Form 10-Q Zep Inc. For: Feb 28

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April 8, 2015 4:46 PM EDT

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2015

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 01-33633

Zep Inc.

(Exact name of registrant as specified in its charter)

Delaware		26-0783366
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1310 Seaboard Industrial Boulevard, Atlanta, Georgia		30318-2825
(Address of principal executive offices)		(Zip Code)

(404) 352-1680

(Registrant’s telephone number, including area code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock — $0.01 Par Value — 23,225,301 shares as of April 3, 2015.

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Zep Inc.

INDEX

		Page No.
Part I. Financial Information

Item 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Balance Sheets — February 28, 2015 and August 31, 2014	3

	Condensed Consolidated Statements of Operations — Three and six months ended February 28, 2015 and 2014	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and six months ended February 28, 2015 and 2014	5

	Condensed Consolidated Statements of Cash Flows — Six months ended February 28, 2015 and 2014	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19

Item 4.	Controls and Procedures	19

Part II. Other Information

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 6.	Exhibits	20

Signatures		21

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

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

See accompanying notes to the condensed consolidated financial statements.

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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

See accompanying notes to the condensed consolidated financial statements.

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Zep Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (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
Other comprehensive income (loss):
Foreign currency translation adjustment	(5,072		)	(1,118		)	(8,148		)	(176		)
Other comprehensive income (loss)	(5,072		)	(1,118		)	(8,148		)	(176		)
Comprehensive income (loss)	$	(4,910	)	$	(1,800	)	$	(4,848	)	$	2,239

See accompanying notes to the condensed consolidated financial statements.

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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

See accompanying notes to the condensed consolidated financial statements.

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Zep Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands, except share and per-share data and as indicated)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of the Business

Zep Inc. (“Zep,” “we,” “our” or the “Company”) is a leading consumable chemical packaged goods company, providing a wide variety of high performance chemicals and related products and services that help professionals maintain, clean and protect their assets. We market our products and services under well recognized brand names, including Zep®, Zep Professional®, Zep Commercial®, Zep Automotive® and other Zep Inc. brands. Our common stock is listed on the New York Stock Exchange under the ticker symbol “ZEP.”

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended August 31, 2014 filed with the United States Securities and Exchange Commission (“SEC”) on November 12, 2014. Management believes that all adjustments necessary for the fair statement of results, consisting of normal recurring items, have been included in the accompanying unaudited condensed consolidated financial statements.

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The principal areas of judgment relate to: (1) accounts receivable, including estimates as to the recoverability of insurance receivables; (2) inventories; (3) long-lived and definite-lived intangible assets; (4) goodwill and indefinite-lived intangibles; (5) self-insurance reserves; (6) assessment of loss contingencies, including environmental and litigation liabilities; and (7) legal and other contingencies. Future events and their effects cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our condensed consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Actual results could differ from the estimates we have used.

The results of operations for the three and six months ended February 28, 2015 are not necessarily indicative of the results we expect for the full fiscal year because our net sales, net income and operating cash flows are generally higher in the second half of our fiscal year. More specifically, due to the seasonal nature of a portion of our business and the number of available selling days, sales in the third and fourth quarters of our fiscal year have historically exceeded those generated in the first half of the fiscal year.

Consolidation Policy

We consolidate all entities that we control. The general condition for control is ownership of a majority of the voting interests of an entity. Control may also exist in arrangements where we are the primary beneficiary of a variable interest entity (“VIE”). An entity that will have both the power to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb the losses or receive the benefits significant to the VIE is considered a primary beneficiary of that entity. We have determined that we are not a primary beneficiary in any material VIE. We eliminate all significant intercompany accounts and transactions from our condensed consolidated financial statements.

Fair Value Disclosures

Our financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, and debt. The net book values of cash and cash equivalents, trade receivables, and trade payables are representative of their respective fair values due to their short-term nature. We estimate that the carrying value of all of our outstanding debt obligations approximates fair value based on the variable nature of our effective interest rate associated with the indebtedness, which is a Level 2 fair value estimate based on a market approach.

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2. FIRE AT AEROSOL MANUFACTURING FACILITY

On May 23, 2014, a fire occurred at our aerosol manufacturing facility located in Marietta, Georgia (the “Aerosol Facility”). The fire, the cause of which remains unknown, destroyed our chemical raw material warehouse and damaged other supporting infrastructure that contains or supports our production equipment. Some of the work in process, raw material and finished goods inventory located at the Aerosol Facility was also destroyed or damaged. The products manufactured at the Aerosol Facility included cleaning and maintenance chemicals, lubricants and automotive brake cleaner.

We have arranged for contract manufacturers, one of which was already producing certain aerosol products for us, to manufacture products formerly produced in the Aerosol Facility. We also resumed production at the Aerosol Facility on a limited basis in an attempt to mitigate revenue loss resulting from the fire. We are assisting the contract manufacturers in their efforts to satisfy our requirements for the products by loaning them production equipment and assigning some of our associates to work with them, as needed. However, despite these efforts, the contract manufacturers are currently unable to manufacture some of our products in the quantity and in the formulations required to satisfy some customer requirements for the products. Furthermore, because some of the raw materials destroyed in the fire represented long-term supplies that normally would not have been replenished at the rate required after the fire, we experienced delays in obtaining supplies of some of the raw materials needed by the contract manufacturers to produce our products. We now have the capabilities to meet the majority of our customer requirements. As a result of the fire, we have experienced, and continue to experience, higher costs of production in two key categories: (1) higher costs associated with the production by contract manufacturers as compared to costs of our historical in-house production and (2) costs associated with inefficiencies of operating at our Aerosol Facility on a limited basis as compared to a full-production basis. We expect that our business-interruption insurance will cover these costs for a period of time that will be determined through discussions with our insurance companies.

We maintain casualty and business-interruption insurance that we believe will cover the losses resulting from the fire after the first $1.0 million of losses, which is the Company’s self-insured retention under such policies. Our insurance covers: (1) the costs to repair, rebuild or replace the damaged portions of the Aerosol Facility (without deduction for depreciation) at the same or another site, (2) the gross earnings, defined as income minus variable expenses during the time when production is suspended at the Aerosol Facility, and (3) the increased costs during the disruption of production.

We also maintain commercial liability insurance, subject to a $1.5 million self-insured retention. As of February 28, 2015, we have recorded a $2.8 million reserve related to third party claims related to the fire, which represents our best estimate.

We maintain workers’ compensation insurance, subject to a $500,000 per claim self-insured retention. One workers’ compensation claim has been asserted against us as a result of the fire at the Aerosol Facility.

Our insurance coverage may not fully compensate us for all losses we incur as a result of the fire, which in turn, could have a material adverse impact on our financial condition and results of operations. The timing of receipt of insurance proceeds from losses related to the fire will continue to be materially different from when those losses are incurred.

A summary of our total costs incurred and lost gross earnings related to the fire since the fire occurred, along with related insurance recoveries recorded and insurance proceeds received, is shown in the table below:

	Six Months Ended February 28, 2015						Since the Fire Occurred May 23, 2014
	Incurred		Recoveries Recorded		Insurance Proceeds		Incurred		Recoveries Recorded		Insurance Proceeds

Incremental costs(1)	$	13,317	$	13,317	$	16,859	$	31,423	$	31,423	$	21,859
Lost gross earnings(2)	1,590		1,000		1,000		4,443		1,000		1,000
Total			$	14,317	$	17,859			$	32,423	$	22,859

(1) We record estimated insurance recoveries for excess costs related to the fire to the extent we have determined that recovery of such costs is probable, thereby offsetting the costs incurred.

(2) We record recoveries for lost gross earnings due to the fire only when we have received the cash proceeds or a written confirmation of the amount of the proceeds from the insurer. We continue to be in discussions with our insurance companies regarding the recoverability of the remaining $3.4 million of unrecovered lost gross earnings.

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Our inability to fulfill customer requirements has resulted in the loss of certain customers and will likely result in temporary or permanent loss of customers or market share for certain of our aerosol products, and, thus, may continue to cause a loss of revenue in future periods. The estimated impact of lost sales related to the fire for the first six months of fiscal 2015 was approximately $3.4 million with an estimated impact to profit before tax of $1.6 million. We expect that our business interruption insurance will cover these losses for a period of time that will be determined through discussions with our insurance companies. We have received cash proceeds from our insurance companies of $1.0 million to date related to the gross earnings associated with lost sales, which is reflected as fire related gain, net in our condensed consolidated statements of operations for the three and six months ended February 28, 2015. Any significant loss of revenue resulting from the fire and its aftermath that is not covered by our insurance policy could have a material impact on our financial condition and results of operations.

We may be liable to third parties as a result of damage to or destruction of their property or as a result of the release of hazardous substances into the environment during the fire. We also may be liable to regulatory authorities for potential violations of regulatory requirements and/or for damage to the environment caused by the release of hazardous substances during the fire. We cannot fully estimate the amount of such exposure at this time.

Activity impacting the insurance receivable balance related to the fire in the first six months of fiscal 2015 is summarized below:

Balance at August 31, 2014	$	13,106
Fire related costs to be recovered:
Employee related expenses	3,988
Incremental costs of outsourced production	5,471
Professional fees	636
Clean up and waste removal	790
Other fire related costs	2,432
Total additional fire related costs	13,317
Less: Cash proceeds received (excluding $1,000 recorded as fire related gain, net)	(16,859		)
Balance at February 28, 2015	$	9,564

3. INVENTORIES

Inventories include materials, direct labor and related manufacturing overhead and are stated at the lower of cost (approximate costs determined on a first-in, first-out or average cost basis) or market, and consisted of the following:

	February 28, 2015			August 31, 2014
Raw materials and supplies	$	15,283		$	15,386
Work in process	4,711			1,721
Finished goods	66,303			60,959
	86,297			78,066
Less: Reserves	(2,433		)	(2,116		)
Inventories, net	$	83,864		$	75,950

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4. DEBT OBLIGATIONS

Our indebtedness and credit arrangements consisted of the following:

	February 28, 2015			August 31, 2014
Revolving credit facility and capital leases	$	137,564		$	125,006
Term loan	73,125			75,000
Industrial revenue bonds	—			7,150
	210,689			207,156
Less: Debt discount	(242		)	(270		)
Less: Current maturities of long-term debt	(20,001		)	(20,006		)
Long term debt, less current maturities	$	190,446		$	186,880

On August 21, 2014, the Company entered into a $325 million five-year senior, secured credit facility (the “2014 Credit Facility”). The 2014 Credit Facility is comprised of a revolving loan facility that provides for advances in the initial aggregate principal amount of up to $250 million and a term loan to the Company, in the initial aggregate principal amount of $75 million. As of February 28, 2015, $190 million of the total $211 million in borrowings outstanding under the 2014 Credit Facility have been reflected within Long-term debt, less current maturities on the condensed consolidated balance sheets given our current intent and ability to settle $190 million of those borrowings in periods subsequent to February 29, 2016. The short- and long-term classification of debt on the condensed consolidated balance sheets may fluctuate not only in response to repayment of amounts borrowed under the 2014 Credit Facility, but also concurrent with changes in our projected cash flow for the 12-month period subsequent to the balance sheet date. The base interest rate associated with borrowings made under the 2014 Credit Facility during the three and six months ended February 28, 2015 approximated 0.1% and 0.2%, respectively. In addition to this base interest rate, our effective interest rate includes an applicable margin that adjusts in accordance with our leverage ratio. During the three and six months ended February 28, 2015, this applicable margin averaged 2.47%.

As of August 31, 2014, we had $7.2 million of industrial revenue bonds outstanding that were issued in connection with the construction of our facility in DeSoto, Texas and were scheduled to be due in 2018. In the first quarter of fiscal 2015, we redeemed those industrial revenue bonds using funds available under the 2014 Credit Facility.

As of February 28, 2015, our credit availability under the 2014 Credit Facility totaled $60.0 million. We remained in compliance with our debt covenants as of February 28, 2015, and we believe that, during the next twelve months, based on our current operations, our liquidity and capital resources will be sufficient to meet our working capital, capital expenditure and other anticipated cash requirements.

The 2014 Credit Facility replaced the five-year revolving credit agreement, dated as of July 15, 2010, among the Company, Acuity Specialty Products, Inc., certain other subsidiaries of the Company, and JPMorgan Chase Bank, N.A., Wells Fargo Bank, National Association, Regions Bank and the other lenders party thereto, as lenders, which was due to expire on July 15, 2015 (the “2010 Credit Facility”). As such, there were no amounts outstanding under the 2010 Credit Facility as of February 28, 2015. The effective interest rate associated with borrowings made under the 2010 Credit Facility included an applicable margin that averaged 3.50% during the three and six months ended February 28, 2014.

5. COMMITMENTS AND CONTINGENCIES

Litigation

We are subject to various legal claims arising in the normal course of business. We are self-insured up to specified limits for certain types of claims, including product liability, and are fully self-insured for certain other types of claims, including environmental, product recall, and patent infringement. Based on information currently available, it is the opinion of management that the ultimate resolution of pending and threatened legal proceedings will not have a material adverse effect on our results of operations, financial position, or cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of such matters, if unfavorable, could have a material adverse effect on our results of operations, financial position, or cash flows.

We establish accruals for legal claims when the costs associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for such claims. However, we cannot make a meaningful estimate of actual costs or a range of reasonably possible losses that could possibly be higher or lower than the amounts accrued. In addition, from time to time we may incur expense associated with efforts to enforce our non-compete agreements.

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California Sales Representative Litigation

In December 2010, two of our former California-based sales representatives filed suit against us on behalf of themselves and all other sales representatives who were employed by Acuity Specialty Products, Inc. in the State of California and similarly situated. In fiscal 2013, we settled the original two plaintiffs’ claims and paid the State of California fees under the California Labor Code Private Attorney General Act of 2004. The Court awarded the plaintiffs’ lawyers legal fees in the amount of $1,162,000 with respect to the lawsuit filed by the two California sales representatives. The Company believes that the award is excessive and has appealed.

The ultimate resolution of the plaintiffs’ attorney fees associated with the California Sales Representative Litigation is uncertain. We are reserved for this matter based on a settlement offer to plaintiffs’ counsel. All other issues regarding this litigation have been resolved.

During the second quarter and first six months of fiscal 2014, we recorded charges of $3.8 million and $4.6 million, respectively, against earnings associated with legal defense and settlement costs related to the California Sales Representative Litigation. Of these charges, $1.0 million was classified within interest expense, net, in the condensed consolidated statements of operations for the three months ended February 28, 2014. The additional $2.8 million and $3.6 million in the three and six months ended February 28, 2014, respectively, were classified as selling, distribution and administrative expenses in the condensed consolidated statements of operations.

Environmental Matters

General

Our operations are subject to federal, state, local, and foreign laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances and solid and hazardous waste, and the remediation of contaminated sites. Permits and environmental controls are required for certain of our operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by the issuing authorities. We will incur capital and operating costs relating to environmental compliance on an ongoing basis. Environmental laws and regulations have generally become stricter in recent years, and the cost of responding to future changes may be substantial. While management believes that we are currently in substantial compliance with all material environmental laws and regulations, and have taken reasonable steps to ensure such compliance, there can be no assurance that we will not incur significant costs to remediate violations of such laws and regulations, particularly in connection with acquisitions of existing operating facilities, or to comply with changes in, or stricter or different interpretations of, existing laws and regulations. Such costs could have a material adverse effect on our results of operations.

