Page 1 of 50
Index to Exhibits on Page 14
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, 1999.
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 - 40,699,192 shares as of December 31, 1999.
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
----------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS -
NOVEMBER 30, 1999 AND AUGUST 31, 1999 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS ENDED NOVEMBER 30, 1999 AND 1998 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
THREE MONTHS ENDED NOVEMBER 30, 1999 AND 1998 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9-11
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 11
MARKET RISK
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
Page 3
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per-share data)
November 30, August 31,
1999 1999
----------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,469 $ 2,254
Receivables, less reserves for doubtful accounts of $7,566 at November 30,
1999 and $6,306 at August 31, 1999 356,915 382,188
Inventories, at the lower of cost (on a first-in, first-out basis) or market 234,909 218,191
Linens in service, net of amortization 57,715 58,875
Deferred income taxes 9,073 10,271
Prepayments 12,648 8,634
----------------- -------------
Total Current Assets 672,729 680,413
----------------- -------------
Property, Plant, and Equipment, at cost:
Land 27,227 25,764
Buildings and leasehold improvements 187,602 186,776
Machinery and equipment 603,958 587,719
----------------- -------------
Total Property, Plant, and Equipment 818,787 800,259
Less-Accumulated depreciation and amortization 431,893 417,946
----------------- -------------
Property, Plant, and Equipment-net 386,894 382,313
----------------- -------------
Other Assets:
Goodwill and other intangibles 546,537 551,995
Other 79,064 81,068
----------------- -------------
Total Other Assets 625,601 633,063
----------------- -------------
Total Assets $1,685,224 $1,695,789
================= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 364 $ 368
Commercial paper, short-term 120,474 102,539
Notes payable 11,562 11,471
Accounts payable 119,207 128,122
Accrued salaries, commissions, and bonuses 37,372 65,458
Current portion of self-insurance reserves 8,637 8,785
Accrued taxes payable 13,807 12,203
Other accrued liabilities 85,642 94,939
----------------- -------------
Total Current Liabilities 397,065 423,885
----------------- -------------
Long-Term Debt, less current maturities 432,852 435,199
----------------- -------------
Deferred Income Taxes 95,526 95,557
----------------- -------------
Self-Insurance Reserves, less current portion 38,710 38,828
----------------- -------------
Other Long-Term Liabilities 86,965 86,446
----------------- -------------
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 30,427 29,055
Retained earnings 987,837 976,461
Accumulated other comprehensive income items (9,336) (9,326)
----------------- -------------
1,066,847 1,054,109
Less-Treasury stock, at cost (17,228,036 shares at November 30, 1999 and
17,449,752 shares at August 31, 1999) 432,741 438,235
----------------- -------------
Total Stockholders' Equity 634,106 615,874
----------------- -------------
Total Liabilities and Stockholders' Equity $1,685,224 $1,695,789
================= =============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
Page 4
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per-share data)
THREE MONTHS ENDED
NOVEMBER 30
-----------------------------
1999 1998
------------- -------------
Sales and Service Revenues:
Net sales of products $ 542,294 $ 443,457
Service revenues 77,716 75,469
------------- -------------
Total Revenues 620,010 518,926
------------- -------------
Costs and Expenses:
Cost of products sold 327,152 261,701
Cost of services 45,134 43,737
Selling and administrative expenses 193,733 170,207
Interest expense, net 9,986 2,342
Other expense, net 4,153 9
------------- -------------
Total Costs and Expenses 580,158 477,996
------------- -------------
Income before Provision for Income Taxes 39,852 40,930
Provision for Income Taxes 15,462 15,226
------------- -------------
Net Income $ 24,390 $ 25,704
============= =============
Per Share:
Basic earnings per share $ .60 $ .62
============= =============
Basic Weighted Average Number
of Shares Outstanding 40,584 41,407
============= =============
Diluted earnings per share $ .60 $ .62
============= =============
Diluted Weighted Average
Number of Shares Outstanding 40,686 41,614
============= =============
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
---------------------------
1999 1998
------------- -------------
