Page 1 of 23
Index to Exhibits on Page 17
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 February 28, 2001.
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 - 41,151,100 shares as of March 31, 2001.
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
-----------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Unaudited) -
FEBRUARY 28, 2001 AND AUGUST 31, 2000 3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) -
THREE AND SIX MONTHS ENDED FEBRUARY 28, 2001
AND FEBRUARY 29, 2000 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -
SIX MONTHS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
INDEX TO EXHIBITS 17
Page 3
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per-share data)
February 28, August 31,
2001 2000
------------------ ---------------
Assets
Current Assets:
Cash and cash equivalents $ 5,732 $ 1,510
Receivables, less reserves for doubtful accounts
of $8,875 at February 28, 2001 and $7,310 at August 31, 2000 369,632 405,748
Inventories, at the lower of cost (on a first-in,
first-out basis) or market 265,275 257,579
Linens in service, net of amortization 55,235 57,162
Deferred income taxes 10,024 10,285
Prepayments 29,103 25,740
------------------ ---------------
Total Current Assets 735,001 758,024
------------------ ---------------
Property, Plant, and Equipment, at cost:
Land 28,528 28,697
Buildings and leasehold improvements 217,060 206,946
Machinery and equipment 577,321 559,483
------------------ ---------------
Total Property, Plant, and Equipment 822,909 795,126
Less-Accumulated depreciation and amortization 398,050 368,067
------------------ ---------------
Property, Plant, and Equipment-net 424,859 427,059
------------------ ---------------
Other Assets:
Goodwill and other intangibles 522,971 536,009
Other 91,324 95,347
------------------ ---------------
Total Other Assets 614,295 631,356
------------------ ---------------
Total Assets $1,774,155 $1,816,439
================== ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 1,067 $ 201
Commercial paper 255,434 236,706
Notes payable 21,366 20,285
Accounts payable 112,026 130,573
Accrued salaries, commissions, and bonuses 42,648 63,832
Current portion of self-insurance reserves 6,996 7,006
Accrued taxes payable 11,396 1,924
Other accrued liabilities 67,484 76,425
------------------ ---------------
Total Current Liabilities 518,417 536,952
------------------ ---------------
Long-Term Debt, less current maturities 382,790 384,242
------------------ ---------------
Deferred Income Taxes 76,003 96,153
------------------ ---------------
Self-Insurance Reserves, less current portion 29,694 37,484
------------------ ---------------
Other Long-Term Liabilities 89,375 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 29,859 29,657
Retained earnings 1,028,241 1,022,974
Unearned compensation on restricted stock (Note 7) (1,160) -
Accumulated other comprehensive income items (15,794) (12,777)
------------------ ---------------
1,099,065 1,097,773
Less-Treasury stock, at cost (16,767,419 shares at February
28, 2001 and 17,090,414 shares at August 31, 2000) 421,189 429,303
------------------ ---------------
Total Stockholders' Equity 677,876 668,470
------------------ ---------------
Total Liabilities and Stockholders' Equity $1,774,155 $1,816,439
================== ===============
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 SIX MONTHS ENDED
------------------------------ -----------------------------
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Sales and Service Revenues:
Net sales of products $527,821 $527,994 $1,090,473 $ 1,070,288
Service revenues 79,608 77,419 160,715 155,135
-------------- -------------- -------------- --------------
Total Revenues 607,429 605,413 1,251,188 1,225,423
-------------- -------------- -------------- --------------
Costs and Expenses:
Cost of products sold 314,784 316,963 647,467 640,877
Cost of services 46,201 44,805 92,634 89,939
Selling and administrative expenses 204,254 196,003 422,358 392,974
Amortization expense 5,272 5,198 10,319 10,363
Interest expense, net 13,375 10,527 26,636 20,513
Gain on sale of business (2,360) (170) (2,360) (356)
Other expense (income), net 784 (1,043) 2,766 (1,869)
-------------- -------------- -------------- --------------
Total Costs and Expenses 582,310 572,283 1,199,820 1,152,441
-------------- -------------- -------------- --------------
Income before Provision for Income Taxes 25,119 33,130 51,368 72,982
Provision for Income Taxes 9,294 12,854 19,006 28,316
-------------- -------------- -------------- --------------