Superfund Sites

Certain of our subsidiaries are currently a party to federal and state administrative proceedings arising under federal and state laws enacted for the protection of the environment where a state or federal agency or a private party alleges that hazardous substances generated by our subsidiary have been discharged into the environment and a state or federal agency is requiring a cleanup of soil and/or groundwater pursuant to federal or state superfund laws. In each of these proceedings in which our subsidiary has been named as a party that allegedly generated hazardous substances that were transported to a waste site owned and operated by another party, either: (1) our subsidiary is one of many other identified generators who have reached an agreement regarding the allocation of costs for cleanup among the various generators and our potential liability is not material; (2) our subsidiary has been identified as a potential generator and the sites have been remediated by the Environmental Protection Agency or by a state for a cost that is not material; (3) other generators have cleaned up the site and have not pursued a claim against our subsidiary and our liability, if any, would not be material; or (4) our subsidiary has been identified as a potential generator but has been indemnified by its waste broker and transporter.

Environmental Remediation Orders

Certain of our subsidiaries are a party to environmental remediation orders with respect to certain facilities, as discussed below. We arrived at our current estimates with respect to these matters based on studies prepared by independent third party environmental consulting firms. Our estimates of the actual costs of remediation of these matters could vary depending upon the results of additional testing and geological studies, the rate at which site conditions may change, the success of initial remediation designed to address the most significant areas of contamination, and changes in regulatory requirements.

One of our subsidiaries has been named as a responsible party with respect to a facility located on Seaboard Industrial Boulevard in Atlanta, Georgia that it owns and currently uses in the manufacture of our products. Further, our subsidiary has executed a consent order with the Georgia Environmental Protection Division (“EPD”) covering this remediation, and is operating under an EPD approved Corrective Action Plan, which may be amended from time to time based on the progression of our remediation. While it is reasonably possible that the total remediation cost could range up to $10.0 million, management’s best estimate of the total probable

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remediation costs continues to be $5.0 million. As of February 28, 2015, we recorded liabilities related to the remediation of this site in an undiscounted, pre-tax amount of $2.1 million.

One of our subsidiaries has been named as a responsible party with respect to our Aerosol Facility. With regard to the Aerosol Facility, our subsidiary is responsible for the expected costs of implementing an Amended Corrective Action Plan that was conditionally approved by the EPD in June 2012 under the Georgia Hazardous Response Act. Testing subsequent to the fire has not shown a need to materially change our remediation efforts at the site.

Additionally, one of our subsidiaries previously conducted manufacturing operations at a facility in Cartersville, Georgia that has since been sold and where sub-surface contamination exists. Pursuant to the terms of the sale, the subsidiary retained environmental exposure that might arise from its previous use of this property. Management is preparing a plan to address sub-surface contamination at this location.

While it is reasonably possible that the total costs incurred by us in connection with the remediation of the Aerosol Facility and the Cartersville site could range up to an aggregate of $16.0 million, we recorded liabilities related to the remediation of these sites in an aggregate undiscounted, pre-tax amount of $7.0 million, which is management’s best estimate of total remaining remediation costs. Our recorded liabilities include the costs to rebuild the water treatment facility that was destroyed in the fire.

6. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Unvested shares of restricted stock are excluded from basic shares outstanding. Diluted earnings per share is computed similarly, but reflects the potential dilution that would occur if dilutive options were exercised and restricted stock awards were vested. The following table shows the computation of basic and diluted earnings per share:

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

Net income (loss)	$	162	$	(682	)	$	3,300	$	2,415

Basic weighted average shares outstanding	22,553		22,320			22,497		22,242
Common stock equivalents (stock options and restricted stock)	464		—			496		629
Diluted weighted average shares outstanding	23,017		22,320			22,993		22,871

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

For the three month periods ended February 28, 2015 and 2014, we excluded 0.7 million and 1.2 million common stock equivalents, respectively, from our earnings per share calculation because of their anti-dilutive effect on this calculation. For the three month period ended February 28, 2014, no adjustment for common stock equivalents is reflected in the calculation of dilutive loss per share because the effect of including these potentially dilutive items would be anti-dilutive. For the six month periods ended February 28, 2015 and 2014, we excluded 0.7 million and 0.3 million common stock equivalents, respectively, from our earnings per share calculation because of their anti-dilutive effect on this calculation.

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7. SECURITIZATION OF CERTAIN ACCOUNTS RECEIVABLE

On May 31, 2013, we entered into a Master Receivables Purchase Agreement with Bank of America N.A. (“BofA”), whereby BofA may periodically purchase certain accounts receivable amounts from us. Proceeds received from these transfers will be discounted at a rate of LIBOR plus 225 basis points, which is currently less than our cost of borrowing. We receive the majority of those proceeds immediately upon our transfer of qualifying receivable balances to BofA, whereas the billing terms associated with accounts receivable that we may subject to this program can range up to one year. We believe these transfers represent an economical means to manage operating working capital. We will continue to administer the collection of the accounts receivable that are securitized under this agreement. Therefore, we account for the transfer of these receivables as securitized borrowing transactions rather than a true sale of accounts receivable. Accounts receivable subject to this agreement remain classified as accounts receivable, less reserve for doubtful accounts in our condensed consolidated balance sheets. As of February 28, 2015, the amount of securitized borrowings reflected within other accrued liabilities in our condensed consolidated balance sheets totaled $8.2 million. The expense that we recorded in connection with the discount incurred on the transfer of these receivables, which was nominal, is reflected within interest expense, net in our condensed consolidated statements of operations. The proceeds received from these transfers are reflected as secured borrowings in our condensed consolidated statements of cash flows.

8. RESTRUCTURING

In fiscal year 2013, we began executing a variety of complexity-reduction activities, including facilities consolidation, process simplification, product-line and customer rationalization, and headcount reductions related to such activities. In the second quarter of fiscal 2015, we recorded $0.6 million of additional restructuring charges related to the simplification and alignment of our U.S. commercial and European operations. As of February 28, 2015, the restructuring reserve was classified as short-term and included in accrued compensation on the accompanying condensed consolidated balance sheets:

	Severance Costs			Facility Exit Costs
Balance as of August 31, 2014	$	834		$	261
Restructuring charges, net	578			(71		)
Cash payments	(251		)	(190		)
Foreign currency translation	(67		)	—
Balance as of February 28, 2015	$	1,094		$	—

9. ACQUISITIONS

Vehicle Care division of Ecolab Inc.

We completed the acquisition of Ecolab’s Vehicle Care division (“EVC”), effective December 1, 2012 (“Closing Date”), for $116.8 million in cash. The combination of EVC, our existing North American Sales and Service vehicle wash operations, and Niagara National LLC created a new platform that we refer to as “Zep Vehicle Care.” Zep Vehicle Care is a leading provider of vehicle care products, including soaps, polishes, sealants, wheel and tire treatments and air fresheners to professional car washes, convenience stores, auto detailers, and commercial fleet wash customers. Zep Vehicle Care provides car, truck and fleet wash operators with high efficacy products for their wash tunnels and facilities. In addition, we entered into a transition services agreement under which Ecolab continued to provide certain services to us until December 1, 2013.

The operating results of EVC are included in our condensed consolidated financial statements as of the Closing Date. We incurred acquisition and integration costs associated with the EVC acquisition and our previous acquisitions during the three and six months ended February 28, 2014 of $0.4 million and $1.0 million, respectively.

10. SUBSEQUENT EVENT

On April 8, 2015, the Company announced that it has entered into a definitive agreement under which New Mountain Capital will acquire all outstanding common shares of Zep Inc. for $20.05 per share in cash. The enterprise value of the transaction is approximately $692 million.

Under the terms of the agreement, Zep Inc. shareholders will receive $20.05 in cash for each outstanding share of Zep Inc. common stock they own. The purchase price represents a 23% premium to Zep Inc.’s 90-day volume weighted average stock price for the period ended April 7, 2015. The agreement was unanimously approved by Zep Inc.’s Board of Directors.

The definitive agreement contains a “go-shop” provision under which Zep Inc. may solicit alternative proposals from third parties during the next 30 calendar days on customary terms and conditions for transactions of this nature. The Zep Inc. Board, with the assistance of its advisors, has the right to actively solicit acquisition proposals during this period. There can be no assurances that this process will result in any alternative transaction.

The acquisition is subject to customary closing conditions, including receipt of shareholder and regulatory approvals. The acquisition requires the affirmative vote of a majority of the votes cast by the holders of outstanding shares of the Company’s stock, which will be sought at a special meeting of shareholders. New Mountain Capital has received fully committed debt financing in connection with the acquisition. The transaction is currently expected to close in the third calendar quarter of 2015.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read together with our unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this quarterly report and our audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended August 31, 2014 for a more complete understanding of our financial condition and results of operations. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Actual results could differ materially from those discussed in these forward looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below, particularly in “Cautionary Statement Regarding Forward Looking Information.”

References to our Form 10-K made throughout this document refer to our Annual Report on Form 10-K for the year ended August 31, 2014, filed with the SEC on November 12, 2014.

Business Overview

We are a leading consumable chemical packaged goods company, providing a wide variety of high performance chemicals and related products and services that help professionals maintain, clean and protect their assets. We market our products and services under well recognized brand names, including Zep®, Zep Professional®, Zep Commercial®, Zep Automotive® and other Zep Inc. brands. Our common stock is listed on the New York Stock Exchange under the ticker symbol “ZEP.”

Due to the seasonal nature of a portion of our business and the number of available selling days, sales, net income and operating cash flows in the third and fourth quarters of our fiscal year have historically exceeded those generated in the first half of the fiscal year. Additional discussion of trends and expectations related to the remainder of fiscal year 2015 and beyond is included within the Strategy and Outlook and Results of Operations sections.

Subsequent Event

Year-to-Date Highlights

· Net sales for the first half of fiscal 2015 were $328.4 million, an increase of $5.7 million, or 1.8%, as compared to $322.6 million reported for the same period a year ago, mainly due to increased sales volume and higher customer prices. We realized sales growth in strategic end markets, such as home improvement retailers and transportation, partially offset by the impacts of unfavorable foreign exchange and lost sales due to the fire at our Aerosol Facility.

· Gross profit for the first half of fiscal 2015 was $151.1 million, a decrease of 1.4% compared to $153.3 million reported for the same period a year ago. Gross profit margin was 46.0% for the first half of fiscal 2015, a decrease compared with the prior year period primarily due to unfavorable sales channel mix.

· We reported net income of $3.3 million for the first half of fiscal 2015, an increase of $0.9 million compared with the first half of fiscal year 2014. Our net income in the first half of fiscal 2015 includes a $1.0 million pre-tax gain resulting from insurance recoveries during the second quarter of fiscal 2015 for lost gross earnings associated with lost sales due to the fire, while the prior year period was impacted by costs associated with the California Sales Representative Litigation.

Strategy and Outlook

Our strategy is to be a leading provider of maintenance and cleaning products and services for customers engaged primarily in the transportation, industrial maintenance and institutional janitorial & sanitation (“jan/san”) end markets. We have transformed our business over the past five years by developing a multi-channel and multi-brand approach designed to meet the changing needs and preferences of these markets. As a result, we are competitively positioned to benefit from favorable transportation trends including growth in new vehicle sales and average vehicle age and miles driven, as well as from favorable industrial maintenance and institutional jan/san trends which benefit from a growing economy and employment.

Our various Zep brands are now available through our dedicated direct sales force, hundreds of distributors including Fastenal, Grainger and Lagasse, and in thousands of retail locations including Ace Hardware, Advance Auto Parts, AutoZone, The Home Depot, Lowe’s, Menards, Tractor Supply and True Value. Additionally, we have increased the global reach of Zep’s brand by expanding our European operations to include the United Kingdom and developed a network of distributors in China.

In the near term, we intend to make investments in sales, training, management and marketing to strengthen our existing platforms for future organic growth. Additionally, we expect to continue to invest in our supply chain to realize sourcing efficiencies and minimize manufacturing and logistics costs.

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We expect to see continued organic sales growth in certain markets, partially offset by sales lost as a result of the fire. We believe that our investments in our growth initiatives will yield positive future financial results and that insurance proceeds will partially offset the impact of the fire, including the sustained losses to property and lost gross earnings resulting from the fire.

Results of Operations

Second Quarter of Fiscal Year 2015 Compared with Second Quarter of Fiscal Year 2014

The following table sets forth information comparing significant components of net income (loss) for the second quarter of fiscal 2015 with the second quarter of fiscal 2014. Both dollar and percentage changes included within the table below were calculated from our condensed consolidated statements of operations.

	Three Months Ended February 28,
(dollars in millions)	2015			% of net sales		2014			% of net sales		Percent Change
Net sales	$	160.1				$	157.8				1.5
Gross profit	72.3			45.2		74.0			46.9		(2.3	)
Selling, distribution and administrative expenses	70.1			43.8		70.9			44.9		(1.1	)
Fire related gain, net	(1.0		)	(0.6	)	—			—		—
Acquisition and integration costs	—			—		0.4			0.3		(100.0	)
Restructuring charges	0.6			0.4		—			—		—
Operating profit	2.6			1.6		2.7			1.7		(4.1	)
Other expense (income)
Interest expense, net	1.9			1.2		3.4			2.2		(45.9	)
Other expense, net	0.5			0.3		0.2			0.2		93.5
Income (loss) before income taxes	0.3			0.2		(0.9		)	(0.6	)	—
Income tax provision	0.1			0.1		(0.3		)	(0.2	)	—
Net income (loss)	0.2			0.1		(0.7		)	(0.4	)	—

Net sales totaled $160.1 million in the second quarter of fiscal 2015 compared with $157.8 million in the second quarter of fiscal 2014, an increase of $2.3 million, or 1.5%. The increase in sales was driven by a $4.0 million increase in volume and a $2.1 million increase due to higher prices. These increases were partially offset by a negative impact from foreign currency translation of $3.3 million and lost sales due to the fire of $0.5 million. Sales volume growth in the second quarter of fiscal 2015 was led by our home improvement and automotive retail channels and our vehicle care business.

Gross profit decreased $1.7 million, or 2.3%, to $72.3 million in the second quarter of fiscal year 2015 compared with $74.0 million in the second quarter of fiscal 2014. Gross profit as a percentage of net sales decreased from 46.9% in the second quarter of fiscal 2014 to 45.2% in the second quarter of fiscal 2015 due to unfavorable sales mix and manufacturing performance resulting from decreased production during the 2015 period, which was largely a function of an intentional reduction of inventory.

Selling, distribution and administrative expenses decreased $0.8 million, or 1.1%, primarily due to the prior year period including $2.8 million of costs related to legal fees and settlements associated with the California Sales Representative Litigation (see Note 5 — Commitments and Contingencies). Partially offsetting the decrease in legal expenses are increases in employee compensation costs and professional fees.

Operating profit decreased $0.1 million in the second quarter of fiscal 2015 to a profit of $2.6 million compared with
$2.7 million in the second quarter of fiscal 2014. In addition to the net impacts of the items discussed above, operating profit in the second quarter of fiscal 2015 benefitted from the inclusion of a $1.0 million gain resulting from insurance recoveries during the second quarter of fiscal 2015 for lost sales due to the fire.

Interest expense, net decreased from $3.4 million for the second quarter of fiscal 2014 to $1.9 million in the second quarter of fiscal 2015 primarily due to the inclusion of $1.0 million in interest expense associated with settlements made in the California Sales Representative Litigation in the second quarter of fiscal 2014. The remaining decrease is due to lower borrowing costs associated with the 2014 Credit Facility as compared to the 2010 Credit Facility. While interest associated with our debt is variable in nature, we expect net interest expense to range between $6.5 million and $7.5 million in fiscal 2015.

