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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended August 31, 2011.

OR

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

For the transition period from              to             .

Commission file number 001-33633.

Zep Inc.

(Exact name of registrant as specified in its charter)

(404) 352-1680

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

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

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 o  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

Based on the closing price of the registrant’s common stock of $15.69 as quoted on the New York Stock Exchange on February 28, 2011, the aggregate market value of voting stock held by nonaffiliates of the registrant was $121,937,565.

The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 21,980,523 as of October 28, 2011.

Documents Incorporated by Reference

Table of Contents

Zep Inc.

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PART I

Item 1. Business

Our Business

Zep Inc. is a leading provider of cleaning and maintenance chemicals and related products and services. We market our products and services under well recognized brand names, some of which have been in existence since we were founded in 1937. For the fiscal year ended August 31, 2011, we generated net sales of $646.0 million and net income of $17.4 million. As of August 31, 2011, we had total assets of $403.8 million. We sell our products to more than 200,000 customers, which are located primarily in the United States (79% of fiscal 2011 net sales), Canada (12% of fiscal 2011 net sales), and Europe (9% of fiscal 2011 net sales). We became an independent, publicly owned company in 2007 after having been spun-off by our former parent company. Our common stock is listed on the New York Stock Exchange under the ticker symbol “ZEP.”

We believe that the applicable market for our products and services in the United States is approximately $19 billion. The market consists of three different types of end-users. The largest category of end-users is professional maintenance and cleaning personnel who buy products from business-to-business supply distributors. We believe this type of end-user represents approximately 44% of the U.S. market. The next largest category, representing approximately 35% of the U.S. market, is the occasional purchaser of cleaning and maintenance chemicals who purchases products from retail establishments. The third type of end-user purchases cleaning and maintenance chemicals directly from a salesperson who represents the manufacturer. This portion of the market represents the remaining approximately 21% of the U.S. market and consists of end users seeking specific specialty chemicals from a highly trained, technical sales organization.

Our goal is to sell our products and services in each type of channel. Accordingly, we market our products and services in the following ways:

·                          Our distributor sales organization markets our products to large national and regional business-to-business distributors that target the industrial maintenance, janitorial/sanitation, and automotive markets. The distributors selling our branded and private label products include W.W. Grainger Inc.; HD Supply; Lagasse, Inc.; Bunzl; Fastenal Company; TripleS; Interline Brands, Inc.; Toyota Motor Sales USA, Inc.; Nissan North America, Inc.; Subaru of America, Inc. and Kia Motors America, Inc.

·                          Our retail sales organization markets our products to contractors, small business owners and homeowners through retailers such as home-improvement stores, hardware stores, discount stores and auto parts stores. We believe that we are the largest supplier of industrial-strength cleaning chemicals to The Home Depot. Sales to The Home Depot, which is our largest single customer, accounted for approximately 10% of our fiscal 2011 total net sales.  Other retailers selling our branded and private label products include Wal-Mart; Ace Hardware; Menard’s; Advance Auto Parts, Inc.; and TruServ Hardware.

·                          Through the direct sales force of our sales and service organization, we provide convenient, highly effective cleaning and maintenance solutions to customers that include commercial, industrial, institutional and governmental end-users, ranging in size from small sole proprietorships to the United States federal government. Our sales and service organization maintains a particular focus on meeting the needs of customers in the transportation, food processing, industrial manufacturing, and food service industries. We provide value-added services to the customers of our sales and service organization on application uses, safety aspects, product selection, specific formulations, inventory management, customer employee training and equipment, including dispensers. We believe that the services we offer often reduce the total cost of our customers’ cleaning and maintenance needs. Accordingly, we believe that the customers of our sales and service organization benefit from a more effective solution that is superior to many of our competitors’ offerings. We are a leading U.S. provider of cleaning and maintenance solutions in the direct-sales channel.  Customers served by our sales and service organization include U.S. Communities; Costco; Ameriquest; Harrah’s Entertainment, Inc.; Ryder Truck Rental; and Waste Management, Inc.

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A summary of our product offerings, our representative brands, including selected licensed brands, and the customers we serve through each of our sales organizations is provided in the following table:

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Our Strategy

Our strategy is to strengthen our position as a leading provider of innovative, environmentally sustainable cleaning and maintenance solutions for commercial and industrial end users. We seek to achieve financial performance in the top quartile of our peer group of companies by growing our share with existing and new customers and expanding our margins. To achieve this financial performance, we intend to

·                  Profitably grow the sales and service business;

·                  Serve “pro” customers through a broad retail base;

·                  Grow sales with new and existing distributors;

·                  Build upon existing European and develop other international capabilities; and

·                  Expand through selected acquisitions.

During the three years following our spin-off in 2007, we streamlined our historical product offering by approximately 50%, allowing our direct sales organization to focus on its most profitable products; we reduced our branch network from 42 locations to the 17 locations we believe are the best positioned to serve our customers; and we reduced non-sales headcount by approximately 10%. These changes allowed us to increase our cash flows and to reduce our debt by 53% before we began pursuing acquisitive growth opportunities. Most importantly, we reduced the breakeven point of our direct-sales business by almost one-third.

We began to implement our acquisition strategy in fiscal 2010. In January 2010, we acquired Amrep, Inc., a leader in maintenance chemicals for the automotive aftermarket as well as the janitorial market sold through distributors. In September 2010, we acquired certain assets and liabilities from Waterbury Companies, Inc., including certain air-care brands. These two acquisitions gave us a solid presence in the industrial distribution market, and strengthened our position in the retail market. The acquisition of Amrep also allowed us to consolidate further our manufacturing operations. In October 2010, we acquired the assets of Niagara National, LLC, which complements the strength of our direct-sales organization in the vehicle-wash market, specifically in the truck and fleet washing equipment markets.

During fiscal 2011, we completed the integration of the Amrep, Inc., Waterbury Companies, Inc., and Niagara National, LLC acquisitions.  With these acquisitions now complete, we are realizing numerous synergies in the sourcing, manufacturing and delivery of our products and services, including the capability to provide single order invoicing for our customers.  We also centralized our supply chain operations during the year to allow manufacturing plants to produce product for multiple sales channels.  With these components of our business transformation now complete, we will continue our focus on growing the business both organically as well as through acquisitions.

Our Competition

The market for cleaning and maintenance chemicals and related services is highly competitive. Overall, competition is fragmented in the commercial, industrial, and institutional end-markets, with numerous local and regional operators selling directly to customers, distributors, and a few national competitors. Many of these competitors offer products in some, but not all, of the markets we serve. Competition is based primarily on brand name recognition, price, product quality, and customer service. Competitors in the commercial, industrial, and institutional end-market include but are not limited to Ecolab Inc., Diversey, Inc., Arch Chemicals, Inc., RPM International, Inc., NCH Corporation, Rochester Midland Corporation, The Claire Manufacturing Company, Swisher Hygiene, Inc., Newell Rubbermaid Inc., Georgia-Pacific, and State Chemical Manufacturing Company. Many companies compete within the broader retail market for cleaning chemical products, including but not limited to Church & Dwight Co., Inc., Procter and Gamble, WD-40 Company, Gojo Industries, Inc. Reckitt Benckiser plc, S.C. Johnson & Sons, Inc., Sunshine Makers, Inc., and The Clorox Company. We also compete in the home improvement channel with pest control companies such as Bayer, A.G., Spectrum Brands, Inc., and The Scott’s Company. Competitors in the automotive original equipment aftermarkets include Excelda Manufacturing, CRC Industries, Inc., Ashland Inc., and Technical Chemical Company. Furthermore, barriers to entry and expansion in the industry are low, which may lead to additional competitive pressure in the future. In the industrial and institutional direct-sales market channel, we believe we are one of the top four market leaders in the U.S., which together hold slightly less than approximately 30% of the total market share.

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Seasonality and Cyclicality

Our business exhibits some seasonality, with net sales being affected by weather and the annual budget cycles of major customers. Historically, due to this seasonality and the number of available selling days, the second half of our fiscal year is much stronger in terms of sales, earnings, and cash flow than the first half.

In addition, our net sales are dependent on economic conditions in the retail, wholesale and industrial markets. Furthermore, we believe that demand for our products correlates positively to seasonally adjusted manufacturing employment, overall employment levels and, to some degree, new motor vehicle sales. Therefore, economic downturns generally have an adverse effect on our net sales and operating income. Our customers in the North American sales and service channel are typically small business operations, who are themselves struggling in this challenging economic environment. The adverse effect of downturns may be mitigated to some extent in health-driven, sophisticated markets, such as North America and Europe, by customer expectations and health and safety regulations that require increased frequency of use of cleaning products. Health and safety regulations are also shrinking the pool of available chemicals. Together, these trends are driving demand and development of improved product formulations and application methods.

Our Products

We produce a wide range of cleaning and maintenance solutions for commercial, industrial, institutional, and consumer customers. Our product portfolio includes anti-bacterial and industrial hand care products, cleaners, degreasers, deodorizers, disinfectants, floor finishes, sanitizers, pest- and weed-control products, air-care products and delivery systems and a wide variety of automotive maintenance chemicals. We currently have more than 4,000 unique formulations that are used in manufacturing products for our customers. Many of our formulations are trade secrets. The value of the formulations to our business depends on our ability to maintain them as trade secrets.  We own, or have pending, domestic and foreign registrations for approximately 435 trademarks. Our trademarks and formulations are important to our business. We have an active program to protect our intellectual property by filing for patents and trademarks and by pursuing legal actions against persons who infringe our intellectual property.