Net Income $ 15,825 $ 20,276 $ 32,362 $ 44,666
============== ============== ============== ==============
Per Share:
Basic Earnings per Share $ 0.39 $ 0.50 $ 0.79 $ 1.10
============== ============== ============== ==============
Basic Weighted Average Number of
Shares Outstanding 41,076 40,711 41,002 40,641
============== ============== ============== ==============
Diluted Earnings per Share $ 0.38 $ 0.50 $ 0.79 $ 1.10
============== ============== ============== ==============
Diluted Weighted Average Number of
Shares Outstanding 41,497 40,737 41,183 40,721
============== ============== ============== ==============
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)
SIX MONTHS ENDED
-------------------------------
February 28, February 29,
2001 2000
-------------- --------------
Cash Provided by (Used for) Operating Activities
Net income $32,362 $44,666
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization 46,155 42,493
Provision for losses on accounts receivable 2,599 2,047
(Gain) loss on the sale of property, plant, and equipment 1,824 (1,024)
Gain on the sale of business (2,360) (356)
Change in assets and liabilities net of effect of
acquisitions and divestitures-
Receivables 32,709 14,602
Inventories and linens in service, net (7,301) (22,185)
Deferred income taxes (19,889) 1,433
Prepayments and other (3,686) (12,279)
Accounts payable and accrued liabilities (30,000) (45,856)
Self-insurance reserves and other long-term liabilities (12,505) (2,614)
-------------- --------------
Net Cash Provided by Operating Activities 39,908 20,927
-------------- --------------
Cash Provided by (Used for) Investing Activities
Purchases of property, plant, and equipment (36,984) (47,443)
Sale of property, plant, and equipment 1,416 2,094
Acquisitions (223) (21,533)
Divestitures 2,286 -
Change in other assets 4,097 1,300
-------------- --------------
Net Cash Used for Investing Activities (29,408) (65,582)
-------------- --------------
Cash Provided by (Used for) Financing Activities
Borrowings of notes payable, net 1,081 -
Issuances of commercial paper, net (less than 90 days) 27,581 51,045
Issuances of commercial paper (greater than 90 days) 1,347 140,551
Repayments of commercial paper (greater than 90 days) (10,200) (122,750)
Repayments of long-term debt (586) (568)
Treasury stock transactions, net 1,532 2,098
Cash dividends paid (27,095) (26,444)
-------------- --------------
Net Cash Provided by (Used for) Financing Activities (6,340) 43,932
-------------- --------------
Effect of Exchange Rate Changes on Cash 62 (48)
-------------- --------------
Net Change in Cash and Cash Equivalents 4,222 (771)
Cash and Cash Equivalents at Beginning of Period 1,510 2,254
-------------- --------------
Cash and Cash Equivalents at End of Period $ 5,732 $ 1,483
============== ==============
Supplemental Cash Flow Information:
Income taxes paid during the period $29,168 $41,932
Interest paid during the period 21,800 19,677
Noncash Investing and Financing Activities:
Treasury shares issued under long-term incentive plan $ 4,928 $ 5,667
Noncash aspects of acquisitions--
Assets acquired $ 224 $ -
Liabilities assumed or incurred - 1,219
Noncash aspects of sale of businesses--
Reduction of liabilities recorded in conjunction
with 1997 sale of business $ 2,069 $ -
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 otherwise 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 normal, recurring nature, which
are, in the opinion of management, necessary to present fairly the consolidated
financial position as of February 28, 2001 and February 29, 2000, the
consolidated results of operations for the three and six months ended February
28, 2001 and February 29, 2000, and the consolidated cash flows for the six
months ended February 28, 2001 and February 29, 2000. Certain reclassifications
have been made to the prior year's financial statements to conform to the
current year's presentation. Certain information and footnote disclosures
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 included 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 and six months ended February 28, 2001
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,
"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 sale 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 costs and
expenses. The adoption of EITF 00-10 will result in an increase in sales and
service revenues and costs and expenses, with no impact on net income. The
company has not yet calculated the effect of this reclassification on its
reported revenues and costs.
