Page 1 of 41
Index to Exhibits on Page 15
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2000.
OR
[ ] 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 1-3208.
NATIONAL SERVICE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-0364900
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1420 Peachtree Street, N.E., Atlanta, Georgia 30309-3002
(Address of principal executive offices) (Zip Code)
(404) 853-1000
(Registrant's telephone number, including area code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - $1.00 Par Value - 41,052,654 shares as of December 31, 2000
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Unaudited) -
NOVEMBER 30, 2000 AND AUGUST 31, 2000 3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) -
THREE MONTHS ENDED NOVEMBER 30, 2000 AND 1999 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -
THREE MONTHS ENDED NOVEMBER 30, 2000 AND 1999 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11-12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
Page 3
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per-share data)
November 30, August 31,
2000 2000
ASSETS
Current Assets:
Cash and cash equivalents $ 3,148 $ 1,510
Receivables, less reserves for doubtful accounts of $8,269 at November 30,
2000 and $7,310 at August 31, 2000 388,299 409,448
Inventories, at the lower of cost (on a first-in, first-out basis) or market 270,843 257,579
Linens in service, net of amortization 55,593 57,162
Deferred income taxes 9,721 10,285
Prepayments 30,500 25,740
Total Current Assets 758,104 761,724
Property, Plant, and Equipment, at cost:
Land 28,538 28,697
Buildings and leasehold improvements 209,339 206,946
Machinery and equipment 564,549 559,483
Total Property, Plant, and Equipment 802,426 795,126
Less-Accumulated depreciation and amortization 381,788 368,067
Property, Plant, and Equipment-net 420,638 427,059
Other Assets:
Goodwill and other intangibles 530,677 536,009
Other 93,538 95,347
Total Other Assets 624,215 631,356
Total Assets $1,802,957 $1,820,139
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $1,065 $ 201
Commercial paper, short-term 244,645 236,706
Notes payable 20,039 20,285
Accounts payable 114,325 130,573
Accrued salaries, commissions, and bonuses 48,672 63,832
Current portion of self-insurance reserves 8,289 7,006
Accrued taxes payable 6,388 1,924
Other accrued liabilities 80,677 80,125
Total Current Liabilities 524,100 540,652
Long-Term Debt, less current maturities 383,043 384,242
Deferred Income Taxes 94,260 96,153
Self-Insurance Reserves, less current portion 31,517 37,484
Other Long-Term Liabilities 96,695 93,138
Stockholders' Equity:
Series A participating preferred stock, $.05 stated value, 500,000 shares
authorized, none issued
Preferred stock, no par value, 500,000 shares authorized, none issued
Common stock, $1 par value, 120,000,000 shares authorized, 57,918,978 shares
issued 57,919 57,919
Paid-in capital 28,428 29,657
Retained earnings 1,025,964 1,022,974
Accumulated other comprehensive income items (15,295) (12,777)
1,097,016 1,097,773
Less-Treasury stock, at cost (16,866,324 shares at November 30, 2000 and
17,090,414 shares at August 31, 2000) 423,674 429,303
Total Stockholders' Equity 673,342 668,470
Total Liabilities and Stockholders' Equity $1,802,957 $1,820,139
The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 4
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per-share data)
THREE MONTHS ENDED
NOVEMBER 30
2000 1999
Sales and Service Revenues:
Net sales of products $562,652 $542,294
Service revenues 81,107 77,716
Total Revenues 643,759 620,010
Costs and Expenses:
Cost of products sold 332,683 323,914
Cost of services 46,433 45,134
Selling and administrative expenses 218,104 196,971
Amortization expense 5,047 5,166
Interest expense, net 13,261 9,986
Other expense (income), net 1,982 (1,013)
Total Costs and Expenses 617,510 580,158
Income before Provision for Income Taxes 26,249 39,852
Provision for Income Taxes 9,712 15,462
Net Income $ 16,537 $ 24,390
Per Share:
Basic Earnings per Share $ .40 $ .60
Basic Weighted Average Number of Shares Outstanding 40,941 40,584
Diluted Earnings per Share $ .40 $ .60
Diluted Weighted Average Number of Shares Outstanding 40,958 40,686
The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 5
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
THREE MONTHS ENDED
NOVEMBER 30
2000 1999
Cash Provided by (Used for) Operating Activities
Net income $16,537 $24,390
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Depreciation and amortization 22,502 21,210
Provision for losses on accounts receivable 1,522 1,315
