ATLANTA -- Zep Inc. has today announced financial results for its fiscal quarter ended Nov. 30, 2009. Zep’s operating profit totaled $8.8 million during the first quarter of fiscal year 2010 compared with an operating loss of $0.8 million in the first quarter of fiscal year 2009. Net cash provided by operating activities during the three months ended Nov. 30, 2009 totaled $7.1 million, an $18.1 million improvement from the three months ended Nov. 30, 2008. Reported operating profit margins for the first fiscal quarters of 2010 and 2009 were 7 percent and (0.6 percent), respectively.

Zep generated net income during the quarter of $5.4 million, or 25 cents per diluted share, which included $0.2 million, or 1 cent per diluted share, of charges for restructuring activities related primarily to facility consolidations. The company reported a net loss in the first quarter of the prior year of $1.5 million, or 7 cents per diluted share, which included $1.2 million, or 6 cents per diluted share, of charges for severance-related restructuring activities.

John Morgan, chairman, president and chief executive officer, stated, “During the past year we meaningfully lowered the breakeven point of the business through the execution of sustainable restructuring and cost-reduction initiatives. We continue to benefit from and remain committed to those actions, and are pleased to announce substantial earnings and cash flow improvement despite slightly lower comparative first quarter sales. While company-wide sales volumes have yet to return to pre-recession levels, demand in some of our end-markets has stabilized compared with the prior year, and we are seeing sequential improvement in certain markets. The discipline of our associates has allowed us to continue strengthening our balance sheet by reducing our net debt position.”

First Quarter Results
Net sales totaled $126.8 million during the first quarter of fiscal year 2010 compared with $129.2 million in the first quarter of fiscal year 2009, representing a decrease of $2.4 million or 1.9 percent. During the first quarter, the company realized higher year-to-date selling prices of approximately $1 million, primarily from domestic operations. The company experienced double-digit year-over-year volume growth in sales to customers accessed through the retail channel. Also, foreign currency translation on international sales favorably impacted total net sales by $2.4 million. Total volume-related declines adversely impacted first quarter net sales by $6.9 million as declining sales volumes to industrial and institutional customers more than offset these aforementioned gains.

While demand for Zep’s products in certain of its industrial and institutional end-markets, including schools, government and food, is stabilizing, the company continues to face challenges within other end-markets, including transportation and industrial operations. During the quarter, the company renegotiated the terms of the company’s contract with its licensee in France. Terms of the new contract are favorable to Zep. Separately, the company executed a release agreement with its licensee in France that addressed historical business transactions. The company received a one-time, $1.1 million payment pursuant to this release agreement, all of which was recognized in our first quarter net sales.

Gross profit margin was 55.1 percent in the first quarter of fiscal year 2010, representing a 265 basis point improvement from the first quarter of fiscal year 2009 and a 180 basis point improvement from the fourth quarter of fiscal year 2009. Raw material costs in this fiscal year’s first quarter were $3.5 million lower than those experienced in the prior year period, due to both reduced commodity costs and on-going success of sourcing initiatives. Inventories were increased during the quarter in response to promotional sales activities of certain of the company’s retail customers and an increase in demand for sanitizer products due to concern surrounding the H1N1 virus. The result improved manufacturing absorption favorably impacted same-quarter comparative gross margins by approximately 80 basis points. Partially offsetting the benefit of lower raw material costs and improved manufacturing absorption was the impact of higher sales through the retail channel, which adversely affected gross margin by approximately 115 basis points compared with the prior year first quarter.

Zep reduced selling, distribution and administrative expenses as a percentage of sales by approximately 380 basis points compared with the year-ago period to 47.9 percent in the first quarter of fiscal year 2010. The company continued to benefit from previously announced initiatives undertaken to streamline administrative costs, and remains committed to furthering those initiatives in fiscal year 2010. During the first quarter, Zep recorded a pretax restructuring charge of $0.4 million related primarily to costs associated with facility consolidation. Zep conducted first quarter operations with 10.9 percent fewer non-sales associates compared with the prior year period. While the large majority of these cost structure improvements are permanent, Zep will cease benefiting from certain temporary actions beginning in calendar year 2010. A portion of the matching contribution provided under the company’s defined contribution plan has been restored, and the company will reinstate the remainder of the matching benefit beginning January 2010. Additional compensation adjustments, which are merit-based in nature, will become effective that month. In total, the company expects approximately $2.8 million in annualized costs to return to its overhead structure beginning in calendar year 2010.

Zep’s net cash provided by operating activities totaled $7.1 million during the quarter, an $18.1 million improvement from the prior year period. The $18.1 million improved cash flow generation was driven in part by substantial improvement in year-over-year operating results. At the end of the current fiscal year’s first quarter, the company was in an income tax payable position due to the above mentioned generation of operating profit, whereas last year the company recorded income tax receivables until a year-to-date profit was attained during our third quarter. Also, certain uses of cash normally occurring in the first quarter, including but not limited to the payment of incentive program obligations, were shifted to the second quarter of fiscal year 2010. The company estimates that between $6 million and $7 million of our year-over-year operating cash flow improvement resulted from this timing shift involving the payment of certain liabilities.

Strategic Initiatives Update
Zep continued to grow its core Zep Sales & Service organization in the first quarter by augmenting its sales force with experienced professionals. The company is also working to empower its sales force with new tools that, once fully developed, will help maximize its ability to evaluate pricing and otherwise improve business transactions. Zep consolidated two facilities during the first quarter, and anticipates consolidation of at least three more locations in fiscal year 2010. Facility consolidations have historically resulted in improved customer service, reduced inventories and reduced operating costs. The company continues to pursue new industrial distribution partnerships with its Zep Professional product line and expand upon existing relationships. Beginning in the latter portion of the company’s second fiscal quarter, the Zep Professional product line will be made available to customers of WW Grainger not only through that distributor’s online resources, but also through its catalog and branch network. Zep is experiencing success in growing its Zep Commercial, Enforcer and private branded product lines with both existing and new retail customers and announced a newly forged relationship with Advance Auto Parts during its first fiscal quarter.

Effective Jan. 4, Zep acquired Amrep Inc. for cash consideration of approximately $64.4 million, subject to post-closing working capital adjustments. Amrep Inc., which is now a wholly-owned subsidiary of Zep Inc., is a specialty chemical formulator and packager focused in the automotive, fleet maintenance, industrial/MRO supply, institutional supply and motorcycle markets.

Morgan concluded, “We are pleased with our ability to leverage previous and ongoing efforts to increase productivity and streamline the business. While we will continue to manage the business in a manner that assumes there will not be a significant near-term economic recovery of the markets in which we participate, we believe we have a stronger platform for long-term growth and profitability. We are making investments designed to grow the lifeblood of the company, the Zep rep sales force, and to expand our distribution, retail, and European sales. We believe the acquisition of Amrep will both broaden our access to key strategic markets and presents numerous synergistic opportunities, and we will continue to make investments to execute plans for acquisitive growth. We look forward to continuing our work to create value for all stakeholders, including our customers, our associates, our communities, and, of course, our shareholders.”