The effective tax rate for the second quarter of fiscal 2015 was 43.8%, compared with 28.1% in the second quarter of fiscal 2014. The increase was primarily due to an increase in non-deductible expenses, partially offset by increases in the benefit of lower foreign tax rates and the benefit for the release of a valuation allowance on state tax credits.

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Diluted earnings (loss) per share in the second quarter of fiscal 2015 totaled $0.01, compared to $(0.03) in the second quarter of fiscal 2014.

First Half of Fiscal Year 2015 Compared with First Half of Fiscal Year 2014

The following table sets forth information comparing significant components of net income for the first half of fiscal 2015 with the first half of fiscal 2014. Both dollar and percentage changes included within the table below were calculated from our condensed consolidated statements of operations.

	Six Months Ended February 28,
(dollars in millions)	2015			% of net sales		2014		% of net sales	Percent Change
Net sales	$	328.4				$	322.6		1.8
Gross profit	151.1			46.0		153.3		47.5	(1.4	)
Selling, distribution and administrative expenses	141.6			43.1		142.3		44.1	(0.5	)
Fire related gain, net	(1.0		)	(0.3	)	—		—	—
Acquisition and integration costs	—			—		1.0		0.3	(100.0	)
Restructuring charges	0.5			0.2		—		—	—
Operating profit	10.0			3.0		10.0		3.1	(0.2	)
Other expense (income)
Interest expense, net	3.7			1.1		5.8		1.8	(36.4	)
Other expense, net	1.1			0.3		0.4		0.1	205.3
Income before income taxes	5.2			1.6		3.9		1.2	34.5
Income tax provision	1.9			0.6		1.5		0.5	30.9
Net income	3.3			1.0		2.4		0.7	36.6

Net sales totaled $328.4 million in the first half of fiscal 2015 compared with $322.6 million in the first half of fiscal 2014, an increase of $5.7 million, or 1.8%. This increase was mainly due to an $11.1 million increase in sales volume and a $3.2 million increase due to higher customer prices. We realized sales growth in strategic end markets, such as home improvement retailers and transportation. These sales increases were partially offset by unfavorable foreign exchange of $5.3 million and lost sales due to the fire of $3.2 million.

Gross profit decreased $2.2 million, or 1.4%, to $151.1 million in the first half of fiscal 2015 compared with $153.3 million in the first half of fiscal 2014. Gross profit as a percentage of net sales decreased to 46.0% in the first half of fiscal 2015 as compared to 47.5% in the first half of fiscal 2014 primarily due to unfavorable sales channel mix.

Selling, distribution and administrative expenses decreased $0.7 million, or 0.5%, primarily due to the inclusion of $3.6 million of legal fees and settlement costs in the prior year period associated with the California Sales Representative Litigation (see Note 5 — Commitments and Contingencies). The decrease in legal expenses was partially offset by higher sales and marketing costs and increases in employee compensation costs and professional fees in the first half of fiscal 2015.

Operating profit in both the first half of fiscal 2015 and the first half of fiscal 2014 was $10.0 million. In addition to the net impacts of the items discussed above, operating profit in the first half of fiscal 2015 was also impacted by the inclusion of a $1.0 million gain resulting from insurance recoveries during the second quarter of fiscal 2015 for lost sales due to the fire.

Interest expense, net decreased from $5.8 million for the first half of fiscal 2014 to $3.7 million for the first half of fiscal 2015 due to the prior year period including $1.0 million in interest expense associated with settlements made in the California Sales Representative Litigation. The decrease is also the result of lower borrowing costs associated with the 2014 Credit Facility as compared to the 2010 Credit Facility.

The effective tax rate for the first half of fiscal 2015 was 36.9%, compared with 37.9% in the first half of fiscal 2014. We anticipate that our effective tax rate will range between 36.0% and 38.0% for fiscal year 2015.

Diluted earnings per share generated in the first half of fiscal year 2015 totaled $0.14, compared to $0.11 in the first half of fiscal year 2014.

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Liquidity and Capital Resources

We have three principal sources of near-term liquidity: (1) existing cash and cash equivalents; (2) cash generated by operations; and (3) available borrowing capacity under our 2014 Credit Facility, which provides for a maximum borrowing capacity of $323 million. As of February 28, 2015, we had approximately $109.8 million available under the 2014 Credit Facility. We have letters of credit totaling $2.6 million outstanding as of February 28, 2015 for the purpose of securing collateral requirements under our casualty insurance programs and securing certain environmental obligations. These letters of credit were issued under the 2014 Credit Facility, thereby reducing the total availability under the facility by such amount. In November 2014, we redeemed $7.2 million of industrial revenue bonds that were due in 2018 using funds available under the 2014 Credit Facility.

As of February 28, 2015, we had $3.1 million in cash and cash equivalents, of which $1.7 million was held by our foreign subsidiaries. Cash and cash equivalents held by our foreign subsidiaries averaged $13.1 million during the first six months of fiscal 2015. If in the future it becomes necessary to use all or a portion of the accumulated earnings generated by our foreign subsidiaries for our U.S. operations, we would be required to accrue and pay U.S. income taxes on the funds repatriated for use within our U.S. operations. Determination of the amount of U.S. income taxes that would be required to be accrued is not practicable due to uncertainties related to the timing and source of any potential distribution of such funds, along with other important factors such as the amount of associated foreign tax credits. Furthermore, our intent is to continue to reinvest earnings generated by our foreign subsidiaries indefinitely outside of the U.S. for purposes of, including but not limited to, growing our international operations.

We were in compliance with our debt covenants as of February 28, 2015, and we believe that our liquidity and capital resources are sufficient to meet our working capital, capital expenditure and other anticipated cash requirements over the next twelve months. In fiscal 2015, we expect sources of cash to include cash flow from operations as well as insurance proceeds relating to the fire at our Aerosol Facility. Our intended uses of cash in fiscal 2015 include investments in the organization to promote organic growth and rebuilding our aerosol production capabilities, while in the past much of our cash uses were focused on external acquisitions. We have an effective shelf registration statement that registers the issuance of up to an aggregate of $300 million of equity, debt, and certain other types of securities through one or more future offerings. The net proceeds from the sale of any securities pursuant to the shelf registration statement may be used for general corporate purposes, which may include funding capital expenditures, pursuing growth initiatives, whether through acquisitions, joint ventures or otherwise, repaying or refinancing indebtedness or other obligations, and financing working capital.

Net debt, which is defined as current maturities of long-term debt plus long-term debt, less current maturities minus cash and cash equivalents, as of February 28, 2015, was $207.3 million, an increase of $14.7 million compared with August 31, 2014. The increase in net debt primarily reflects an increase in our outstanding debt and decrease in cash, primarily due to payments of accounts payable and a temporary build-up of inventory during the first half of fiscal 2015.

Cash Flow

We use available cash and cash flow provided by operating activities primarily to fund operations and capital expenditures. Net cash used for operating activities totaled $18.1 million during the first half of fiscal year 2015, compared with net cash provided by operating activities of $0.6 million in the prior year period. Operating working capital increased $9.9 million in the first half of fiscal 2015 driven by payments of accounts payable and increases in inventories of certain aerosol products produced by contract manufacturers and for certain seasonal promotional activities.

In the first half of fiscal 2015, we have received $17.9 million of insurance proceeds related to the fire. We have classified a total of $7.3 million of those proceeds as cash flow from operating activities, $6.3 million of which is presented as insurance proceeds for fire-related operating costs. That amount represents recoveries to defray such costs as cleaning and removing debris from the property. The remaining $1.0 million, which was paid to us by our insurers related to lost sales due to the fire, is reflected within net income as a cash item on our condensed consolidated statement of cash flows for the first six months of fiscal 2015. The remaining $10.5 million of insurance proceeds are classified as cash flow from investing activities.

Included in cash flow provided by (used for) operating activities was $3.3 million and $6.7 million of interest payments in the first half of fiscal 2015 and 2014, respectively. Cash flows from operating activities also included $4.0 million and $6.2 million of cash paid for income taxes in the first half of fiscal 2015 and 2014, respectively.

Management believes that investing in assets and programs that will increase the return on our invested capital over time is a key factor in creating stockholder value. We invested $5.2 million and $5.3 million in the first half of fiscal year 2015 and 2014, respectively. We expect to make capital expenditures of approximately $25 million to $30 million in fiscal year 2015, including amounts related to replacing our aerosol production capabilities.

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Cash flow provided by financing activities was $2.4 million in the first half of fiscal 2015 as compared with $4.5 million in the first half of fiscal 2014.

Off-Balance Sheet Arrangements and Contractual Obligations

In our Form 10-K, we disclosed our off balance sheet arrangements and contractual obligations. As of February 28, 2015, there have been no material changes to those off-balance sheet arrangements and contractual obligations outside the ordinary course of business.

Critical Accounting Policies

There were no significant changes to our critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended August 31, 2014 during the first six months of fiscal 2015.

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q contains, and other written or oral statements made by or on behalf of us 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 we file 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 regarding our performance in the remainder of fiscal year 2015;

· statements regarding our ability to successfully implement our strategic initiatives and plans including, without limitation, investments in sales capacity, supply chain optimization and product innovation;

· statements relating to our future economic performance, benefits of productivity improvements, business prospects, revenue, income, cash flows, and financial condition;

· statements regarding expected insurance recoveries;

· statements regarding the outcome of contingencies, including pending legal and regulatory proceedings; and

· statements preceded by, followed by, or that include the words “expects,” “believes,” “intends,” “anticipates,” and similar terms that relate to future events, performance, or our operating results.

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” within our Form 10-K.

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You are cautioned not to place undue reliance on any of our forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to publically update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks as part of our ongoing business due primarily to fluctuations in both interest rates and foreign exchange rates that could impact our results from operations and financial condition. There have been no material changes to our exposure from market risks from those disclosed in Part II, “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” within the Form 10-K.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls and procedures as required by Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the evaluation as of February 28, 2015, management has concluded that our disclosure controls and procedures were not effective as a result of a material weakness in our internal control over financial reporting as described in our Form 10-K (“material weakness”).

(b) Changes in Internal Control over Financial Reporting

Except as set forth below, during the three months ended February 28, 2015, there have not been any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Plan for Remediation of Material Weakness in Internal Control over Financial Reporting

As previously discussed in our Form 10-K, we are in the process of remediating the material weakness in our internal control over financial reporting. Our remediation plan includes enhancing our complement of resources with accounting and internal control knowledge through additional hiring and/or training to implement and perform additional controls over the preparation and review of manual journal entries and account reconciliations. Our plan also includes developing formal policies and improving processes, including reducing usage of manual journal entries and implementing an approval control for manual journal entries with the objective of preventing errors prior to posting to the general ledger.

Management, with the oversight of the Audit Committee of the Board of Directors, has made substantial progress toward remediation of the material weakness through the following actions:

· redesign and implementation of enhanced policies and procedures for preparation and review of account reconciliations;

· reduction in the number of manual journal entries by more than 50% per month through automation and rationalization efforts;

· development of policies and standard procedures for the documentation and review of manual journal entries;

· engagement of a consulting firm to assist with the analysis of underlying causes of the material weakness and the development and implementation of policies and procedures to remediate the material weakness; and

· hiring of temporary resources and recruitment of permanent resources to provide capacity to fully implement and sustain adherence to redesigned policies and procedures.

When fully implemented and operating effectively, we expect these enhancements will remediate the material weakness described above. We have incurred and expect to incur additional costs associated with our remediation efforts. We plan to remediate the material weakness during our fiscal year ended August 31, 2015. However, we cannot determine how long it will take to fully and effectively execute our remediation plan, and we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is party to litigation incidental to our business from time to time. For additional information regarding litigation to which we are a party, see Note 5 — Commitments and Contingencies to our accompanying condensed consolidated financial statements for more details, which is incorporated by reference into this item.

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in Part I, “Item 1A. Risk Factors” of our Form 10-K.

Item 6. Exhibits

Exhibits are listed on the Index to Exhibits, which is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	REGISTRANT Zep Inc.

Date: April 8, 2015	/s/ John K. Morgan
	JOHN K. MORGAN
	CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER

Date: April 8, 2015	/s/ Mark R. Bachmann
	MARK R. BACHMANN EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

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INDEX TO EXHIBITS

Exhibit No.	Description
3(a)	Restated Certificate of Incorporation of Zep Inc.	Reference is made to Exhibit 3.1 of registrant’s Form 8-K as filed with the Securities and Exchange Commission on October 26, 2007, which is incorporated herein by reference.

3(b)	Amended and Restated By-Laws of Zep Inc. (effective January 8, 2014)	Reference is made to Exhibit 3(b) of registrant’s Form 8-K as filed with the Securities and Exchange Commission on January 9, 2014, which is incorporated herein by reference.

10.1	Severance Agreement, dated as of March 25, 2014, between Zep Inc. and Steven E. Nichols+	Filed with the Securities and Exchange Commission as part of this Form 10-Q.

10.2	Form of Performance Stock Unit Award Agreement+	Filed with the Securities and Exchange Commission as part of this Form 10-Q.

10.3	Form of Incentive Stock Option Agreement+	Filed with the Securities and Exchange Commission as part of this Form 10-Q.

10.4	Form of Restricted Stock Award Agreement+	Filed with the Securities and Exchange Commission as part of this Form 10-Q.

31(a)	Rule 13a-14(a)/15d-14(a) Certification, signed by John K. Morgan	Filed with the Securities and Exchange Commission as part of this Form 10-Q.

31(b)	Rule 13a-14(a)/15d-14(a) Certification, signed by Mark R. Bachmann	Filed with the Securities and Exchange Commission as part of this Form 10-Q.

32(a)	Section 1350 Certification, signed by John K. Morgan	Furnished with the Securities and Exchange Commission as part of this Form 10-Q. Such certification shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

32(b)	Section 1350 Certification, signed by Mark R. Bachmann	Furnished with the Securities and Exchange Commission as part of this Form 10-Q. Such certification shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

101.INS	XBRL Instance Document *

101.SCH	XBRL Taxonomy Extension Schema Document*

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB	XBRL Taxonomy Extension Label Linkbase Document*

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

+ Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q.

* Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (Unaudited) — February 28, 2015 and August 31, 2014; (ii) Condensed Consolidated Statements of Operations (Unaudited) — Three and Six Months Ended February 28, 2015 and 2014; (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) — Three and Six Months Ended February 28, 2015 and 2014; (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) — Six Months Ended February 28, 2015 and 2015; and (v) Notes to Condensed Consolidated Financial Statements (Unaudited).

Exhibit 10.1

Zep Inc.

SEVERANCE AGREEMENT

THIS AGREEMENT (the “Agreement”), made and entered into as of this 25th day of March 2014, by and between Zep Inc., a Delaware corporation (the “Company”), and Steven Nichols (the “Executive”).

WITNESSETH:

WHEREAS, Executive is a key employee of the Company and an integral part of the Company’s management; and

WHEREAS, the Company desires to provide Executive with certain benefits if Executive’s employment is terminated involuntarily under certain circumstances; and

WHEREAS, the Agreement is not intended to provide for the deferral of compensation within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), but rather, is intended to satisfy the short-term deferral exemption under Treasury Regulation (“Treas. Reg.”) §1.409A-1(b)(4) and/or the separation pay exemption under Treas. Reg. §1.409A-1(b)(9); and

NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows:

1. TERM OF AGREEMENT

Unless earlier terminated as hereinafter provided, this Agreement shall commence on the date hereof and shall be for a rolling, two-year term (the “Term”) and shall be deemed to extend automatically, without further action by either the Company or Executive, each day for an additional day, such that the remaining term of the Agreement shall continue to be two years; provided, however, that either party may, by written notice to the other, cause this Agreement to cease to extend automatically and, upon such notice, the “Term” of this Agreement shall be the two-year period following the date of such notice, and this Agreement shall terminate upon the expiration of such Term; provided, further, that in the event of a Change in Control (as defined in Section 2.3 below), the Term of this Agreement shall not expire prior to the expiration of three (3) years after the occurrence of a Change in Control. This Agreement shall not be considered an employment agreement and in no way guarantees Executive the right to continue in the employment of the Company or its affiliates. Executive’s employment is considered employment at will, subject to Executive’s right to receive payments and benefits upon certain terminations of employment as provided below.