(Gain) loss on the sale of property, plant, and equipment 1,865 (434)
Gain on the sale of business - (186)
Change in assets and liabilities net of effect of acquisitions and divestitures-
Receivables 18,939 27,574
Inventories and linens in service, net (12,526) (15,264)
Deferred income taxes (1,328) 4,368
Prepayments and other (4,760) (3,421)
Accounts payable and accrued liabilities (21,169) (30,270)
Self-insurance reserves and other long-term liabilities (2,553) 426
Net Cash Provided by Operating Activities 19,029 29,708
Cash Provided by (Used for) Investing Activities
Purchases of property, plant, and equipment (14,660) (21,792)
Sale of property, plant, and equipment 589 783
Acquisitions (200) (14,030)
Change in other assets 2,348 693
Net Cash Used for Investing Activities (11,923) (34,346)
Cash Provided by (Used for) Financing Activities
Borrowings (repayments) of notes payable, net (246) 91
Issuances (repayments) of commercial paper, net (less than 90 days) 15,601 (73,931)
Issuances of commercial paper (greater than 90 days) 1,338 89,801
Repayments of commercial paper (greater than 90 days) (9,000) -
Repayments of long-term debt (335) (286)
Treasury stock transactions, net 754 1,199
Cash dividends paid (13,547) (13,014)
Net Cash Provided by (Used for) Financing Activities (5,435) 3,860
Effect of Exchange Rate Changes on Cash (33) (7)
Net Change in Cash and Cash Equivalents 1,638 (785)
Cash and Cash Equivalents at Beginning of Period 1,510 2,254
Cash and Cash Equivalents at End of Period $ 3,148 $ 1,469
Supplemental Cash Flow Information:
Income taxes paid during the period $ 3,308 $ 9,207
Interest paid during the period 9,674 5,511
Noncash Investing and Financing Activities:
Treasury shares issued under long-term incentive plan $ 4,551 $ 5,667
Noncash aspects of acquisitions--
Assets acquired $ 200 $ 876
Liabilities assumed or incurred - 24
The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 6
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share and per-share data and as indicated)
1. BASIS OF PRESENTATION
The interim consolidated financial statements included herein have been prepared
by the company without audit and the condensed consolidated balance sheet as of
August 31, 2000 has been derived from audited statements. These statements
reflect all adjustments, all of which are of a noraml, recurring nature, which
are, in the opinion of management, necessary to present fairly the consolidated
financial position as of November 30, 2000, the consolidated results of
operations for the three months ended November 30, 2000 and 1999, and the
consolidated cash flows for the three months ended November 30, 2000 and 1999.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation. Certain information
and footnote discolsures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto inclulded in the company's Annual Report on Form 10-K for the fiscal
year ended August 31, 2000.
The results of operations for the three months ended November 30, 2000 are not
necessarily indicative of the results to be expected for the full fiscal year
because the company's revenues and income are generally higher in the second
half of its fiscal year and because of the uncertainty of general business
conditions.
2. RECENT ACCOUNTING STANDARDS
Newly Adopted Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 133 (as amended by SFAS
No. 138), "Accounting for Derivative Instruments and Hedging Activities," was
issued in June of 1998 and is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Accordingly, the company adopted SFAS 133 at the
beginning of the quarter ended November 30, 2000. The adoption of this statement
did not have a material impact on the company’s consolidated financial
statements.
Accounting Standards Yet to be Adopted
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." Specifically, Issue 00-10 addresses how the seller of goods should
classify amounts billed to a customer for shipping and handling. The EITF
concluded that all amounts billed to a customer in a sales transaction related
to shipping and handling represent revenues earned for the goods provided and
should be classified as revenue. The company is required to and will adopt EITF
00-10 in the fourth quarter of fiscal year 2001. The company has historically
netted certain shipping and handling revenues charged to customers in cost and
expenses. The adoption of EITF 00-10 will result in an increase in sales and
service revenues and cost and expenses, with no impact on net income. The
company has not calculated the effect of this reclassification on its reported
revenues and costs.
