Page 1 of 53
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 May 31, 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) (ZipCode)
(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 - 40,778,623 shares as of June 30, 2000
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
-----------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS -
MAY 31, 2000 AND AUGUST 31, 1999 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS AND NINE MONTHS ENDED MAY 31, 2000 AND 1999
4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
NINE MONTHS ENDED MAY 31, 2000 AND 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)
May 31, August 31,
2000 1999
------------------ ---------------
Assets
Current Assets:
Cash and cash equivalents $ 1,489 $ 2,254
Receivables, less reserves for doubtful accounts of $7,867 at May 31,
2000 and $6,306 at August 31, 1999 385,139 382,188
Inventories, at the lower of cost (on a first-in, first-out basis) or market 264,417 218,191
Linens in service, net of amortization 57,130 58,875
Deferred income taxes 8,095 10,271
Prepayments 12,961 8,634
------------------ ---------------
Total Current Assets 729,231 680,413
------------------ ---------------
Property, Plant, and Equipment, at cost:
Land 28,216 25,764
Buildings and leasehold improvements 202,032 186,776
Machinery and equipment 632,337 587,719
------------------ ---------------
Total Property, Plant, and Equipment 862,585 800,259
Less-Accumulated depreciation and amortization 450,876 417,946
------------------ ---------------
Property, Plant, and Equipment-net 411,709 382,313
------------------ ---------------
Other Assets:
Goodwill and other intangibles 539,932 551,995
Other 81,924 81,068
------------------ ---------------
Total Other Assets 621,856 633,063
------------------ ---------------
Total Assets $1,762,796 $1,695,789
================== ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 262 $ 368
Commercial paper, short-term 200,178 102,539
Notes payable 11,242 11,471
Accounts payable 119,428 128,122
Accrued salaries, commissions, and bonuses 48,277 65,458
Current portion of self-insurance reserves 7,956 8,785
Accrued taxes payable - 12,203
Other accrued liabilities 80,919 94,939
------------------ ---------------
Total Current Liabilities 468,262 423,885
------------------ ---------------
Long-Term Debt, less current maturities 433,778 435,199
------------------ ---------------
Deferred Income Taxes 92,353 95,557
------------------ ---------------
Self-Insurance Reserves, less current portion 37,540 38,828
------------------ ---------------
Other Long-Term Liabilities 83,098 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 30,083 29,055
Retained earnings 1,002,021 976,461
Accumulated other comprehensive income items (11,701) (9,326)
------------------ ---------------
1,078,322 1,054,109
Less-Treasury stock, at cost (17,140,355 shares at May 31, 2000 and
17,449,752 shares at August 31, 1999) 430,557 438,235
------------------ ---------------
Total Stockholders' Equity 647,765 615,874
------------------ ---------------
Total Liabilities and Stockholders' Equity $1,762,796 $1,695,789
================== ===============
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 NINE MONTHS ENDED
MAY 31 MAY 31
------------------------------ -----------------------------
2000 1999 2000 1999
-------------- --------------- -------------- --------------
Sales and Service Revenues:
Net sales of products $ 562,000 $ 489,787 $1,632,288 $1,369,808
Service revenues 83,040 80,051 238,175 229,315
-------------- --------------- -------------- --------------
Total Revenues 645,040 569,838 1,870,463 1,599,123
-------------- --------------- -------------- --------------
Costs and Expenses:
Cost of products sold 340,788 301,328 987,925 836,864
Cost of services 46,070 39,661 136,009 118,565
Selling and administrative expenses 208,175 178,706 594,889 514,656
Interest expense, net 11,678 3,340 32,191 8,219
Gain on sale of businesses - (2,303) (356) (5,814)
Restructuring expense, asset impairments, and
other charges - - - (2,216)
Other expense (income), net 4,379 471 12,873 (143)
-------------- --------------- -------------- --------------
Total Costs and Expenses 611,090 521,203 1,763,531 1,470,131
-------------- --------------- -------------- --------------
Income before Provision for Income Taxes 33,950 48,635 106,932 128,992
Provision for Income Taxes 13,174 18,094 41,490 47,985
-------------- --------------- -------------- --------------
Net Income $ 20,776 $ 30,541 $ 65,442 $ 81,007
