News Column

Zep Inc. Reports Fiscal Third Quarter 2014 Results

July 10, 2014

Fiscal Third Quarter 2014 Highlights:

  • Net sales increased 0.6% to $187.0 million, representing 2.1% organic growth

    in average daily sales
  • Adjusted EBITDA increased 13.6% to $19.3 million
  • Adjusted EBITDA margin increased 110 basis points to 10.3%
  • Adjusted diluted earnings per share increased 20.0% to $0.30
  • Adjusted diluted cash earnings per share increased 14.7% to $0.39

    Impact of Marietta Fire:

  • Impressive response from associates and first responders with no serious injuries
  • Excellent progress on implementation of previously developed business continuity plan
  • Expect some uncertainty while re-establishing aerosol manufacturing capacity
  • Expect sales pipeline success to partially offset near-term fire-related sales losses


    ATLANTA--(BUSINESS WIRE)-- Zep Inc. (NYSE: 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, 2014August 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  





    Zep Inc.

    Don De Laria, 404-350-6266

    VP, Investor Relations & Communications

    don.delaria@zep.com

    Source: Zep Inc.


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