Form 10-Q Zep Inc. For: Nov 30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM�10-Q

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(Mark One)

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

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For the quarterly period ended November 30, 2014

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OR

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

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For the transition period from ������������ to ������������

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Commission file number 01-33633

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Zep Inc.

(Exact name of registrant as specified in its charter)

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(404) 352-1680

(Registrant�s telephone number, including area code)

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N/A

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

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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

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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

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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):

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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

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

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Common Stock � $0.01 Par Value � 23,049,758 shares as of December 31, 2014.

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Zep Inc.

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INDEX

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PART�I. FINANCIAL INFORMATION

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Item�1.��������������������������������� Financial Statements (unaudited)

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Zep Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(In thousands, except share and per-share data)

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See accompanying notes to the condensed consolidated financial statements.

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Zep Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(In thousands, except per share data)

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See accompanying notes to the condensed consolidated financial statements.

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Zep Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(In thousands)

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See accompanying notes to the condensed consolidated financial statements.

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Zep Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)

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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)

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1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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Description of the Business

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Zep Inc. (�Zep� or �we� or �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.�

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Basis of Presentation

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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.

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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.

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The results of operations for the three months ended November�30,�2014 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.� Certain reclassifications of prior period amounts and the presentation of such amounts have been made to conform to the presentation adopted for the current period.

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Consolidation Policy

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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.

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Fair Value Disclosures

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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

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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 there was also destroyed or damaged.� The products manufactured at the Aerosol Facility included cleaning and maintenance chemicals, lubricants and automotive brake cleaner.

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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 would normally have not 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.�These conditions could continue for the foreseeable future.

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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.�The estimated impact of lost sales related to the fire for the first quarter of fiscal 2015 was approximately $2.9 million with an estimated impact to profit before tax of $1.3 million. We expect that for at least the next couple of quarters our business will continue to be impacted by the inability to fully meet customer requirements.�We expect that our business interruption insurance will cover these losses for a period of time that will be determined through discussion with our insurance companies.� No insurance recoveries have been recorded to date related to lost sales. 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.

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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 may also 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.

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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 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.

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We also maintain commercial liability insurance, subject to a $1.5 million self-insured retention. As of November�30, 2014, we have recorded a $2.8 million reserve related to third party claims related to the fire, which represents our best estimate.

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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.

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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.

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Since the fire occurred, we have incurred costs of $24.5 million related to the fire.�Based on the provisions of the Company�s insurance policies and management�s estimates, the losses incurred have been reduced by the estimated insurance recoveries.� The Company has determined that recovery of the incurred losses, including amounts related to the retentions described above, is probable and has recorded $24.5 million of insurance recoveries through November�30, 2014.� To date, we have received $16.9 million in insurance proceeds, $11.9 million of which was received in the first quarter of fiscal 2015.

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

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3. INVENTORIES

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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:

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4. DEBT OBLIGATIONS

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Our indebtedness and credit arrangements consisted of the following:

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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 November�30,�2014, $183�million of the total $203�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 $183�million of those borrowings in periods subsequent to November�30,�2015. 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 approximated 0.3% during the three months ended November�30,�2014. 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 months ended November�30,�2014, this applicable margin averaged 2.46%.

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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.

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As of November�30,�2014, our credit availability under the 2014 Credit Facility totaled $81.9�million. We remained in compliance with our debt covenants as of November�30,�2014, and we believe that, during the next twelve months, our liquidity and capital resources will be sufficient to meet our working capital, capital expenditure and other anticipated cash requirements.

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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 November�30, 2014.� The effective interest rate associated with borrowings made under the 2010 Credit Facility included an applicable margin that averaged 3.50% during the three months ended November�30,�2013.

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5. COMMITMENTS AND CONTINGENCIES

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Litigation

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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.

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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

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In December�2010, two of our 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 PAGA fees.� 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.

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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.

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Environmental Matters

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General

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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.

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Superfund Sites

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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

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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.

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Environmental Remediation Orders

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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.

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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 remediation costs continues to be $5.0�million. As of November�30, 2014, we recorded liabilities related to the remediation of this site in an undiscounted, pre-tax amount of $2.2 million.

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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.� We have not yet been able to fully assess the impact of the fire on the environmental conditions that are the focus of our remediation efforts at the site.

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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.

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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 $7.4 million, which is management�s best estimate of total remaining remediation costs.� Our recorded liabilities include the costs to rebuild the water treatment facility destroyed in the fire.

