Page 1 of 40
Index to Exhibits on Page 15
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________.
Commission file number 1-3208.
NATIONAL SERVICE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-0364900
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1420 Peachtree Street, N.E., Atlanta, Georgia 30309-3002
(Address of principal executive offices) (Zip Code)
(404) 853-1000
(Registrant's telephone number, including area code)
None
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - $1.00 Par Value - 40,726,493 shares as of March 31, 2000
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
----------------
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS -
FEBRUARY 29, 2000 AND AUGUST 31, 1999 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS AND SIX MONTHS ENDED
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-9
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-12
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 12
PART II. OTHER INFORMATION
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
Page 3
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per-share data)
February 29, August 31,
2000 1999
----------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,483 $ 2,254
Receivables, less reserves for doubtful accounts of $7,275 at February 29,
2000 and $6,306 at August 31, 1999 377,441 382,188
Inventories, at the lower of cost (on a first-in, first-out basis) or market 243,276 218,191
Linens in service, net of amortization 56,988 58,875
Deferred income taxes 11,643 10,271
Prepayments 14,838 8,634
----------------- -------------
Total Current Assets 705,669 680,413
----------------- -------------
Property, Plant, and Equipment, at cost:
Land 28,193 25,764
Buildings and leasehold improvements 191,949 186,776
Machinery and equipment 614,720 587,719
----------------- -------------
Total Property, Plant, and Equipment 834,862 800,259
Less-Accumulated depreciation and amortization 438,117 417,946
----------------- -------------
Property, Plant, and Equipment-net 396,745 382,313
----------------- -------------
Other Assets:
Goodwill and other intangibles 545,376 551,995
Other 77,308 81,068
----------------- -------------
Total Other Assets 622,684 633,063
----------------- -------------
Total Assets $1,725,098 $1,695,789
================= =============
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Current maturities of long-term debt $ 324 $ 368
Commercial paper, short-term 172,050 102,539
Notes payable 11,474 11,471
Accounts payable 126,688 128,122
Accrued salaries, commissions, and bonuses 35,241 65,458
Current portion of self-insurance reserves 9,108 8,785
Accrued taxes payable - 12,203
Other accrued liabilities 75,539 94,939
----------------- -------------
Total Current Liabilities 430,424 423,885
----------------- -------------
Long-Term Debt, less current maturities 434,007 435,199
----------------- -------------
Deferred Income Taxes 95,517 95,557
----------------- -------------
Self-Insurance Reserves, less current portion 37,158 38,828
----------------- -------------
Other Long-Term Liabilities 85,892 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 30,451 29,055
Retained earnings 994,683 976,461
Accumulated other comprehensive income items (9,086) (9,326)
----------------- -------------
1,073,967 1,054,109
Less-Treasury stock, at cost (17,192,485 shares at February 29, 2000 and
17,449,752 shares at August 31, 1999) 431,867 438,235
----------------- -------------
Total Stockholders' Equity 642,100 615,874
----------------- -------------
Total Liabilities and Stockholders' Equity $1,725,098 $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 SIX MONTHS ENDED
------------------------------ -----------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
-------------- --------------- -------------- --------------
Sales and Service Revenues:
Net sales of products $ 527,994 $ 436,564 $ 1,070,288 $ 880,021
Service revenues 77,419 73,795 155,135 149,264
-------------- --------------- -------------- --------------
Total Revenues 605,413 510,359 1,225,423 1,029,285
-------------- --------------- -------------- --------------
Costs and Expenses:
Cost of products sold 319,985 263,394 647,137 525,095
Cost of services 44,805 45,608 89,939 89,345
Selling and administrative expenses 192,981 165,743 386,714 335,950
Interest expense, net 10,527 2,537 20,513 4,879
Gain on sale of businesses (170) (3,511) (356) (3,511)
Restructuring expense, asset impairments,
and other charges - (2,216) - (2,216)