We employ a staff of chemists and technical support personnel who develop new products and support both our sales representatives and customers. We also license new products and technologies from third parties and engage others to assist with product development. As a result, we continually refresh our product portfolio and service offerings through the introduction of new products and formulations, the incorporation of proven technologies into new applications and the introduction of new services to meet the demands of our customers and the industries we serve. The development of environmentally preferable products based on renewable and environmentally preferred raw materials is a principal focus of our product development efforts. We are expanding our GreenLink™ product line and introducing products for the automotive market under the EnviroEdge™ name. We recently launched the Provisions™ food service cleaning product line, which is composed of biodegradable detergents and cleansers ideally suited for the growing food segment.

Manufacturing

We manufacture our products at eight facilities located in the United States, Canada, the Netherlands and Italy. The five United States facilities produce approximately 90% of our manufactured product. Certain finished goods purchased from contract manufacturers and finished goods suppliers supplement the products that we manufacture. Sales of finished products manufactured for us by third party suppliers currently account for approximately 20% of our net sales volume. Outsourced product is predominately manufactured in the United States.

The key raw materials we use in our chemical products, which account for most of our revenue, are surfactants, polymers and resins, fragrances, water, solvents and other petroleum-based materials, and packaging materials. Many of the raw materials we use are petroleum-based and, therefore, are subject to the availability and price of oil or its derivatives. Additionally, some of the raw materials we use are agriculture-based commodities, which are subject to changes in availability and price.  We purchase most chemical raw materials on the open market. Although we do not currently engage in any commodity hedging transactions for raw materials, we have committed and expect to continue to commit to purchase certain materials for specified periods of time. Furthermore, we constantly monitor and investigate alternative suppliers and materials based on numerous attributes including quality, service, and price. Accordingly, the cost of products sold may be affected by changes in the market price of raw materials or the sourcing of finished goods. Due to the mix of purchases (raw materials, components parts and finished goods), the timing of price increases and other economic and competitive forces within the supply chain, it is not possible to determine the financial impact of future changes in the market price of these raw materials.

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Products sold to commercial, industrial and institutional end-markets are shipped from approximately 20 strategically located branch warehouses throughout North America and Europe, which are supplied directly from our production facilities, and by one large distribution center in Atlanta, Georgia. Products sold to home improvement retailers are distributed nationwide from another facility located in Georgia. We also utilize warehouses maintained by third-party logistics companies in our distribution network. Our products are primarily delivered through common and local carriers.

Environmental Regulation

Our operations are regulated under a number of federal, state, local and foreign environmental, health and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air, soil and water as well as the use, handling, storage and disposal of these materials. These laws and regulations include, but are not limited to, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), as well as analogous state, local and foreign laws. Compliance with these environmental laws is a major consideration for us because we use hazardous materials in some of our manufacturing processes. In addition, because we are a generator of hazardous waste, we, along with any other person who disposes of or arranges for the disposal of our waste, may be subject to financial exposure for costs associated with an investigation and any remediation of sites at which we have disposed or arranged for the disposal of hazardous waste if those sites become contaminated, even if we fully complied with applicable environmental laws at the time of disposal. Furthermore, process wastewater from our manufacturing operations is discharged to various types of wastewater management systems. We may incur significant costs relating to contamination that may have been, or is currently being, caused by this practice. We are also subject to numerous federal, state, local and foreign laws that regulate the manufacture, storage, distribution and labeling of many of our products, including some of our disinfecting, sanitizing and antimicrobial products. Some of these laws require us to have operating permits for our production facilities, warehouse facilities and operations. We may not have some of these permits or some of the permits that we do have may not be current. In the event of a violation of these laws, we may be liable for damages and the costs of remedial actions and may also be subject to revocation, non-renewal or modification of our operating and discharge permits, and revocation of product registrations. Any revocation, non-renewal or modification may require us to cease or limit the manufacture and sale of products at one or more of our facilities and may have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, legislation or regulations restricting emissions of greenhouse gases and our need to comply with such legislation or regulations could affect our business, financial condition, results of operation or cash flows. Environmental laws may also become more stringent over time, which could increase our compliance costs.

The environmental regulations we believe are most significant to us are summarized below.  Risks related to these regulations and the nature of our manufacturing processes and selling activities are provided within Item 1A. Risk Factors section of this document.

Toxic Substances

We are subject to various federal, state, local and foreign laws and regulations governing the production, transport and import of industrial chemicals. Notably, the Toxic Substances Control Act gives the U.S. Environmental Protection Agency (“EPA”), the authority to track, test and/or ban chemicals that may pose an environmental or human-health hazard. We are required to comply with certification, testing, labeling and transportation requirements associated with regulated chemicals. To date, compliance with these laws and regulations has not had a material adverse effect on our business, financial condition, results of operations or cash flows.

Pesticide Regulation

Some of our facilities are subject to various federal, state, local and foreign laws and regulations governing the manufacture and/or use of pesticides. We manufacture and sell certain disinfecting and sanitizing products that kill micro-organisms, such as bacteria, viruses and fungi. These products are considered “pesticides” or “antimicrobial pesticides” and, in the United States, are governed primarily by the Federal Insecticide, Fungicide and Rodenticide Act, as amended by the Food Quality Protection Act of 1996 (“FIFRA”). To register these products, we must meet various efficacy, toxicity and labeling requirements and must pay initial and ongoing registration fees. In addition, some states or foreign jurisdictions may impose taxes on sales of pesticides. Although the cost of maintaining, and delays associated with, pesticide registration have increased in recent years, compliance with the various laws and regulations governing the manufacture and sale of pesticides has not had a material adverse effect on our business, financial condition, results of operations or cash flows.

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Ingredient Regulation

Numerous federal, state, local and foreign laws and regulations relate to the sale of products containing ingredients that may impact human health and the environment. Specifically, the State of California has enacted Proposition 65, which requires us to disclose specified listed ingredient chemicals on the labels of our products. To date, compliance with these laws and regulations has not had a material adverse effect on our business, financial condition, results of operations or cash flows.

Other Environmental Regulation

Many of our facilities are subject to various federal, state, local or foreign laws and regulations governing the discharge, transportation, use, handling, storage and disposal of hazardous substances. In the United States, these statutes include the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act as well as analogous state laws. We are also subject to the Superfund Amendments and Reauthorization Act of 1986, including the Emergency Planning and Community Right-to-Know Act, which impose reporting requirements when toxic substances are released into the environment. In Europe, we are subject to portions of the compliance obligations under the EU European Community Directive “Registration, Evaluation, Authorization, and Restriction of Chemicals” (EU Directive No. 2006/1907). The directive imposes several requirements related to the identification and management of risks related to chemical substances manufactured or marketed in Europe. Our compliance obligations are mostly associated with the use of chemicals as opposed to the manufacture of chemicals. Each year we make various capital investments and expenditures necessary to comply with applicable laws and regulations. To date, these investments and expenditures have not had a material adverse effect on our business, financial condition, results of operations or cash flows.

Environmental Remediation and Proceedings

We may be jointly and severally liable under CERCLA or its state, local or foreign equivalents for the costs of environmental contamination on or from our properties and at off-site locations where we disposed of or arranged for the disposal or treatment of hazardous waste. Generally, CERCLA imposes joint and several liability on each potentially responsible party (“PRP”) that actually contributed hazardous waste to a site. Customarily, PRPs will work with the EPA to agree on and implement a plan for site investigation and remediation. Based on our experience with these environmental proceedings and, our estimate of the contribution to be made by other PRPs with the financial ability to pay their shares, we believe that our share of the costs at these sites will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

In addition to the liabilities imposed by CERCLA or its state, local or foreign equivalents, we may be liable for costs of investigation and remediation of environmental contamination on or from our current or former properties or at off-site locations under numerous other federal, state, local and foreign laws. Our operations involve the handling, transportation and use of numerous hazardous substances. We are aware that there is or may be soil or groundwater contamination at some of our facilities resulting from past or current operations and practices. Based on available information, we believe that the costs to investigate and remediate known contamination at these sites will not have a material adverse effect on our results of operations.

Environmental Permits and Licensing

In the ordinary course of our business, we are continually subject to environmental inspections and monitoring by governmental enforcement authorities. In addition, our production facilities, warehouse facilities and operations require operating permits that are subject to renewal, modification and, in specified circumstances, revocation. While we believe that we are currently in material compliance with existing permit and licensing requirements, we may not be in compliance with all permit or licensing requirements at some of our facilities. Based on available information, we believe that costs associated with any failure to satisfy our permit and licensing obligations will not have a material adverse effect on our business, financial condition, results of operations or cash flows.

Product Registration and Compliance

In addition to our pesticides, which are required to be registered in the U.S. pursuant to FIFRA and in other countries pursuant to comparable foreign regulations, various federal, state, local and foreign laws and regulations regulate some of our products and require us to register our products and to comply with specified requirements. In the United States, we must register our sanitizing and disinfecting products with the EPA. When we register these products, we must also submit to the EPA information regarding the chemistry, toxicology and efficacy for the agency’s review. Data must be consistent with the desired claims stated on the product label. In addition, each state where these products are sold requires registration and payment of a fee.

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We are also subject to various federal, state, local and foreign laws and regulations that regulate products manufactured and sold by us for controlling microbial growth on humans, animals and processed foods. In the United States, these requirements are generally administered by the U.S. Food and Drug Administration, (“FDA”). The FDA regulates the manufacture and sale of food, drugs and cosmetics, which includes antibacterial soaps, hand sanitizers and products used in food preparation establishments. The FDA requires companies to register antibacterial hand-care products and imposes specific criteria that the products must meet in order to be marketed for these regulated uses. Before we are able to advertise our product as an antibacterial soap, a hand sanitizer or a food-related product, we must generate, and maintain in our possession, information about the product that is consistent with the appropriate FDA monograph. FDA monographs dictate the necessary requirements for various product types such as antimicrobial hand soaps. In addition, the FDA regulates the labeling of these products. If the FDA determines that any of our products do not meet its standards for an antibacterial product, we will not be able to market the product as an antibacterial product. Similar product registration regulations and compliance programs exist in many other countries where we operate. To date, the cost of complying with product registration and compliance has not had a material adverse effect on our business, financial condition, results of operations or cash flows.