Cash Provided by (Used for) Operating Activities
Net income $ 24,390 $ 25,704
Adjustments to reconcile net income to net cash provided by (used for)operating activities:
Depreciation and amortization 21,210 14,444
Provision for losses on accounts receivable 1,315 1,430
Gain on the sale of property, plant, and equipment (434) (60)
Gain on the sale of business (186) -
Change in noncurrent deferred income taxes 2,614 (853)
Change in assets and liabilities net of effect of acquisitions and divestitures-
Receivables 27,853 3,445
Inventories and linens in service, net (15,264) (15,768)
Deferred income taxes 1,754 2,681
Prepayments and other (3,700) (5,420)
Accounts payable and accrued liabilities (30,270) 19,153
Self-insurance reserves and other long-term liabilities 426 1,234
------------- ---------------
Net Cash Provided by Operating Activities 29,708 45,990
------------- ---------------
Cash Provided by (Used for) Investing Activities
Purchases of property, plant, and equipment (21,792) (15,284)
Sale of property, plant, and equipment 783 362
Acquisitions (14,030) (28,498)
Change in other assets 693 2,019
------------- ---------------
Net Cash Used for Investing Activities (34,346) (41,401)
------------- ---------------
Cash Provided by (Used for) Financing Activities
Proceeds from notes payable, net 91 374
Repayments of commerical paper, net (less than 90 days) (73,931) -
Proceeds from issuances of commerical paper (greater than 90 days) 89,801 -
Borrowings of long-term debt - 28,003
Repayments of long-term debt (286) (19)
Issuances (purchases) of treasury stock, net 1,199 (7,270)
Cash dividends paid (13,014) (12,853)
------------- ---------------
Net Cash Provided by Financing Activities 3,860 8,235
------------- ---------------
Effect of Exchange Rate Changes on Cash (7) 71
------------- ---------------
Net Change in Cash and Cash Equivalents (785) 12,895
Cash and Cash Equivalents at Beginning of Period 2,254 19,146
------------- ---------------
Cash and Cash Equivalents at End of Period $ 1,469 $ 32,041
============= ===============
Supplemental Cash Flow Information:
Income taxes paid (received) during the period $ 9,207 $ (419)
Interest paid during the period 5,511 2,742
Noncash Investing and Financing Activities:
Treasury shares issued under long-term incentive plan $ 5,667 $ -
Noncash aspects of acquisitions--
Liabilities assumed or incurred $ 24 $ 5,418
Treasury stock issued - 845
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)
(In thousands, except share and per-share data)
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, 1999 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 November 30, 1999, the consolidated results of
operations for the three months ended November 30, 1999 and 1998, and the
consolidated cash flows for the three months ended November 30, 1999 and 1998.
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, 1999.
The results of operations for the three months ended November 30, 1999 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. BUSINESS SEGMENT INFORMATION
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Three Months Ended November 30, 1999 Revenues (Loss) Expense Acquisitions
-------------- ------------- ----------------- ----------------
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
============= ============= ================= ================
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Three Months Ended November 30, 1998 Revenues (Loss) Expense Acquisitions
-------------- ------------- ----------------- ----------------
Lighting Equipment $284,077 $ 29,479 $ 6,458 $ 33,311
Chemical 116,744 8,536 2,445 2,307
Textile Rental 75,469 6,719 3,632 5,748
Envelope 42,636 3,536 1,400 2,369
-------------- ------------- ----------------- ----------------
518,926 48,270 13,935 43,735
Corporate (4,998) 509 47
Interest expense, net (2,342)
-------------- ------------- ----------------- ----------------
Total $518,926 $ 40,930 $ 14,444 $ 43,782
============== ============= ================= ================
Identifiable Assets
------------------------ -------------------
November 30, 1999 August 31, 1999
------------------------ -------------------
Lighting Equipment $1,061,228 $1,073,936
Chemical 229,998 233,461
Textile Rental 205,238 203,509
Envelope 141,994 139,755
------------------------ -------------------
Subtotal 1,638,458 1,650,661
Corporate 46,766 45,128
------------------------ -------------------
Total $1,685,224 $1,695,789
======================== ===================
Page 7
3. INVENTORIES
Major classes of inventory as of November 30, 1999 and August 31, 1999 were as
follows:
November 30, August 31,
1999 1999
------------ -------------
Raw Materials and Supplies $ 97,176 $ 99,249