In November 2000, the EITF reached a final consensus on EITF Issue 00-14,
"Accounting for Certain Sales Incentives," which addresses the recognition,
measurement, and income statement classification of certain sales incentives.
The EITF concluded that the costs associated with sales incentives should be
recognized at the later of the date the related revenue is recorded or the date
the incentive is offered. Additionally, the EITF concluded that costs associated
with sales incentives other than free products or services should be classified
as a reduction of revenue, while costs associated with free products or services
should be classified as expense. The company is required to and will adopt EITF
00-14 in the fourth quarter of fiscal year 2001. The company has not yet
calculated the effect of this reclassification on its reported revenues and
costs.
Page 7
3. BUSINESS SEGMENT INFORMATION
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization and
Six Months Ended February 28, 2001 Revenues (Loss) Expense Acquisitions
------------- ------------- ----------------- ----------------
Lighting Equipment $727,645 $61,614 $26,132 $23,695
Chemical 249,728 16,887 5,766 4,497
Textile Rental 160,715 7,736 8,268 5,804
Envelope 113,100 2,575 4,756 2,342
------------- ------------- ----------------- ----------------
1,251,188 88,812 44,922 36,338
Corporate (10,808) 1,233 869
Interest expense, net (26,636)
------------- ------------- ----------------- ----------------
Total $1,251,188 $51,368 $46,155 $37,207
============= ============= ================= ================
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization and
Six Months Ended February 29, 2000 Revenues (Loss) Expense Acquisitions
------------- ------------- ----------------- ----------------
Lighting Equipment $ 721,691 $64,300 $24,646 $40,610
Chemical 239,508 20,094 5,510 2,251
Textile Rental 155,135 11,434 7,556 15,024
Envelope 109,089 5,523 3,648 9,214
-------------- ------------- ----------------- ----------------
1,225,423 101,351 41,360 67,099
Corporate (7,856) 1,133 1,877
Interest expense, net (20,513)
------------- ------------- ----------------- ----------------
Total $1,225,423 $72,982 $42,493 $68,976
============= ============= ================= ================
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization and
Three Months Ended February 28, 2001 Revenues (Loss) Expense Acquisitions
------------- ------------- ----------------- ----------------
Lighting Equipment $349,965 $28,338 $13,549 $14,804
Chemical 123,373 10,350 2,919 2,370
Textile Rental 79,608 4,009 4,121 3,733
Envelope 54,483 863 2,431 1,258
------------- ------------- ----------------- ----------------
607,429 43,560 23,020 22,165
Corporate (5,066) 633 182
Interest expense, net (13,375) -------------
------------- ------------- ----------------- ----------------
Total $607,429 $25,119 $23,653 $22,347
============= ============= ================= ================
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization and
Three Months Ended February 29, 2000 Revenues (Loss) Expense Acquisitions
------------- ------------- ----------------- ----------------
Lighting Equipment $354,096 $29,013 $12,240 $15,706
Chemical 119,607 11,472 2,798 917
Textile Rental 77,419 6,306 3,804 11,456
Envelope 54,291 2,455 1,867 4,867
------------- ------------- ----------------- ----------------
605,413 49,246 20,709 32,946
Corporate (5,589) 574 208
Interest expense, net (10,527)
------------- ------------- ----------------- ----------------
Total $605,413 $33,130 $21,283 $33,154
============= ============= ================= ================
Page 8
Total Assets
-------------------------------------------
February 28, 2001 August 31, 2000
------------------- ------------------
Lighting Equipment $1,114,318 $1,142,227
Chemical 243,147 241,645
Textile Rental 218,911 222,957
Envelope 151,816 151,003
------------------- ------------------
Subtotal 1,728,192 1,757,832
Corporate 45,963 58,607
------------------- ------------------
Total $1,774,155 $1,816,439
=================== ==================
4. INVENTORIES
Major classes of inventory as of February 28, 2001 and August 31, 2000 were as
follows:
February 28, August 31,
2001 2000
----------------- -----------------
Raw Materials and Supplies $110,410 $104,566
Work-in-Process 19,470 20,262
Finished Goods 135,395 132,751
----------------- -----------------
Total $265,275 $257,579
================= =================
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 and
restricted stock awards were vested. The following table calculates basic
earnings per common share and diluted earnings per common share at February 28,
2001 and February 29, 2000:
Three Months Ended Six Months Ended
-------------------------------- -------------------------------
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
--------------- ------------- -------------- -------------