3. BUSINESS SEGMENT INFORMATION
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Revenues (Loss) Expense Acquisitions
Three Months Ended November 30, 2000
Lighting Equipment $377,680 $33,276 $12,583 $ 8,891
Chemical 126,355 6,537 2,847 2,127
Textile Rental 81,107 3,727 4,147 2,071
Envelope 58,617 1,712 2,325 1,084
643,759 45,252 21,902 14,173
Corporate (5,742) 600 687
Interest expense, net (13,261)
Total $643,759 $26,249 $22,502 $14,860
Page 7
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Revenues (Loss) Expense Acquisitions
Three Months Ended November 30, 1999
Lighting Equipment $367,595 $35,287 $12,406 $24,904
Chemical 119,901 8,622 2,712 1,334
Textile Rental 77,716 5,128 3,752 3,568
Envelope 54,798 3,068 1,781 4,347
620,010 52,105 20,651 34,153
Corporate (2,267) 559 1,669
Interest expense, net (9,986)
Total $620,010 $39,852 $21,210 $35,822
Total Assets
November 30, August 31,
2000 2000
Lighting Equipment $1,133,007 $1,145,927
Chemical 232,861 241,645
Textile Rental 220,850 222,957
Envelope 153,868 151,003
Subtotal 1,740,586 1,761,532
Corporate 62,371 58,607
Total $1,802,957 $1,820,139
4. INVENTORIES
Major classes of inventory as of November 30, 2000 and August 31, 2000 were as
follows:
November 30, August 31,
2000 2000
Raw Materials and Supplies $101,376 $104,566
Work-in-Process 19,183 20,262
Finished Goods 150,284 132,751
Total $270,843 $257,579
Page 8
5. EARNINGS PER SHARE
The company accounts for earnings per share using Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Under this statement, basic
earnings per share is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed similarly but reflects the
potential dilution that would occur if dilutive options were exercised. The
following table calculates basic earnings per common share and diluted earnings
per common share at November 30:
Three Months Ended
November 30
2000 1999
Basic earnings per common share:
Net income $16,537 $24,390
Basic weighted average shares outstanding (in thousands) 40,941 40,584
Basic earnings per common share $ .40 $ .60
Diluted earnings per common share:
Net income $16,537 $24,390
Basic weighted average shares outstanding (in thousands) 40,941 40,584
Add - Shares of common stock issuable upon assumed
exercise of dilutive stock options (in thousands) 17 102
Diluted weighted average shares outstanding (in thousands) 40,958 40,686
Diluted earnings per common share $ .40 $ .60
6. COMPREHENSIVE INCOME
The company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," in the first quarter of fiscal 1999. SFAS No.
130 requires the reporting of a measure of all changes in equity of an entity
that result from recognized transactions and other economic events other than
transactions with owners in their capacity as owners. Other comprehensive income
(loss) for the three months ended November 30, 2000 and 1999 includes only
foreign currency translation adjustments. The calculation of comprehensive
income is as follows:
Three Months Ended
November 30
2000 1999
Net income $16,537 $24,390
Other comprehensive income (loss) (2,518) (10)
Comprehensive Income $14,019 $24,380
Page 9
7. LEGAL PROCEEDINGS
The company is subject to various legal claims arising in the normal course of
business out of the conduct of its current and prior businesses, including
patent infringement and product liability claims. 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 the company's financial condition or results of operations. 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 the company's results of operations in a particular future period. The
company reserves for known legal claims when payments associated with the claims
become probable and the costs can be reasonably estimated. The actual costs of
resolving legal claims may be substantially lower or higher than that reserved.
The company does not believe that the amount of such costs below or in excess of
that reserved is reasonably estimable.
Among the product liability claims to which the company is subject are claims
arising from the installation and distribution of asbestos-containing
insulation, primarily in the southeastern United States, by a previously
divested business of the company. The company has reached settlement agreements
with substantially all of its relevant insurers providing for their payment of
these claims up to the various policy limits. Over the past two decades, through
November 30, 2000, approximately 35,800 such claims against the company's
business have been resolved for an aggregate cost (liability payments and other
expenses) of approximately $40 million, approximately $39 million of which has
been paid by insurers. The average per-claim liability payment made by the
company and its insurers is less than nine hundred dollars over that period and
is slightly more than a thousand dollars over the past two years. As of November
30, 2000, there were approximately 31,400 similar claims pending against the
company, including approximately 16,000 claims that have been settled in
principle (but not yet finalized) for amounts generally consistent with recent
historical per-claim settlement costs. The company anticipates that similar
claims will be made in the future. Neither the number of such claims nor the
liabilities which may arise from them is reasonably estimable.