Employees

As of August 31, 2011, we had approximately 2,300 employees, including 1,720 in the United States, 220 in Canada, and 360 in Europe. Of our approximately 2,300 employees, we estimate that 210 are subject to collective bargaining agreements in the United States and Europe including employees at our manufacturing facility on Seaboard Industrial Boulevard in Atlanta, Georgia.

International Operations

See Note 12: Geographic Distribution of Operations of Notes to Consolidated Financial Statements for information regarding the geographic distribution of net sales, operating profit, and long-lived assets.

Information Concerning Zep Inc.

We were incorporated in 2007 under the laws of Delaware. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K (and all amendments to these reports), together with all reports filed pursuant to Section 16 of the Securities Exchange Act of 1934 by our officers, directors, and beneficial owners of 10% or more of our common stock, available free of charge through the “SEC Filings” link on our website, located at www.zepinc.com, as soon as reasonably practicable after they are filed with or furnished to the SEC. Information included on our website is not incorporated by reference into this Annual Report on Form 10-K. Our reports are also available at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or on their website at www.sec.gov.  The SEC may be contacted regarding such requests at

1-800-SEC-0330.

We have adopted a written Code of Ethics and Business Conduct that applies to all of our directors, officers, and employees, including our chief executive officer and chief financial officer. The Code of Ethics and Business Conduct and our Corporate Governance Guidelines are available free of charge through the “Corporate Governance” link on our website at www.zepinc.com. The charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, and the rules and procedures relating thereto, are also available free of charge through the “Corporate Governance” link on our website. Each of the Code of Ethics and Business Conduct, the Corporate Governance Guidelines, and the committee charters is available in print to any of our stockholders by written request. Such requests should be directed to the Corporate Secretary, Zep Inc., 1310 Seaboard Industrial Boulevard, Atlanta, Georgia 30318. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers from any provision of this Code of Ethics and Business Conduct applicable to our chief executive officer and chief financial officer by posting such information within the investor relations corporate governance sections on our website at www.zepinc.com.

Item 1A. Risk Factors

The following are important factors that could affect our business and our financial condition and results of operations. Such factors could also cause our actual results for future periods to differ materially from our expectations, including those expressed in or implied by any forward-looking statements contained in this Annual Report on Form 10-K. This could cause the market price of our securities to decrease. The risk factors described below are not the only risks that may affect us. Additional, risks and uncertainties not presently known to us also my adversely affect our and our financial condition and our results of operations.  See the section entitled “Cautionary Statement Regarding Forward-Looking Information”.

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We may also refer to this disclosure to identify factors that may cause results to differ from those expressed in or implied by other forward-looking statements made in oral presentations, including conference calls and/ or webcasts open to the public.

Except as may be required under applicable law, we undertake no responsibility to update our Cautionary Statements Regarding Forward-Looking Information.

Risks Related to our Business

Global economic conditions could continue to affect adversely our business and financial results.

Unfavorable economic conditions, and in particular, downturns that affect the transportation, food processing, food service, manufacturing, government and housekeeping markets, may negatively impact our business and financial results. The recent global recession, many aspects of which, such as high unemployment, are continuing, negatively impacted all of these markets. During periods of difficult economic conditions and uncertainty, we experience decreased demand for our products as many customers either defer purchases or purchase lower-cost products. Credit quality has frequently experienced declines during periods of difficult economic conditions, which may negatively impact our ability to collect accounts receivable on a timely basis, or at all, from certain customers. Furthermore, the ability of certain suppliers to fill our orders for raw materials or other goods and services may decline in the future because of the diminished availability of credit. A prolonged period of difficult economic conditions, particularly one that affects the end-user markets listed above, could have a material adverse impact on our business, results of operations and financial condition, and our ability to make distributions to our stockholders.

Our results can be adversely affected by fluctuations in the cost or availability of materials used in our manufacturing processes.

The key raw materials we use in our chemical products are surfactants, polymers and resins, fragrances, water, solvents and other petroleum-based materials and packaging materials. Many of the raw materials that we use are energy dependent and, therefore, are subject to the availability and price of energy related inputs such as oil and natural gas. Some of the raw materials we use are agriculture-based commodities and are subject to changes in availability and price. Furthermore, there are a limited number of suppliers for some of our raw materials. Competitive conditions, governmental restrictions, natural disasters and other events could limit the quantities of our raw materials that we are able to purchase. As a result, the price and availability of the raw materials we use may fluctuate substantially.

For example, during fiscal year 2011, we experienced difficulty obtaining pyrethrum, a key component of our agricultural pest control products due to an industry-wide shortage. As another example, we also expect that the cost of ethanol, which is used in some of our products and which is increasing in importance as a transportation fuel, will soon increase substantially because corn production was insufficient to meet expected demand for the product.

We may not be able to increase the prices of our products to recover the increased cost of the raw materials we use. Significant increases in the prices of our raw materials could have a negative effect on demand for our products and on our operating margins. Furthermore, our ability to meet the demand for our products could be negatively impacted by shortages of our raw materials.

We do not currently engage in commodity hedging transactions for significant quantities of our raw materials. We are not always able to enter into a supply agreement for certain raw materials. When we are able to do so, we face the risk that the price of the raw material covered by the contract may decline during the term of the supply agreement.

We face significant competition and may face more significant competition in the future.

Our industry is highly competitive. Our competition includes numerous local and regional operators selling directly to customers, numerous distributors and several national competitors. Many of our competitors are privately-held companies that have cost structures that are lower than ours or that have lower financial-return requirements than we have. Competition is based primarily on brand name recognition, price, product quality, and customer service. Furthermore, barriers to entry and expansion in the industry are low, which may lead to additional competitive pressure in the future. We cannot assure you that we will be able to continue to compete successfully against current or future competitors or that change in the source or intensity of competitive pressure in the industry will not result in reduced market share that could negatively impact our results of operations, financial condition, or cash flows.

We may be unable to sustain our significant customer relationships.

Our relationships with our largest customers depend on our ability to deliver high quality products and services. The loss of or substantial decrease in the volume of purchases by one or more of our largest customers could harm our sales and

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profitability. The Home Depot is our largest single customer. It represented approximately 10%, 10%, and 11% of our total net sales during the fiscal years ended August 31, 2011, 2010, and 2009, respectively. Our relationship with The Home Depot is not subject to any written contract obligating The Home Depot to purchase our products and, The Home Depot could sever its relationship with us upon little or no notice. We have developed plans for reducing our cost structure if we were to lose one or more of our largest customers; however, we could not implement the actions contemplated by these plans immediately and we would incur substantial costs in doing so.  Therefore, the loss of The Home Depot as a customer would have at least a near-term material adverse affect on our financial condition and results of operations.

If we are unable to implement our growth strategy, the price of our common stock may be adversely affected.

Our strategy is to achieve profitable growth by, among other things, acquiring other product lines and businesses. Our ability to implement our growth strategy depends upon a variety of factors that are not within our control, including:

·                  our ability to make profitable acquisitions;

·                  our ability to integrate acquired companies and facilities into our existing operations; and

·                  the availability of capital.

We compete for acquisition opportunities with companies that have significantly greater financial resources than we have. Therefore, we may be unable to complete an acquisition that we believe could be important to our growth strategy because one of our competitors may be willing to pay more for a potential acquisition candidate or may be able to use its financial resources to acquire a potential acquisition candidate before we are able to obtain financing.

The implementation of our growth strategy may place additional demands on our administrative, operational and financial resources and may increase the demands on our financial systems and controls. Our ability to manage our growth successfully may require us to continue to improve and expand these resources, systems and controls. If our management is unable to manage growth effectively, our operating results could be adversely affected. If we are unable to manage our growth, our financial condition and results of operations may be adversely affected.

Our growth strategy requires that we make expenditures in connection with the acquisition of other product lines and companies. We cannot predict the amount of our expenditures in connection with our growth strategy because opportunities for implementing our growth strategy arise unexpectedly. We will be required to seek additional sources of financing as we pursue our growth strategy, which may include issuing debt or equity securities. Our need for additional financing may place us at a disadvantage in competing for acquisitions. When a future acquisition opportunity arises, we will be required to evaluate the sources of financing, which may be limited on short notice, and the terms of the financing available at the time. Certain sources of financing may have a dilutive effect on stockholders’ existing equity positions. If we cannot find financing on acceptable terms, we may be unable to make the acquisition.

We are subject to a broad range of environmental, health, and safety laws and regulations in the jurisdictions in which we operate, and we may be exposed to substantial environmental, health, and safety costs and liabilities.