Basic earnings per common share:
Net income $15,825 $20,276 $32,362 $44,666
Basic weighted average shares
outstanding (in thousands) 41,076 40,711 41,002 40,641
--------------- ------------- -------------- -------------
Basic earnings per common share $ 0.39 $ 0.50 $ 0.79 $ 1.10
=============== ============= ============== =============
Diluted earnings per common share:
Net income $15,825 $20,276 $32,362 $44,666
Basic weighted average shares
outstanding (in thousands) 41,076 40,711 41,002 40,641
Add - Shares of common stock issuable
upon assumed exercise of dilutive
stock options (in thousands) 386 26 164 80
Add - Unvested restricted stock
(in thousands) 35 - 17 -
--------------- ------------- -------------- -------------
Diluted weighted average shares
outstanding (in thousands) 41,497 40,737 41,183 40,721
--------------- ------------- -------------- -------------
Diluted earnings per common share $ 0.38 $ 0.50 $ 0.79 $ 1.10
=============== ============= ============== =============
Page 9
6. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," 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 and six months ended February 28, 2001 and February
29, 2000 includes only foreign currency translation adjustments. The calculation
of comprehensive income is as follows:
Three Months Ended Six Months Ended
---------------------------------- ---------------------------------
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
--------------- --------------- -------------- ---------------
Net income $15,825 $20,276 $32,362 $44,666
Foreign currency translation adjustments (499) 250 (3,017) 240
--------------- --------------- -------------- ---------------
Comprehensive Income $15,326 $20,526 $29,345 $44,906
=============== =============== ============== ===============
7. RESTRICTED STOCK
In October 2000, the company awarded 256,800 shares of restricted stock to
officers and other key employees under the National Service Industries, Inc.
Long-Term Achievement Incentive Plan. The shares are granted in 20 percent
increments when the company's stock price equals or exceeds certain stock price
targets ranging from $22.14 to $38.50 for thirty consecutive calendar days. The
shares vest ratably in four equal annual installments beginning one year from
the date of grant. During the vesting period, the participants have voting
rights and receive dividends, but the shares may not be sold, assigned,
transferred, pledged or otherwise encumbered. If the stock price targets are not
reached on or before the fifth anniversary of the award date, the corresponding
shares are not granted. Additionally, granted but unvested shares are forfeited
upon termination of employment, unless certain retirement criteria are met.
The fair value of the restricted shares on the date of grant is amortized
ratably over the vesting period. In January 2001, the first stock price target
was achieved and 51,260 restricted shares were granted. Unearned compensation on
restricted stock of $1,281 was initially recorded based on the market value of
the shares on the date of grant and is generally being amortized over four
years. The company recorded compensation expense related to restricted stock of
$121 during the quarter ended February 28, 2001. The unamortized balance of
unearned compensation on restricted stock is included as a separate component of
stockholders' equity.
8. 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
February 2001, approximately 37,400 such claims against the company's business
have been resolved for an aggregate cost (liability payments and other expenses)
of approximately $44 million, approximately $42 million of which has been paid
or is expected to be 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 February 28, 2001, there were approximately 28,300 similar claims pending
against the company, including approximately 15,200 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.
Page 10
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"). Beginning on February 1, 2001, the company has
used CCR for claims processing and handling; the company has used coordinating
counsel and local counsel for the defense of claims. Prior to that date, the CCR
handled the processing and settlement of claims on behalf of the company and
retained local counsel for the defense of claims, and the company benefited from
cost sharing with other CCR members. The company was 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 were 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 recently paid 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 will seek to recover the recent payment
and any future payments from insurance and other sources, there is no assurance
that such payments will 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 and early 2001. The
absence of these traditional defendants may increase the cost of resolving
similar claims for other defendants, including the company.