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6. EARNINGS PER SHARE

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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:

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For the quarters ended November�30,�2014 and 2013, we excluded 0.9�million and 0.2�million, respectively, common stock equivalents 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

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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 on our condensed consolidated balance sheets. As of November�30, 2014, the amount of securitized borrowings reflected within other accrued liabilities in our condensed consolidated balance sheets totaled $10.5�million. The expense that we recorded in connection with the discount incurred on the transfer of receivables during the three months ended November�30, 2014, which was nominal, is reflected within interest expense, net on our condensed consolidated statements of income. The proceeds received from these transfers are reflected as secured borrowings on our condensed consolidated statements of cash flows.

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8. RESTRUCTURING

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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.� During the fourth quarter of fiscal 2013, we recorded a $5.2�million restructuring charge in connection with these efforts.� As of November�30,�2014, the restructuring reserve was classified as short-term and included in accrued compensation and other accrued liabilities on the accompanying condensed consolidated balance sheet:

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9. ACQUISITIONS

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Vehicle Care division of Ecolab Inc.

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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 (�Niagara�) 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.

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The operating results of EVC are included in our condensed consolidated financial statements as of the Closing Date. We incurred $0.6 million in acquisition and integration costs during the three months ended November�30,�2013, $0.4�million related to the EVC acquisition and $0.2�million related to the continued integration of operations in the United Kingdom that were acquired during fiscal year 2012.

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

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The following information should be read together with our unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this quarterly report 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.�

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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.

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Business Overview

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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.�

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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.

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Highlights

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������������������ Net sales for the first quarter of fiscal 2015 were $168.3�million, an increase of 2.1% compared to the $164.9�million reported in the same period a year ago.� The increase was primarily driven by our home improvement retail channel and transportation business, partially offset by the impact of lost sales of $2.9 million due to the fire and foreign currency translation impact of $2.0 million.

������������������ Gross profit for the first quarter of fiscal 2015 was $78.8�million, a decrease of 0.6% compared to $79.3�million that we reported for the same period a year ago. Gross profit as a percentage of net sales decreased to 46.8% in the first quarter of fiscal 2015 due to unfavorable sales channel mix.

������������������ We reported net income of $3.1�million for the first quarter of fiscal 2015, which is flat compared to the first quarter of fiscal 2014, due to increased investments in organic growth initiatives.� Net income for the first quarter of fiscal 2014 included $0.6�million of acquisition and integration costs. The first quarter of fiscal 2014 also included $0.8�million of legal fees associated with the California Sales Representative Litigation.

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Strategy and Outlook

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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, average vehicle age and miles driven, and from favorable industrial maintenance and institutional jan/san trends which benefit from a growing economy and employment.

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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.

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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 optimizing our supply chain to realize sourcing efficiencies and minimize shipping and logistics costs.

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We expect the recovery efforts relating to the May�23, 2014 fire at our Aerosol Facility will continue to consume a significant amount of resources through the first half of fiscal 2015.� As a result, we expect our supply chain to proceed with the proper cadence, realizing that executing our business continuity plan and preserving existing customer relationships is our top priority, followed closely by realizing longer-term supply chain efficiencies as well as sourcing and logistics cost reductions.

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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 offset, over the longer term, the majority of the sustained losses to property and lost margin resulting from the fire.

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Results of Operations

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First Quarter of Fiscal Year 2015 Compared with First Quarter of Fiscal Year�2014

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The following table sets forth information comparing significant components of net income for the first quarter of fiscal 2015 with the first quarter of fiscal 2014.� Both dollar and percentage changes included within the tables below were calculated from our Condensed Consolidated Statements of Income.

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Net sales totaled $168.3�million in the first quarter of fiscal 2015 compared with $164.9�million in the first quarter of fiscal 2014, an increase of $3.4�million, or 2.1%.� The increase in revenue was due to increases in both volume and price and was partially offset by lost sales due to the fire of $2.9 million and a negative impact from foreign currency translation of $2.0 million. Sales volume growth in the first quarter of fiscal 2015 was driven by our home improvement retail channel and transportation market.

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Gross profit decreased $0.5�million, or 0.6%, to $78.8�million in the first quarter of fiscal 2015 compared with $79.3�million in the first quarter of fiscal 2014. Gross profit as a percentage of net sales decreased to 46.8% in the first quarter of fiscal 2015 due to sales mix.

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Selling, distribution and administrative expenses increased $0.1�million, or 0.2%. The first quarter of fiscal 2014 included $0.8�million of legal fees associated with the California Sales Representative Litigation as compared to no significant legal defense fees in the first quarter of fiscal 2015.� Excluding the impact of those legal fees, selling, distribution and administrative expenses increased due to higher sales and marketing costs and increased freight costs.

