Zep (ZEP) Updates on Fire at Aerosol Facility

Zep (NYSE: ZEP) issues update following a fire at its aerosol manufacturing facility

On May 23, 2014, a fire occurred at our aerosol manufacturing facility located in Marietta, Georgia (the “Aerosol Facility”). The products manufactured at the Aerosol Facility included cleaning and maintenance chemicals, lubricants and automotive brake cleaner. Approximately 19% of our fiscal 2013 revenue was attributable to products manufactured at the Aerosol Facility.

The fire, the origin of which is unknown, destroyed our chemical raw material warehouse and damaged other supporting infrastructure that contains our production equipment. Some of the work in process, raw material and finished goods inventory located there was also destroyed or damaged. We are evaluating the extent of the damage resulting from the fire and the full extent of the loss is not yet known. In the third quarter of fiscal 2014, we wrote down inventory by $2.1 million and fixed assets by $2.7 million as a result of the fire. At this time, we do not know when or if we will resume production at the Aerosol Facility, at a newly constructed facility or continue to outsource the production.

On June 2, 2014, we resumed production of certain aerosol products manufactured by the Aerosol Facility through a contract manufacturer. We are assisting the contract manufacturer to accommodate our production demands by loaning it equipment and by assigning some of our associates to work at its facilities. We expect the rate of production by the contract manufacturer to increase as it adds production capacity to its facilities. Furthermore, we are exploring the possibility of having additional contract manufacturers supply certain of our products. It is unlikely that all the individual products produced at the Aerosol Facility will be transitioned to third-party manufacturers and this will result in revenue loss. Any material loss of revenue resulting from the fire and its aftermath could have a material impact on our financial condition and results of operations.

We maintain casualty and business-interruption insurance (“first-party insurance”) that we believe will cover the losses resulting from the fire after the first $1 million of losses, which is the Company’s deductible under such policies. Our first-party insurance covers the costs to repair, rebuild or replace the damaged portions of the Aerosol Facility (without deduction for depreciation) at the same or another site, the gross earnings (defined as income minus variable expenses during the time when production is suspended at the Aerosol Facility) and the increased costs during the disruption of production. We have reflected the full $1 million deductible in the quarter ended May 31, 2014 as our property losses exceed the deductible. The timing of our receipt of insurance proceeds from losses relating to the fire may be materially different from when those losses are incurred

We also maintain commercial liability insurance, subject to a $1.5 million deductible. We have received and recorded notice of the assertion of $42,000 in claims against us as a result of the fire related to damage to vehicles that were parked in the area of the fire. A claim has not yet been received related to an adjacent property that we believe was completely destroyed by the fire. We cannot estimate the total amount of the claims that will be asserted against us as a result of the fire at the Aerosol Facility.

We maintain workers’ compensation insurance, subject to a $500,000 per claim deductible. 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 is out of our control and may be materially different from when those losses are incurred.

The following table reflects the items included in Fire related charges, net for the three and nine months ended May 31, 2014:

Based on the provision of the Company’s insurance policies and management’s estimates, the charges incurred have been reduced by the estimated insurance recovery taking into consideration associated deductibles. The Company has determined that recovery of these losses is probable and recorded a $4.6 million receivable as of May 31, 2014. In June 2014, we received $5.0 million of first-party insurance proceeds, representing advancement of funds to defray the expenses we incurred to begin cleaning the property, to evaluate the extent of the damage and to outsource the production of our products to the contract manufacturer.

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