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 in the foreseeable future 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.
9. 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 $8.0 million and $10.2 million at February 28, 2001 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 Blydenburgh Landfill matter in
New York (which is discussed below), the company believes its liability is de
minimis at each of the currently active sites which it does not own where it has
been named as a PRP due to its limited involvement at the site and/or the number
of viable PRPs. Specifically, the preliminary allocation among 48 PRPs at the
Crymes Landfill site in Georgia indicates that the company's liability is not
significant, and there are more than 1,000 PRPs at the M&J Solvents site in
Georgia. 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 currently pending, subject to
EPD's final approval. Until the CSR is
Page 11
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 was requested by the State of Florida to clean up
chlorinated solvent contamination in the groundwater beneath the property and
beneath 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 presented expert
evidence to the State of Florida in 1998 that the company is not the source of
the contamination, and the State has not responded. On this matter, it is not
possible to quantify the company's potential exposure.
In connection with the sale of certain assets, including 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. Because the company is not the
source of contamination, the company asserted an indemnification claim against
the company from which it bought the property. The prior owner is currently
addressing 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 outcome of the
company's indemnification claim against the prior owner.
During the second quarter of 2001, management performed a review of the other
environmental liabilities recorded in connection with the textile rental
segment's 1997 uniform plants divestiture. Based on the advice of the company's
environmental experts, the company decreased its estimates for certain
environmental exposures and, as a result, reduced the related liability and
recorded a gain of approximately $2.0 million. The gain is included in "Gain on
sale of business" in the accompanying consolidated statements of income.
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. The company has also asserted an
indemnification claim against the parent of Initial Services Investments, Inc.,
which the company acquired in 1992 and which had previously purchased and sold
certain assets of Serv-All Uniform Rental Corp. The federal district court in
the Eastern District of New York denied the company's motion for summary
judgement on the issue of successor liability and granted the State of New
York's motion for partial summary judgment and for a declaratory judgment that
the company is a successor to Serv-All Uniform Rental Corp. The company is
appealing this decision. At this stage, it is too early to quantify the
company's potential exposure, the likelihood of an adverse result, or the
outcome of the company's indemnification claim.
Page 12
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 February 28,
2001. Net working capital was $216.6 million, down from $221.1 million at August
31, 2000, and the current ratio remained constant at 1.4. The company's
percentage of debt to total capitalization increased slightly to 49.4 percent
compared to 49.0 percent at August 31, 2000.
Results of Operations
National Service Industries generated revenue of $607.4 million and $1.3 billion
in the three and six months ended February 28, 2001, respectively, compared to
revenue of $605.4 million and $1.2 billion, respectively, in the previous year.
The year-to-date increase was related to growth in the company's core
businesses, primarily the lighting equipment and chemical segments. Revenue for
the second quarter increased by approximately $2.0 million as improvements in
the chemical and textile rental segments were partially offset by a decrease in
the lighting equipment segment.
Net income totaled $15.8 million, or $.38 per diluted share, for the three
months ended February 28, 2001 compared to net income of $20.3 million, or $.50
per diluted share, for the three months ended February 29, 2000. On a
year-to-date basis, net income declined $12.3 million, from $44.7 million to
$32.4 million. Net income was negatively impacted by weakened economic
conditions, higher interest expense and energy costs, and expenses associated
with repositioning the company for an economic slowdown. Interest expense of
$13.4 million and $26.6 million for the respective three and six months ended
February 28, 2001, increased $2.9 million and $6.1 million, respectively,
compared to a year ago as a result of higher interest rates and increased debt
levels. The company expects to offset the effects of the economic slowdown with
operational initiatives including the consolidation of the chemical businesses,
a working capital reduction project, a major sourcing initiative, aggressive
sales efforts, and other cost reduction projects. However, further deterioration
in economic conditions could negatively impact this outlook.
The lighting equipment segment reported revenue of $350.0 million for the second
quarter, representing a decrease of $4.1 million compared to the previous year.