Work-in-Process 18,709 16,718
Finished Goods 119,024 102,224
------------ -------------
Total $ 234,909 $ 218,191
============ =============
4. EARNINGS PER SHARE
The company accounts for earnings per share using Statement of Financial
Accounting Standards ("SFAS") 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 could 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
-------------------------------
1999 1998
------------- ------------
Basic earnings per common share:
Net income $ 24,390 $ 25,704
Basic weighted average shares outstanding (in thousands) 40,584 41,407
------------- ------------
Basic earnings per common share $ .60 $ .62
============= ============
Diluted earnings per common share:
Net income $ 24,390 $ 25,704
Basic weighted average shares outstanding (in thousands) 40,584 41,407
Add - Shares of common stock issuable upon
assumed exercise of dilutive stock options (in thousands) 102 207
------------- ------------
Diluted weighted average shares outstanding (in thousands) 40,686 41,614
------------- ------------
Diluted earnings per common share $ .60 $ .62
============= ============
5. COMPREHENSIVE INCOME
The company adopted SFAS 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 quarters ended November 30,
1999 and 1998 includes only foreign currency translation adjustments. The
calculation of comprehensive income is as follows:
Three Months Ended
November 30
----------------------------
1999 1998
----------- -----------
Net income $ 24,390 $ 25,704
Other comprehensive income (loss) (10) 2,033
----------- -----------
Comprehensive Income $ 24,380 $ 27,737
=========== ===========
6. 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.
Page 8
The company's environmental reserves, which are included in current liabilities,
totaled $10,900 and $11,000 at November 30, 1999 and August 31, 1999,
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 can be given as to any particular site.
The company is currently a party to, or otherwise involved in, legal proceedings
in connection with several 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. Until EPD's review and approval of the CSR are completed, which
are not subject to a deadline, 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 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.
The company is currently evaluating emissions of volatile organic compounds from
its manufacturing operations in the Atlanta, Georgia area to determine whether
it will need to install pollution control equipment or modify its operations to
comply with federal and state air pollution regulations. Until the current
evaluations are completed, the company is not able to quantify the possible cost
of compliance. However, based upon currently available information, the company
does not expect that any material expenditures will be required to achieve
compliance.
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 threatened 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.
7. INCREASE IN SHARES AUTHORIZED UNDER LONG-TERM ACHIEVEMENT INCENTIVE PLAN
On January 5, 2000, the stockholders approved an amendment to the National
Service Industries, Inc. Long-Term Achievement Incentive Plan for the benefit of
officers and other key employees of the company. In addition to other
modifications, the amendment increases the number of shares authorized for
issuance under the plan from 1,750,000 to 5,750,000.
Page 9
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 continued to be in solid financial condition at November
30, 1999. Net working capital was $275.7 million, up from $256.5 million at
August 31, 1999, and the current ratio was 1.7 compared with 1.6 at August 31,
1999. At November 30, 1999, the company's percentage of debt to total
capitalization remained constant at 47.1 percent.
Results of Operations
National Service Industries generated quarterly revenue of $620.0 million in the
first quarter of fiscal 2000 compared with quarterly revenue of $518.9 million
in the first quarter of fiscal 1999. The increase was primarily due to acquired
revenue in the lighting equipment and envelope segments. The lighting equipment
segment purchased Holophane Corporation ("Holophane") in July 1999 and certain
assets of Peerless Corporation ("Peerless") in April 1999. In addition, the
envelope segment purchased substantially all of Gilmore Envelope in February
1999. For the quarter, these acquisitions generated a combined $85.0 million of
revenue that was not included in prior year results. Excluding acquisitions,
revenue increases related to growth in the company's core businesses primarily
in the lighting equipment, chemical, and envelope segments.