Since 1988 the company has been a member, together with a number of other
companies that are among the defendants in these claims, of the Center for
Claims Resolution (the "CCR"), which has handled all such claims on behalf of
the company. The company has been responsible for varying percentages of CCR's
defense and liability payments on a claim-by-claim basis pursuant to
predetermined sharing formulae; substantially all of the company's portion of
those payments have been paid directly by the company's insurers. During 2000,
one member left the CCR; another member had its membership terminated by the
CCR's Board; and another member declared bankruptcy. These members have failed
to pay certain financial obligations in connection with settlements that were
reached while they were CCR members. The company expects to pay CCR
approximately five hundred thousand dollars for the company's allocated share of
the amount needed to cover defaulted obligations relating to paid settlements;
the CCR may request, and the company may be subject to claims that it has
liability for, further payments with respect to settlements reached in principle
but not finalized. Although the company would seek to recover any such payments
from insurance and other sources, there is no assurance that such payments, if
made by the company, would be recoverable. In addition, several significant
companies that are traditional co-defendants in similar claims but are not
members of CCR sought bankruptcy protection during 2000. The absence of these
traditional defendants may increase the cost of resolving similar claims for
other defendants, including the company and the other remaining CCR members. The
company expects that beginning on or about February 1, 2001, it will use CCR for
claims processing and handling but not for sharing of liability costs; the
company will also use coordinating counsel and will participate more directly in
defense of claims.
The ultimate asbestos-related liability of the company is difficult to estimate.
Based on the company's experience to date, the company believes that
substantially all of the costs it may incur in defending and ultimately
disposing of asbestos-related claims will be paid by its insurers. The company
is and will continue monitoring and analyzing the trends, developments, and
variables affecting or likely to affect the resolution of pending and future
claims against the company.
Page 10
8. ENVIRONMENTAL MATTERS
The company's operations, as well as similar operations of other companies, are
subject to comprehensive laws and regulations relating to the generation,
storage, handling, transportation, and disposal of hazardous substances and
solid and hazardous wastes and to the remediation of contaminated sites. Permits
and environmental controls are required for certain of the company's operations
to limit air and water pollution, and these permits are subject to modification,
renewal, and revocation by issuing authorities. The company believes that it is
in substantial compliance with all material environmental laws, regulations, and
permits. On an ongoing basis, the company incurs capital and operating costs
relating to environmental compliance. Environmental laws and regulations have
generally become stricter in recent years, and the cost of responding to future
changes may be substantial.
The company's environmental reserves, which are included in current liabilities,
totaled $10.1 million and $10.2 million at November 30 and August 31, 2000,
respectively. The actual cost of environmental issues may be substantially lower
or higher than that reserved due to the difficulty in estimating such costs,
potential changes in the status of government regulations, and the inability to
determine the extent to which contributions will be available from other
parties. The company does not believe that any amount of such costs below or in
excess of that accrued is reasonably estimable.
Certain environmental laws, such as Superfund, can impose liability for the
entire cost of site remediation upon each of the current or former owners or
operators of a site or parties who sent waste to a site where a release of a
hazardous substance has occurred regardless of fault or the lawfulness of the
original disposal activity. Generally, where there are a number of potentially
responsible parties ("PRPs") that are financially viable, liability has been
apportioned based on the type and amount of waste disposed of by each party at
such disposal site and the number of financially viable PRPs, although no
assurance as to the method of apportioning the liability can be given as to any
particular site.
