Zacks_Analysts' Blog : Zep Beats Zacks Consensus - Analyst Blog

Zep Inc. (ZEP) reported fiscal 2010 third quarter results. The company posted a 3.2% reduction in GAAP net income to $5.2 million from $5.4 million in the prior year quarter. Excluding special items, pro forma earnings came in at 30 cents per share, which topped the Zacks Consensus Estimate by 4 cents or 15%.

 

Zep is a producer, marketer and service provider of cleaning and maintenance solutions for commercial, industrial, institutional and consumer end-markets. The company's product portfolio includes anti-bacterial and industrial hand care products, cleaners, degreasers, deodorizers, disinfectants, floor finishes, sanitizers, and pest and weed control products.

 

Quarterly Details

 

Sales grew 24.5% to $153.0 million from $123.0 million in the year-ago quarter. The growth was primarily driven by the acquisition of Amrep Inc., which contributed $29.3 million to overall sales. Zep acquired Amrep, a specialty chemical formulator and packager focused in the automotive aftermarket and the janitorial market, for approximately $63.5 million in January this year.

 

Zep’s gross profit increased 14.0% year over year to $75.6 million, while gross margin dipped 460 basis points (bps) to 49.4%. The reduction in margin was primarily due to unfavorable product mix arising from the acquisition, partially offset by lower raw material costs.

 

Selling, Distribution and Administrative expenses, as a percentage of sales, decreased 460 bps to 42.1% primarily due to restructuring initiatives and cost synergies related to the integration of Amrep. However, operating margin reduced by 120 bps year over year to 6.0% as Zep recorded a $2.0 million restructuring charge, which was non-existent in the year-ago period.

 

Balance and Cash Flow

 

At the end of the quarter, Zep had cash and cash equivalents of $12.6 million and long-term debt-to-capitalization of 44.5%, compared with a cash balance of $6.6 million and long-term debt-to-capitalization of 33.3%. During the first nine months of fiscal 2010, the company generated $15.2 million from operations and received $129.0 million from the revolving credit facility. The company also deployed $89.0 million toward debt repayment, $63.5 million toward the Amrep acquisition and $7.7 million toward capital expenditure.

 

The Zacks Consensus Estimate on Zep’s earnings for fiscal 2010 is currently pegged at 99 cents per share, which moved down a penny over the past 2 months. For the next fiscal year, the Zacks Consensus Estimate, derived from 4 covering analysts, has remained constant at $1.28 per share over the past 2 months.