First quarter net income decreased by 5.1 percent, or $1.3 million, from $25.7
million, or $.62 per basic and diluted share, for the quarter ended November 30,
1998 to $24.4 million, or $.60 per basic and diluted share. Income from
acquisitions not included in prior year results and a decrease in corporate
expenses positively impacted earnings during the first quarter. However, these
items were more than offset by increased interest expense on borrowings and
amortization expense related to recent acquisitions, a charge for closing a
manufacturing facility in the lighting equipment segment, and operating profit
decreases in the textile rental and envelope segments.
The lighting equipment segment reported record first quarter revenue of $367.6
million, an increase of 29.4 percent over last year's first quarter revenue of
$284.1 million. This increase resulted primarily from the acquisitions of
Holophane and Peerless. Additionally, continued strength in the non-residential
construction market had a positive impact on first quarter lighting equipment
revenue resulting in growth in the segment's core business. Operating profit
increased 19.7 percent to $35.3 million driven by contributions from Holophane
and Peerless, offset somewhat by a $1.0 million pretax charge for closing a
manufacturing facility in California.
First quarter chemical segment revenue of $119.9 million increased 2.7 percent
from last year's $116.7 million, primarily due to higher revenue from
international locations and continued growth in the retail channel. Operating
profit increased 1.0 percent to $8.6 million primarily as a result of the
increase in revenue.
Textile rental segment revenue, representing all of the company's service
revenues, increased 3.0 percent to $77.7 million. The current year increase was
primarily related to acquired revenue and increased revenue in the segment's
base business resulting from price increases and improved customer retention.
Operating profit decreased $1.6 million from $6.7 million in the first quarter
of fiscal 1999 to $5.1 million in the first three months of fiscal 2000. Higher
delivery costs, the negative impact of two hurricanes, and contract wage
increases for production employees more than offset the increase in revenue.
Excluding unusual items in both periods, operating profit decreased 8.3 percent.
During the quarter, fiscal 1997 restructuring reserves were reduced by payments
of $.2 million and $.1 million related to severance and union related costs and
exit costs, respectively.
Envelope segment revenue increased 28.5 percent to $54.8 million, while
operating profit decreased 13.2 percent to $3.1 million from the prior year's
$3.5 million. Revenue increased due to additional sales resulting from the
Gilmore Envelope acquisition and continued volume growth in the base business.
Operating margins decreased from 8.3 percent during the first quarter of fiscal
1999 to 5.6 percent in the first quarter of fiscal 2000 as a result of lower
average margins from prior year acquisitions, higher paper prices which were
passed on to customers, and depreciation from a new enterprise resource planning
system.
Corporate expenses decreased to $2.3 million primarily due to lower incentive
compensation expense. Net interest expense increased $7.6 million to $10.0
million in the quarter ended November 30, 1999 as a result of increased
borrowings to finance acquisitions. Additionally, the provision for income taxes
was 38.8 percent of pretax income for the quarter compared with 37.2 percent in
the prior-year period primarily due to goodwill acquired in the Holophane
purchase, which is not deductible for tax purposes.
Page 10
Liquidity and Capital Resources
Operating Activities
Operations provided cash of $29.7 million during the first quarter of fiscal
2000 compared with $46.0 million during the first quarter of fiscal 1999. The
2000 cash flow was lower primarily because of a decrease in current liabilities
related to incentive plan payments and decreases in accounts payable. These
payments were offset somewhat by a decrease in accounts receivable, primarily in
the lighting equipment segment.
Investing Activities
Investing activities used cash of $34.3 million for the three months ended
November 30, 1999 compared with cash used of $41.4 million in the three months
ended November 30, 1998. The change in investing cash flows relates primarily to
a decrease in acquisition spending from $28.5 million during the prior-year
first quarter to $14.0 million during the first three months of fiscal 2000.
Acquisition spending during the first quarter of fiscal 2000 related primarily
to Holophane. The company purchased Holophane in July 1999 for approximately
$470.8 million, including approximately $20 million for the payoff of
Holophane's existing debt. Of the total purchase price, $454.6 million was paid
during fiscal 1999 and $13.2 million was paid during the first quarter of the
current year, which was primarily for the purchase of the remaining tendered
Holophane shares. Other acquisition spending during the first quarter related to
several minor purchases in the textile rental segment. Prior year acquisition
spending of $28.5 million was primarily due to the lighting equipment segment's
purchase of certain assets of GTY Industries, a manufacturer of
architectural-grade light fixtures for landscape, in-grade, and underwater
applications.