The company is currently a party to, or otherwise involved in, legal proceedings
in connection with state and federal Superfund sites, two of which are located
on property owned by the company. Except for the Crymes Landfill and M&J
Solvents matters in Georgia, the company believes its liability is de minimis at
each of the sites which it does not own where it has been named as a PRP. At the
Crymes Landfill and M&J Solvents sites in Georgia, since the matters are
currently in the investigative phase, the company does not know whether its
liability is de minimis but believes that its exposure at each of the sites is
not likely to result in a material adverse effect on the company due to its
limited involvement at the sites and the number of viable PRPs. For property
which the company owns on Seaboard Industrial Boulevard in Atlanta, Georgia, the
company has conducted an investigation on its and adjoining properties and
submitted a Compliance Status Report ("CSR") to the State of Georgia
Environmental Protection Division ("EPD") pursuant to the Georgia Hazardous Site
Response Act. The CSR is subject to EPD's final approval. Until the CSR is
finalized, the company will not be able to determine if remediation will be
required, if the company will be solely responsible for the cost of such
remediation, or whether such cost is likely to result in a material adverse
effect on the company. For property which the company owns on East Paris Street
in Tampa, Florida, the company has been requested by the State of Florida to
clean up chlorinated solvent contamination in the groundwater on the property
and on surrounding property known as Seminole Heights Solvent Site and to
reimburse approximately $430 thousand of costs already incurred by the State of
Florida in connection with such contamination. The company believes that it has
a strong defense due to likely off-site sources of the contamination and because
contamination from the property, if any, was due to prior owners and not the
company's operations. At this time, it is too early to quantify the company's
potential exposure or the likelihood of an adverse result.
In connection with the sale of the North Bros. business and 29 of the company's
textile rental plants in 1997, the company has retained environmental
liabilities arising from events occurring prior to the closing, subject to
certain exceptions. The company has received notice from the buyer of the
textile rental plants of the alleged presence of perchloroethylene contamination
on one of the properties involved in the sale. The company has since asserted an
indemnification claim against the company from which it bought the property. The
prior owner is currently conducting an investigation of the contamination at its
expense, subject to a reservation of rights. At this time, it is too early to
quantify the company's potential exposure in this matter, the likelihood of an
adverse result, or the possibility that the company may be fully or partially
indemnified.
The State of New York has filed a lawsuit against the company alleging that the
company is responsible as a successor to Serv-All Uniform Rental Corp. for past
and future response costs in connection with the release or potential release of
hazardous substances at and from the Blydenburgh Landfill in Islip, New York.
The company believes that it is not a successor to Serv-All Uniform Rental Corp.
and therefore has no liability with respect to the Blydenburgh Landfill, and it
has responded to the lawsuit accordingly. At this stage of the litigation, it is
too early to quantify the company's potential exposure or the likelihood of an
adverse result.
Page 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes.
National Service Industries is a diversified service and manufacturing company
operating in four segments: lighting equipment, chemicals, textile rental, and
envelopes. The company remained in solid financial condition at November 30,
2000. Net working capital was $234.0 million, up from $221.1 million at August
31, 2000, and the current ratio remained constant at 1.4. At November 30, 2000,
the company's percentage of debt to total capitalization increased slightly to
49.1 percent compared to 49.0 percent at August 31, 2000.
Results of Operations
National Service Industries generated revenue of $643.8 million in the three
months ended November 30, 2000, compared to revenue of $620.0 million in the
previous year. The increase was related to growth in the company's core
businesses, primarily in the lighting equipment and chemical segments.
Net income totaled $16.5 million, or $.40 per diluted share, for the three
months ended November 30, 2000, compared to net income of $24.4 million, or $.60
per diluted share, for the three months ended November 30, 1999. Net income
declined $7.9 million primarily because of increased interest expense and costs
incurred to reposition the business for an anticipated economic slowdown.
Interest expense increased $3.3 million as a result of higher interest rates and
increased debt levels associated with working capital increases. Additional
costs to reposition the businesses were associated with the closing and
streamlining of operations and the rollout of technological enhancements.
Management expects these initiatives to reduce the company's cost structure and
improve service capability. Anticipated higher interest costs and continued
investments to improve the company's cost structure are forecasted to negatively
impact second quarter performance, with first half results as much as thirty
percent lower than last year's first half results. However, management expects
reductions in the company's cost structure to contribute to improved second half
results.
The lighting equipment segment reported revenue of $377.7 million for the first
quarter, an increase of $10.1 million over the previous year. The increase in
revenue resulted primarily from higher sales volumes in its core business.
However, a recent slowing of order rates may indicate an initial weakening in
the non-residential construction market. Excluding a $1.0 million pretax charge
during the first quarter of fiscal 2000 for closing a manufacturing facility in
California, operating profit decreased approximately $3.0 million, from $35.3
million to $33.3 million, because of planned promotional costs associated with
home center retail sales, increased spending for information technology, and
costs to establish a Texas distribution center.