As of the date hereof, this Agreement is intended to, and shall, supersede and replace in its entirety any prior severance agreement and the severance obligations contained in any employment letter agreement between Executive and the Company (or a predecessor to the Company).

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2. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings specified below:

2.1 “Board” or “Board of Directors”. The Board of Directors of Zep Inc., or its successor.

2.2 “Cause”. The involuntary termination of Executive by the Company for the following reasons shall constitute a termination for Cause:

a. If termination shall have been the result of an act or acts by the Executive which have been found in an applicable court of law to constitute a felony (other than traffic-related offenses);

b. If termination shall have been the result of an act or acts by the Executive which are determined in the good faith judgment of the Company to be in violation of law or of written policies of the Company and which result in material injury to the Company;

c. If termination shall have been the result of an act or acts of dishonesty by the Executive resulting or intended to result directly or indirectly in gain or personal enrichment to the Executive at the expense of the Company; or

d. Upon the continued failure by the Executive substantially to perform the duties reasonably assigned to Executive given Executive’s training and experience (other than any such failure resulting from incapacity due to mental or physical illness not constituting a Disability, as defined herein), after a demand in writing for substantial performance of such duties is delivered by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has not substantially performed his duties, and such failure results in material injury to the Company.

If Executive’s employment is terminated for any reason, the supervising executive to whom Executive directly reports (the “Supervising Executive”) shall make an initial determination whether or not the termination was for Cause. If the Supervising Executive determines that the termination was for Cause, then, within ten (10) days of such termination, the Company shall provide written notice to the Executive indicating that the termination was for Cause and noting that benefits will not be made available to the Executive pursuant to this Agreement.

2.3 “Change in Control”. For purposes of this Agreement, a “Change in Control” shall mean any of the following events:

a. The acquisition (other than from the Company in an acquisition that is approved by the Incumbent Board, as defined herein) by any “Person” (as the term person is used for purposes of Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”)), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the Company’s then outstanding voting securities; or

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b. The individuals who, as of November 1, 2007, are members of the Board (the “Incumbent Board”), cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by the Company’s stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; or

c. Consummation of a merger or consolidation involving the Company if the stockholders of the Company, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than sixty percent (60%) of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation; or

d. Consummation of a complete liquidation or dissolution of the Company or of the sale or other disposition of all or substantially all of the assets of the Company.

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to Section 2.3 solely because twenty percent (20%) or more of the combined voting power of the Company’s then outstanding securities is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition.

2.4 “Change in Control Agreement”. An agreement between Executive and the Company providing for the payment of compensation and benefits to Executive in the event of Executive’s termination of employment under certain circumstances following a “change in control” of the Company (as defined in such agreement).

2.5 “Company”. Zep Inc., a Delaware corporation, or any successor to its business and/or assets.

2.6 “Date of Termination”. The date specified in the Notice of Termination (which may be immediate) as the date upon which the Executive experiences a Termination of Employment.

2.7 “Disability”. Disability means the Executive: (a) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months; or (b) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Company. Medical determination of Disability may be made by either the

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Social Security Administration or by the provider of an accident or health plan covering employees of the Company provided that the definition of “disability” applied under such disability insurance program complies with the requirements of the preceding sentence. Upon the request of the plan administrator, the Executive must submit proof to the Company of the Social Security Administration’s or the provider’s determination.

2.8 “Good Reason”. A “Good Reason” for termination by Executive of Executive’s employment with the Company shall mean the occurrence during the Term after the occurrence of a Change in Control, without Executive’s express consent, of any of the following acts by the Company, or failures by the Company to act, and such act or failure to act has not been corrected within thirty (30) days after written notice of such act, or failure to act, is given by Executive to the Company:

a. A material diminution in the Executive’s base compensation which is defined, for purposes of this paragraph, as base salary;

b. A material diminution in the Executive’s authority, duties, or responsibilities from those in effect immediately prior to the Change in Control;

c. A material change in the geographic location at which the Executive must perform his services, which is defined, for purposes of this paragraph, as requiring the Executive to be based more than 50 miles from the primary workplace where Executive was based immediately prior to the Change in Control; or

d. Any other action or inaction that constitutes a material breach by the Company of the agreement under which the Executive performs his services.

In no event shall a termination by the Executive be deemed to constitute a termination for Good Reason unless the Executive separates from service from the Company within two years of the initial existence of one of the events outlined in this Section 2.8. In addition, a termination by the Executive will only constitute a termination for Good Reason if the Executive provides the Company with notice within ninety (90) days of the initial existence of one of the events outlined in this Section and the Company is provided thirty (30) days in which to remedy the event and not be required to pay the amount due under this Agreement if the event is so remedied.

2.9 “Notice of Termination”. A written notice from one party to the other party specifying the Date of Termination and setting forth in reasonable detail the facts and circumstances relating to the basis for termination of Executive’s employment.

2.10 “Section 409A”. Section 409A of the Code and the regulations and rulings thereunder.

2.11 “Severance Period”. A period equal to the lesser of (i) nine (9) months from the Executive’s Date of Termination or (ii) the number of months (rounded to the nearest month) from the Executive’s Date of Termination until the date he attains age 65. In no event shall the Severance Period extend beyond December 31st of the second calendar year following the Date of Termination.

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2.12 “Termination of Employment”. With respect to the payment of all benefits under the Agreement, whether a “termination of employment” takes place is determined based upon the facts and circumstances surrounding the termination of the Executive’s employment and upon whether the Company and the Executive intended for the Executive to provide significant services for the Company following such termination. A change in the Executive’s employment status will not be considered a termination of employment if:

a. the Executive continues to provide services as an employee of the Company at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three, full calendar years of employment (or, if employed less than three years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three, full calendar years of employment (or, if less, such lesser period), or

b. the Executive continues to provide services to the Company in a capacity other than as an employee at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three, full calendar years of employment (or if employed less than three years, such lesser period), and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final, three full calendar years of employment (or if less, such lesser period).

For purposes of applying this definition, a reference to the Company shall also be deemed a reference to any affiliate thereof within the contemplation of Code Sections 414(b) and 414(c).

3. SCOPE OF AGREEMENT

This Agreement provides for the payment of compensation and benefits to Executive in the event his employment (i) is involuntarily terminated by the Company without Cause, or (ii) is terminated by Executive for Good Reason. If Executive is terminated by the Company for Cause, dies, incurs a Disability or voluntarily terminates employment (other than for Good Reason), this Agreement shall terminate, and Executive shall be entitled to no payments of compensation or benefits pursuant to the terms of this Agreement; provided that in such events, Executive will be entitled to whatever benefits are payable pursuant to the terms of any health, life insurance, disability, welfare, retirement, deferred compensation, or other plan or program maintained by the Company.

If, as a result of Executive’s termination of employment, Executive becomes entitled to compensation and benefits under this Agreement, under a Change in Control Agreement and/or under a policy or plan provided by the Company, Executive shall be entitled to choose to receive benefits under whichever agreement or plan provides Executive the greater aggregate compensation and benefits (and not under the other agreement) and there shall be no duplication of benefits. The Executive will be fully bound by all of the terms and conditions of the agreement under which he chooses to receive benefits. Except as provided in the preceding sentences, the severance pay and benefits provided for in Section 4 herein shall be in lieu of any other severance pay to which the Executive may be entitled under any Company severance plan, program or arrangement for a termination of employment covered by such circumstances.

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4. BENEFITS UPON INVOLUNTARY TERMINATION WITHOUT CAUSE BY THE COMPANY OR FOR GOOD REASON

If Executive’s employment is involuntarily terminated by the Company during the term of this Agreement without Cause (and such termination does not arise as a result of Executive’s death or Disability), or if Executive terminates his employment with the Company for Good Reason, the Executive shall be entitled to the compensation and benefits described below, provided that Executive, as described in Section 4.5, executes a valid release of claims in such form as may be required by the Company. In the event Executive is terminated without Cause or Executive terminates his employment for Good Reason, the Company may, in its discretion and to provide equitable treatment, grant benefits to Executive in addition to those provided below in circumstances where Executive suffers a diminution of projected benefits as a result of Executive’s termination prior to attainment of age 65, including without limitation, additional retirement benefits, provided that any such grant of additional benefits shall be consistent with the requirements of Code Section 409A, and no such grant shall be made which would violate Code Section 409A and the regulations and rulings thereunder.

With the exception of the applicable COBRA premiums provided under Section 4.2 and the outplacement services provided in Section 4.5 of this Agreement, those payments described in this Article 4 that exceed two times the lesser of: (1) the amount of the Executive’s annualized compensation based upon the annual rate of pay the Executive received from the Company in the year preceding the year of the Executive’s termination, adjusted for any increase in compensation that the Executive would have expected to receive had the Executive not separated from service with the Company, and as defined under Treas. Reg. §1.409A-1(b)(9)((iii)(A)(1); or (2) the maximum amount that may be taken into account for a qualified plan under Code Section 401(a)(17) for the year in which the Date of Termination occurs shall be paid, on a ratable basis, not later than 2 1/2 months after the end of the year in which Date of Termination occurs.

4.1 Severance Payment. Executive shall continue to receive an amount equal to sixteen and two-tenths (16.2) months of his Base Salary (subject to withholding of all applicable taxes) for the entire Severance Period (as defined in Section 2.11 above), payable in the same manner as it was being paid on his Date of Termination.

4.2 Health Care and Life Insurance. The Company shall provide the following health care and life insurance benefits to the Executive:

a. if the Executive shall elect to continue medical coverage under the Company’s group health plan pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), the Company shall pay the difference between the applicable premium for COBRA continuation coverage and the active employee monthly premium cost until the earliest of: (a) the date on which the Executive is eligible to participate in another medical plan, (b) the first day of the month for which the Executive fails timely to remit the Executive’s potion of the premium, or (c) the end of the Severance Period. Executive shall be responsible for the timely and proper election of COBRA continuation coverage for Executive and Executive’s eligible dependents. Executive will be billed monthly for the continued medical coverage under COBRA and the Executive’s failure timely to pay Executive’s portion of the

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COBRA premium shall terminate the COBRA coverage and the Company’s obligations under this Section 4.2(a); and

b. during the Severance Period or until such time as Executive obtains similar benefits as the result of obtaining other employment, the Company shall pay the monthly premium for term life insurance in an amount equal to that in effect on the Executive’s Termination Date.

4.3 Outplacement Services. Executive will be provided with customary outplacement services by an outplacement firm selected by the Company for the Severance Period, provided that the Company’s total cost for such services shall not exceed an amount equal to ten percent (10%) of Executive’s Base Salary.

4.4 Other Benefits. Except as expressly provided herein, all other fringe benefits provided to Executive as an active employee of the Company shall cease on his Date of Termination, provided that any conversion or extension rights applicable to such benefits shall be made available to Executive at his Date of Termination or when such coverages otherwise cease at the end of the Severance Period. Except as expressly provided herein, for all other plans sponsored by the Company, the Executive’s employment shall be treated as terminated on his Date of Termination, and Executive’s right to benefits shall be determined under the terms of such plans; provided, however, in no event will Executive be entitled to severance payments or benefits under any other severance plan, policy, program or agreement of the Company, except to the extent Executive is covered by a Change in Control Agreement.

4.5 Release of Claims. To be entitled to any of the compensation and benefits described above in this Section 4, Executive shall sign a release of claims substantially in the form attached hereto as Exhibit A. No payments shall be made under this Section 4 until such release has been properly executed and delivered to the Company and until the expiration of the revocation period, if any, provided under the release. If the release is not properly executed by the Executive and delivered to the Company within the reasonable time periods specified in the release, the Company’s obligations under this Section 4 will terminate.

4.6 Nothing in this Agreement is intended to provide for the deferral of compensation within the meaning of Code Section 409A. All payments hereunder are intended to satisfy the short-term deferral exemption under Treas. Reg. §1.409A-1(b)(4) and/or the separation pay exemption under Treas. Reg. §1.409A-1(b)(9), as may be amended.

5. CONFIDENTIALITY, NON-SOLICITATION AND NON-COMPETITION

5.1 Purpose and Reasonableness of Provisions. Executive acknowledges that, prior to and during the Term of this Agreement, the Company has furnished and will furnish to Executive Confidential Information and Trade Secrets (as defined in Sections 5.11(a) and 5.11(b) respectively) which could be used by a competitor of the Company to the Company’s substantial detriment. Moreover, the parties recognize that Executive, during the course of his employment with the Company, has and will develop important relationships with customers and others having valuable business relationships with the Company. In view of the foregoing, Executive acknowledges and agrees that the restrictive covenants contained in this Section 5 and Exhibit B

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to the Agreement are reasonably necessary to protect the Company’s legitimate business interests and good will.

5.2 Proprietary Rights. All Confidential Information, Trade Secrets, and all physical and electronic embodiments thereof are confidential and are and will remain the sole and exclusive property of the Company. The Executive must (1) immediately disclose to the Company all Confidential Information and Trade Secrets developed, conceived, received or disclosed, in whole or in part, by or to the Executive while Employed by the Company; (2) assign to the Company any right, title, or interest Executive may have in such Confidential Information and Trade Secrets, and (3) at the request and expense of the Company, do all things and sign all documents or instruments reasonably necessary in the opinion of the Company to eliminate any ambiguity as to the ownership by, and rights of, the Company in such Confidential Information and Trade Secrets, including, without limitation, providing full cooperation in litigation and other proceedings to establish or protect such right. The Executive agrees that any copyright in the expression of such Confidential Information or Trade Secrets shall be the property of the Company, and that any patent rights and any invention or novel devices or processes developed by the use of such Confidential Information or Trade Secrets shall be the exclusive property of the Company.

5.3 Trade Secrets and Confidential Information. During the term of employment and for so long as such information remains Confidential Information, Executive agrees that he shall protect any such Confidential Information and shall not, except in connection with the performance of his remaining duties for the Company, disclose or otherwise copy, reproduce, use, distribute or otherwise disseminate any such Confidential Information, or any physical embodiments thereof, to any person or entity. Executive further agrees that he shall not, except in connection with the performance of his remaining duties for the Company, disclose or otherwise copy, reproduce, distribute or otherwise disseminate any Trade Secrets, or any physical embodiments thereof, to any person or entity. Executive will, in no event, take any action causing, or fail to take any action necessary in order to prevent any Confidential Information or Trade Secrets disclosed to or developed by Executive to lose their character as such; provided, however, that Executive may make disclosures required by a valid order or subpoena issued by a court or administrative agency of competent jurisdiction, in which event Executive will promptly notify the Company of such order or subpoena to provide the Company an opportunity to protect its interests. Executive’s obligations under this Section 5.3 shall survive any expiration or termination of this Agreement, provided that Executive may, after such expiration or termination, disclose Confidential Information or Trade Secrets with the prior written consent of the Chief Executive Officer.

The Executive attests that, during his employment with the Company, he has not and will not offer, disclose or use on Executive’s own behalf or on behalf of the Company, any information Executive received prior to employment by the Company, which was supplied to Executive confidentially or which Executive should reasonably know to be confidential, to any person, organization or entity other than the Company without the written approval of such person, organization or entity.