Other expense (income), net 4,155 (623) 8,494 (614)
-------------- --------------- -------------- --------------
Total Costs and Expenses 572,283 470,932 1,152,441 948,928
-------------- --------------- -------------- --------------
Income before Provision for Income Taxes 33,130 39,427 72,982 80,357
Provision for Income Taxes 12,854 14,665 28,316 29,891
-------------- --------------- -------------- --------------
Net Income $ 20,276 $ 24,762 $ 44,666 $ 50,466
============== =============== ============== ==============
Per Share:
Basic Earnings per Share $ .50 $ .60 $ 1.10 $ 1.22
============== =============== ============== ==============
Basic Weighted Average Number
of Share Outstanding 40,711 41,046 40,641 41,219
============== =============== ============== ==============
Diluted Earnings per Share $ .50 $ .60 $ 1.10 $ 1.22
============== =============== ============== ==============
Diluted Weighted Average Number
of Shares Outstanding 40,737 41,227 40,721 41,412
============== =============== ============== ==============
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 29, February 28,
2000 1999
-------------- --------------
Cash Provided by (Used for) Operating Activities
Net income $ 44,666 $ 50,466
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization 42,493 28,988
Provision for losses on accounts receivable 2,047 2,055
Gain on the sale of property, plant, and equipment (1,024) (410)
Gain on the sale of business (356) (3,511)
Restructuring expense, asset impairments, and other charges - (2,216)
Change in noncurrent deferred income taxes 2,250 941
Change in assets and liabilities net of effect of acquisitions and divestitures-
Receivables 7,083 4,883
Inventories and linens in service, net (22,185) (8,990)
Deferred income taxes (817) 2,406
Prepayments and other (4,760) (2,473)
Accounts payable and accrued liabilities (45,856) (24,359)
Self-insurance reserves and other long-term liabilities (2,614) 4,623
-------------- -------------
Net Cash Provided by Operating Activities 20,927 52,403
-------------- -------------
Cash Provided by (Used for) Investing Activities
Purchases of property, plant, and equipment (47,443) (31,973)
Sale of property, plant, and equipment 2,094 931
Sale of businesses - 631
Acquisitions (21,533) (39,234)
Change in other assets 1,300 (384)
-------------- -------------
Net Cash Used for Investing Activities (65,582) (70,029)
-------------- -------------
Cash Provided by (Used for) Financing Activities
Proceeds from notes payable, net - 2,738
Issuances of commerical paper, net (less than 90 days) 51,045 -
Issuances of commerical paper (greater than 90 days) 140,551 -
Repayments of commerical paper (greater than 90 days) (122,750) -
Borrowings of long-term debt - 187,582
Repayments of long-term debt (568) (80,037)
Issuances (purchases) of treasury stock, net 2,098 (23,535)
Cash dividends paid (26,444) (25,952)
-------------- -------------
Net Cash Provided by Financing Activities 43,932 60,796
-------------- -------------
Effect of Exchange Rate Changes on Cash (48) 110
-------------- -------------
Net Change in Cash and Cash Equivalents (771) 43,280
Cash and Cash Equivalents at Beginning of Period 2,254 19,146
-------------- -------------
Cash and Cash Equivalents at End of Period $ 1,483 $ 62,426
============== =============
Supplemental Cash Flow Information:
Income taxes paid during the period $ 41,932 $ 25,941
Interest paid during the period 19,677 5,906
Noncash Investing and Financing Activities:
Treasury shares issued under long-term incentive plan $ 5,667 -
Noncash aspects of sale of businesses--
Receivables recorded - $ 396
Liabilities assumed - 326
Noncash aspects of acquisitions--
Liabilities assumed or incurred $ 1,219 $ 12,027
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 February 29, 2000, the consolidated results of
operations for the three and six months ended February 29, 2000 and February 28,
1999, and the consolidated cash flows for the six months ended February 29, 2000
and February 28, 1999. Certain reclassifications have been made to the prior
year's financial statements to conform to the current year's presentation.
Certain information and footnote 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 and six months ended February 29, 2000
are not necessarily indicative of the results to be expected for the full fiscal
year because the company's revenues and income are generally higher in the
second half of its fiscal year and because of the uncertainty of general
business conditions.