In the chemical segment, revenue increased $6.5 million, or 5.4 percent, due to
sales volume growth in its core business. Operating profit of $6.5 million was
$2.1 million lower than last year's results primarily because of costs incurred
in conjunction with the consolidation of the Zep and Selig manufacturing
operations and costs associated with a North American direct sales force
training meeting. Management expects to benefit from these initiatives during
the second half of the fiscal year through reduced operating costs and through
improved direct sales force effectiveness.
The textile rental segment generated revenue of $81.1 million during the first
quarter, representing a 4.4 percent increase over last year. This increase was
attributable primarily to revenues associated with acquired businesses.
Operating profit was $3.7 million compared to $5.1 million a year ago. The
decline in operating profit was primarily related to costs incurred to close a
facility in order to reduce the segment's cost structure and improve customer
service.
Envelope segment revenue increased 7.0 percent from $54.8 million to $58.6
million. The increase was primarily due to higher sales volumes to strategic
partners. Operating profit decreased $1.4 million to $1.7 million primarily
because of costs associated with reorganizing the Miami, Florida manufacturing
facility.
Corporate expenses totaled $5.7 million, compared to $2.3 million one year ago,
primarily as a result of lower-than-normal prior-year long-term incentive
compensation expense. Additionally, the provision for income taxes decreased to
37.0 percent of pretax income for the first quarter compared to 38.8 percent in
the prior year, primarily due to the implementation of various tax-saving
strategies impacting fiscal 2001.
Page 12
Liquidity and Capital Resources
Operating Activities
Operations provided cash of $19.0 million during the first quarter of fiscal
2001 compared with $29.7 million during the respective period of the prior year.
Fiscal 2001 operating cash flow was lower primarily because of a decrease in net
income.
Investing Activities
Investing activities used cash of $11.9 million versus $34.3 million in the
prior year. The improvement in investing cash flows related primarily to a
decrease in acquisition spending and a decrease in purchases of property, plant,
and equipment. Higher acquisition spending in fiscal 2000 was primarily due to
remaining payments associated with the 1999 acquisition of Holophane.
Capital expenditures totaled $14.7 million compared to $21.8 million in the
first quarter of last year. In the first quarter of fiscal 2001, the lighting
equipment segment invested primarily in manufacturing upgrades and improvements.
Capital expenditures in the envelope segment were primarily related to
manufacturing process improvements and information systems. In the chemical
segment, capital expenditures were associated with manufacturing equipment and
facilities improvements. Capital investments in the textile rental segment were
mainly attributable to building improvements, replacing old equipment, and
information systems. In the first quarter of fiscal 2000, the lighting equipment
segment invested in land, buildings, and equipment for a new plant in Mexico and
in manufacturing upgrades and improvements. Capital expenditures in the envelope
segment related primarily to new folding capacity. The textile rental segment's
expenditures related to replacing old equipment and delivery truck
refurbishments. Management believes current cash balances, anticipated cash
flows from operations, available funds from the commercial paper program or the
committed credit facilities, and the complimentary lines of credit are
sufficient to meet the company's planned level of capital spending and general
operating cash requirements for the next twelve months.
Financing Activities
Cash used by financing activities totaled $5.4 million in the current-year first
quarter compared to cash provided of $3.9 million in fiscal 2000 primarily as a
result of a decrease in cash provided by net borrowings. First quarter dividend
payments totaled $13.5 million, or 33 cents per share, compared with $13.0
million, or 32 cents per share, for the prior-year period.
Legal Proceedings
For information concerning legal proceedings, including trends and developments
involving legal proceedings, see footnote 7 to the financial statements included
in this filing.
Environmental Matters
For information concerning environmental matters, see footnote 8 to the
financial statements included in this filing.
Quantitative and Qualitative Disclosures About Market Risk
The company is exposed to market risks that may impact the Consolidated Balance
Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash
Flows due to changing interest rates and foreign exchange rates. The company
does not currently participate in any significant hedging activities, nor does
it currently utilize any derivative financial instruments. The following
discussion provides additional information regarding the company's market
risks.
Interest Rates- Interest rate fluctuations expose the company's variable-rate
debt to changes in interest expense and cash flows. The company's variable-rate
debt, primarily commercial paper, amounted to $286.8 million at November 30,
2000. Based on outstanding borrowings at quarter end, a 10 percent adverse
change in effective market interest rates at November 30, 2000 would result in
additional annual after-tax interest expense of approximately $1.2 million.