Nothing contained herein shall be in derogation or a limitation of the rights of the Company to enforce its rights or the duties of Executive under then applicable Georgia law

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relating to Trade Secrets including, in particular, the Georgia Trade Secrets Act, O.C.G.A. Sections 10-1-760, et seq.

5.4 Return of Confidential Information and Trade Secrets; Return of Property. Upon request by the Company and, in any event, upon termination of the employment of the Executive with the Company for any reason, Executive will promptly deliver to the Company all property belonging to the Company, including but without limitation, all Confidential Information and Trade Secrets and all embodiments thereof, all Company files, customer lists, management reports, memoranda, research, Company forms, financial data and reports and other documents (including all such data and documents in electronic form) supplied to or created by him in connection with his employment hereunder (including all copies of the foregoing) in his possession or control, and all of the Company’s equipment and other materials in his possession or control. Executive agrees not to keep copies of Company property. As part of this obligation, Executive agrees to provide all computers Executive utilized to conduct Company business to the Company at the Company’s option for imaging and deletion of Company Confidential Information and Trade Secret Information immediately upon Executive’s separation from the Company for any reason. Executive’s obligations under this Section 5.4 shall survive any expiration or termination of this Agreement.

5.5 Inventions. The Executive does hereby assign to the Company the entire right, title and interest in any Invention (as defined in Section 5.11(d) below) which is made, conceived, either solely or jointly with others, during employment with the Company. The Executive agrees to promptly disclose to the Company all such Inventions. The Executive will, if requested, promptly execute and deliver to the Company a specific assignment of title for an Invention and will, at the expense of the Company, take all reasonably required action by the Company to patent, copyright or otherwise protect the Invention.

5.6 Non-Competition. The Executive agrees that, while employed by the Company and for a period equal to the Severance Period thereafter, Executive shall comply with the non-competition restrictions attached hereto as Exhibit B. In the event of any material change in corporate organization (including, without limitation, spin-offs, split-offs, or public offerings of subsidiaries’ stock) on the part of the Direct Competitors set forth in Exhibit B hereto, the parties agree to amend Exhibit B, as necessary, at the Company’s request, in order to reflect such change. Upon execution, each such written modification to Exhibit B shall represent an enforceable amendment to this Agreement and shall augment and supplant the definitions of the terms Executive Services or Direct Competitor as set forth in Exhibit B hereto.

5.7 Non-Solicitation of Customers/Suppliers. The Executive agrees that, during the course of employment with the Company, and for a period equal to the Severance Period thereafter, the Executive will not directly or indirectly (i) divert or attempt to divert any person, concern or entity which is furnished products or services by the Company from doing business with the Company or otherwise change its relationship with the Company negatively; or (ii) induce or attempt to induce any customer, supplier or service provider to cease being a customer, supplier or service provider of the Company or to otherwise change its relationship with the Company negatively.

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5.8 Non-Solicitation of Employees. The Executive agrees that, during the course of employment with the Company, and for a period equal to the Severance Period thereafter, the Executive shall not, directly or indirectly, whether on behalf of the Executive or others, solicit, lure or attempt to solicit or lure away from employment by the Company any person employed by the Company. The provision of this paragraph shall only apply to those persons employed by the Company at the time of solicitation or attempted solicitation.

5.9 Injunctive Relief. Executive acknowledges that if he breaches or threatens to breach any of the provisions of this Section 5 and/or Exhibit B to the Agreement, his actions may cause irreparable harm and damage to the Company which could not be compensated by damages alone. Accordingly, if Executive breaches or threatens to breach any of the provisions of this Section 5 and/or Exhibit B to the Agreement, the Company shall be entitled to seek injunctive relief, in addition to any other rights or remedies the Company may have. Executive hereby waives the requirement for a bond by the Company as a condition to seeking injunctive relief. The existence of any claim or cause of action by Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of Executive’s agreements under this Section 5 and/or Exhibit B to the Agreement.

5.10 Provisions Severable. If any provision in this Section 5 and/or Exhibit B to the Agreement is determined to be in violation of any law, rule or regulation or otherwise unenforceable, and cannot be modified to be enforceable, such determination shall not affect the validity of any other provisions of this Agreement, but such other provisions shall remain in full force and effect. Each and every provision, paragraph and subparagraph of this Section 5 and Exhibit B to the Agreement is severable from the other provisions, paragraphs and subparagraphs and constitutes a separate and distinct covenant.

5.11 Definitions. For purposes of this Section 5 and Exhibit B to the Agreement, the following definitions shall apply:

a. “Confidential Information” means:

(i) information relating to the Company’s Business (as defined in Exhibit B hereto) (A) which Executive develops, helps develop in conjunction with others, creates, or becomes aware as a consequence of or through Executive’s employment with the Company or any other arrangement or relationship with the Company; (B) which has value to the Company, actual or potential, from not being generally known by others who can obtain economic value from its disclosure or use (whether or not such material or information is marked “confidential”). For purposes of this Agreement, subject to the foregoing, and according to terminology commonly used by the Company, the Company’s Confidential Information shall include, but not be limited to, information pertaining to: (1) Business Opportunities (as defined below); (2) data and compilations of data relating to the Company’s Business; (3) compilations of information about, and communications and agreements with, customers and potential customers of the Company; (4) computer software, hardware, network and internet technology utilized, modified or enhanced by the Company or by Executive in furtherance of Executive’s duties with the Company; (5) compilations of data concerning Company products, services, customers, and end users including but not limited to compilations concerning projected sales, new project timelines, inventory reports, sales, and cost and expense reports; (6) compilations of

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information about the Company’s employees and independent contracting consultants; (7) the Company’s financial information, including, without limitation, amounts charged to customers and amounts charged to the Company by its vendors, suppliers, and service providers; (8) proposals submitted to the Company’s customers, potential customers, wholesalers, distributors, vendors, suppliers and service providers; (9) the Company’s marketing strategies and compilations of marketing data; (10) compilations of data or information concerning, and communications and agreements with, vendors, suppliers and licensors to the Company and other sources of technology, products, services or components used in the Company’s Business; (11) any information concerning services requested and services performed on behalf of customers of the Company, including planned products or services; and (12) the Company’s research and development records and data. Confidential Information also includes any summary, extract or analysis of such information together with information that has been received or disclosed to the Company by any third party as to which the Company has an obligation to treat as confidential.

(ii) Confidential Information shall not include:

(A) Information generally available to the public other than as a result of improper disclosure by Executive;

(B) Information that becomes available to Executive from a source other than the Company (provided Executive has no knowledge that such information was obtained from a source in breach of a duty to the Company);

(D) Information obtained in filings with the Securities and Exchange Commission.

b. “Trade Secrets” includes Confidential Information constituting a trade secret under Georgia Law.

c. “Business Opportunities” means all ideas, concepts or information received or developed (in whatever form) by Executive concerning any business, transaction or potential transaction within the Company’s Business that constitutes or may constitute an opportunity for the Company to earn a fee or income, which are opportunities in which the Company has gained a legal or equitable interest or expectancy growing out of a preexisting right or relationship with a current or prospective customer, specifically including those relationships that were initiated, nourished or developed at the Company’s expense. All ideas, concepts and information concerning any Business Opportunity shall constitute Confidential Information (as defined in paragraph (a) above).

d. “Inventions” means contributions, discoveries, improvements and ideas and works of authorship, whether or not patentable or copyrightable, (i) which relate directly to the Company’s Business, or (ii) which result from any work performed by Executive

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or by Executive’s fellow employees for the Company, or (iii) for which equipment, supplies, facilities, Confidential Information or Trade Secrets of the Company are used, or (iv) which is developed on the Company’s time.

e. “Customers” means customers of the Company with whom Executive had material contact on behalf of the Company during the two-year period preceding the termination of Executive’s employment with the Company.

f. “Company’s Business” shall have the meaning provided on Exhibit B.

g. “Direct Competitor” shall have the meaning provided on Exhibit B.

h. “Executive Services” shall mean the services performed by the Executive as provided on Exhibit B.

i. “Territory” shall mean the areas identified in Section 2 of Exhibit B hereto. Executive acknowledges that Executive has reviewed Exhibit B, which is incorporated herein by reference, and Executive acknowledges that Executive will perform Executive Services on behalf of the Company throughout the Territory.

6. MISCELLANEOUS

6.1 No Obligation to Mitigate. Executive shall not be required to mitigate the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer after the Date of Termination or otherwise, except as provided in Section 4.2 with respect to benefits coverages.

6.2 Contract Non-Assignable. The parties acknowledge that this Agreement has been entered into due to, among other things, the special skills and knowledge of Executive, and agree that this Agreement may not be assigned or transferred by Executive.

6.3 Successors; Binding Agreement.

a. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, or who acquires the stock of the Company, to expressly assume and agree to perform this Agreement, in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.

b. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representative, executors, administrators, successors, heirs, distributees, devisees and legatees.

Executive’s Initials:

6.4 Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or seven days after mailing if mailed first class, certified mail, postage prepaid, addressed as follows:

If to the Company:		Zep Inc.
		Attention: General Counsel
		1310 Seaboard Industrial Blvd.
		Atlanta, GA 30318

If to the Executive:		To his last known address on file with the Company

Any party may change the address to which notices, requests, demands and other communications shall be delivered or mailed by giving notice thereof to the other party in the same manner provided herein.

6.5 Provisions Severable. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which shall remain in full force and effect.

6.6 Waiver. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by the party making the waiver.

6.7 Amendments and Modifications. This Agreement may be amended or modified only by a writing signed by both parties hereto, which makes specific reference to this Agreement.

6.8 Governing Law. The validity and effect of this Agreement shall be governed by and be construed and enforced in accordance with the laws of the State of Georgia.

6.9 Disputes; Legal Fees; Indemnification.

a. Disputes. All claims by Executive for compensation and benefits under this Agreement shall be in writing and shall be directed to and be determined by the Chief Executive Officer of the Company, or his designee, provided that such designee shall not be the Supervising Executive (the Chief Executive Officer or such designee is hereinafter referred to as the “Administrator”). Any denial by the Administrator of a claim for benefits under this Agreement shall be provided in writing to Executive within thirty (30) days of such decision and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Administrator shall afford a reasonable opportunity to Executive for a review of its decision denying a claim and shall further allow Executive to request in writing that the Administrator reconsider the denial of the claim within sixty (60) days after notification by the

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Administrator that Executive’s claim has been denied. To the extent permitted by applicable law, any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Fulton County, Georgia, in accordance with the rules of the American Arbitration Association then in effect for commercial arbitrations. Judgment may be entered on the arbitrator’s award in any court having jurisdiction.

b. Legal Fees. If the Company involuntarily terminates Executive without Cause or Executive terminates his employment for Good Reason, then, in the event Executive incurs legal fees and other expenses in seeking to obtain or to enforce any rights or benefits provided by this Agreement and is successful to a significant extent in obtaining or enforcing any such rights or benefits through settlement, mediation, arbitration or otherwise, the Company shall promptly pay Executive’s reasonable legal fees and expenses and related costs incurred in enforcing this Agreement including, without limitation, attorneys fees and expenses, experts fees and expenses, and investigative fees. Except to the extent provided in the preceding sentence, each party shall pay its own legal fees and other expenses associated with any dispute under this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

	Zep Inc.


	By:	/s/ John K. Morgan
		John K. Morgan
		Chairman, President and
		Chief Executive Officer


	Executive:


	/s/ Steven Nichols
	Steven Nichols

Executive’s Initials:

EXHIBIT A

To Zep Inc.

SEVERANCE AGREEMENT

GENERAL RELEASE

a) Released Claims: The undersigned Executive of Zep Inc. (the “Company”), having entered into that certain Zep Inc. Severance Agreement dated September 13, 2010 (the “Agreement”), which Agreement is expressly incorporated herein by reference, hereby enters into the following General Release effective as of the date listed below. This General Release must be executed and returned to Zep Inc., without modification, within thirty (30) days of the date of the termination of Executive’s employment in order for Executive to receive any of the compensation and benefits set forth in Section 4 of the Agreement.

Executive hereby irrevocably and unconditionally fully and finally releases, acquits and forever discharges all the claims described herein that he may now have against the Released Parties listed in Section (b), below, except that he is not releasing any claim that relates to: (1) his right to enforce this General Release; (2) any rights or claims that arise after the execution of this General Release; or (3) any rights or claims that he cannot lawfully release. Subject only to the exceptions just noted, Executive is releasing any and all claims, demands, actions, causes of action, liabilities, debts, losses, costs, expenses, or proceedings of every kind and nature, whether direct, contingent, or otherwise, known or unknown, past, present, or future, suspected or unsuspected, accrued or unaccrued, whether in law, equity, or otherwise, and whether in contract, warranty, tort, strict liability, or otherwise, which he now has, may have had at any time in the past, or may have at any time in the future arising or resulting from, or in any matter incidental to, any and every matter, thing, or event occurring or failing to occur at any time in the past up to and including the date of this General Release. Executive understands that the claims he is releasing might arise under many different laws (including statutes, regulations, other administrative guidance, and common law doctrines), such as, but not limited to, the following:

Anti-discrimination and retaliation statutes, such as Title VII of the Civil Rights Act of 1964, which prohibits discrimination and harassment based on race, color, national origin, religion, and sex and prohibits retaliation; the Age Discrimination in Employment Act (“ADEA”), which prohibits age discrimination in employment; the Equal Pay Act, which prohibits paying men and women unequal pay for equal work; the Americans With Disabilities Act and Sections 503 and 504 of the Rehabilitation Act of 1973, which prohibit discrimination based on disability; Sections 1981 and 1983 of the Civil Rights Act of 1866, which prohibit discrimination and harassment on the basis of race, color, national origin, religion or sex; the Sarbanes-Oxley Act of 2002, which prohibits retaliation against employees who participate in any investigation or proceeding related to an alleged violation of mail, wire, bank, or securities laws; Georgia anti-discrimination statutes, which prohibit retaliation and discrimination on the basis of age, disability, gender, race, color, religion, and national origin; and any other federal, state, or local laws prohibiting employment discrimination or retaliation.

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Federal employment statutes, such as the WARN Act, which requires that advance notice be given of certain work force reductions; the Executive Retirement Income Security Act of 1974, which, among other things, protects employee benefits; the Family and Medical Leave Act of 1993, which requires employers to provide leaves of absence under certain circumstances; and any other federal laws relating to employment, such as veterans’ reemployment rights laws.

Other laws, such as any federal, state, or local laws providing workers’ compensation benefits (except as otherwise prohibited by law), restricting an employer’s right to terminate employees, or otherwise regulating employment; any federal, state, or local law enforcing express or implied employment contracts or requiring an employer to deal with employees fairly or in good faith; any state and federal whistleblower laws, any other federal, state, or local laws providing recourse for alleged wrongful discharge, improper garnishment, assignment, or deduction from wages, health and/or safety violations, improper drug and/or alcohol testing, tort, physical or personal injury, emotional distress, fraud, negligence, negligent misrepresentation, abusive litigation, and similar or related claims, willful or negligent infliction of emotional harm, libel, slander, defamation and/or any other common law or statutory causes of action.