============== =============== ============== ==============
Per Share:
Basic Earnings per Share $ .51 $ .75 $ 1.61 $ 1.97
============== =============== ============== ==============
Basic Weighted Average Number of Shares
Outstanding 40,752 40,654 40,677 41,030
============== =============== ============== ==============
Diluted Earnings per Share $ .51 $ .75 $ 1.61 $ 1.97
============== =============== ============== ==============
Diluted Weighted Average Number of Shares
Outstanding 40,756 40,851 40,711 41,221
============== =============== ============== ==============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 5
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONCOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
NINE MONTHS ENDED
-------------------------------
MAY 31
-------------------------------
2000 1999
-------------- --------------
Cash Provided by (Used for) Operating Activities
Net income $ 65,442 $ 81,007
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization 63,875 44,033
Provision for losses on accounts receivable 3,520 2,762
Gain on the sale of property, plant, and equipment (1,198) (1,164)
Gain on the sale of business (356) (5,814)
Restructuring expense, asset impairments, and other charges - (2,216)
Change in noncurrent deferred income taxes (914) 727
Change in assets and liabilities net of effect of acquisitions and divestitures-
Receivables (4,021) (15,781)
Inventories and linens in service, net (44,493) 6,085
Deferred income taxes 2,732 6,998
Prepayments and other (2,883) (1,552)
Accounts payable and accrued liabilities (37,070) (8,141)
Self-insurance reserves and other long-term liabilities (2,883) 8,087
-------------- -------------
Net Cash Provided by Operating Activities 41,751 115,031
-------------- -------------
Cash Provided by (Used for) Investing Activities
Purchases of property, plant, and equipment (78,793) (48,298)
Sale of property, plant, and equipment 3,287 3,487
Sale of businesses - 3,767
Acquisitions (21,550) (62,881)
Change in other assets (3,660) (1,299)
-------------- -------------
Net Cash Used for Investing Activities (100,716) (105,224)
-------------- -------------
Cash Provided by (Used for) Financing Activities
Borrowings (repayments) of notes payable, net (229) 3,343
Issuances of commercial paper, net (less than 90 days) 93,699 -
Issuances of commercial paper (greater than 90 days) 186,024 -
Repayments of commercial paper (greater than 90 days) (182,750) -
Borrowings of long-term debt - 187,582
Repayments of long-term debt (861) (80,044)
Treasury stock transactions, net 3,039 (38,293)
Cash dividends paid (39,884) (38,913)
-------------- -------------
Net Cash Provided by Financing Activities 59,038 33,675
-------------- -------------
Effect of Exchange Rate Changes on Cash (838) 265
-------------- -------------
Net Change in Cash and Cash Equivalents (765) 43,747
Cash and Cash Equivalents at Beginning of Period 2,254 19,146
-------------- -------------
Cash and Cash Equivalents at End of Period $ 1,489 $ 62,893
============== =============
Supplemental Cash Flow Information:
Income taxes paid during the period $ 53,801 $ 37,888
Interest paid during the period 28,309 9,940
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 $ 15,574
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 May 31, 2000, the consolidated results of operations
for the three and nine months ended May 31, 2000 and 1999, and the consolidated
cash flows for the nine months ended May 31, 2000 and 1999. Certain
reclassifications have been made to the prior year's financial statements to
conform to the current year's presentation. Certain information and footnote
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 nine months ended May 31, 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 ("SFAS") No. 133 (as amended by SFAS
No. 138), "Accounting for Derivative Instruments and Hedging Activities," was
issued in June of 1998 and is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The company will adopt SFAS 133 in the first
quarter of fiscal 2001 and 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
Nine Months Ended May 31, 2000 Revenues (Loss) Expense Acquisitions
------------- ------------- --------------- --------------
Lighting Equipment $1,093,469 $ 92,187 $36,630 $ 58,279
Chemical 373,153 34,644 8,290 4,254
Textile Rental 238,175 19,410 11,525 20,526
Envelope 165,666 6,185 5,714 15,240
------------- ------------- --------------- --------------
1,870,463 152,426 62,159 98,299
Corporate (13,303) 1,716 2,044