As noted above, our operations are regulated under a number of federal, state, local and foreign environmental, health and safety laws and regulations that govern, among other things, the manufacture, storage, distribution, sale and use of our products. Regulation of our products and operations continues to increase with more stringent standards, including evolving climate change standards, causing increased costs of operations and potential for liability if a violation occurs. Notably, the Toxic Substances Control Act gives the U.S. Environmental Protection Agency (“EPA”), the authority to track, test and/or ban chemicals that may pose an environmental or human-health hazard. We are required to comply with certification, testing, labeling and transportation requirements associated with regulated chemicals. To date, compliance with these laws and regulations has not had a material adverse effect on our business, financial condition, results of operations or cash flows. However, the costs of complying with these laws and regulations, including participation in assessments and remediation of contaminated sites and installation of pollution control facilities, have been, and in the future could be, significant. In addition, these laws and regulations may also result in substantial environmental and product liabilities associated with product usage, divested assets, third party locations, and past activities. We have accrued a liability for environmental remediation activities where appropriate. The cost of addressing environmental matters (including the timing of any charges related thereto), however, cannot be predicted with certainty. These liabilities may not ultimately be adequate, especially in light of potential changes in environmental conditions, changing interpretations of laws and regulations by regulators and courts, the discovery of previously unknown environmental conditions, the risk of governmental orders to carry out additional compliance on certain sites not initially included in remediation in progress, our potential liability to remediate sites for which provisions have not previously been established and the adoption of more stringent environmental laws. Such future developments could result in increased environmental

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costs and liabilities and could require significant capital and other ongoing expenditures, any of which could have a material adverse effect on our financial condition or results of operations. Furthermore, the failure to comply with our obligations under the environmental laws and regulations could subject us to administrative, civil, or criminal penalties, obligations to pay damages or other costs, and injunctions or other orders, including orders to cease operations. In addition, the presence of environmental contamination at our properties could adversely affect our ability to sell property, receive full value for a property, use a property as collateral for a loan, or obtain or maintain financing.

We 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 us 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 we have been named as a party that allegedly generated hazardous substances that were transported to a waste site owned and operated by another party, either (1) we are one of many other identified generators who have reached an agreement on the allocation of costs for cleanup among the various generators and our potential liability is not material; (2) we have been identified as a potential generator and the sites have been remediated by the EPA or by a state for a cost that is not material; or (3) other generators have cleaned up the site and have not pursued a claim against us and our liability, if any, would not be material.

We own and operate property located on Seaboard Industrial Boulevard in Atlanta, Georgia where we have been named as a responsible party. We and the current and former owners of adjoining properties have agreed to share the expected costs and responsibilities of implementing a Corrective Action Plan, approved in 2004, under the Georgia Hazardous Site Response Act (“HSRA”) to periodically monitor property along a nearby stream for a period of five years, which ended in December 2009. Monitoring actions will continue until the Georgia Environmental Protection Division (the “EPD”) notifies the Company that such activities are no longer necessary. Further, we have executed a Consent Order with the EPD covering this remediation. On November 23, 2009, the EPD approved the Corrective Action Plan submitted by the Company to address the subsurface contamination north of Seaboard Industrial Boulevard. The Company continues to actively remediate subsurface contamination at this site in compliance with the approved Corrective Action Plan.

In May 2007, we accrued an undiscounted pre-tax liability of $5.0 million representing our best estimate of costs associated with subsurface remediation, primarily to remove contaminants from soil underlying one of our manufacturing facilities, and other related environmental issues. While over approximately the next twenty years it is reasonably possible that the total losses incurred by Zep in connection with this matter could range up to $10.0 million, management’s best estimate of remediation costs continues to be $5.0 million. To date, we have expended approximately $2.4 million of the $5.0 million reserve established in May 2007. Further sampling, engineering studies, and/or changes in regulatory requirements could cause us to revise the current estimate. We arrived at the current estimates on the basis of studies prepared by independent third party environmental consulting firms. The actual cost of remediation will vary depending upon the results of additional testing and geological studies, the success of initial remediation efforts in the first five years addressing the most significant areas of contamination, the rate at which site conditions may change, and the requirements of the EPD.

Amrep is 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 Amrep 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 Amrep has been named as a party that allegedly generated hazardous substances that were transported to a waste site owned and operated by another party, either (1) Amrep is one of many other identified generators who have reached an agreement on the allocation of costs for cleanup among the various generators and Amrep’s potential liability is not material, or (2) Amrep has been identified as a potential generator but has been indemnified by its waste broker and transporter.

Amrep’s primary manufacturing location in Marietta, Georgia is the only active site involving property which Amrep owns with respect to which Amrep has been named as a potentially responsible party. With regard to this location, Amrep is responsible for the expected costs of implementing an Amended Corrective Action Plan that was submitted in March 2009 under HSRA, the approval of which is still pending. The EPD is reviewing the Amended Corrective Action Plan and will determine whether additional actions are necessary and, if so, for what period of time.

As of August 31, 2011, the liabilities presented within Zep’s Consolidated Balance Sheets reflect an undiscounted, pre-tax liability of approximately $10.9 million, which represents Zep’s best estimate of costs associated with the aforementioned Amended Corrective Action Plan, primarily to remediate contaminants in soil and ground water underlying the Marietta manufacturing facility and affected adjacent properties, and other related environmental issues. While over approximately the next twenty years it is reasonably possible that the total losses incurred by Zep in connection with this matter could range up to $18.0 million, management’s best estimate of remaining remediation costs continues to be $10.9 million.

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Further sampling, engineering studies, and/or changes in regulatory requirements could cause revision to the current estimate. The initially recorded $12.0 million estimate was derived on the basis of studies prepared by independent third party environmental consulting firms. To date, we have expended approximately $1.1 million of the initial $12.0 million reserve established in December 2009. The actual cost of remediation will vary depending upon the results of additional testing and geological studies, the success of initial remediation designed to address the most significant areas of contamination, the rate at which site conditions may change, and the requirements of the EPD.

Additionally, Amrep previously conducted manufacturing operations at a property in Georgia that has since been sold. Pursuant to the terms of the sale, Amrep has 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 site and, at this time, does not anticipate costs associated with future remediation efforts will be material. As of August 31, 2011, accruals associated with this effort totaled approximately $0.2 million. However, the actual cost of remediation could vary depending upon the results of additional testing and geological studies and the rate at which site conditions may change. Finally, management is preparing a plan to address the sub-surface contamination at a Texas manufacturing location owned by Amrep, and, at this time, does not anticipate the costs associated with future remediation efforts will be material. These estimates could change, however, based upon the response of the Texas Commission on Environmental Quality to that plan.

We use a variety of hazardous materials and chemicals in our manufacturing processes and in connection with maintenance work on our manufacturing facilities. Because of the nature of these substances or related residues, we may be liable for certain costs, including, among others, costs for health-related claims or removal or re-treatment of such substances. In addition, although we have developed environmental, health, and safety programs for our employees, including measures to protect our employees from exposure to hazardous substances, and conduct regular assessments at our facilities, we may be involved in claims and litigation filed on behalf of persons alleging injury as a result of occupational exposure to substances or other hazards at our current or former facilities. Due to the unpredictable nature of personal injury litigation, it is not possible to predict the ultimate outcome of any such claims or lawsuits that may arise. If any such claims and lawsuits, individually or in the aggregate, were resolved against us, our results of operations and cash flows could be adversely affected.

We may not properly execute, or realize anticipated benefits from, our ongoing strategic or other initiatives.

Our success is partly dependent upon properly executing, and realizing the anticipated benefits from, our ongoing strategic growth initiatives (a discussion of which is provided within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations), our information technology initiatives, and other initiatives. These initiatives are primarily designed to increase our revenue and market share and to make us more efficient in the sales, manufacture, and distribution of our products. We continue our phased implementation of a new enterprise resource planning system (“ERP”) for certain aspects of our business. The implementation is a technically intensive process, requiring design, programming, testing, modifications and project coordination. Although our ERP implementation process includes months of planning and training, which is intended to minimize business disruption and conversion risks, we may experience disruptions in our business operations related to this implementation effort. Such disruptions could result in material adverse consequences, including costs associated with delays in the design and implementation of the system, loss of information, loss of personnel, a reduction in our ability to process transactions, harm to our control environment, and unanticipated increases in operating costs and losses of customers and associated revenues. These initiatives, including the implementation of the ERP system, are complex; a failure to implement them properly may, in addition to not providing the anticipated benefits, result in an interruption to our sales, manufacturing, logistics, customer service, or accounting functions. Furthermore, we have invested a significant amount of capital into a number of these initiatives and will invest a significant amount of capital into others, which might have been more efficiently used if the anticipated benefits are not fully realized. Any of these results could have a material adverse effect on our business and results of operations, including the requirement to reduce the book value of certain assets that must be evaluated for impairment.

Our business could suffer in the event of a work stoppage or increased organized labor activity.

As of August 31, 2011, approximately 210 of our 2,300 employees were covered by collective bargaining agreements in the United States and Europe. While we consider our relations with employees to be generally good, we cannot assure you that we will not experience work stoppages, strikes, or slowdowns in the future. In addition, we outsource to third parties the manufacturing of certain of our products that currently account for approximately 20% of our net sales volumes, and we cannot assure you that these third parties will not experience work stoppages, strikes or slowdowns in the future. A prolonged work stoppage, strike, or slowdown at any of our facilities or those of our third party suppliers could have a material adverse effect on our results of operations. Further, we cannot assure you that, upon expiration of any of our existing collective bargaining agreements, new agreements will be reached without union action or that any new agreement will be on terms satisfactory to us. Moreover, we cannot assure you that our non-union facilities will not

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become subject to labor union organizing efforts. If any current non-union facilities were to unionize, we would incur increased risk of work stoppages and possibly higher labor costs.

We do not have a back-up manufacturing facility for the production of our aerosol products.

Currently, the only location where we manufacture our aerosol products is our facility in Marietta, Georgia.  We decided to locate all aerosol-product production at this facility to achieve economies of scale.  The facility now produces the aerosol products marketed by Zep and Amrep and the aerosol products that we acquired as part of our recent acquisition of assets from Waterbury Companies.  If we were unable to continue to operate this facility, due to a natural disaster or industrial accident, for example, we would be unable to produce our aerosol products until operations at the plant were restored or we were able to find a contract manufacturer to produce the products for us.  The inability to manufacture our aerosol products would have a material adverse affect on our financial condition, results of operations and cash flows.