Examples of released claims, include, but are not limited to the following (except to the extent explicitly preserved by Section (a), above, of this General Release): (i) claims that in any way relate to allegations of alleged discrimination, retaliation or harassment; (ii) claims that in any way relate to Executive’s employment with the Company and/or its conclusion, such as claims for breach of contract, compensation, overtime wages, promotions, upgrades, bonuses, commissions, lost wages, or unused accrued vacation or sick pay; (iii) claims that in any way relate to any state law contract or tort causes of action; and (iv) any claims to attorneys’ fees, costs and/or expenses or other indemnities with respect to claims Executive is releasing.

b) Released Parties: The Released party/parties is/are Zep Inc., all current, future and former parents, subsidiaries, related companies, partnerships, or joint ventures related thereto, and, with respect to each of them, their predecessors and successors; and, with respect to each such entity, all of its past, present, and future employees, officers, directors, stockholders, owners, representatives, assigns, attorneys, agents, and any other persons acting by, through, under or in concert with any of the persons or entities listed in this subsection, and their successors (hereinafter the “Released Parties”).

c) Unknown Claims: Executive understands that he is releasing the Released Parties from claims that he may not know about as of the date of the execution of this General Release, and that is his knowing and voluntary intent even though Executive recognizes that someday he might learn that some or all of the facts he currently believes to be true are untrue and even though he might then regret having signed this General Release. Nevertheless, Executive is expressly assuming that risk and agrees that this General Release shall remain effective in all respects in any such case. Executive expressly waives all rights he might

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have under any law that is intended to protect him from waiving unknown claims. Executive understands the significance of doing so. If Executive resides in California, Executive hereby expressly waives the provisions of California Civil Code Section 1542, which provides as follows: “A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.” Moreover, this Release does not extend to those rights which, as a matter of law, cannot be waived, including but not limited to, unwaivable rights that Executive may have under the California Labor Code.

d) Ownership of Claims: Executive represents and warrants that he has not sold, assigned or transferred any claim he is purporting to release, nor has he attempted to do so. Executive expressly represents and warrants that he has the full legal authority to enter into this General Release for himself and his estate, and does not require the approval of anyone else.

e) Pursuit of Released Claims: Executive represents that he has not filed or caused to be filed any lawsuit, complaint, or charge with respect to any claim this General Release purports to waive, and he promises never to file or prosecute any lawsuit, complaint, or charge based on such claims. This provision shall not apply to any non-waivable charges or claims brought before any governmental agency. With respect to any such non-waivable claims, however, Executive agrees to waive his right (if any) to any monetary or other recovery, including but not limited to reinstatement, should any governmental agency or other third party pursue any claims on his behalf, either individually or as part of any class or collective action.

f) FMLA and FLSA Rights Honored: Executive acknowledges that he has received all of the leave from work for family and/or personal medical reasons and/or other benefits to which he believes he is entitled under Employer’s policy and the Family and Medical Leave Act of 1993 (“FMLA”), as amended. Executive has no pending request for FMLA leave with Employer; nor has Employer mistreated Executive in any way on account of any illness or injury to Executive or any member of Executive’s family. Executive further acknowledges that he has received all of the monetary compensation, including hourly wages, salary and/or overtime compensation, to which he believes he is entitled under the Fair Labor Standards Act (“FLSA”), as amended.

g) ADEA Release Requirements Have Been Satisfied: Executive understands that this General Release has to meet certain requirements to validly release any ADEA claims Executive might have had, and Executive represents and warrants that all such requirements have been satisfied. Executive acknowledges that, before signing this General Release, he was given at least twenty-one (21) days to consider this General Release. Executive further acknowledges that: (1) he took advantage of as much of this period to consider this General Release as he wished before signing it; (2) he carefully read this General Release; (3) he fully understands it; (4) he entered into this General Release knowingly and voluntarily (i.e., free from fraud, duress, coercion, or mistake of fact); (5) this General Release is in writing and is understandable; (6) in this General Release, Executive waives current ADEA claims; (7) Executive has not waived future ADEA claims; (8) Executive is receiving valuable consideration in exchange for execution of this General Release that he would not otherwise be entitled to receive such consideration; and (9) Employer encourages Executive in writing

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to discuss this General Release with his attorney (at his own expense) before signing it, and that he has done so to the extent he deemed appropriate.

h) Revocation: For a period of at least seven (7) days following the execution of this General Release, Executive may revoke this General Release. If Executive wishes to revoke this General Release in its entirety, he must make a revocation in writing which must be delivered by hand or confirmed facsimile before 5:00 p.m. of the seventh day of the revocation period to the General Counsel of Zep Inc. at 1310 Seaboard Industrial Boulevard, Atlanta, Georgia 30318, otherwise the revocation will not be effective. If Executive timely revokes this General Release, Employer shall retain payments and benefits otherwise payable to Executive under the Agreement.

i) Access to Independent Legal Counsel; Knowing and Voluntary Execution: EXECUTIVE ACKNOWLEDGES THAT HE HAS BEEN ADVISED TO SEEK INDEPENDENT LEGAL COUNSEL OF HIS OWN CHOOSING IN CONNECTION WITH ENTERING INTO THIS GENERAL RELEASE. EXECUTIVE FURTHER ACKNOWLEDGES THAT, IF DESIRED, HIS LEGAL COUNSEL HAS REVIEWED THIS GENERAL RELEASE, THAT EXECUTIVE FULLY UNDERSTANDS THE TERMS AND CONDITIONS OF THIS GENERAL RELEASE AND THAT EXECUTIVE AGREES TO BE FULLY BOUND BY AND SUBJECT THERETO. EXECUTIVE HAS CAREFULLY READ THIS GENERAL RELEASE AND KNOWS AND UNDERSTANDS THE CONTENTS THEREOF, AND THAT HE EXECUTES THE SAME AS HIS OWN FREE ACT AND DEED.

IN WITNESS WHEREOF, Executive has executed this General Release on the date set forth below.


	Signature of Executive

	Date:

Executive’s Initials:

EXHIBIT B

To Zep Inc.

SEVERANCE AGREEMENT

AGREED NON-COMPETITION RESTRICTIONS NEGOTIATED AND CONSENTED TO IN CONSIDERATION FOR SEVERANCE AGREEMENT

1. DEFINITIONS

Capitalized terms contained herein shall have the same meaning as those defined terms set forth in the Severance Agreement. In addition, the following terms used in this Exhibit “B” shall have the following meanings:

(A) “Direct Competitor” includes but is not limited to the following entities: (1) Ecolab Inc., including without limitation its Nalco Company; (2) Diversey Inc., a part of Sealed Air Corporation; (3) NCH Corporation; (4) State Chemical Manufacturing Company, a division of State Industrial Products Corporation; (5) Rochester Midland Corporation; (6) Swisher Hygiene, Inc.; (7) CRC Industries, Inc.; (8) S. C. Johnson & Son, Inc.; (9) Newell Rubbermaid Inc.; (10) WD-40 Company; (11) Georgia-Pacific Corporation; (12) Gojo Industries, Inc.; (13) Arch Chemicals, Inc., a part of Lonza Group Ltd.; (14) RPM International, Inc.; (15) PLZ Aeroscience Corporation and all subsidiaries; (16) Church & Dwight Co., Inc.; (17) Proctor and Gamble; (18) Reckitt Benckiser plc; (19) Sunshine Makers, Inc.; (20) The Clorox Company; (21) Bayer, A.G.; (22) Spectrum Brands, Inc.; (23) The Scott’s Company; (24) Excelda Manufacturing; (25) Ashland Inc.; (26) Technical Chemical Company; and (27) Kimball Midwest, (28) Chemtura Corporation; (29) ChemStation International, Inc.; and (30) Safety-Kleen Systems Inc.; as well as any of their respective affiliates, subsidiaries and/or parent companies that are either located or transact business within the Territory and are engaged in the Company Business (as that term is defined in subsection D herein), but only to the extent each, and only with respect to business operation(s) of each that, engage(s) in the manufacturing and/or sale of one or more of the classes of products that constitute the Company Business.

(B) “Executive Services” means those principal duties and responsibilities that Executive performs on behalf of the Company during his employment.

(C) “Restricted Period” means the “Severance Period” in the Severance Agreement, namely, a period equal to the lesser of (i) nine (9) months from the Executive’s Date of Termination or (ii) the number of months (rounded to the nearest month) from the Executive’s Date of Termination until the date he attains age 65.

(D) “Company Business” means the manufacture and/or sales of cleaning and maintenance solutions for commercial, industrial, institutional, and consumer customers, including, without limitation, the manufacture and/or sale of the following types of products: anti-bacterial and industrial hand-care products; cleaners; degreasers; deodorizers; disinfectants,

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floor finishes; sanitizers; pest- and weed-control products; air-care products and delivery systems; and automotive maintenance chemicals.

2. ACKNOWLEDGEMENTS

Executive acknowledges that during the period of his employment with the Company, he has rendered and will render executive, strategic and managerial services, including the Executive Services, to and for the Company throughout the United States, which are special, unusual, extraordinary, and of peculiar value to the Company. Executive further acknowledges that the services he performs on behalf of the Company, including the Executive Services, are at a senior managerial level and are not limited in their territorial scope to any particular city, state, or region, but instead have nationwide impact throughout the United States (the “Territory”). Executive further acknowledges and agrees that: (a) the Company’s business is, at the very least, national in scope; (b) these restrictions are reasonable and necessary to protect the Confidential Information, business relationships, and goodwill of the Company; and (c) should Executive engage in or threaten to engage in activities in violation of these restrictions, it would cause the Company irreparable harm which would not be adequately and fully redressed by the payment of damages to the Company. In addition to other remedies available to the Company, the Company shall accordingly be entitled to injunctive relief in any court of competent jurisdiction for any actual or threatened breach by Executive of the provisions of this Severance Agreement. Executive further acknowledges that he will not be entitled to any compensation or benefits from the Company or any of its affiliates in the event of a final, non-appealable judgment that he materially breached his duties or obligations under this Severance Agreement.

3. NON-COMPETITION

Executive agrees that, while employed by the Company and for a period equal to the Restricted Period thereafter, but only for such period as Base Salary is paid to Executive under Section 4.1 of the Severance Agreement, he will not, directly (i.e., as an officer or employee) or indirectly (i.e., as an independent contractor, consultant, advisor, board member, agent, shareholder, investor, joint venturer, or partner), provide or perform any of the Executive Services on behalf of any Direct Competitor anywhere within the Territory. Nothing in this provision shall divest Executive from the right to acquire as a passive investor (with no involvement in the operations or management of the business) up to 1% of any class of securities which is: (i) issued by any Direct Competitor, and (ii) publicly traded on a national securities exchange or over-the-counter market.

4. SEPARABILITY

Executive acknowledges that the foregoing covenant in Section 3 of this Exhibit “B” is a separate and distinct obligation of Executive and is deemed to be separable from the remaining covenants and provisions of the Severance Agreement. If any of the provisions of the foregoing covenant should ever be deemed to exceed the time, geographic, product, or other limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, product, or other limitations permitted by applicable law. If any particular provision of the foregoing covenant is held to be invalid, the

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remainder of the covenant and the remaining provisions of the Severance Agreement shall not be affected thereby and shall remain in full force and effect.

5. ENTIRE AGREEMENT

The foregoing covenant, together with the provisions set forth in Section 5.6 of the Severance Agreement, constitutes the entire agreement between the parties hereto with respect to that subject matter, and supersedes any and all prior communications, agreements and understandings, written or oral, with respect to the same. Notwithstanding the previous sentence, this Agreement is intended to complement and will not supersede the restrictive covenants in any other enforceable agreements between Employee and Company, if any. No provision of this Exhibit B may be modified, waived or discharged unless such waiver, modification or discharge is approved and agreed to in writing by both parties hereto. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Exhibit B shall not be deemed a waiver or relinquishment of any right granted in this Exhibit B or the future performance of any such term or condition or of any other term or condition of this Exhibit B, unless such waiver is contained in a writing signed by the party making the waiver. No agreements or representations, oral or otherwise, express or implied, with respect to Executive’s non-competition obligations have been made by either party which are not set forth expressly in this Exhibit B and/or in the Severance Agreement.

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Exhibit 10.2

Zep Inc.

Performance Stock Unit Award Agreement

THIS AGREEMENT has been presented by Zep Inc., a Delaware corporation, (the “Company”) to , an employee of the Company (“Grantee”) as of (the “Grant Date”) subject to Grantee’s acceptance of this Agreement in accordance with Section 1.2 of this Agreement.

WHEREAS, the Company maintains the Amended and Restated Zep Inc. 2010 Omnibus Incentive Plan (the “Plan”), and Grantee has been selected by the Committee to receive a Performance Stock Unit Award under the Plan subject to the terms and conditions of the Plan and this Agreement;

WHEREAS, Grantee desires to accept the Performance Stock Unit Award proposed by the Committee subject to the terms and conditions of the Plan and this Agreement.

1. Award

1.1 Grant. Effective as of the Grant Date, but subject to Grantee’s acceptance of this award pursuant to Section 1.2 below, the Company hereby awards to Grantee the number of performance stock units set forth on, and determined in accordance with, Exhibit A, attached to and made a part of this Agreement (the “Performance Stock Units”), all subject to the terms and conditions set forth in this Agreement and in the Plan.

1.2 Acceptance by Grantee. This Performance Stock Unit award is conditioned upon Grantee’s acceptance of all of the terms and conditions set forth in this Agreement and the Plan, as evidenced by Grantee’s electronic acceptance of this Agreement during the time period allowed by the Committee. If all of the terms and conditions of this Agreement are not so timely accepted by Grantee, the Performance Stock Units awarded pursuant to this Agreement shall be cancelled by the Committee.

1.3 Plan Terms and Conditions. This Agreement shall be construed in accordance with, and shall be subject to, the provisions of the Plan (the provisions of which are incorporated into this Agreement by this reference) and, except as otherwise expressly set forth in this Agreement, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. In the event that any provision of this Agreement conflicts with a provision of the Plan, the Plan provision shall control.

2. Performance Stock Unit

2.1 Description. A Performance Stock Unit is an accounting unit which represents the opportunity for Grantee to receive for each Performance Stock Unit one share of Common Stock or a cash amount equal to the Fair Market Value of one share of Common Stock. The Committee may, in its discretion determine whether the requirements set forth in this Agreement for the receipt of stock or cash have been satisfied, and whether Grantee will receive stock or cash.

2.2 Cash Payment. If the Committee determines that Grantee will receive cash for a Performance Stock Unit (a “Cash Payment”), the cash for each Performance Stock Unit which vests

pursuant to Section 3 will equal the Fair Market Value of a share of Common Stock on (a) the vesting date set forth in Exhibit A (the “Vesting Date”) if the payment is based on the achievement of a performance goal under Exhibit A; (b) the date that Grantee has a separation from service if the payment is made pursuant to Section 3.2, or (c) the effective date of a Change in Control if the payment is made pursuant to Section 3.3. A Cash Payment may be rounded to the nearest whole dollar.

2.3 Performance Goal. The performance goal for the Performance Stock Units is set forth in Exhibit A. As set forth on Exhibit A, there are “Threshold,” “Target” and “Maximum” levels of achievement of the performance goal each of which results in a different number of Performance Stock Units being granted hereunder. If the Company’s performance fails to reach the “Threshold” performance level as set forth on Exhibit A, no Performance Stock Units will be earned hereunder, and Grantee will no longer have the right to receive any shares of Common Stock or a Cash Payment with respect to the this award.

3. Timing of Payment

3.1 General Rule. As soon as administratively feasible after end of the Performance Period set forth in Exhibit A (the “Measurement Date”), the Committee shall certify the level of achievement of the Performance Goal. Thereafter, subject to Sections 3.2, 3.3 and 3.4, Grantee will be entitled to receive a number of shares of Common Stock or a Cash Payment, as determined by the Committee. The Committee shall cause the Company to issue shares of Common Stock or make a Cash Payment to, or on behalf of, Grantee pursuant to this Section 3.1 at a time determined by the Committee, which in no event shall be later than two and a half months after the end of the calendar year in which the Performance Period ends.