Interest expense, net (32,191)
------------- ------------- --------------- --------------
Total $1,870,463 $ 106,932 $63,875 $100,343
============= ============= =============== ==============
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Nine Months Ended May 31, 1999 Revenues (Loss) Expense Acquisitions
------------- ------------- --------------- --------------
Lighting Equipment $ 862,857 $ 82,270 $19,553 $ 67,076
Chemical 360,670 29,756 7,562 8,160
Textile Rental 229,315 26,146 10,862 11,955
Envelope 146,281 11,054 4,535 23,592
------------- ------------- --------------- --------------
1,599,123 149,226 42,512 110,783
Corporate (12,015) 1,521 396
Interest expense, net (8,219)
------------- ------------- --------------- --------------
Total $1,599,123 $ 128,992 $44,033 $111,179
============= ============= =============== ==============
Page 7
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Three Months Ended May 31, 2000 Revenues (Loss) Expense Acquisitions
------------- ------------- --------------- --------------
Lighting Equipment $ 371,778 $ 27,887 $11,984 $ 17,669
Chemical 133,645 14,550 2,780 2,003
Textile Rental 83,040 7,976 3,969 5,502
Envelope 56,577 662 2,066 6,026
------------- ------------- --------------- --------------
645,040 51,075 20,799 31,200
Corporate (5,447) 583 167
Interest expense, net (11,678)
------------- ------------- --------------- --------------
Total $ 645,040 $ 33,950 $21,382 $ 31,367
============= ============= =============== ==============
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Three Months Ended May 31, 1999 Revenues (Loss) Expense Acquisitions
------------- ------------- --------------- --------------
Lighting Equipment $ 306,192 $ 28,957 $ 6,642 $ 27,335
Chemical 127,230 11,495 2,586 3,837
Textile Rental 80,051 10,212 3,597 2,659
Envelope 56,365 4,400 1,713 6,081
------------- ------------- --------------- --------------
569,838 55,064 14,538 39,912
Corporate (3,089) 507 60
Interest expense, net (3,340)
------------- ------------- --------------- --------------
Total $ 569,838 $ 48,635 $15,045 $ 39,972
============= ============= =============== ==============
Identifiable Assets
May 31, 2000 August 31, 1999
--------------- -----------------
Lighting Equipment $1,093,127 $1,073,936
Chemical 245,159 233,461
Textile Rental 219,972 203,509
Envelope 150,714 139,755
--------------- -----------------
Subtotal 1,708,972 1,650,661
Corporate 53,824 45,128
--------------- -----------------
Total $1,762,796 $1,695,789
=============== =================
4. INVENTORIES
Major classes of inventory as of May 31, 2000 and August 31, 1999 were as
follows:
May 31, August 31,
2000 1999
---------- ----------
Raw Materials and Supplies $107,371 $99,249
Work-in-Process 19,426 16,718
Finished Goods 137,620 102,224
---------- ----------
Total $264,417 $218,191
========== ==========
5. EARNINGS PER SHARE
The company accounts for earnings per share using Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Under this statement, basic
earnings per share is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed similarly but reflects the
potential dilution that would occur if dilutive options were exercised. The
following table calculates basic earnings per common share and diluted earnings
per common share at May 31:
Page 8
Three Months Ended Nine Months Ended
May 31 May 31
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- --------------
Basic earnings per common share:
Net income $20,776 $30,541 $65,442 $81,007
Basic weighted average shares outstanding (in thousands) 40,752 40,654 40,677 41,030
--------------- -------------- -------------- --------------
Basic earnings per common share $ .51 $ .75 $ 1.61 $ 1.97
=============== ============== ============== ==============
Diluted earnings per common share:
Net income $20,776 $30,541 $65,442 $81,007
Basic weighted average shares outstanding (in thousands) 40,752 40,654 40,677 41,030
Add - Shares of common stock issuable upon assumed
exercise of dilutive stock options (in thousands) 4 197 34 191
--------------- -------------- -------------- --------------
Diluted weighted average shares outstanding (in thousands) 40,756 40,851 40,711 41,221
--------------- -------------- -------------- ---------------
Diluted earnings per common share $ .51 $ .75 $ 1.61 $ 1.97
=============== ============== ============== ===============
6. COMPREHENSIVE INCOME
The company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," in the first quarter of fiscal 1999. SFAS No.