If we are unable to protect our intellectual property rights, our ability to compete may be negatively impacted.

The market for our products depends to a significant extent upon the goodwill associated with our brand names. We own, or have licenses to use, all of the material trademark and trade name rights we use in connection with the packaging, marketing, and distribution of our major products both in the United States and in other countries where our products are principally sold. In addition, we possess trade secret product formulations and other product information, some of which are patented, which are competitively sensitive. Intellectual property protection is important to our business. Although most of our trademarks are registered in the United States and in the foreign countries in which we operate, we may not be successful in asserting trademark or trade name protection. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The costs required to protect our intellectual property rights may be substantial.

We cannot be certain that we will be able to assert our intellectual property rights successfully in the future or that they will not be invalidated, circumvented, or challenged. Other parties may infringe on our intellectual property rights and may thereby dilute the value of our brand names in the marketplace. Any infringement of our intellectual property rights would also likely result in a diversion of our time and resources to protect these rights through litigation or otherwise. Others may claim that our business or products infringe on their intellectual property rights.

Recent California legislation, called the “Green Chemistry Initiative”, regulates products that contain chemicals deemed to exhibit a “hazard trait” such as carcinogenicity, toxicity or mutagenicity. As a result of this legislation, we may be required to disclose certain of our proprietary product formulations, the identity of the chemicals used in certain of our products and chemical and market data with respect to certain of our products to the California Department of Toxic Substance Control (the “DTSC”). We intend to request protective treatment for any proprietary confidential business information that we are required to disclose to DTSC. However, DTSC has the discretion to deny a claim of trade secret status. If it does so, we may lose trade-secret protection for the formulation. Loss of trade-secret protection for a product formulation could enable our competitors to duplicate the product. Our failure to protect our trademarks and trade names, or any adverse judgment with respect to infringement of others’ intellectual property rights, may have a material adverse effect on our business, financial condition, results of operations, and cash flows.

If our products are improperly manufactured, packaged, or labeled or become adulterated, we may need to recall those items and may experience product liability claims if consumers are injured.

If we improperly manufactured, packaged, or labeled our products or if they become adulterated, we may be required to recall the affected products. Our quality control procedures relating to the raw materials and other supplies, including packaging, that we receive from third-party suppliers, including packaging, or our quality control procedures relating to our products after our products are formulated and packaged may not be sufficient. We have previously initiated product recalls, and widespread product recalls could result in significant losses due to the costs of a recall, the destruction of product inventory, and lost sales due to the unavailability of product for a period of time. We may also be liable if the use of any of our products causes injury, and could suffer losses from a significant product liability judgment against us. A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our products, which could have a material adverse effect on our business and financial results.

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We have recorded a significant amount of goodwill and other identifiable intangible assets. We may be required to record non-cash charges for impairment of our goodwill and other identifiable intangible assets, if we do not achieve the anticipated benefits from the transactions that gave rise to the goodwill and other intangible assets.

We have recorded a significant amount of goodwill and other identifiable intangible assets, including customer relationships, trademarks and developed technologies. Goodwill and other net identifiable intangible assets were approximately $149.6 million as of August 31, 2011, or approximately 37.0% of our total assets. Goodwill, which represents the excess of cost over the fair value of the net assets of the businesses acquired, was approximately $84.4 million as of August 31, 2011, or 20.9% of our total assets.

Goodwill and net identifiable intangible assets are recorded at fair value on the date of acquisition and, in accordance with ASC 350, Intangibles—Goodwill and Other, will be reviewed at least annually for impairment. Impairment may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products and services sold by our business, and a variety of other factors. Some of the products and services we sell to our customers are dependent upon laws and regulations, and changes to such laws or regulations could impact the demand for our products and services. The amount of any quantified impairment must be expensed immediately as a non-cash charge to results of operations. In the event we are required to record impairment charges related to our intangible assets in the future, we may not realize the full value of our intangible assets. Any future determination of impairment of a significant portion of goodwill or other identifiable intangible assets would have an adverse effect on our financial condition and results of operations.

Risks Related to our Common Stock and Our Structure

The market price for our common stock may be volatile, and you may not be able to sell our stock at a favorable price.

Our common stock is traded on the New York Stock Exchange. The market price of our common stock has in the recent past been, and may in the future be, highly volatile and subject to wide fluctuations. This volatility may occur for many reasons, including for reasons unrelated to our performance, such as reports by industry analysts, investor perceptions, or negative announcements by our customers, competitors, or suppliers regarding their own performance, as well as general economic and industry conditions. Additional factors that could cause the market price of our common stock to rise and fall include, but are not limited to, the following:

·                  variations in our quarterly results;

·                  announcements of technological innovations by us or by our competitors;

·                  introductions of new products or services or new pricing policies by us or by our competitors;

·                  acquisitions or strategic alliances by us or by our competitors;

·                  recruitment or departure of key personnel or key groups of personnel;

·                  the gain or loss of significant orders;

·                  the gain or loss of significant customers;

·                  the disruption of supply and/or price of key raw materials;

·                  significant changes in regulatory requirements;

·                  increased litigation resulting from product or employee claims;

·                  adverse developments concerning environmental matters;

·                  changes in the estimates of our operating performance or changes in recommendations by any securities analysts that elect to follow our stock;

·                  market conditions in our industry, the industries of our customers, and the economy as a whole; and

·                  the dilution of our earnings per share caused by our acquisition of another company or product line or because of our issuance of additional shares of our common stock or shares of a series of preferred stock or debt securities that are convertible into shares of our common stock.

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Certain provisions of our certificate of incorporation, bylaws and rights plan may discourage takeovers.

Our certificate of incorporation and bylaws contain certain anti-takeover provisions that may make more difficult or expensive or that may discourage a tender offer, change in control or takeover attempt that is opposed by our Board of Directors. In particular, our certificate of incorporation and bylaws:

·                  classify our Board of Directors into three groups, so that stockholders elect only one-third of the Board each year;

·                  permit stockholders to remove directors only for cause and only by the affirmative vote of at least 80% of our voting shares;

·                  permit a special stockholders’ meeting to be called only by a majority of the Board of Directors;

·                  do not permit stockholders to take action except at an annual or special meeting of stockholders;

·                  require stockholders to give us advance notice to nominate candidates for election to our Board of Directors or to make stockholder proposals at a stockholders’ meeting;

·                  permit our Board of Directors to issue, without stockholder approval, preferred stock with such terms as the Board may determine;

·                  require the vote of the holders of at least 80% of our voting shares for stockholder amendments to our bylaws; and

·                  require, for the approval of a business combination with stockholders owning 5% or more of our voting shares, the vote of at least 50% of our voting shares not owned by such stockholder, unless certain “fair price” requirements are met or the business combination is approved by our continuing directors.

The preferred stock purchase rights attached to our shares of common stock, in effect, prevent a person or group from acquiring more than 15% of the total number of shares of our common stock outstanding at any time without obtaining prior approval from our Board of Directors, to be granted at the Board’s sole discretion. In addition, Delaware law generally restricts mergers and other business combinations between us and any holder of 15% or more of our common stock, unless the transaction or the 15% acquisition is approved in advance by our Board of Directors.

These provisions of our certificate of incorporation and bylaws, Delaware law, and the preferred stock purchase rights could discourage potential acquisition proposals and could delay or prevent a change in control of our company, even though a majority of our stockholders may consider such proposals, if effected, desirable. Such provisions could also make it more difficult for third parties to remove and replace the members of our Board of Directors. Moreover, these provisions could diminish the opportunities for stockholders to participate in certain tender offers, including tender offers at prices above the then-current market value of our common stock, and may also inhibit increases in the trading price of our common stock that could result from takeover attempts or speculation.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate office and our primary manufacturing facilities are owned by us and located in the metropolitan Atlanta, Georgia, area. We also have manufacturing facilities located at two additional sites in Georgia and in Texas, Canada, Italy and the Netherlands. We own six of our eight manufacturing facilities. The facilities in Italy and Canada are leased. Additionally, we own branch and storage facilities in Illinois and Washington. We lease sales offices and storage facilities throughout North America and Europe. We believe our facilities, which are adequate for our current needs, are in good operating condition.

Item 3. Legal Proceedings

Legal Proceedings

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 in future periods. We establish accruals for legal claims

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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 reserved for such claims. However, unless otherwise disclosed, we cannot make a meaningful estimate of actual costs or a range of reasonably possible losses that could be higher or lower than the amounts accrued.

Britto and Cowan v. Zep Inc. and Acuity Specialty Products, Inc.

The Company is a defendant in Britto and Cowan v. Zep Inc. and Acuity Specialty Products, Inc., a lawsuit that commenced in December 2010 in the Superior Court in Alameda County, California.  The plaintiffs, who were formerly employed as sales representatives by Acuity Specialty Products, Inc., a subsidiary of the Company (“Acuity”), brought the lawsuit on behalf of themselves and on behalf of a putative class that includes all of Acuity’s current sales representatives based in California and all former sales representatives based in California who were employed by Acuity on December 30, 2006 or thereafter.  The putative class consists of 141 members, including 30 current sales representatives and 111 former sales representatives.  The plaintiffs allege that Acuity failed to reimburse the putative class members for work-related expenses and failed to pay the putative class members their wages by assessing unlawful deductions from commissions.  The Plaintiffs are also seeking to recover statutory and/or civil penalties pursuant to the California Labor Private Attorney General Act.  The Court has not yet considered whether to certify the putative class.  The Company believes that it has substantial factual and legal defenses to the claims made in the lawsuit and intends to assert the defenses aggressively.