2. ACCOUNTING STANDARDS YET TO BE ADOPTED
Statement of Financial Accounting Standards No. 133, "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. The
company is in the process of evaluating the impact of adoption on the
Consolidated Balance Sheets and Consolidated Statements of Income.
3. BUSINESS SEGMENT INFORMATION
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
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 Including
Six Months Ended February 28, 1999 Revenues (Loss) Expense Acquisitions
-------------- -------------- -------------- --------------
Lighting Equipment $ 556,665 $ 53,313 $ 12,911 $ 39,741
Chemical 233,440 18,261 4,976 4,323
Textile Rental 149,264 15,934 7,265 9,296
Envelope 89,916 6,654 2,822 17,511
-------------- -------------- -------------- --------------
1,029,285 94,162 27,974 70,871
Corporate (8,926) 1,014 336
Interest expense, net (4,879)
-------------- -------------- -------------- --------------
Total $1,029,285 $ 80,357 $ 28,988 $ 71,207
============== ============== ============== ==============
Page 7
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
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
============== ============== ============== ==============
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Three Months Ended February 28, 1999 Revenues (Loss) Expense Acquisitions
-------------- -------------- -------------- --------------
Lighting Equipment $ 272,588 $ 23,834 $ 6,454 $ 6,430
Chemical 116,696 9,725 2,531 2,016
Textile Rental 73,795 9,215 3,632 3,547
Envelope 47,280 3,118 1,422 15,142
-------------- -------------- -------------- --------------
510,359 45,892 14,039 27,135
Corporate (3,928) 505 290
Interest expense, net (2,537)
-------------- -------------- -------------- --------------
Total $ 510,359 $ 39,427 $ 14,544 $ 27,425
============== ============== ============== ==============
Identifiable Assets
February 29, 2000 August 31, 1999
------------------- -------------------
Lighting Equipment $1,080,589 $1,073,936
Chemical 230,013 233,461
Textile Rental 214,517 203,509
Envelope 147,664 139,755
------------------- -------------------
Subtotal 1,672,783 1,650,661
Corporate 52,315 45,128
------------------- -------------------
Total $1,725,098 $1,695,789
=================== ===================
4. INVENTORIES
Major classes of inventory as of February 29, 2000 and August 31, 1999 were as
follows:
February 29, 2000 August 31, 1999
------------------- -------------------
Raw Materials and Supplies $ 87,275 $ 99,249
Work-in-Process 11,612 16,718
Finished Goods 144,389 102,224
------------------- -------------------
Total $ 243,276 $ 218,191
=================== ===================
5. 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 February 29 and February 28:
Page 8
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
--------------- -------------- --------------- ---------------
Basic earnings per common share:
Net income $ 20,276 $ 24,762 $ 44,666 $ 50,466
Basic weighted average shares outstanding (in thousands) 40,711 41,046 40,641 41,219
--------------- -------------- --------------- ---------------
Basic earnings per common share $ .50 $ .60 $ 1.10 $ 1.22
=============== ============== =============== ===============
Diluted earnings per common share:
Net income $ 20,276 $ 24,762 $ 44,666 $ 50,466
Basic weighted average shares outstanding (in thousands) 40,711 41,046 40,641 41,219
Add - Shares of common stock issuable upon assumed
exercise of dilutive stock options (in thousands) 26 181 80 193
--------------- -------------- --------------- ---------------
Diluted weighted average shares outstanding (in thousands) 40,737 41,227 40,721 41,412
--------------- -------------- --------------- ---------------
Diluted earnings per common share $ .50 $ .60 $ 1.10 $ 1.22
=============== ============== =============== ===============
6. 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 three and six months ended
February 29, 2000 and February 28, 1999 includes only foreign currency
translation adjustments. The calculation of comprehensive income is as follows:
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Net income $ 20,276 $ 24,762 $ 44,666 $ 50,466
Other comprehensive income (loss) 250 (367) 240 1,666
--------------- --------------- --------------- ---------------
Comprehensive Income $ 20,526 $ 24,395 $ 44,906 $ 52,132
=============== =============== =============== ===============
7. ENVIRONMENTAL MATTERS
The company's operations, as well as similar operations of other companies, are
subject to comprehensive laws and regulations relating to the generation,
storage, handling, transportation, and disposal of hazardous substances and
solid and hazardous wastes and to the remediation of contaminated sites. Permits
and environmental controls are required for certain of the company's operations
to limit air and water pollution, and these permits are subject to modification,
renewal, and revocation by issuing authorities. The company believes that it is
in substantial compliance with all material environmental laws, regulations, and
permits. On an ongoing basis, the company incurs capital and operating costs
relating to environmental compliance. Environmental laws and regulations have
generally become stricter in recent years, and the cost of responding to future
changes may be substantial.