The decrease in revenue resulted primarily from a softening in the
non-residential construction market. Operating profit for the second quarter
declined $.7 million to $28.3 million versus one year ago due to the decrease in
revenue and higher expenses associated with sales, marketing, and technology
initiatives. On a year-to-date basis, revenue increased $5.9 million from $721.7
million for the six months ended February 29, 2000, to $727.6 million for the
six months ended February 28, 2001 due to higher sales volumes in the first
quarter. Excluding a $1.0 million pretax charge during the first quarter of
fiscal 2000 for closing a manufacturing facility in California, year-to-date
operating profit decreased approximately $3.7 million to $61.6 million because
of increased spending for sales, marketing, and technology initiatives and costs
to establish a Texas distribution center.
Revenue in the chemical segment of $123.4 million and $249.7 million for the
quarter and six months ended February 28, 2001, respectively, increased $3.8
million and $10.2 million, respectively, compared to the same prior-year
periods. The increase was due to sales volume growth in North America primarily
in the retail channel. Operating profit of $10.4 million and $16.9 million for
the respective three and six months ended February 28, 2001 was, respectively,
$1.1 million and $3.2 million lower than last year's results primarily because
of costs incurred to integrate the chemical operations, increased energy costs,
and up-front costs associated with developing new sales representatives. The
chemical segment expects to realize the benefits of the integration in the
latter part of this fiscal year.
Textile rental segment revenue, representing all of the company's service
revenue, increased $2.2 million to $79.6 million during the second quarter and
increased $5.6 million to $160.7 million year-to-date primarily as a result of
volume and price increases and revenues associated with acquired businesses.
Operating profit for the quarter and year-to-date of $4.0 million and $7.7
million, respectively, decreased by $2.3 million and $3.7 million, respectively,
compared to a year ago. The decrease in operating margins primarily resulted
from higher natural gas prices, front-end selling and implementation costs
associated with several new large customer accounts, costs incurred to close a
facility in order to reduce the segment's cost structure and improve customer
service, increased retiree medical costs, and fewer gains associated with the
sale of assets.
Page 13
During the second quarter of 2001, management performed a review of the
liabilities recorded in connection with the textile rental segment's 1997
uniform plants divestiture. In 1997, the textile rental segment accrued for
items related to the sale of its uniform plants, including environmental
exposures. Based on the advice of the company's environmental experts, the
company decreased its estimates for certain environmental exposures and, as a
result, reduced the related liability and recorded a gain of approximately $2.0
million. The gain is included in "Gain on sale of business" in the accompanying
consolidated statements of income.
Second quarter revenue in the envelope segment was relatively flat compared to
last year's results. Revenue increased $4.0 million, or 3.7 percent, to $113.1
million for the six months ended February 28, 2001 compared to a year ago
primarily because of higher sales volumes to strategic partners during the first
quarter. Operating profit for the quarter ended February 28, 2001 declined $1.6
million to $.9 million principally as a result of power outages in California
and higher costs for raw materials. In addition to these factors, costs
associated with reorganizing the Miami, Florida manufacturing facility resulted
in a decrease in year-to-date operating profit from $5.5 million to $2.6
million.
Corporate expenses for the second quarter of $5.1 million were $.5 million lower
than the previous year. The favorable variance for the quarter was a result of
lower long-term incentive compensation expense, partially offset higher
insurance costs. For the six months ended February 28, 2001, corporate expenses
increased $3.0 million to $10.8 million. Higher year-to-date corporate expenses
were primarily caused by lower-than-normal long-term incentive compensation
expense in the prior-year first quarter and higher costs related to strategic
and operational initiatives. Additionally, the provision for income taxes
decreased to 37.0 percent of pretax income, compared to 38.8 percent in the
prior year, due mainly to the implementation of various tax-saving strategies.
Liquidity and Capital Resources
Operating Activities
Operations provided cash of $39.9 million during the six months ended February
28, 2001 compared with $20.9 million during the respective period of the prior
year. The change in operating cash flows was largely due to an increase in cash
provided by receivables and inventory compared to the same period a year ago,
primarily in the lighting equipment segment, partially offset by a decrease in
net income.