In May 2011, the Company made settlement offers to all members of the putative class, other than the named plaintiffs, who were then currently employed by Acuity in an effort to reduce the expenses of litigating the case and to eliminate any potential adverse impact to ongoing selling efforts.  Approximately 30 of the offerees accepted the settlement offer. In September 2011, the Company participated in an unsuccessful, non-binding mediation process in an attempt to settle the lawsuit. In October 2011, the Company made a second offer of settlement to the members of the putative class who are currently employed and who did not accept the first settlement offer, as well as a first settlement offer to all members of the putative class who are former employees of Acuity.  As of November 1, 2011, approximately 18 additional members of the putative class had accepted a settlement offer.

The Company may enter into additional discussions regarding settlement of the lawsuit with the named plaintiffs and other members of the putative class, and may enter into settlement agreements, if it believes settlement is in the best interest of the Company’s shareholders.  During the year ended August 31, 2011, the Company incurred $2.6 million of expenses related to this matter, which includes an accrual for legal defense fees incurred but not paid by the Company as of August 31, 2011.  That amount also includes a $1.8 million accrual, which, based on the facts known as of the time of this document’s filing, represents management’s best estimate of the probable loss related to this litigation.  In addition to already-recorded amounts, the Company anticipates incurring approximately $1.2 million of costs associated with legal defense fees during the first half of fiscal year 2012.

If the Company is not successful in its defense against the claims asserted in the lawsuit and if there is an adverse verdict on the merits from which there is no successful appeal, or in the event of a negotiated settlement of the litigation, the resulting liability could be material to the Company’s financial condition or results of operations.  However, because of the uncertainty of the outcome of the lawsuit, including whether the class will be certified and the amount of damages, if any, any class member may be able to prove, and because the Company’s liability, if any, arising from the litigation, including the size of any damages awarded if plaintiffs are successful in the litigation or any negotiated settlement, could vary widely, the Company cannot estimate the reasonably possible losses or range of loss that may arise from the litigation in excess of the amounts described above.

Item 4. [Removed and Reserved]

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Our common stock is traded on the New York Stock Exchange under the symbol “ZEP”. There were 3,111 stockholders of record as of October 28, 2011. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. The following table sets forth the New York Stock Exchange high and low sale prices and the dividend payments for our common stock for the periods indicated.

We began making dividend payments, at an annual rate of $0.16 per share, in the second quarter of fiscal 2008. Our Board of Directors evaluates our dividend policy periodically, taking into consideration the composition of our stockholder base; our financial condition, earnings and funding requirements; our growth prospects; applicable law; and any other factors our Board of Directors deems, in its discretion, relevant. Our Board of Directors believes that it is in the best interests of our stockholders to continue paying dividends and has no present intention to change the annual dividend rate. On October 5, 2011, our Board of Directors declared a quarterly dividend of $0.04 per share.

Our ability to fund a regular quarterly dividend is impacted by our financial results and the availability of surplus funds. All dividends are paid out of current year earnings. Delaware law prohibits the payment of dividends or otherwise distributing funds to our stockholders absent a legally available surplus. There can be no assurance that we will continue to pay quarterly dividends at this level or at all in the future. Also, restrictions under the instruments governing our indebtedness could impair our ability to make dividend payments.

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Stockholder Return Performance Graph

The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate such information by reference into such filing.

The following graph compares the change in cumulative total stockholders’ return on our common stock with (a) the S&P Smallcap 600 Index and (b) the Russell 2000 Index, each for the period from November 1, 2007 (the date our stock first traded other than on a when-issued basis) through August 31, 2011. The graph assumes an initial investment of $100 at the closing price on November 1, 2007 and assumes all dividends were reinvested. We have presented the Russell 2000 Index, in lieu of an industry index or peer group, because we believe there is no published index or peer group that adequately compares to our business. Except for the initial measurement date (November 1, 2007), the figures for the chart and graph set forth below have been calculated based on the closing prices on the last trading day on the New York Stock Exchange for each period indicated.

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Item 6. Selected Financial Data

The following table sets forth our selected financial data, which have been derived from our Consolidated Financial Statements for each of the five years in the period ended August 31, 2011. We were a wholly owned subsidiary of Acuity Brands, Inc. during all periods prior to November 1, 2007 presented in the below listed tabular disclosure. The information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the notes related to those financial statements included elsewhere in this report. Operating expenses included within our historical income statements that were incurred prior to November 1, 2007 reflect direct expenses of our business together with allocations of certain Acuity Brands corporate expenses that have been charged to us based on usage or other methodologies appropriate for allocating such expenses. In our opinion, these assumptions and allocations have been made on a reasonable and appropriate basis under the circumstances. Our combined financial information (for periods preceding our spin-off from Acuity Brands, Inc.) may not be indicative of our future performance and does not necessarily reflect what our financial condition and results of operations would have been had we operated as a separate, stand-alone entity during all the periods presented, as many changes have occurred and will continue to occur in our operations and capitalization as a result of our spin-off from Acuity Brands.

(1)               On October 31, 2007, the separation from Acuity Brands was completed in a tax-free distribution to its stockholders of one share of our common stock for every two shares of Acuity Brands’ common stock held as of the record date. Prior to this date, all of our outstanding shares were owned by Acuity Brands. Accordingly, for periods prior to October 31, 2007, basic and diluted earnings per share have been computed using the number of shares of our common stock outstanding on October 31, 2007, the date on which our common stock was distributed by Acuity Brands to its stockholders.

On September 1, 2009, we retrospectively adopted an accounting pronouncement which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and should be included in the computation of earnings per share. The application of this guidance to each of the basic and diluted earnings per share computations for the three years ended August 31, 2011 effectively reduced those computations by $0.01. Due to the number of unvested shares issued during fiscal year 2008 in connection with our previously disclosed one-time founders’ award, the application of this guidance to each of the basic and diluted earnings per share computations for the year ended August 31, 2008 effectively reduced those computations by $0.02. We did not pay dividends prior to our October 31, 2007 spin-off, nor did we have control over the equity award programs previously administered by our former parent company, whose compensation philosophy may have differed from that reflected in our currently administered equity award programs. Therefore, it is not practicable to retrospectively apply this guidance before we became a stand-alone, public entity. However, we believe that retrospective application of this guidance would not have had an impact on basic and diluted earnings per share as we did not pay dividends during those periods.

(2)               Operating working capital is defined as the sum of accounts receivable and inventory less accounts payable.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Item 1A. Risk Factors, Item 6. Selected Financial Data, Item 8. Financial Statements and Supplementary Data, including the notes thereto, and the other financial information included elsewhere in this Annual Report on Form 10-K. Please see “Cautionary Statement Regarding Forward-Looking Information” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

Company

We are a leading provider of cleaning and maintenance chemicals and related products and services for commercial, industrial, institutional and consumer applications, which we market under well recognized brand names, some of which have been in existence since we were founded in 1937. Our product portfolio, which is currently produced using more than 4,000 unique formulations, includes anti-bacterial and industrial hand care products, cleaners, degreasers, deodorizers, disinfectants, floor finishes, sanitizers, pest- and weed-control products, air-care products and delivery systems and a wide variety of automotive maintenance chemicals. We sell our products through a sales and service organization, to consumers primarily through home improvement stores and automotive after-market retailers, and to national and regional business-to-business distributors that target the industrial maintenance, janitorial/sanitation, and automotive markets. We are a leading U.S. provider of cleaning and maintenance solutions in the direct-sales channel. Furthermore, as a result of recent acquisitions, we have established a strong presence in the industrial distribution market.

On January 4, 2010, we acquired Amrep, Inc. (“Amrep”), a specialty chemical formulator and packager focused in the automotive, fleet maintenance, industrial/MRO supply, institutional supply, and motorcycle markets. Amrep’s products are marketed under recognized and established brand names such as Misty®, Next Dimension™, Petro®, and i-Chem®. We believe the acquisition of Amrep to be an important strategic step in our efforts to utilize distribution to expand our presence in a number of end markets while minimizing channel conflict through the manufacture of both private branded products and national brands.

On September 2, 2010, Amrep and certain other of our subsidiaries acquired certain brands and assets and assumed certain liabilities of the North American operations of Waterbury Companies, Inc. (“Waterbury”), a provider of air-care delivery systems and products for facility maintenance. We market Waterbury’s products under recognized and established brand names such as TimeMist(R), TimeWick®, MicrobeMax(TM), Country Vet(R), and Konk(TM). We did not acquire Waterbury’s manufacturing facility.

On October 1, 2010, we completed the acquisition of the brands and assets of Atlanta-based Niagara National LLC (“Niagara”), a manufacturer of truck wash systems and products. The historical total assets and operating results of Niagara are not material to our Consolidated Financial Statements. Through this acquisition, we have added the Niagara brand of custom truck wash, pressure washers, water recovery systems and maintenance chemicals to our transportation product portfolio, which includes the Zep, EnviroEdge, and Armor All Professional® brands.

During fiscal 2011, we completed the integration of the Amrep, Waterbury, and Niagara acquisitions.  With these acquisitions now complete, we are realizing numerous synergies in the sourcing, manufacturing and delivery of our products and services, including the capability to provide single order invoicing for our customers.

See Note 3 of Notes to Consolidated Financial Statements for more information regarding these acquisitions. None of our acquisition activities have impacted our compliance with our debt covenants, nor have these activities affected management’s belief that we will be able to meet the liquidity needs of our business over the next 12 months.

Basis of Presentation

We prepare our Consolidated Financial Statements, which present our financial position, results of operations, and cash flows, in accordance with U.S. generally accepted accounting principles. The financial statements and other financial information in this Form 10-K as of and for the three years ended August 31, 2011 are presented on a consolidated basis and include our accounts and those of our majority-owned subsidiaries.