The company's environmental reserves, which are included in current liabilities,
totaled $10,788 and $11,000 at February 29, 2000 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 as to the method of apportioning the liability can be given as to any
particular site.
Page 9
The company is currently a party to, or otherwise involved in, legal proceedings
in connection with state and federal Superfund sites, two of which are located
on property owned by the company. Except for the Crymes Landfill and M&J
Solvents matters in Georgia, the company believes its liability is de minimis at
each of the sites which it does not own where it has been named as a PRP. At the
Crymes Landfill and M&J Solvents sites in Georgia, since the matters are
currently in the investigative phase, the company does not know whether its
liability is de minimis but believes that its exposure at each of the sites is
not likely to result in a material adverse effect on the company due to its
limited involvement at the sites and the number of viable PRPs. For property
which the company owns on Seaboard Industrial Boulevard in Atlanta, Georgia, the
company has conducted an investigation on its and adjoining properties and
submitted a Compliance Status Report ("CSR") to the State of Georgia
Environmental Protection Division ("EPD") pursuant to the Georgia Hazardous Site
Response Act. The company is currently responding to EPD's comments regarding
the CSR. Until the CSR is completed, 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.
8. 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 10
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 February
29, 2000. Net working capital was $275.2 million, up from $256.5 million at
August 31, 1999, and the current ratio remained constant at 1.6. At February 29,
2000, the company's percentage of debt to total capitalization increased to 49.0
percent from 47.2 percent at August 31, 1999.
Results of Operations
National Service Industries generated revenue of $605.4 million and $1.2 billion
in the three and six months ended February 29, 2000, respectively, compared with
revenue of $510.4 million and $1.0 billion in the three and six months ended
February 28, 1999, respectively. 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. These acquisitions generated combined revenue of $70.3 million and $155.6
million for the three and six months ended February 29, 2000, respectively, that
was not included in prior-year results. Excluding acquisitions, revenue
increased in each of the company's core businesses.
Net income totaled $20.3 million and $44.7 million, or $.50 and $1.10 per
diluted share, for the three and six months ended February 29, 2000,
respectively, compared to net income of $24.8 million and $50.5 million, or $.60
and $1.22 per diluted share, for the three and six months ended February 28,
1999. Income from acquisitions not included in prior year results and income
from core business growth in the lighting equipment and chemical segments were
more than offset by increased interest expense on borrowings and amortization
expense related to recent acquisitions. Additionally, operating profit decreased
in the textile rental segment as the second quarter of fiscal 1999 included $3.5
million in unusual gains compared to $.7 million during the second quarter of
fiscal 2000. Current year to date net income also included a charge for closing
a manufacturing facility in the lighting equipment segment.
The lighting equipment segment reported revenue of $354.1 million and $721.7
million for the three and six months ended February 29, 2000, respectively,
representing an increase of 29.9 percent and 29.6 percent over the respective
periods of the prior year. These increases resulted primarily from the
acquisitions of Holophane and Peerless. Additionally, continued strength in the
non-residential construction market had a positive impact on lighting equipment
revenue resulting in growth in the segment's core business. Operating profit
increased 21.7 percent and 20.6 percent for the three and six months ended
February 29, 2000, respectively, driven by contributions from Holophane and
Peerless, growth in the segment's core business, and containment of fixed costs,
offset somewhat by a $1.0 million pretax charge during the first quarter of
fiscal 2000 for closing a manufacturing facility in California.
