Zep Inc. Reports Fiscal Second Quarter 2015 Results

April 8, 2015 | By Business Wire News

ATLANTA

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 six-month periods ended February 28, 2015.

“I’m pleased to see a continuation of organic sales growth trends this quarter. Transportation-related end-markets continued to show strong growth while promotional activity drove increases in our retail home center business,” said John K. Morgan, Chairman, President and Chief Executive Officer of Zep Inc. “Due to the outstanding effort of our associates, we’ve now established full aerosol capability and minimized the revenue impacts from the fire. Additionally, as we communicated last quarter, we reduced inventory in the quarter that resulted in unfavorable manufacturing absorption which negatively impacted earnings by $0.02 per diluted share compared to the prior year.”

Net sales, on a comparable basis, grew 3.8% in the second fiscal quarter to $160.1 million as a result of increases in both volume and price. Strong gains in transportation-related end-markets and at retail home centers drove organic sales gains that more than offset declines in our North American Sales & Service business. Gross profit margin in the first quarter of fiscal 2015 was 45.2% which was impacted by channel mix given the success in many of our retail businesses and lower manufacturing absorption. Fiscal 2015 gross profit margins are expected to be between 46-48% of net sales. Selling, distribution and administrative expenses were $800,000 lower compared to last year as the prior year included expenses for the California legal settlement. Interest expense was approximately $1.6 million lower than last year due to lower interest rates and $1.0 million of one-time interest costs associated with the settlement of the California legal matter in the prior year.

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.

About Zep Inc.

Zep Inc., with fiscal year 2014 net sales of approximately $700 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 63% 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^®, Zep Automotive^®, 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 the continued lowering of inventory levels for the remainder of fiscal 2015 and the expectation that gross profit margins will be between 46-48% of net sales in fiscal 2015.

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:

the ongoing impact of the fire that occurred at our aerosol manufacturing facility on May 23, 2014 on our financial results, operations and prospects;
general economic conditions;
the cost or availability of raw materials;
competition in the markets we serve;
our ability to realize anticipated benefits from strategic planning initiatives and the timing of the benefits of such actions;
market demand and pricing for our products and/or services;
our ability to maintain our customer relationships; 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, 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)

	February 28, 2015		August 31, 2014
ASSETS
Cash and cash equivalents	$	3,129	$	14,303
Accounts receivable, less reserve for doubtful accounts of $3,950 at February 28, 2015 and $4,474 at August 31, 2014		95,601		108,010
Inventories, net		83,864		75,950
Insurance receivable		9,564		13,106
Prepaid expenses and other current assets		13,062		6,254
Deferred income taxes		8,164		10,452
Total Current assets		213,384		228,075
Property, plant and equipment, net of accumulated depreciation of $117,042 at February 28, 2015 and $112,794 at August 31, 2014		72,951		75,361
Goodwill		120,254		121,005
Identifiable intangible assets, net		116,506		121,643
Other long-term assets		12,260		10,127
Total Assets	$	535,355	$	556,211

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current maturities of long-term debt	$	20,001	$	20,006
Accounts payable		51,437		65,874
Accrued compensation		16,490		19,720
Other accrued liabilities		33,130		39,329
Total Current liabilities		121,058		144,929
Long-term debt, less current maturities		190,446		186,880
Deferred income taxes		17,930		13,931
Other long-term liabilities		16,880		17,092
Total Liabilities		346,314		362,832

Commitments and Contingencies (Note 5)
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; 22,664,359 issued and outstanding at February 28, 2015, and 22,396,229 issued and outstanding at August 31, 2014		227		224
Paid-in capital		111,494		108,432
Retained earnings		73,663		72,918
Accumulated other comprehensive income		3,657		11,805
Total Stockholders’ equity		189,041		193,379
Total Liabilities and Stockholders’ equity	$	535,355	$	556,211


Zep Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In thousands, except per share data)

	Three Months Ended February 28,						Six Months Ended February 28,
	2015			2014			2015			2014

Net sales	$	160,070		$	157,752		$	328,360		$	322,644
Cost of products sold		87,758			83,709			177,267			169,340
Gross profit		72,312			74,043			151,093			153,304

Selling, distribution, and administrative expenses		70,110			70,889			141,610			142,276
Fire related gain, net		(1,000	)		—			(1,000	)		—
Restructuring costs		578			—			507			—
Acquisition and integration costs		—			417			—			1,031
Operating profit		2,624			2,737			9,976			9,997

Other expense:
Interest expense, net		1,862			3,441			3,658			5,752
Loss on foreign currency transactions		377			120			807			170
Miscellaneous expense, net		97			125			283			187
Total other expense		2,336			3,686			4,748			6,109
Income (loss) before income taxes		288			(949	)		5,228			3,888
Income tax provision (benefit)		126			(267	)		1,928			1,473
Net income (loss)	$	162		$	(682	)	$	3,300		$	2,415