Investing Activities
Investing activities used cash of $29.4 million compared to $65.6 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 $37.0 million for the six-month period compared to
$47.4 million in the previous year. The lighting equipment segment invested
primarily in manufacturing upgrades and improvements and a new corporate
facility. 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. In the textile rental segment, capital investments were
primarily attributable to building improvements, equipment upgrades, and
information systems. In the same period one year ago, capital spending was
primarily attributable to the lighting equipment, envelope, and textile rental
segments. 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, manufacturing process improvements, and information
systems. The textile rental segment's expenditures related to replacing old
equipment and delivery truck purchases and 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 for financing activities totaled $6.3 million during the six months
ended February 28, 2001 compared to cash provided of $43.9 million one year ago,
primarily as a result of a reduction in cash provided by net borrowings. The
decrease in cash provided by net borrowings resulted largely from improved
operating cash flows and a decrease in capital expenditures and acquisition
spending. Year-to-date dividend payments totaled $27.1 million, or 66 cents per
share, compared with $26.4 million, or 65 cents per share, for the prior-year
period.
Page 14
Legal Proceedings
For information concerning legal proceedings, including trends and developments
involving legal proceedings, see footnote 8 to the financial statements included
in this filing.
Environmental Matters
For information concerning environmental matters, including trends and
developments involving environmental matters, see footnote 9 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 significant 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 $288.0 million at February 28,
2001. Based on outstanding borrowings at quarter-end, a 10 percent adverse
change in effective market interest rates at February 28, 2001 would result in
additional annual after-tax interest expense of approximately $1.1 million.
Although a fluctuation in interest rates would not affect interest expense or
cash flows related to the $360 million publicly traded notes, the company's
primary fixed-rate debt, a 10 percent increase in effective market interest
rates at February 28, 2001 would decrease the fair value of these notes to
approximately $344 million.
Foreign Exchange Rates-The majority of the company's revenue, expense, and
capital purchases are transacted in U.S. dollars. 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. The
company does not engage in speculative transactions, nor does the company hold
or issue financial instruments for trading purposes. To the extent possible, the
company mitigates its exposure to unfavorable foreign currency translation
adjustments on the balance sheet through the use of foreign-currency denominated
debt agreements.
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) expectations
regarding a continued economic slowdown and the company's ability to offset the
effect of the slowdown with operational initiatives including the consolidation
of the chemical businesses, a working capital reduction project, a major
sourcing initiative, aggressive sales efforts, and other cost reduction
projects; (b) anticipated benefits of the integration of the chemical operations
during the latter part of this fiscal year; and (c) expectations relating to
contingent liabilities involving environmental matters and legal proceedings. 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, sourcing, 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.
Page 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information concerning legal proceedings, including trends and developments
involving legal proceedings, see footnote 8 to the financial statements included
in this filing.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 17).
(b) There were no reports on Form 8-K for the three months ended February 28,
2001.
Page 16
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 April 13, 2001 /s/ KENYON MURPHY
KENYON MURPHY
SENIOR VICE PRESIDENT
AND GENERAL COUNSEL
DATE April 13, 2001 /s/ BROCK HATTOX
BROCK HATTOX
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Page 17
INDEX TO EXHIBITS
Page No.
EXHIBIT 10(iii)A (1) Nonemployee Director' Stock Option Agreement 18
Dated December 21, 2000 between National
Service Industries, Inc. and
(a) Leslie M. Baker, Jr.
(b) John L. Clendenin
(c) Thomas C. Gallagher
(d) Samuel A. Nunn
(e) Roy Richards, Jr.
(f) Ray M. Robinson
(g) Betty L. Siegel
(h) Kathy Brittain White
(i) Barrie A. Wigmore
(j) Neil Williams
(2) Amendment No. 1 to the National Service 23
Industries, Inc. Executives'Deferred
Compensation Plan (as Amended and Restated
October 4, 2000)Dated December 21, 2000
National Service Industries Inactive
Filed: 13 Apr 01, 12:00am