Chemical segment revenue increased 2.5 percent to $119.6 million for the second
quarter and 2.6 percent to $239.5 million for the six months due to continued
growth in the retail channel and higher revenue from the institutional and
industrial channels, resulting primarily from an increase in the segment's core
business. Operating profit of $11.5 million and $20.1 million during the three
and six months ended February 29, 2000, respectively, was higher than last
year's results primarily due to a reduction in general and administrative
expenses, fluctuations in selling expenses, and an increase in revenue.
Textile rental segment revenue, representing all of the company's service
revenues, increased 4.9 percent to $77.4 million for the quarter and 3.9 percent
to $155.1 million for the six months. The current year revenue increase was
primarily related to acquired revenue and price increases in the segment's base
business, offset somewhat by the negative impact of ice storms in the Southeast
during the second quarter. Operating profit decreased to $6.3 million from last
year's $9.2 million for the second quarter and to $11.4 million from $15.9
million for the first half of the year primarily as a result of $3.5 million of
unusual items being included in the prior year compared to a $.7 million gain on
the sale of property in the current quarter. Operating profit for the three and
six months ended February 28, 1999 included $5.7 million of unusual gains
related to the 1997 uniform plants divestiture and restructuring activities,
offset by a $2.2 million write-off for merchandise inventory used by
unprofitable accounts. Excluding unusual items in both years, operating margins
for the quarter remained flat. However, year to date margins declined as higher
fuel costs, the impact of adverse weather, and contract wage increases for
production employees more than offset the increase in revenue.
Envelope segment revenue increased 14.8 percent to $54.3 million and 21.3
percent to $109.1 million for the three and six months ended February 29, 2000,
respectively, while operating profit decreased 21.3 percent to $2.5 million and
17.0 percent to $5.5 million for the three and six months ended February 29,
2000, respectively.
Page 11
Revenue increased due to additional sales resulting from the Gilmore Envelope
acquisition and continued volume growth in the base business, offset somewhat by
the prior year divestiture of Techno-Aide/Stumb Metal Products in June 1999.
Operating margin percentages decreased during the three and six month periods as
a result of lower average margins from prior year acquisitions, higher paper
prices which were passed on to customers, pre-production costs associated with
newly acquired manufacturing equipment, and depreciation from a new enterprise
resource planning system.
Corporate expenses increased to $5.6 million during the second quarter primarily
due to costs related to strategic initiatives. For the six months, corporate
expenses decreased to $7.9 million as costs related to strategic initiatives
were offset by lower incentive compensation expense. Net interest expense
increased $8.0 million to $10.5 million and $15.6 million to $20.5 million for
the three and six months ended February 29, 2000, respectively, as a result of
increased borrowings to finance recent 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 recorded in the
Holophane acquisition, which is not deductible for tax purposes.
Liquidity and Capital Resources
Operating Activities
Operations provided cash of $20.9 million during the first half of fiscal 2000
compared with $52.4 million during the first six months of fiscal 1999. The 2000
cash flow was lower primarily because of a decrease in current liabilities
related to incentive compensation plan payments, an increase in income tax
payments, and a decrease in accounts payable. Additionally, increases in
inventory, offset somewhat by a decrease in accounts receivable primarily in the
lighting equipment segment, contributed to the decrease in operating cash flow
compared to the prior year.
Investing Activities
Investing activities used cash of $65.6 million for the six months ended
February 29, 2000 compared with cash used of $70.0 million in the six months
ended February 28, 1999. The change in investing cash flows relates primarily to
a decrease in acquisition spending offset by an increase in purchases of
property, plant, and equipment. Acquisition spending during the first six months
of fiscal 2000 was $21.5 million and 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 $14.5
million was paid during the first six months of the current year, which was
primarily for the cash-out of remaining Holophane shares. Other acquisition
spending during the first half of fiscal 2000 related to several minor purchases
in the textile rental segment. Prior year acquisition spending of $39.2 million
was primarily due to the lighting equipment segment's purchase of certain assets
of GTY Industries (d/b/a "Hydrel"), a manufacturer of architectural-grade
lighting fixtures for landscape, in-grade, and underwater applications, and the
envelope segment's purchase of substantially all of Gilmore Envelope, an
envelope manufacturer headquartered in Los Angeles, California.