Earnings (loss) per share:
Basic earnings (loss) per share	$	0.01		$	(0.03	)	$	0.15		$	0.11
Diluted earnings (loss) per share	$	0.01		$	(0.03	)	$	0.14		$	0.11

Shares used for computation:
Basic		22,553			22,320			22,497			22,242
Diluted		23,017			22,320			22,993			22,871
Dividends Declared per Share	$	0.06		$	0.05		$	0.11		$	0.10


Zep Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands)

	Six Months Ended February 28,
	2015			2014
Operating Activities
Net income	$	3,300		$	2,415
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization		10,751			11,042
Gain on disposal of fixed assets		(3	)		(68	)
Excess tax benefits from share-based payments		(116	)		(201	)
Other non-cash charges		1,580			1,735
Deferred income taxes		3,554			843
Insurance proceeds for fire related operating costs		6,322			—
Change in assets and liabilities:
Accounts receivable		8,754			8,263
Inventories		(9,791	)		(10,286	)
Prepayments and other current assets		(20,189	)		617
Accounts payable		(13,066	)		5,593
Accrued compensation and other current liabilities		(7,738	)		(18,954	)
Other long-term liabilities		(244	)		111
Other assets		(1,208	)		(555	)
Net cash provided by (used for) operating activities		(18,094	)		555

Investing Activities
Purchases of property, plant, and equipment		(5,218	)		(5,269	)
Insurance proceeds for assets damaged in fire		10,536			—
Proceeds from sale of property, plant, and equipment		3			67
Principal payment from innovation partner		—			300
Net cash provided by (used for) investing activities		5,321			(4,902	)

Financing Activities
Proceeds from credit facility borrowings		301,604			176,900
Repayments of borrowings from credit facility		(290,679	)		(171,025	)
Principal repayment – industrial revenue bonds		(7,150	)		—
Proceeds from (payments for) secured borrowings		(498	)		(1,342	)
Debt issuance costs		159			—
Stock issuances		1,369			1,981
Excess tax benefits from share-based payments		116			201
Dividend payments		(2,556	)		(2,262	)
Net cash provided by financing activities		2,365			4,453
Effect of exchange rate changes on cash		(766	)		20
Net change in cash and cash equivalents		(11,174	)		126
Cash and cash equivalents – beginning of period		14,303			2,402
Cash and cash equivalents – end of period	$	3,129		$	2,528


Zep Inc. RECONCILIATION OF NON-GAAP MEASURES (Unaudited; In thousands)

	Three Months Ended February 28,						Six Months Ended February 28,
	2015			2014			2015			2014

Net income (loss)	$	162		$	(682	)	$	3,300		$	2,415
Interest expense, net		1,862			3,441			3,658			5,752
Income tax provision (benefit)		126			(267	)		1,928			1,473
Depreciation and amortization		5,328			5,519			10,751			11,042
EBITDA	$	7,478		$	8,011		$	19,637		$	20,682

Acquisition & integration costs		–			417			–			1,031
Restructuring		578			–			507			–
California legal matter		44			2,777			87			3,549
Fire related gain, net		(1,000	)		–			(1,000	)		–
Margin on lost sales – fire related		299			–			1,590			–
Adjusted EBITDA	$	7,399		$	11,205		$	20,821		$	25,262

Adjusted EBITDA margin		4.6	%		7.1	%		6.3	%		7.8	%

	Three Months Ended February 28,						Six Months Ended February 28,
	2015			2014			2015			2014

Net income (loss)	$	162		$	(682	)	$	3,300		$	2,415
Acquisition and integration costs		–			417			–			1,031
Restructuring costs		578			–			507
California legal matter		44			3,825			87			4,597
Fire related gain, net		(1,000	)		–			(1,000	)		–
Margin on lost sales – fire related		299			–			1,590			–
Net tax effect of above items		35			(1,193	)		(437	)		(2,132	)
Adjusted net income	$	118		$	2,367		$	4,047		$	5,911

	Three Months Ended February 28,						Six Months Ended February 28,
	2015			2014			2015			2014

Diluted earnings (loss) per share	$	0.01		$	(0.03	)	$	0.14		$	0.11
Acquisition and integration costs, net of tax		–			0.01			–			0.03
Restructuring costs, net of tax		0.01			–			0.01			–
California legal matter, net of tax		0.00			0.12			0.00			0.12
Fire related (gain), net of tax		(0.02	)		–			(0.03	)		–
Margin on lost sales – fire related, net of tax		0.01			–			0.04			–
Adjusted diluted earnings per share	$	0.01		$	0.10		$	0.16		$	0.26
Amortization		0.09			0.09			0.18			0.18
Adjusted cash earnings per share	$	0.10		$	0.19		$	0.34		$	0.44

	Three Months Ended February 28,
	2015		2014		Growth Rate

Net sales	$	160,070	$	157,752	1.5	%
Foreign currency impact		3,270		–
Adjusted net sales, constant currency	$	163,340	$	157,752	3.5	%

Fire-related lost sales		460		–
Adjusted net sales, constant currency & fire-related	$	163,800	$	157,752	3.8	%