130 requires the reporting of a measure of all changes in equity of an entity
that result from recognized transactions and other economic events other than
transactions with owners in their capacity as owners. Other comprehensive income
(loss) for the three and nine months ended May 31, 2000 and 1999 includes only
foreign currency translation adjustments. The calculation of comprehensive
income is as follows:
Three Months Ended Nine Months Ended
May 31 May 31
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- ---------------
Net income $20,776 $30,541 $65,442 $81,007
Other comprehensive income (loss) (2,615) 824 (2,375) 2,490
--------------- -------------- -------------- ---------------
Comprehensive Income $18,161 $31,365 $63,067 $83,497
=============== ============== ============== ===============
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 $10,849 and $11,000 at May 31, 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 remained in solid financial condition at May 31, 2000.
Net working capital was $261.0 million, up from $256.5 million at August 31,
1999, and the current ratio remained constant at 1.6. At May 31, 2000, the
company's percentage of debt to total capitalization increased to 49.9 percent
from 47.2 percent at August 31, 1999.
Results of Operations
National Service Industries generated revenue of $645.0 million and $1.9 billion
in the three and nine months ended May 31, 2000, respectively, compared to
revenue of $569.8 million and $1.6 billion in the respective periods last year.
The increases were 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 $63.7 million and $218.0 million for
the three and nine months ended May 31, 2000, respectively, that was not
included in prior-year results. Excluding acquisitions, revenue during the first
nine months increased in each of the company's core businesses.
Net income totaled $20.8 million and $65.4 million, or $.51 and $1.61 per
diluted share, for the three and nine months ended May 31, 2000, respectively,
compared to net income of $30.5 million and $81.0 million, or $.75 and $1.97 per
diluted share, for the respective prior year periods. Increased interest expense
on borrowings and amortization expense related to recent acquisitions more than
offset income from acquisitions not included in prior-year results for the three
and nine months ended May 31, 2000. Additionally, lower operating profits in the
lighting equipment, textile rental, and envelope segments negatively impacted
third quarter net income. The decrease in third quarter operating profit in the
lighting equipment segment related to lower-than-planned sales volumes and
production timing problems at the segment's Monterrey, Mexico and Cochran,
Georgia manufacturing facilities. Operating profits decreased in the textile
rental segment primarily due to unusual gains included in last year's results
that were not repeated in the current year. Envelope segment operating profits
were negatively impacted by lower volumes in the direct mail market, increased
paper prices, and production delays associated with start-up inefficiencies of
new equipment and the relocation of two plants. In addition to the items
discussed above, year-to-date operating profits were also positively impacted by
core business growth, primarily in the chemical segment, partially offset by a
charge for closing a manufacturing facility in the lighting equipment segment.
The lighting equipment segment reported revenue of $371.8 million for the third
quarter and $1.1 billion for the nine months representing increases of 21.4
percent and 26.7 percent over the respective periods of the prior year. The
increase in revenue resulted primarily from the acquisitions of Holophane and
Peerless. Operating profit decreased 3.7 percent for the quarter primarily as a
result of lower-than-planned sales volumes and production timing problems. The
production timing problems were encountered during the expansion of the
segment's Monterrey, Mexico facility and at the segment's Cochran, Georgia
plant. The problems encountered with the expansion of the Monterrey facility
restrained production rates and resulted in an under-absorption of costs.
