tax effect of above items				(3,093	)				331					(5,200	)				(438	)
Adjusted net income			$	6,833				$	5,637				$	12,769				$	13,342
			Three Months Ended										Nine Months Ended
			May 31,										May 31,
				2014					2013					2014					2013
Diluted earnings per share			$	0.09				$	0.28				$	0.20				$	0.56
Acquisition and integration costs, net of tax			—						—					0.03					0.09
Provision for loan loss, net of tax				0.15				—						0.15				—
Fire related charges, net of tax				0.03				—						0.03				—
Restructuring charges, net of tax			—						—				—					—
California legal matter, net of tax				0.03					0.01					0.15					0.03
Legal settlement, net of tax			—						(0.04	)			—						(0.04	)
Contingent consideration adjustment, net of tax			—						—				—						(0.04	)
Adjusted diluted earnings per share			$	0.30				$	0.25				$	0.56				$	0.60
Amortization				0.09					0.09					0.27					0.23
Adjusted diluted cash earnings per share			$	0.39				$	0.34				$	0.83				$	0.83