Although a fluctuation in interest rates would not affect interest expense or
cash flows related to the $160 million and $200 million publicly traded notes,
the company's primary fixed-rate debt, a 10 percent increase in effective market
interest rates at November 30, 2000 would decrease the fair value of these notes
to approximately $134 and $193 million, respectively.
Foreign Exchange Rates-The majority of the company's revenue, expense, and
capital purchases are transacted in U.S. dollars. International operations
during the first quarter of fiscal 2001, primarily in the lighting equipment and
chemical segments, represented less than 10 percent of revenue, operating
profit, and long-lived assets. The company does not believe a 10 percent
fluctuation in average foreign currency rates would have a material effect on
its consolidated financial statements or results of operations.
Page 13
Cautionary Statement Regarding Forward-Looking Information
This filing contains forward-looking statements, within the meaning of the
Private Securities Litigation Reform Act of 1995, that involve risks and
uncertainties. Consequently, actual results may differ materially from those
indicated by the forward-looking statements. Statements made herein that may be
considered forward looking include statements concerning: (a) anticipated future
benefits of initiatives undertaken to reduce the company's cost structure and
improve the company's service capability; (b) anticipated higher interest costs
and investments to improve the company's cost structure and their impact on
second quarter performance; (c) expected earnings during the first half, second
half, and full fiscal year of 2001; (d) indications of a weakening in the
non-residential construction market; and (e) the realization of expected
benefits through reduced operating costs and improved direct sales force
effectiveness in the chemical segment during the second half of the fiscal year.
A variety of risks and uncertainties could cause the company's actual results to
differ materially from the anticipated results or other expectations expressed
in the company's forward-looking statements. The risks and uncertainties include
without limitation the following: (a) the uncertainty of general business and
economic conditions, including the potential for a greater-than-expected
slowdown in non-residential construction awards, interest rate changes, and
fluctuations in commodity and raw material prices; (b) unexpected developments
and outcomes in the company's legal and environmental proceedings; (c) the
company's ability to realize the anticipated benefits of strategic initiatives
related to increased productivity, new product development, technological
advances, cost synergies, decreases in net working capital, and the achievement
of sales growth across the business segments; and (d) the successful completion
of changes to manufacturing operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information concerning legal proceedings, including trends and developments
involving legal proceedings, see footnote 7 to the financial statements included
in this filing.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held December 21, 2000, all nominees for
director were elected to the board without opposition and Arthur Andersen LLP's
appointment as independent auditor for the current fiscal year was ratified. The
elected board members are as follows:
James S. Balloun, Chairman David Levy Betty L. Siegel
Leslie M. Baker, Jr. Sam Nunn Kathy Brittain White
John L. Clendenin Roy Richards, Jr. Barrie A. Wigmore
Thomas C. Gallagher Ray M. Robinson Neil Williams
In addition, stockholders voted on the following:
Votes
Cast
Affirmative Negative Abstentions
Stockholder proposal recommending the sale of the Corporation 2,239,287 21,932,101 2,647,652
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 15).
(b) There were no reports on Form 8-K for the three months ended November 30, 2000.
Page 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL SERVICE INDUSTRIES, INC.
REGISTRANT
DATE January 9, 2001 /S/ KENYON MURPHY
KENYON MURPHY
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
DATE January 9, 2001 /S/ BROCK HATTOX
BROCK HATTOX
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Page 15
INDEX TO EXHIBITS
Page No.
EXHIBIT 10(iii)A (1) Incentive Stock Option Agreement for Executive Officers Effective 16
Beginning October 24, 2000 between National Service Industries, Inc.
and Joseph G. Parham, Jr.
(2) Nonqualified Stock Option Agreement for Executive Officers Effective 23
Beginning October 4, 2000 between National Service Industries, Inc.
and:
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(3) Nonqualified Stock Option Agreement for Executive Officers Effective 29
Beginning October 24, 2000 between National Service Industries, Inc.
and:
(a) James S. Balloun
(b) George H. Gilmore
(c) Brock A. Hattox
(d) David Levy
(e) Joseph G. Parham, Jr.
(4) Restricted Stock Award Agreement Effective Beginning October 24, 2000 36
between National Service Industries, Inc. and:
(a) James S. Balloun
(b) George H. Gilmore
(c) Brock A. Hattox
(d) David Levy
(e) Joseph G. Parham, Jr.