We include shipping and handling fees billed to customers in Net Sales. Shipping and handling costs associated with inbound freight and freight between manufacturing facilities are generally recorded in Cost of Products Sold, which also includes the cost normally incurred in acquiring and producing inventory for sale, purchasing and receiving costs, and inspection costs. Certain customer-related shipping and handling costs, as well as other distribution costs, are included in

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Selling, Distribution, and Administrative Expenses. We believe this presentation is consistent with many of our peers and competitors.  However, we acknowledge that our gross profit amounts may not be comparable to certain other entities, as some entities may include all of the costs related to their distribution network in their cost of products sold. Customer-related shipping and handling costs included within our Selling, Distribution, and Administrative Expenses totaled $42.4 million, $36.0 million, and $31.5 million for the fiscal years ended August 31, 2011, 2010, and 2009, respectively.  Other distribution costs, which primarily consist of the cost of warehousing finished goods inventory, totaled $22.0 million, $21.0 million, and $22.9 million for the fiscal years ended August 31, 2011, 2010, and 2009, respectively.

Strategy

Our strategy is to strengthen our position as a leading provider of innovative, environmentally sustainable cleaning and maintenance solutions for commercial and industrial end users. We seek to achieve financial performance in the top quartile of our peer group of companies by growing our share with existing and new customers and expanding our margins. To achieve this financial performance, we intend to

·                  Profitably grow the sales and service business;

·                  Serve “pro” customers through a broad retail base;

·                  Grow sales with new and existing distributors;

·                  Build upon existing European and develop other international capabilities; and

·                  Expand through selected acquisitions.

During the three years following our spin-off in 2007, we streamlined our historical product offering by approximately 50%, allowing our direct sales organization to focus on its most profitable products; we reduced our North American branch network from 42 locations to the 17 locations we believe are the best positioned to serve our customers; and we reduced non-sales headcount by approximately 10%. These changes allowed us to increase our cash flows and to reduce our debt by 53% before we began pursuing acquisitive growth opportunities. Most importantly, we reduced the breakeven point of our direct-sales business by almost one-third.

We began to implement our acquisition strategy in fiscal 2010. In January 2010, we acquired Amrep, Inc., a leader in maintenance chemicals for the automotive aftermarket as well as the janitorial market sold through distributors. In September 2010, we acquired certain assets and liabilities from Waterbury Companies, Inc., including certain air-care brands. These two acquisitions gave us a solid presence in the industrial distribution market, and strengthened our position in the retail market. The acquisition of Amrep also allowed us to consolidate further our manufacturing operations. In October 2010, we acquired the assets of Niagara National, LLC, which complements the strength of our direct-sales organization in the vehicle-wash market, specifically in the truck and fleet washing equipment markets.

During fiscal 2011, we completed the integration of the Amrep, Waterbury, and Niagara acquisitions.  With these acquisitions now complete, we are realizing numerous synergies in the sourcing, manufacturing and delivery of our products and services, including the capability to provide single order invoicing for our customers.   We also centralized our supply chain operations during the year to allow manufacturing plants to produce product for multiple sales channels.  With these components of our business transformation now complete, we will continue to focus on growing the business both organically as well as through acquisitions.

Liquidity and Capital Resources

The following table sets forth certain indicators of our consolidated financial condition and liquidity as of the end of the fiscal years shown (dollars in thousands):

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 $313 million. As of August 31, 2011, we had approximately $189 million available under the 2010 Credit Facility. We also have $7.2 million of industrial revenue bonds that are due in

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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 Zep’s facility in DeSoto, Texas. We have issued outstanding letters of credit totaling $11.0 million 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 issued under the 2010 Credit Facility as of August 31, 2011, thereby reducing the total availability under the facility by such amount. As of August 31, 2011, we had $7.2 million in cash and cash equivalents of which $4.7 million was held by our foreign subsidiaries. Cash and cash equivalents held by our foreign subsidiaries averaged $13.0 million during fiscal year 2011. 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. 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 U.S. for purposes including but not limited to growing our international operations through acquisitions. The increase of operating working capital (calculated by adding accounts receivable and inventories, and subtracting accounts payable), total debt and capital lease obligations, and total debt-to-total capitalization (net of cash) during fiscal years 2011 and 2010 reflects the effect of acquisition activity discussed throughout this Form 10-K. We were in compliance with our debt covenants as of August 31, 2011, 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, excluding acquisitions that we may choose to execute in pursuit of our strategic initiatives.  We do not expect the sources of or intended uses for our cash to change significantly in the foreseeable future, excluding acquisitions. In addition, we have an effective shelf registration statement that registers the issuance of up to an aggregate of $200 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 August 31, 2011 was $112.4 million; an increase of $45.5 million compared with August 31, 2010.  The increase in net debt primarily reflects the increased borrowings required to fund the Waterbury and Niagara acquisitions ($76.1 million), capital expenditures during the previous twelve months ($8.9 million), and dividend payments during the previous twelve months ($3.5 million), partially offset by cash flows provided by operating activities of $37.0 million.  Additional cash inflows during the year ended August 31, 2011 include proceeds from the sale of the Company’s former Boston facility and our incentive-based equity award programs.

Cash Flow

We use available cash and cash flow provided by operating activities primarily to fund operations, capital expenditures and dividend payments to stockholders. Net cash flow provided by operating activities for the years ended August 31, 2011 and 2010 was $37.0 million and $34.0 million, respectively. Cash flow provided by operating activities during the year ended August 31, 2011, which improved 8.7% from the prior year, was driven in part by the $17.4 million of net income generated during fiscal year 2011. Additionally, operating working capital provided $6.0 million of cash during the twelve months ended August 31, 2011. The $8.3 million use of cash reflected in the Accrued compensation and other current liabilities line item of our 2011 cash flow statement reflects the year-over-year net decreases of accrued bonuses and restructuring-related severance accruals. Current year restructuring actions are discussed further in Note 9 of Notes to Consolidated Financial Statements.

The majority of the share-based compensation expense generated through the administration of our share-based award programs does not affect our overall cash position. Accordingly, Net Cash Provided by Operating Activities includes approximately $5.0 million of share-based expense, which is reflected as Other non-cash charges within our Consolidated Statements of Cash Flows.

We paid cash dividends on our common stock of $3.5 million, or $0.16 per share, during the twelve months ended August 31, 2011. On October 5, 2011, our Board of Directors declared a quarterly dividend of $0.04 per share payable on November 1, 2011 to stockholders of record as of October 18, 2011. Our ability to generate positive cash flows from operating activities directly affects our ability to make dividend payments. In addition, restrictions under the instruments governing our indebtedness could impair our ability to make such payments. Payments on our indebtedness and the quarterly dividends are expected to account for the majority of our financing activities as they pertain to normal operations.

Net cash flow provided by operating activities for the years ended August 31, 2010 and 2009 was $34.0 million and $30.4 million, respectively. Cash flow provided by operating activities during the year ended August 31, 2010, which improved 11.8% from the prior year, was driven in part by the $13.5 million of net income generated during fiscal year 2010. Additionally, operating working capital provided $5.5 million of cash during the twelve months ended August 31, 2010. As

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of August 31, 2010, operating working capital included in our Consolidated Balance Sheets attributable to the acquisition of Amrep, Inc. totaled $16.1 million. The $4.7 million source of cash reflected in the Accrued compensation and other current liabilities line item of our fiscal 2010 cash flow statement reflects compensation-related costs including administrative salaries and bonuses as well as the net increase of restructuring-related severance accruals.

Management believes that investing in assets and programs that will over time increase the overall return on our invested capital is a key factor in driving stockholder value. We invested $8.9 million and $9.8 million in fiscal years 2011 and 2010, respectively, primarily to affect facility consolidations, reduce our cost structure, enhance information technology, invest in equipment at customer facilities, and improve our manufacturing capabilities. We continue to invest in these items primarily to improve productivity and product quality, increase manufacturing efficiencies, and enhance customer service capabilities. We expect to invest approximately $10.0 million to $12.0 million in fiscal year 2012 for information technology, machinery, and equipment expected to maintain and enhance our operations, and future financial performance.

Contractual Obligations

The following table summarizes our contractual obligations at August 31, 2011:

(1)               These amounts (which represent outstanding debt at August 31, 2011) are included in our Consolidated Balance Sheets. The current versus long-term presentation of our outstanding debt within these statements reflects our intent and ability to refinance certain amounts of outstanding debt that are otherwise contractually due within one year. Further detail regarding our debt instruments is provided in the preceding Liquidity and Capital Resources section as well as in Note 5 of Notes to Consolidated Financial Statements.

(2)               These amounts represent expected future interest payments on debt that are contractually due within one year but that we anticipate will remain outstanding for longer periods given a consistent interest rate environment as well as our ability and intent to refinance certain borrowings made under our 2010 Credit Agreement. Also included in these expected future interest payments are estimates of interest expense related to our $7.2 million industrial revenue bonds that neither mature nor are expected to be repaid before 2018.

(3)               Our operating lease obligations are described in Note 8 of Notes to Consolidated Financial Statements.

(4)               Purchase obligations include commitments to purchase goods or services that specify all significant terms. This amount is primarily composed of purchase orders that were open as of August 31, 2011.

(5)               This amount represents a $3.75 million acquisition-related earnout obligation whose payout is based upon the attainment of earnings targets over a three-year period.

(6)               These amounts are included in our Consolidated Balance Sheets and largely represent liabilities on which we are obligated to make future payments pursuant to certain deferred compensation programs addressed within Note 7 of Notes to Consolidated Financial Statements. Estimates of the value and timing of these amounts are based on various assumptions, including interest rates and other variables.

