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ZEP INC Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: January 7, 2013 07:06AM
ZEP INC (ZEP) filed Quarterly Report for the period ended 2012-11-30.
Highlight of Business Operations:The results of operations for the three months ended November 30, 2012 are not necessarily indicative of the results we expect for the full fiscal year because our net sales and net income 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.
During the quarter ended November 30, 2010, in connection with one of our acquisitions, we recorded a $3.75 million earnout liability whose payment is contingent upon earnings targets that are relative to a portion of our business, which are attainable at any time during a three-year period. During the year ended August 31, 2012, we reduced the fair value of this contingent consideration liability to $1.3 million based on our ongoing assessment of the probability that the acquiree will be paid either all or a portion of the contingency. We recorded the approximate $2.5 million reduction of this liability within Selling, Distribution, and Administrative Expenses within our Consolidated Statements of Income. There was no change in the fair value of our contingent liability during the three months ended November 30, 2012.
We estimate the fair value of this Level 3 liability at each reporting date using a probability-weighted discounted cash flow analysis, which requires the evaluation of significant unobservable inputs that include projected revenues, expenses and cash flows, and assumed discount rates. During the three months ended November 30, 2012, the application of a discount rate factor was not material to the fair value of our contingent consideration obligation, which expires in September 2013. The recurring Level 3 fair value measurements of our contingent consideration liability include the following significant unobservable inputs:
We completed the acquisition of the Vehicle Care division of Ecolab Inc.(Ecolab), effective December 1, 2012, for approximately $116.9 million in cash, subject to post-closing working capital adjustments. The combination of Ecolabs Vehicle Care division, Zeps existing North American Sales and Service vehicle wash operations, Niagara and Washtronics will create a new platform, Zep Vehicle Care, representing approximately 13% of the Companys net sales. Zep Vehicle Care, which will be based in Minnesota, will be 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 will access customers through the direct and distribution channels, and will provide car, truck and fleet wash operators high efficacy products for their wash tunnels and facilities as well as retail operations. We financed the acquisition using existing debt capacity. We will incur additional acquisition-related costs associated with advisory, legal and other due diligence-related services during our second quarter of fiscal year 2013. In addition, we entered into a transition services agreement under which Ecolab will continue to provide certain services to us for up to 12 months.
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 five-year senior, secured credit facility (the 2010 Credit Facility), which provides for a maximum borrowing capacity of $302 million. In October 2012, we amended the 2010 Credit Facility in connection with the purchase of Ecolabs Vehicle Care division. This amendment is described further in Note 3 of Notes to Consolidated Financial Statements. As of November 30, 2012, we had approximately $32.1 million available under the 2010 Credit Facility. We also have $7.2 million of industrial revenue bonds that are due in 2018. Our industrial revenue bonds were issued by the City of DeSoto Industrial Development Authority, Inc. in May 1991 in connection with the construction of Zeps facility in DeSoto, Texas. We have issued outstanding letters of credit totaling $12.1 million as of November 30, 2012, primarily for the purpose of providing credit support for our industrial revenue bonds, securing collateral requirements under our casualty insurance programs as well as supporting certain environmental obligations. These letters of credit were outstanding under the 2010 Credit Facility as of November 30, 2012, and thereby reduced the total availability under the credit facility by such amount. As of November 30, 2012, we had $3.9 million in cash and cash equivalents of which $2.7 million was held by our foreign subsidiaries. Cash and cash equivalents held by our foreign subsidiaries averaged $9.7 million during the three months ended November 30, 2012. 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. federal income taxes on the funds repatriated for use within our U.S. operations. 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 United States for purposes including but not limited to growing our international operations through acquisitions.
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