3.2 Subject to Section 3.3 and Section 3.4, if Grantee fails for any reason whatsoever to be continuously employed by the Company from the Grant Date through the Vesting Date, Grantee’s Performance Stock Units shall, unless otherwise determined by the Committee, automatically be cancelled and Grantee shall not receive any shares of Common Stock or Cash Payment with respect to Grantee’s Performance Stock Units.

3.3 Death or Disability. If Grantee’s continuous employment after the Grant Date is interrupted before the Vesting Date as a result of a “separation from service” (within the meaning of Section 409A of the Code) with the Company by reason of Grantee’s death or Disability, (a) Grantee’s Performance Stock Units shall cease to be subject to a risk of forfeiture under Section 3.1, (b) the Committee shall treat the date of Grantee’s separation from service as the Vesting Date with respect to Grantee’s Performance Stock Units, (c) the Committee shall deem the applicable performance goal to have been met at the “Target Level” of achievement as set forth in Exhibit A, and (d) the Committee shall cause the Company to issue shares of Common Stock or make a Cash Payment to, or on behalf of, Grantee at the “Target Level” of achievement at a time picked by the Committee which is no event later than thirty (30) days after the Grantee’s separation from service.

3.4 Change in Control. If there is a Change in Control within the meaning of Section 409A of the Code before the Vesting Date and Grantee has been continuously employed from the Grant Date to the effective date of such Change in Control, (a) Grantee’s Performance Stock Units shall cease to be subject to a risk of forfeiture under Section 3.1, (b) the Committee shall treat the effective date of such Change in Control as the Vesting Date with respect to Grantee’s Performance Stock Units, (c) the Committee shall deem the performance goal to have been met at the “Target Level” of achievement as

set forth in Exhibit A, and (d) the Committee shall cause the Company to issue shares of Common Stock or make a Cash Payment to Grantee at the “Target Level” of achievement at a time picked by the Committee which in no event shall be later than thirty (30) days after the effective date of such Change in Control.

4. Shareholder Rights and Dividend Equivalents

4.1 Shareholder Rights. Grantee shall have no rights as a shareholder of the Company unless, and until, shares of Common Stock are actually issued to Grantee pursuant to this Agreement, in which event Grantee’s rights as a shareholder shall only relate to periods which begin on or after the date the shares of Common Stock are actually issued to Grantee.

4.2 Dividend Equivalents. If shares of Common Stock are issued or Cash Payment is made to or on behalf of Grantee under Section 3, a cash payment shall be made at the same time to or on behalf of Grantee equal to (a) the sum of the dividends actually paid with respect to a share of Common Stock during the period which starts on the Grant Date and ends on (1) the Vesting Date if the issuance or payment is based on the achievement of a performance goal under Section 3.1, (2) the date that Grantee has a separation from service if the issuance or payment is made pursuant to Section 3.2 or (3) the effective date of a Change in Control if the issuance or payment is made pursuant to Section 3.3 times (b) the number of shares of Common Stock issued or, if a Cash Payment is made, the number of shares of Common Stock which would have been issued but for the Committee’s decision to make a Cash Payment.

5. Miscellaneous

5.1 Employment by Affiliates. For purposes of this Agreement, employment with any Affiliate of the Company shall be treated as employment with the Company.

5.2 Death. If shares of Common Stock are to be issued or a Cash Payment is to be made after Grantee’s death, the shares of Common Stock shall be issued or the Cash Payment shall be made to the Grantee’s surviving spouse or, if there is no surviving spouse, to the Grantee’s estate.

5.3 Assignment. Grantee’s rights under this Agreement are personal to Grantee. Grantee shall not have the right to assign or otherwise transfer Grantee’s right to any person and any attempt to do so shall be null and void and shall not be recognized by the Company.

5.4 General and Unsecured Creditor Status. Grantee’s status with respect to the issuance of shares of Common Stock or the Cash Payment under this Agreement shall be no more than the status of a general and unsecured creditor of the Company.

5.5 Material Business Event. If the Committee determines that there has been a Material Business Event (as defined in the Plan), the Committee may take any of the actions contemplated under Section 14 of the Plan to make an adjustment with respect to the number of Grantee’s Performance Stock Units.

5.6 Investment Representation Letter. The Company reserves the right to require Grantee to sign an investment representation letter prepared by the Company as a condition to the transfer of any Shares of stock to Grantee.

5.7 No Registration. Grantee acknowledges that the Performance Stock Units, or shares of Common Stock issued in connection with the Performance Stock Units, may not be registered under the federal or any state or foreign securities laws, that there may be additional transfer restrictions on the shares issued to Grantee and, further, that the Company is not undertaking any obligation to register any shares issued pursuant to this Agreement under any federal, state or foreign securities laws or to qualify such securities for resale under the applicable foreign jurisdictions’ securities legislation.

5.8 Tax Withholding. The issuance of shares of Common Stock or the Cash Payment pursuant to this Agreement shall be subject to all applicable tax withholdings, and such withholdings shall be made in any manner which the Committee deems appropriate under the circumstances.

5.9 Grantee Bound by the Plan. Grantee hereby acknowledges receipt of a copy of the Plan and the prospectus for the Plan, and agrees to be bound by all the terms and provisions of the Plan.

5.10 Modification of Agreement. This Agreement may be modified, amended, suspended, or terminated, and any terms or conditions hereof may be waived in accordance with the provisions of Section 17.3 of the Plan.

5.11 Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

5.12 Governing Law. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the state of Delaware of the United States of America without giving effect to the conflicts of laws principles thereof.

5.13 Successors in Interest. This Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns, whether by merger, consolidation, reorganization, sale of assets, or otherwise. This Agreement shall inure to the benefit of Grantee’s legal representatives. All obligations imposed upon Grantee and all rights granted to the Company under this Agreement shall be final, binding, and conclusive upon Grantee’s heirs, personal representatives, executors, administrators, and successors.

5.14 Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to the interpretation, construction, or application of this Agreement shall be determined by the Committee. Any determination made under this Section 5.14 shall be final, binding, and conclusive on Grantee and the Company for all purposes.

Grantee’s electronic signature as follows evidences Grantee’s acceptance of all of the terms and conditions of this Agreement and the Plan as of the Grant Date.

Accepted by Grantee:

Exhibit A

[Entire Exhibit is Updated for RONA]

Performance Goal for Performance Stock Unit Award

Award Number:

Grant Date:

Target Share Units:

Performance Period:		September 1, 2014 through August 31, 2017

Measurement Date:		August 31, 2017

Vesting Date:		The later of the date on which the Committee certifies the achievement level of the Performance Goal after the Measurement Date or the third anniversary of the Grant Date ( )

Performance Goal:

The achievement of a level of return on net assets (RONA) (the Achievement Level) between the Threshold and Maximum shown in the table below. Final performance will be measured against the payout curve as of the Measurement Date. The number of shares you will receive will be calculated by multiplying your Target Share Units by the Payout % between 0% and 200%. The exact Payout % will be determined by linear interpolation of the Achievement Level of the performance metric between the Threshold, Target and Maximum. The following table shows the Achievement Level at Threshold, Target and Maximum.

Performance	Threshold	Target	Maximum
Measure	0% Payout	100% Payout	200% Payout
RONA	<10.0%	17.0%	22.0%

The calculation of the final RONA performance measure has been defined to take into consideration fluctuations in RONA throughout the three-year performance period. RONA will be calculated at the end of each fiscal year using the following formula:

Profit Before Tax (PBT)
Net Working Capital(1) + Net Fixed Assets(2)

(1) Net Working Capital (Current Assets - Current Liabilities) will be an average of beginning and ending values for each fiscal year.

(2) Net Fixed Assets (Property, Plant and Equipment + Building and Leaseholder Improvements + Machinery and Equipment — Accumulated Depreciation) will be an average of the beginning and ending values for each fiscal year.

Each one-year result will be weighted at 20% and the average over the entire three-year period will be weighted at 40%.

At the Compensation Committee’s discretion, the Company’s calculated RONA as of the Measurement Date may be adjusted to derive RONA for purposes of determining the number of Performance Stock Units earned under this award. Such adjustments may be added to or deducted from calculated RONA to obtain a measure more reflective of normal operations and may, at the Committee’s discretion, include one or more of the following: restructuring charges; reductions-in-force; the effect of changes in accounting principles and tax laws; gains or losses on asset sales; discontinued operations; acquisitions; the effect of dispositions or divestitures; foreign currency fluctuations; equity adjustments; and extraordinary, unusual or non-recurring gains or losses realized other than in the ordinary course of business which may distort results.

Payout Example:

A payout example assuming an award of 100 Target Share Units, as well as its point on the payout curve follows.

	Calculated RONA		Payout %		Weighting		Actual Shares Earned
Year 1	17.0	%	100	%	20	%	20
Year 2	17.0	%	100	%	20	%	20
Year 3	20.0	%	160	%	20	%	32
3-Year Average	18.0	%	120	%	40	%	48
Actual Shares Received (assuming award of 100 target share units)							120

Exhibit 10.3

Zep Inc.

Incentive Stock Option Agreement

THIS AGREEMENT, made as of October 1, 2014 (the “Grant Date”), between Zep Inc., a Delaware corporation (the “Company”), and (the “Grantee”).

WHEREAS, the Company maintains the Amended and Restated Zep Inc. 2010 Omnibus Incentive Plan (the “Plan”) in order to provide additional incentive to certain officers and key employees of the Company and its Subsidiaries; and

WHEREAS, the Grantee performs services for the Company and/or one of its Subsidiaries; and

WHEREAS, the Committee responsible for administration of the Plan has determined to grant the Option to the Grantee as provided herein; and

NOW, THEREFORE, the parties hereto agree as follows:

1. Grant of Option.

1.1 The Company hereby grants to the Grantee the right and option (the “Option”) to purchase all or any part of an aggregate of whole Shares subject to, and in accordance with, the terms and conditions set forth in this Agreement and the Plan.

1.2 The Option is intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code and shall be so construed; provided, however, that nothing in this Agreement shall be interpreted as a representation, guarantee, or other undertaking on the part of the Company that the Option is or will be determined to be an Incentive Stock Option within the meaning of Section 422 of the Code. To the extent this Option is not treated as an Incentive Stock Option, it will be treated as a Nonqualified Stock Option.

1.3 This Agreement shall be construed in accordance and consistent with, and subject to, the provisions of the Plan (the provisions of which are incorporated herein by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan.

1.4 The Option is conditioned upon Grantee’s acceptance of the terms of this Agreement, as evidenced by Grantee’s execution of this Agreement or by Grantee’s electronic acceptance of the Agreement in a manner and during the time period allowed by the Company. If the terms of this Agreement are not timely accepted by the execution or by such electronic acceptance in the manner and during the time period allowed by the Company, the Option may be unilaterally canceled or terminated by the Committee.

2. Purchase Price.

The price at which the Grantee shall be entitled to purchase Shares upon the exercise of the Option shall be per Share.

3. Duration of Option.

The Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the “Exercise Term”); provided, however, that the Option may be earlier terminated as provided in Sections 1.4, 6 and 7.1 hereof.

4. Vesting and Exercisability of Option.

The Option shall vest, and may be exercised, with respect to the Shares as set forth in the Grantee Summary attached hereto and made a part hereof, subject to earlier termination of the Option as provided in Sections 1.4, 6 and 7.1 hereof or in the Plan. The right to purchase the Shares as they become vested shall be cumulative and shall continue during the Exercise Term unless sooner terminated as provided herein.

5. Manner of Exercise and Payment.

5.1 Subject to the terms and conditions of this Agreement and the Plan, the Option may be exercised by either (i) delivery of written or electronic notice to the Company, at its principal executive office or (ii) online notice given to an online broker with which the Company has made arrangement for the exercise of employee stock options, which notice satisfies the form and conditions set forth in such arrangement, which shall be provided to the Grantee from time to time. Such notice shall state that the Grantee is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and, if delivered in writing to the Company, shall be signed by the person or persons exercising the Option. If requested by the Committee, such person or persons shall (i) deliver this Agreement to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option.

5.2 The notice of exercise described in Section 5.1 shall be accompanied by the full purchase price for any Shares purchased pursuant to the exercise of an Option and shall be paid in full upon such exercise, (i) in cash, by check, by transferring Shares to the Company or by attesting to the ownership of Shares, upon such terms and conditions as may be acceptable to the Committee, or by net settlement of the Option in the manner determined by the Committee or (ii) by such arrangement as is made by the Company with the designated online broker. Any Shares the Grantee transfers to the Company or attests to owning as payment of the purchase price under an Option shall be valued at their Fair Market Value on the day preceding the date of exercise of such Option.

5.3 Upon receipt of notice of exercise and full payment for the Shares in respect of which the Option is being exercised, the Company shall, subject to Section 15 of the Plan, take such action as may be necessary to effect the transfer to the Grantee of the number of Shares as to which such exercise was effective.

5.4 The Grantee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to any Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Agreement and the Grantee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised, (ii) the Company shall have issued and delivered the Shares to the Grantee, and (iii) the Grantee’s name shall have

been entered as a stockholder of record on the books of the Company, whereupon the Grantee shall have full voting and other ownership rights with respect to such Shares.

6. Termination of Employment.

6.1 In General. If the employment of the Grantee with the Company and its Subsidiaries shall terminate for any reason, other than for the reasons set forth in Sections 6.2 or 7.2 below, the Option shall continue to be exercisable (to the extent the Option was vested and exercisable on the date of the Grantee’s termination of employment) at any time within three (3) months after the date of such termination of employment, but in no event after the expiration of the Exercise Term (the “Expiration Date”), unless otherwise determined by the Committee.

6.2 Termination of Employment Due to Death, Disability, or Retirement. If the Grantee’s termination of employment is due to death, Disability, or Retirement (for purposes of this Agreement, “Retirement” means voluntary termination on or after age 65), or if Grantee terminates employment after age 55, the following shall apply:

(a) Termination Due To Death. In the event the Grantee dies while actively employed, the Option shall become immediately and fully exercisable, and shall remain exercisable at any time prior to the Expiration Date, or for one (1) year after the date of death, whichever period is shorter, by (A) such person(s) that have acquired the Grantee’s rights under such Options by will or by the laws of descent and distribution, or (B) if no such person described in (A) exists, the Grantee’s estate or representative of the Grantee’s estate.

(b) Termination by Disability. In the event the employment of the Grantee is terminated by reason of Disability, the Option shall become immediately and fully exercisable as of the date the Committee determines the Grantee terminated for Disability and shall remain exercisable at any time prior to the Expiration Date, or for one (1) year after the date of termination, whichever period is shorter.

(c) Termination by Retirement. In the event the employment of the Grantee is terminated by reason of Retirement, all outstanding unvested Options shall expire, and any Options vested as of Grantee’s date of Retirement shall remain exercisable at any time prior to the Expiration Date, or for five (5) years after the date of termination, whichever period is shorter. In the event of the Grantee’s death after Retirement, the vested Options shall be exercisable in accordance with this subsection (c) and the Option shall be exercisable by the persons described in (a) above.

(d) Termination After Attaining Age 55. If the Grantee terminates employment (other than as a result of death or Disability) after attaining age 55 but prior to age 65, all outstanding unvested Options shall expire, and any Options vested as of Grantee’s date of termination shall, unless the Committee determines otherwise at the time of such termination, remain exercisable at any time prior to the end of the Exercise Term, or for five (5) years after the date of termination, whichever period is shorter. In the event of the Grantee’s death after terminating after age 55, the vested Options shall be exercisable in accordance with this subsection (d) and the Option shall be exercisable by the persons described in (a) above.