Capital expenditures were $21.8 million in the first three months of fiscal
2000, compared with $15.3 million in the first three months of fiscal 1999.
Capital spending during the first quarter of fiscal 2000 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.
The textile rental segment's expenditures related to replacing old equipment and
delivery truck refurbishments. The lighting equipment segment's capital
expenditures in the prior-year first quarter related to upgrading of old tooling
equipment as well as purchases of new tooling equipment for capacity expansion.
Textile rental segment expenditures were for implementation of new technology,
production enhancements, and delivery truck purchases and refurbishments. The
envelope segment's expenditures related primarily to new folding capacity,
manufacturing process improvements, and information systems. Management believes
current cash balances, anticipated cash flows from operations, and available
funds from the commercial paper program or the committed credit facilities, and
the complementary 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 provided by financing activities was $3.9 million in the first quarter of
fiscal 2000 compared with cash provided of $8.2 million in the first quarter of
fiscal 1999. For the quarter ended November 30, 1999, the company increased net
borrowings by $15.7 million primarily under its commercial paper program,
compared with additional net borrowings of $28.4 million in the first quarter of
fiscal 1999. Current year borrowings were used for general corporate purposes,
including working capital requirements, capital expenditures, and financing
acquisitions. At November 30, 1999 and August 31, 1999, approximately $250
million in commercial paper was classified as long-term as the company has the
ability and the intent to refinance the commercial paper on a long-term basis
when market conditions are appropriate. Funds borrowed during the first quarter
of fiscal 1999 were used primarily to finance acquisitions, share repurchases,
and internal growth. Net cash received in connection with issuances of treasury
stock provided cash of $1.2 million in the current quarter while net purchases
of treasury stock used cash of $7.3 million in the same quarter of the prior
year. The company suspended its share repurchase program in the third quarter of
fiscal 1999. Although the company has a standing annual authorization to
repurchase 2.0 million shares plus the number of new shares issued in any one
year, the company does not plan to purchase additional shares until its debt to
capitalization is within the company's stated objective of 30 to 40 percent.
Dividend payments totaled $13.0 million, or 32 cents per share, compared with
$12.9 million, or 31 cents per share, for the prior-year period. On January 5,
2000, the regular quarterly dividend rate was increased 3.1 percent to 33 cents
per share, or an annual calendar year rate of $1.32 per share.
Environmental Matters
See Note 6: Environmental Matters for a discussion of the company's
environmental issues.
Page 11
Impact of the Year 2000 Issue
The "Year 2000 Issue" resulted from the use of two digits rather than four
digits to define the applicable year in certain computer programs. With the
millennium, any of the company's computer programs that had two-digit
date-sensitive software could have interpreted a date of "00" as the year 1900
rather than the year 2000. This could have resulted in a system failure or
miscalculation causing disruption of the operation of computer hardware and
software, as well as intelligent manufacturing equipment and processes, and
telephony.
Management addressed the Year 2000 Issue in four phases: awareness, assessment,
action plan, and plan implementation. All phases of the plan were complete and
all mission critical systems were in compliance prior to the end of calendar
year 1999. The total cost incurred in connection with the Year 2000 Issue was
approximately $6 million and was funded through operating cash flows.
Approximately one-third of the total cost reflected the redeployment of existing
internal information technology resources and was not incremental to the
company.
As of January 14, 2000, all of the company's mission critical systems have been
tested and are fully operational. The company did not experience, nor does it
expect to experience, significant disruptions to its mission critical systems
related to the Year 2000 Issue. There can be no assurance, however, that such
exposures or the costs of remediating any problems associated therewith will not
materially affect the company's future business, financial condition, or results
of operations.