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Operating Profit increased $0.1�million in the first quarter of fiscal 2015 to a profit of $7.4�million compared with $7.3�million in the first quarter of fiscal 2014. Operating profit in the first quarter of fiscal 2014 was impacted by the inclusion of $0.6�million of Acquisition and integration costs associated with the acquisition of EVC as well as the continued integration of operations in the United Kingdom that were acquired during fiscal year 2012.

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Interest expense, net decreased from $2.3�million in the first quarter of fiscal 2014 to $1.8�million in the first quarter of fiscal 2015 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 $6.0�million and $7.0�million in fiscal 2015.

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The effective tax rate for the first quarter of fiscal 2015 was 36.5%, compared with 36.0% in the first quarter of fiscal 2014. The rate increased from the prior year primarily due to an increase in domestic and foreign non-deductible expenses, an increase in state tax expense, and a decrease in the benefit of lower foreign tax rates. We anticipate that our effective tax rate will range between 36.0% and 38.0% for fiscal year 2015, depending on the relative mix of income in various jurisdictions.

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�

Diluted earnings per share was $0.14 in each of the first quarters of fiscal 2015 and 2014.

�

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 $324�million. As of November�30, 2014, we had approximately $118.5 million available under the 2014 Credit Facility. We have outstanding letters of credit totaling $2.6 million 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 as of November�30, 2014, thereby reducing the total availability under the facility by such amount.� In the first quarter of fiscal 2015, we redeemed $7.2�million of industrial revenue bonds that were due in 2018 using funds available under the 2014 Credit Facility.

�

As of November�30, 2014, we had $4.2�million in cash and cash equivalents, of which $3.6�million was held by our foreign subsidiaries. Cash and cash equivalents held by our foreign subsidiaries averaged $13.8�million during the first quarter 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. Our plans do not demonstrate a need to repatriate foreign earnings to fund our U.S. operations. Rather, our intent is to reinvest earnings generated by our foreign subsidiaries indefinitely outside of the U.S. for purposes including but not limited to growing our international operations.

�

We were in compliance with our debt covenants as of November�30, 2014, 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 November�30, 2014, was $198.5�million, an increase of $5.9�million compared with August�31, 2014. The increase in net debt primarily reflects an increase in working capital, primarily due to a temporary inventory build-up during the first quarter 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 our operating activities totaled $14.8�million during the first three months of fiscal 2015, compared with net cash provided by operating activities of $7.0�million in the prior year period. Operating working capital increased $12.3�million in the first quarter of fiscal 2015 driven by increases in inventories due to build-up of certain aerosol products produced by contract manufacturers and inventory builds for certain promotional activities scheduled for the second fiscal quarter of 2015.

�

In September�2014, we received $11.9 million of insurance proceeds related to the fire. We have classified $1.3 million of those proceeds as operating activities as they represented an advance of funds to defray such costs as cleaning and removing debris from the property. The remaining proceeds of $10.6 million are classified within investing activities.

�

Included in cash flow from operating activities was $1.7�million and $3.0�million of interest payments in the first quarter of fiscal 2015 and 2014, respectively.� Cash flows from operating activities also included $1.9�million and $3.9�million of cash paid for income taxes in the first quarter 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 $2.2�million and $2.6�million in the first quarters of fiscal 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 used for financing activities was $3.5�million in the first quarter of fiscal 2015 as compared to $2.1�million used for financing activities in the first quarter 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 November�30, 2014, there have been no material changes to these 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 quarter 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;

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������������������ 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 fluctuation 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 November�30, 2014, 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.

�

(b)�Changes in Internal Control over Financial Reporting

�

During the three months ended November�30, 2014, 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 internal control over financial reporting, which 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. We plan to develop formal policies and improve processes including the reduced usage of manual journal entries and an approval control for manual journal entries with the objective of preventing errors prior to posting to the general ledger. When fully implemented and operating effectively, such enhancements are expected to remediate the material weakness described above. However, we cannot determine how long it will take to remediate this weakness and 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 part, 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.

�

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�

INDEX TO EXHIBITS

�

�

*���������������������������������������� 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) � November�30,�2014, and August�31,�2014; (ii)�Condensed Consolidated Statements of Income (Unaudited) � Three Months Ended November�30,�2014 and 2013; (iii)�Condensed Consolidated Statements of Comprehensive Income (Unaudited) � Three Months Ended November�30,�2014 and 2013; (iv)�Condensed�Consolidated Statements of Cash Flows (Unaudited) � Three Months Ended November�30,�2014 and 2013; and (v)�Notes to Condensed Consolidated Financial Statements (Unaudited).

�

21

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 November�30, 2014;

�

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: January�6, 2015

�

�

1

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 November�30, 2014;

�

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: January�6, 2015

�

�

1

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 November�30, 2014, 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.

�

�

�

1

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 November�30, 2014, 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.

�

�

�

1