7. Effect of Change in Control.

7.1 Notwithstanding anything contained to the contrary in this Agreement, in the event of a Change in Control, the Option shall become immediately and fully exercisable, and the Committee, in its discretion, may terminate the Option, provided that at least 30 days prior to the Change in Control, the Committee notifies the Grantee that the Option will be terminated and provides the Grantee, at the election of the Committee, (i) the right to receive immediately a cash payment in an amount equal to the excess, if any, of (A) the greater of (x) the Fair Market Value on the date preceding the date of surrender, of the shares subject to the Option or portion of the Option surrendered, or (y) the Adjusted Fair Market Value of the Shares subject to the Option or portion thereof surrendered, over (B) the aggregate purchase price for such Shares under the Option; or (ii) the right to exercise all Options (including the Options vested as a result of the Change in Control) immediately prior to the Change in Control.

7.2 If the Options remain outstanding after the Change in Control, and if the employment of the Grantee is terminated within two (2) years following a Change in Control, all vested Options shall continue to be exercisable at any time within five (5) years after the date of such termination of employment. In no event shall the vested Options be exercisable after the Expiration Date.

8. Nontransferability.

The Option may only be exercised by the Grantee or by Grantee’s estate. The Option is not assignable or transferable, in whole or in part, and it may not, directly or indirectly, be offered, transferred, sold, pledged, assigned, alienated, hypothecated or otherwise disposed of or encumbered (including without limitation by gift, operation of law or otherwise) other than by will or by the laws of descent and distribution to the estate of the Grantee upon his death, provided that the deceased Grantee’s beneficiary or the representative of the estate shall acknowledge and agree in writing, in a form reasonably acceptable to the Company, to be bound by the provisions of this Agreement and the Plan as if the beneficiary or the estate were the Grantee.

9. No Right to Continued Employment.

Nothing in this Agreement or the Plan shall be interpreted or construed to confer upon the Grantee any right with respect to continuance of employment by the Company or a Subsidiary, nor shall this Agreement or the Plan interfere in any way with the right of the Company or a Subsidiary to terminate the Grantee’s employment at any time.

10. Adjustments.

In the event of a Material Business Event, the Committee may take any of the actions contemplated under Section 14 of the Plan with respect to this Award and/or the Shares.

11. Withholding of Taxes.

11.1 The Grantee shall be responsible for all federal, state and local income taxes payable with respect to this Option. The Company shall have the right to deduct from any

distribution of cash to the Grantee an amount equal to the federal, state, and local income taxes and other amounts as may be required by law to be withheld (the “Withholding Taxes”) with respect to the Option. If the Grantee is entitled to receive Shares upon exercise of the Option, the Grantee shall pay the Withholding Taxes to the Company in cash prior to the issuance of such Shares. In satisfaction of the Withholding Taxes, the Grantee may make a written election (the “Tax Election”) to have withheld a portion of the Shares issuable to him or her upon exercise of the Option, having an aggregate Fair Market Value equal to the Withholding Taxes, provided that, if the Grantee may be subject to liability under Section 16(b) of the Exchange Act, the election must comply with the requirements applicable to Share transactions by such Grantees.

11.2 If the Grantee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share or Shares issued to him pursuant to his exercise of the Option within the two-year period commencing on the day after the Grant Date or within the one-year period commencing on the day after the date of transfer of such Share or Shares to the Grantee pursuant to such exercise, the Grantee shall, within ten (10) days of such disposition, notify the Company thereof, by delivery of written notice to the Company at its principal executive office.

12. Employee Bound by the Plan.

The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof.

13. Modification of Agreement.

This Agreement may be modified, amended, suspended, or terminated in accordance with the provisions of Section 17.3 of the Plan.

14. Severability.

Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.

15. Governing Law.

The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the state of Delaware without giving effect to the conflicts of laws principles thereof.

16. Successors in Interest.

This Agreement shall inure to the benefit of and be binding upon each successor corporation. This Agreement shall inure to the benefit of the Grantee’s legal representatives. All obligations imposed upon the Grantee and all rights granted to the Company under this Agreement shall be final, binding, and conclusive upon the Grantee’s heirs, executors, administrators, and successors.

17. Resolution of Disputes.

Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction, or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding, and conclusive on the Grantee and the Company for all purposes.

Accepted by Grantee:

GRANTEE SUMMARY

Option Type:

Grant Date:

Shares Granted:

Vesting Dates:

Vest Date		Shares Vesting

Expiration Date:

Exhibit 10.4

Zep Inc.

Restricted Stock Award Agreement

THIS AGREEMENT has been presented by Zep Inc., a Delaware corporation (the “Company”), to , an employee of the Company (the “Grantee”) as of (the “Grant Date”) subject to Grantee’s acceptance of this Agreement in accordance with Section 1.3 of this Agreement.

WHEREAS, the Company maintains the Amended and Restated Zep Inc. 2010 Omnibus Incentive Plan (the “Plan”), and Grantee has been selected by the Committee to receive a Restricted Stock Award under the Plan, subject to the terms and conditions of the Plan and this Agreement;

WHEREAS, Grantee desires to accept the Restricted Stock Award proposed by the Committee subject to the terms and conditions of the Plan and this Agreement.

1. Award of Restricted Stock

1.1 Subject to Section 1.3, the Company effective as of the Grant Date hereby grants to Grantee an award of Shares of restricted stock (“Restricted Stock”), subject to, and in accordance with, the restrictions, terms, and conditions set forth in this Agreement and the Plan.

1.2 This Agreement shall be construed in accordance with, and subject to, the provisions of the Plan (the provisions of which are incorporated herein by reference) and, except as otherwise expressly set forth herein, the capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan.

1.3 This Restricted Stock Award is conditioned upon Grantee’s acceptance of the terms and conditions set forth in this Agreement and the Plan, as evidenced by Grantee’s electronic acceptance of this Agreement during the time period allowed by the Company. If the terms of this Agreement are not so timely accepted by such electronic means in the manner and during the period allowed by the Company, the Restricted Stock Award may be unilaterally cancelled or terminated by the Committee.

2. Restrictions

2.1 Except as otherwise provided in this Section 2, if the Grantee remains continuously employed by the Company from the Grant Date to the Vesting Date, the Restricted Stock shall vest as follows (each such date on which the Restricted Stock vests is hereinafter referred to as a “Vesting Date”), unless otherwise determined by the Committee:

Number of Shares		Vesting Date

For purposes of this Agreement, employment with a Subsidiary or Affiliate of the Company shall be considered employment under the terms of the Plan.

2.2 Except as otherwise provided in this Section 2, for Restricted Stock that become vested on each Vesting Date (the “Vested Shares”), the Grantee shall own the Vested Shares free and clear of all restrictions imposed by this Agreement (except those imposed by Section 4.5). The Company shall transfer the Vested Shares to an unrestricted account in the name of the Grantee as soon as reasonably practical after each Vesting Date, and in any event within thirty (30) days thereof.

2.3 In the event that, prior to a Vesting Date: (i) Grantee dies while actively employed by the Company, or (ii) Grantee has his employment terminated by reason of Disability, any Restricted Stock which had not theretofore vested shall become fully vested and nonforfeitable as of the date of Grantee’s death or termination by reason of Disability. The Company shall transfer the Vested Shares, free and clear of any restrictions imposed by this Agreement (except those imposed by Section 3.5) to Grantee (or, in the event of death, his surviving spouse or, if none, to his estate) as soon as practical after his date of death or termination for Disability, and in any event within thirty (30) days thereof.

2.4 Except for death or Disability as provided in Section 2.3, or except as otherwise provided in a severance agreement, employment agreement or similar agreement with Grantee, or unless otherwise determined by the Committee, if Grantee terminates his employment or if the Company terminates Grantee’s employment prior to the Vesting Date for any reason, the Restricted Stock shall cease to vest further, the unvested Shares of Restricted Stock shall be immediately forfeited, and Grantee shall have no further right or interest in or to such unvested Restricted Stock.

2.5 Notwithstanding the other provisions of this Agreement, if there is a Change in Control within the meaning of Section 409A of the Code before the Vesting Date and Grantee has been continuously employed from the Grant Date to the effective date of such Change in Control, (a) Grantee’s Restricted Stock shall cease to be subject to a risk of forfeiture under Sections 2.1 or 2.4, (b) the Committee shall treat the effective date of such Change in Control as the Vesting Date with respect to Grantee’s Restricted Stock, and (c) the Committee shall cause the Company to issue shares of Common Stock to Grantee at a time picked by the Committee which in no event shall be later than thirty (30) days after the effective date of such Change in Control.

2.6 The Restricted Stock may not be sold, assigned, transferred, pledged, or otherwise encumbered prior to the date Grantee becomes vested in the Restricted Stock.

3. Stock; Dividends; Voting

3.1 The Restricted Stock shall be registered in the name of Grantee as of the Grant Date. The Company may issue stock certificates or evidence Grantee’s interest by using a restricted book entry account with the Company’s transfer agent. Physical possession or custody of any stock certificates that are issued shall be retained by the Company until such time as the Shares of Restricted Stock are vested in accordance with Section 2. The Company reserves the right to place a legend on such stock certificate(s) restricting the transferability of such certificates and referring to the terms and conditions (including forfeiture) of this Agreement and the Plan.

3.2 The Grantee shall not be entitled to receive dividends or similar distributions with respect to Restricted Stock that is not vested or that is forfeited. The Grantee shall be entitled to receive dividends or similar distributions if, when and as declared on vested Shares of Restricted Stock. Shares that vest after the record date, but prior to the payment date with respect to a dividend or distribution, shall be entitled to receive the dividend or distribution. Upon the vesting of any Shares of Restricted Stock comprising a part of this Award, the Company shall either (i) pay to the Grantee an amount of cash equal to the amount of all dividends or similar distributions on the then vesting shares of Restricted Stock (without interest) that were declared and paid between the Grant Date and the Vesting Date (the “Accumulated Dividends”), or (ii) apply an amount equal to the Accumulated Dividends to the payment of the amount of taxes required by any government to be withheld or otherwise deducted and paid with respect to the distribution of the then vesting shares of Restricted Stock to the Grantee. When the Grantee accepts this Award of Restricted Stock, the Grantee shall make an irrevocable election to have the entire amount of the Accumulated Dividends applied as set forth in clause (i) or clause (ii) of the preceding sentence. The Grantee may not elect to have part of the Accumulated Dividends applied as set forth in clause (i) and part as set forth in clause (ii). The Company shall not be required to establish a fund or account for the Grantee with respect to the Accumulated Dividends. However, the Company shall maintain a record of the Accumulated Dividends by making appropriate entries in its accounting records.

3.3 The Grantee shall be entitled to vote all Shares of Restricted Stock comprising this Restricted Stock Award, whether or not vested.

3.4 In the event of a Material Business Event, the Committee may take any of the actions contemplated under Section 14 of the Plan with respect to the Award and/or the Restricted Stock.

3.5 Grantee represents and warrants that he is acquiring the Restricted Stock for investment purposes only, and not with a view to distribution thereof. Grantee is aware that the Restricted Stock may not be registered under the federal or any state securities laws and that in that event, in addition to the other restrictions on the Shares, they will not be able to be transferred unless an exemption from registration is available or the Shares are registered. By making this award of Restricted Stock, the Company is not undertaking any obligation to register the Restricted Stock under any federal or state securities laws.

4. No Right to Continued Employment or Additional Grants

Nothing in this Agreement or the Plan shall be interpreted or construed to confer upon Grantee any right with respect to continuance of employment by the Company or a Subsidiary or Affiliate, nor shall this Agreement or the Plan interfere in any way with the right of the Company or a Subsidiary to terminate Grantee’s employment at any time. The Plan may be terminated at any time, and even if the Plan is not terminated, Grantee shall not be entitled to any additional awards under the Plan.

5. Taxes and Withholding

Grantee shall be responsible for all federal, state, and local income taxes payable with respect to this Restricted Stock Award, including any Accumulated Dividends paid on vested Restricted Stock. Grantee shall have the right to make such elections under the Internal Revenue Code of 1986, as amended, as are available in connection with this Restricted Stock Award. The Company and Grantee agree to report the value of the Restricted Stock in a consistent manner for federal income tax purposes. The Company shall have the right to retain and withhold from any distribution (including the transfer to an unrestricted account in the name of Grantee upon vesting) of Restricted Stock or cash hereunder, the amount of taxes required by any government to be withheld or otherwise deducted and paid with respect to such distribution. At its discretion, the Company may require Grantee to reimburse the Company for any such taxes required to be withheld and may withhold any distribution in whole or in part until the Company is so reimbursed. In lieu thereof, the Company shall have the right to withhold from any other cash amounts due to Grantee an amount equal to such taxes required to be withheld or withhold and cancel (in whole or in part) a number of shares of Restricted Stock having a market value equal to the amount of such taxes. If Grantee has elected to apply the Accumulated Dividends to the payment of such taxes, the Company shall do so.

6. Grantee Bound by the Plan

Grantee hereby acknowledges receipt of a copy of the Plan and the prospectus for the Plan, and agrees to be bound by all the terms and provisions thereof.

7. Modification of Agreement

This Agreement may be modified, amended, suspended, or terminated, and any terms or conditions hereof may be waived in accordance with the provisions of Section 17.3 of the Plan.

8. Severability

9. Governing Law

The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the state of Delaware without giving effect to the conflicts of laws principles thereof.

10. Successors in Interest

This Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns, whether by merger, consolidation, reorganization, sale of assets, or otherwise. This Agreement shall inure to the benefit of Grantee’s legal representatives. All obligations imposed upon Grantee and all rights granted to the Company under this Agreement shall be final, binding, and conclusive upon Grantee’s heirs, executors, administrators, and successors.

11. Resolution of Disputes

Any dispute or disagreement which may arise under, or as a result of, or in any way relate to the interpretation, construction, or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding, and conclusive on Grantee and the Company for all purposes.

12. Pronouns; Including

Wherever appropriate in this Agreement, personal pronouns shall be deemed to include the other genders and the singular to include the plural. Wherever used in this Agreement, the term “including” means “including, without limitation.”

Grantee’s electronic signature as follows evidences Grantee’s acceptance of all of the terms and conditions of this Agreement and the Plan as of the Grant Date.

Accepted by Grantee:

EXHIBIT 31(a)

I, John K. Morgan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Zep Inc. for the quarter ended February 28, 2015;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 8, 2015

/s/ John K. Morgan
John K. Morgan
Chairman, President, and Chief Executive Officer

EXHIBIT 31(b)

I, Mark R. Bachmann, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Zep Inc. for the quarter ended February 28, 2015;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 8, 2015

/s/ Mark R. Bachmann
Mark R. Bachmann
Executive Vice President and Chief Financial Officer

Exhibit 32(a)

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with the Quarterly Report on Form 10-Q of Zep Inc. (the “Corporation”) for the quarter ended February 28, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John K. Morgan, the Chairman, President, and Chief Executive Officer of the Corporation, hereby certify that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ John K. Morgan
John K. Morgan
Chairman, President, and Chief Executive Officer
April 8, 2015

Exhibit 32(b)

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with the Quarterly Report on Form 10-Q of Zep Inc. (the “Corporation”) for the quarter ended February 28, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark R. Bachmann, the Executive Vice President and Chief Financial Officer of the Corporation, hereby certify that to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ Mark R. Bachmann
Mark R. Bachmann
Executive Vice President and Chief Financial Officer
April 8, 2015

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Form 10-Q Zep Inc. For: Feb 28

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