Capital expenditures were $47.4 million in the first six months of fiscal 2000,
compared with $32.0 million in the first six months of fiscal 1999. Capital
spending during the first half 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 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. The lighting equipment segment's capital expenditures in the
prior-year first half related to the purchase of land and buildings for a new
plant, manufacturing improvements and upgrades for capacity expansion, and
implementation of new technology. 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 manufacturing process improvements, information systems, facility
expansion, and new folding capacity. Management believes current cash balances,
anticipated cash flows from operations, 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 decreased $16.9 million to $43.9 million
in the first half of fiscal 2000 primarily as a result of a decrease in cash
provided by net borrowings, offset by the suspension of the company's 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. For the six months ended February 29,
2000, net borrowings, primarily under the company's commercial paper program,
provided cash of $68.3 million compared with cash provided by net borrowings of
$110.3 million during the same period of the prior year. Current year borrowings
were used for general corporate purposes, including working capital
requirements, capital expenditures, and acquisitions. At February 29, 2000 and
August 31, 1999,
Page 12
approximately $250 million in commercial paper was classified as long-term as
the company has the ability to refinance the commercial paper on a long-term
basis. Funds borrowed during the first half of fiscal 1999 were used primarily
to finance acquisitions, share repurchases, and internal growth. Dividend
payments totaled $26.4 million, or 65 cents per share, compared with $26.0
million, or 63 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 7: Environmental Matters for a discussion of the company's
environmental issues.
Impact of the Year 2000 Issue
The company did not experience, nor does it expect to experience, significant
disruptions to its mission critical systems related to the Year 2000 Issue. As
of April 14, 2000, all of the company's mission critical systems have been
tested and are fully operational. However, no assurance can be given that the
cost of remediating any problems associated with the Year 2000 Issue will not
materially affect the company's business.
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 $455.4 million at February 29,
2000. Based on outstanding borrowings at quarter end, a 10 percent adverse
change in effective market interest rates at February 29, 2000 would result in
additional annual after-tax interest expense of approximately $1.7 million.
Although a fluctuation in interest rates would not affect interest expense or
cash flows related to the $160 million publicly traded notes, the company's
primary fixed-rate debt, a 10 percent increase in effective market interest
rates at February 29, 2000 would decrease the fair value of these notes to
approximately $134.4 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 half of fiscal 2000, primarily in the lighting equipment and
chemical segments, represented approximately 9.5 percent of sales and service
revenues, 4.5 percent of operating profit (loss), and 8.4 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. A variety of risks and uncertainties 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 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 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 15).
(b) There were no reports on Form 8-K for the three months ended February 29,
2000.
Page 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL SERVICE INDUSTRIES, INC.
REGISTRANT
DATE April 14, 2000 /s/ KEN MURPHY
KEN MURPHY
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
DATE April 14, 2000 /s/ BROCK HATTOX
BROCK HATTOX
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Page 15
INDEX TO EXHIBITS
Page No.
EXHIBIT 10(iii)A (1) Nonemployee Directors' Stock Option Agreement Dated January 5, 2000 16
between National Service Industries, Inc. and
(a) Leslie M. Baker, Jr.
(b) John L. Clendenin
(c) Thomas C. Gallagher
(d) Bernard Marcus
(e) Samuel A. Nunn
(f) Ray M. Robinson
(g) Herman J. Russell
(h) Betty L. Siegel
(i) Kathy Brittain White
(j) Barrie A. Wigmore
(k) Neil Williams
(2) 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 filed with
the Commission on
November 22, 1999, which
is incorporated herein
by reference.
(3) Nonqualified Stock Option Agreement (Surrendered Aspiration Award) 21
between National Service Industries, Inc. and:
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(d) Stewart A. Searle III
(4) Incentive Stock Option Agreement for Executive Officers Effective 27
Beginning January 5, 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
(5) Nonqualified Stock Option Agreement for Executive Officers Effective 34
Beginning January 5, 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
EXHIBIT 27 Financial Data Schedule 40