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 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 $402.8 million at November 30,
1999. Based on outstanding borrowings at quarter end, a 10 percent adverse
change in effective market interest rates at November 30, 1999 would result in
additional annual after-tax interest expense of approximately $1.6 million. To
address this risk, the company intends to refinance approximately $250 million
of the outstanding commercial paper on a long-term, fixed-rate basis. Although a
fluctuation in interest rates would not affect interest expense or cash flows
related to the company's $160 million publicly traded notes, a 10 percent
adverse change in effective market interest rates at November 30, 1999 would
decrease the fair value of these notes to approximately $138.0 million.
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 2000, primarily in the lighting equipment and
chemical segments, represented approximately 9.8 percent of sales and service
revenues, 7.1 percent of operating profit (loss), and 8.6 percent of
identifiable 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.
Cautionary Statement Regarding Forward-Looking Information
From time to time, the company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
capital expenditures, technological developments, new products, research and
development activities, and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements.
Statements herein which may be considered forward-looking include: (a)
statements made regarding the company's current expectations or beliefs with
respect to the outcome and impact on the company's business, financial
condition, or results of operations of the Year 2000 Issue and environmental
issues and (b) statements made regarding management's intentions or expectations
with regard to future earnings, projected capital expenditures, future cash
flows, debt refinancing, share repurchases, and debt to capitalization
objectives. The company notes that a variety of factors could cause the
company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, and results of the company's business
include without limitation the following: (a) the uncertainty of general
business and economic conditions, including the potential for a slowdown in
non-residential construction awards, fluctuations in commodity and raw material
prices, market demand for public debt, interest rate changes, and foreign
currency fluctuations; and (b) the ability to achieve financing objectives and
strategic initiatives, including but not limited to the achievement of synergies
related to acquisitions and the achievement of sales growth across the business
segments through a combination of increased pricing, enhanced sales force, new
products, improved customer service, and acquisitions.
Page 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held January 5, 2000, all nominees for
director were elected to the board without opposition and Arthur Andersen LLP
was appointed as independent auditor for the current fiscal year. In addition,
stockholders voted on the following:
Votes Cast
----------------------------------------------------------------
Affirmative Negative Abstentions
Proposal to approve the amended and restated
National Service Industries, Inc. Long-Term
Achievement Incentive Plan 23,995,265 3,988,112 989,912
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 14).
(b) Form 8-K/A was filed on October 12, 1999 with regard to the acquisition of
Holophane Corporation.
Page 13
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 14, 2000 /s/ DAVID LEVY
DAVID LEVY
EXECUTIVE VICE PRESIDENT, ADMINISTRATION
AND COUNSEL
DATE January 14, 2000 /s/ BROCK HATTOX
BROCK HATTOX
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Page 14
INDEX TO EXHIBITS
Page No.
EXHIBIT 3 (a) By-Laws as Amended and Restated January 5, 2000 15
EXHIBIT 10(iii)A (1) Second Amendment to the National Service Industries, Inc. 1992 32
Nonemployee Directors' Stock Option Plan, Dated January 5, 2000
(2) Second Amendment of Aspiration Achievement Incentive Award Agreement 33
for the Performance Cycle Ended August 31, 1999 between National
Service Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(d) Stewart A. Searle III
(3) Amendment of the Aspiration Achievement Incentive Award Agreement and 34
Election Form for the Performance Cycle Ending August 31, 2000 between
National Service Industries, Inc. and
(a) James S. Balloun
(b) George H. Gilmore, Jr.
(c) Brock A. Hattox
(d) David Levy
(e) Stewart A. Searle III
(4) Amendment of the Aspiration Achievement Incentive Award Agreement for 39
the Performance Cycle Ending August 31, 2001 between National Service
Industries, Inc. and
(a) James S. Balloun
(b) George H. Gilmore, Jr.
(c) Brock A. Hattox
(d) David Levy
(e) Stewart A. Searle III
[a confidential portion of which has been omitted and filed separately
with the Securities and Exchange Commission]
(5) National Service Industries, Inc. Long-Term Achievement Incentive Plan Reference is made to
as Amended and Restated, Effective as of January 5, 2000 Exhibit A of registrant's
Schedule 14A as filed with
the Commission on
November 22, 1999, which
is incorporated herein by
reference.
EXHIBIT 27 Financial Data Schedule 50