(7)               At August 31, 2011, our liability recorded for uncertain tax positions, including associated interest and penalties, was approximately $1.5 million. Since the ultimate amount and timing of other potential audit related cash settlements cannot be predicted with reasonable certainty, liabilities for uncertain tax positions are excluded from the contractual obligations table above. See further discussion in Note 10 of Notes to Consolidated Financial Statements.

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Results of Operations

Fiscal Year 2011 Compared with Fiscal Year 2010

The following table sets forth information comparing the components of net income for the year ended August 31, 2011 with the year ended August 31, 2010. Both dollar and percentage changes included within the tables below were calculated from our Consolidated Statements of Income:

Net Sales

Net sales were $646.0 million for the year ended August 31, 2011, compared with $568.5 million generated in the prior fiscal year, representing an increase of $77.5 million or 13.6%. Our fiscal year 2011 sales performance included $81.4 million of incremental revenue associated with the acquisitions discussed throughout this Form 10-K. In addition, higher selling prices primarily realized in our direct sales and service channel and favorable foreign currency translation on international sales contributed approximately $16.1 million and $4.6 million, respectively to net sales.  We implemented higher selling prices to offset raw material costs, which continued to rise throughout the majority of fiscal year 2011.  However, weakness in demand, primarily for our products sold through the North American sales and service channel, continued during fiscal year 2011. Excluding revenues derived directly from our recent acquisitions, we experienced volume related sales declines of $23.4 million during fiscal year 2011. Our customers in the North American sales and service channel are typically small business operations, who are themselves struggling in the current economic environment.

During the first quarter of fiscal year 2010, we renegotiated the terms of our contract with our licensee in France. Separately, we executed a release agreement with our licensee in France that addressed historical business transactions. We received a one-time, $1.1 million payment pursuant to this release agreement, all of which was recognized in net sales during the first quarter of fiscal year 2010.

Gross Profit

Gross profit increased $19.7 million, or 7.0% to $302.9 million in fiscal year 2011 compared with $283.2 million in the prior fiscal year. Gross profit margin of 46.9% in fiscal year 2011 decreased approximately 290 basis points from that of the prior fiscal year. Fiscal year 2011 net sales included a full year of sales related to both the Amrep and Waterbury acquisitions, whereas, during the same period in the fiscal year 2010, we only benefited from eight months of sales from the Amrep acquisition. The decline in gross profit margin percentage was primarily attributable to the impact on sales and product mix from the Amrep and Waterbury acquisitions.

Raw material pricing continued to experience upward pressure during fiscal year 2011, and the increased cost of raw materials continues to have a negative impact on gross profit margin. We have implemented price increases to mitigate these higher costs. However, given the unusual economic environment of high unemployment and raw material inflation,

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additional price increases may be difficult to achieve. Therefore, the portion of our gross margin compression resulting from this price versus cost imbalance may persist.

During the second quarter of fiscal year 2011, we detected contamination within one of our manufacturing location’s waste streams, which caused a temporary increase in our wastewater disposal and overall operating costs.  Gross profit in the fiscal year 2011 includes $1.4 million of costs associated with this occurrence, which represents approximately 20 basis points of gross profit margin.  The affected waste treatment facility is now fully functional, and we do not expect future cost associated with this event, if any, to be material.  We also incurred in both fiscal years 2011 and 2010 approximately $1.0 million of expense associated with the ultimate sale-through of acquired inventories having an increased basis due to the application of purchase accounting rules.

Operating Profit

The Amrep and Waterbury acquisitions have significantly altered our margin structure due to the increased percentage of product sold through the distributor and retail channels. While gross profit margin associated with sales through distributor and retail channels is lower, sales through these channels normally result in higher operating margins given lower associated selling and distribution costs. Our selling, distribution and administrative expenses (“SD&A”) as a percentage of sales declined to 41.6% in fiscal year 2011 from 43.6% in fiscal year 2010, an improvement of approximately 200 basis points. This favorable trend is due to the inclusion of Amrep and Waterbury’s operating results as well as the success of previously enacted restructuring initiatives undertaken to reduce the breakeven point of the business. We have been able to use our reduced cost structure to invest further in sales and marketing resources, as well as fund employee incentive programs designed to reward profitable growth.

In fiscal year 2011, we recorded restructuring charges of $1.5 million, primarily for costs associated with the reduction of non-sales headcount and a facility consolidation. In addition, we recorded $0.4 million of severance-related costs in fiscal year 2011 due to the continued reorganization of our recently acquired entities.  During fiscal year 2011, we recorded $2.6 million of expenses associated with the California legal matter described in Note 8 of Notes to Consolidated Financial Statements.  In fiscal year 2010, we recorded restructuring charges of $8.2 million primarily for costs associated with facility consolidations.

We listed a facility in the Boston, Massachusetts area for sale during fiscal year 2010 in conjunction with previously disclosed restructuring programs.  We sold this facility during fiscal year 2011, and we subsequently recognized the related gain of $0.7 million in our operating results.  We lease the majority of our selling branch and warehouse locations, and the sale of owned facilities occurs infrequently.

As previously stated, since January 2010, we have executed three acquisitions resulting in the recording of approximately $63.5 million of finite-lived intangible assets (namely customer relationships and intellectual property). On an annual basis, amortization of these assets will result in approximately $4.0 million of amortization expense. Separately, we incurred acquisition and integration costs totaling $0.4 million and $3.4 million during fiscal years 2011 and 2010, respectively.

Operating profit increased $9.3 million in the year ended August 31, 2011 to a profit of $33.2 million compared with $23.9 million reported in fiscal year 2010. Operating margins were 5.1% in during fiscal year 2011 compared with 4.2% in the prior year.

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Income before Provision for Taxes

Other expenses increased $4.4 million from the year ended August 31, 2010. Our level of indebtedness, and, therefore our interest expense, has increased due primarily to higher debt levels incurred to fund our acquisitions coupled with higher borrowing rates associated with our 2010 Credit Agreement relative to its predecessor agreement that was negotiated in fiscal year 2007. Assuming current debt and interest rate levels, we expect total interest expense to range between $6.5 million and $7.0 million on an annual basis.

On July 15, 2010, we entered into a $320 million five-year senior, secured credit facility. Our previous $100 million revolving credit facility and $40 million receivables security agreement were extinguished on that date, at which time $0.4 million of previously deferred financing costs were written off.

Provision for Taxes and Net Income

Net income for the year ended August 31, 2011 increased $3.9 million, or 28.9%, to $17.4 million from $13.5 million reported in the prior fiscal year. The effective tax rate for fiscal years 2011 and 2010 was 34.9% and 37.8%, respectively. The reduction in the fiscal year 2011 effective tax rate reflects the extension of the domestic research and development credit, a reduction in unfavorable permanent items, and state tax planning strategies — all of which more than offset the impact of additional state liabilities that resulted from our acquisitions.  We anticipate our effective tax rate will range between 35.5% and 36.5% in fiscal year 2012.

Diluted earnings per share generated in fiscal year 2011 totaled $0.78, representing an increase of $0.17 per diluted share from the $0.61 per diluted share earned in the prior year. Earnings in fiscal year 2011 were negatively impacted by $0.08 per diluted share as a result of costs related to the California legal matter, $0.05 per diluted share due to acquisition-related costs, $0.04 per diluted share as a result of restructuring charges, and $0.04 per diluted share due to the above mentioned wastewater contamination. Earnings in fiscal year 2011 were favorably impacted by $0.02 per diluted share as a result of the gain on the sale of our previously owned facility in Boston.  Earnings in fiscal year 2010 were negatively impacted by $0.37 per diluted share due to restructuring charges and costs related to our acquisitions. Earnings in fiscal year 2010 were favorably impacted by $0.03 per diluted share as a result of the one-time revenue benefit from the prior disclosed French licensee royalty settlement.

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Fiscal Year 2010 Compared with Fiscal Year 2009

The following table sets forth information comparing the components of net income for the year ended August 31, 2010 with the year ended August 31, 2009. Both dollar and percentage changes included within the tables below were calculated from our Consolidated Statements of Income:

Net Sales

Net sales were $568.5 million for the year ended August 31, 2010, compared with $501.0 million generated in the prior fiscal year, representing an increase of $67.5 million or 13.5%. Revenues generated from the Amrep acquisition, which was completed in January 2010, comprised $76.7 million of our sales in fiscal year 2010. Amrep sales grew $6.7 million in fiscal year 2010 from the same prior year eight-month period. In total, volume in fiscal year 2010 grew $55.4 million. Excluding revenues derived from the acquisition of Amrep, in fiscal year 2010 we experienced volume related sales declines of $21.3 million. While we achieved year-over-year volume growth in sales to customers accessed through the retail channel, we experienced softness in demand within the majority of our institutional and industrial end markets. Management believes these markets, which include transportation, food processing and service, industrial manufacturing and government, are strongly correlated to seasonally-adjusted manufacturing employment, overall employment levels and, to some degree, new motor vehicle sales. Furthermore, our sales and service sales organization focuses on small businesses, which continued to suffer the effects of the economic downturn in fiscal 2010. Favorable foreign currency translation on international sales and the realization of higher selling prices made necessary by rising raw material costs impacted total net sales by $7.6 million and $4.5 million, for the years ended August 31, 2010 and 2009, respectively. During the first quarter of fiscal year 2010, we renegotiated the terms of our contract with our licensee in France. We believe the terms of the new contract are favorable to us. Separately, we executed a release agreement with our licensee in France that addressed historical business transactions. We received a one-time, $1.1 million payment pursuant to this release agreement, all of which was recognized in net sales during the first quarter of fiscal year 2010.

Gross Profit