Inefficiencies experienced at the Cochran, Georgia facility resulted primarily
from shifting production from the California plant that was closed during the
first quarter. Although the production issues were primarily resolved by the end
of the third quarter, increased operating costs at the Cochran facility
associated with the absorption of production from the California plant may
continue into the fourth quarter. Year-to-date operating profit increased 12.1
percent driven by contributions from Holophane and Peerless, offset somewhat by
a $1.0 million pretax charge during the first quarter of fiscal 2000 for closing
a manufacturing facility in California and due to the aforementioned
lower-than-planned sales volumes and production timing problems.
Chemical segment revenue increased 5.0 percent to $133.6 million for the third
quarter and 3.5 percent to $373.2 million for the nine months due to continued
growth in the retail channel and higher revenue from the institutional and
industrial channels. Operating profit of $14.6 million and $34.6 million during
the three and nine months ended May 31, 2000, respectively, was higher than last
year's results primarily due to higher revenue and a reduction in general and
administrative expenses.
Textile rental segment revenue, representing all of the company's service
revenues, increased 3.7 percent to $83.0 million for the quarter and 3.9 percent
to $238.2 million for the nine months. The current year revenue increase was
primarily related to acquisitions. Operating profit was $8.0 million for the
third quarter and $19.4 million for the nine months down from $10.2 million and
$26.1 million for the same periods last year. Excluding a $2.3 million pretax
gain on the sale of industrial contracts included in the prior year third
quarter, operating profit remained flat for the quarter. Year-to-date operating
profit was lower primarily because last year's results included $2.3 million
pretax gain on the sale of industrial contracts and $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
Page 11
unprofitable accounts. Excluding unusual items in both years, year-to-date
operating margins were slightly lower.
Envelope segment revenue remained flat for the quarter and increased 13.3
percent to $165.7 million for the nine months ended May 31, 2000. The
year-to-date revenue increase primarily related to additional sales resulting
from the Gilmore Envelope acquisition and growth in the segment's base business,
offset somewhat by the prior year divestiture of Techno-Aide/Stumb Metal
Products in June 1999. Operating profit decreased $3.7 million and $4.9 million
for the three and nine months ended May 31, 2000, respectively, compared to the
same periods last year. Operating margins decreased during the three and nine
month periods as a result of lower average margins from prior-year acquisitions,
lower volumes in the segment's higher-margin direct mail market, recent paper
price increases which have not been effectively passed on to customers,
pre-production costs associated with newly acquired manufacturing equipment, the
relocation of two manufacturing facilities, and depreciation from a new
enterprise resource planning system.
Corporate expenses increased to $5.4 million and $13.3 million during the three
and nine months ended May 31, 2000, respectively, due to costs related to
strategic initiatives. Net interest expense increased $8.3 million to $11.7
million and $24.0 million to $32.2 million for the three and nine months ended
May 31, 2000, respectively, as a result of increased borrowings to finance
recent acquisitions and higher working capital requirements related to
production and start-up issues primarily in the lighting equipment and envelope
segments. 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 $41.8 million during the first three quarters of
fiscal 2000 compared with $115.0 million during the respective period of the
prior year. The 2000 cash flow was lower because of an increase in inventory,
primarily in the lighting equipment and chemical segments, a decrease in current
liabilities related to incentive compensation plan payments, an increase in
income tax payments, and a decrease in accounts payable.
Investing Activities
Investing activities used cash of $100.7 million for the nine months ended May
31, 2000 compared with cash used of $105.2 million in the nine months ended May
31, 1999. The change in investing cash flows related primarily to a decrease in
acquisition spending, offset by an increase in purchases of property, plant, and
equipment. Acquisition spending during the first nine months of fiscal 2000 was
$21.6 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 nine months of the current year, primarily for the cash-out of
remaining Holophane shares. Other acquisition spending during the first nine
months of fiscal 2000 related to several minor purchases in the textile rental
segment. Prior-year acquisition spending of $62.9 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 purchase of Peerless
Corporation ("Peerless"), a manufacturer of high performance indirect/direct
suspended lighting products. In addition, the envelope segment purchased
substantially all of Gilmore Envelope, an envelope manufacturer headquartered in
Los Angeles, California, in February 1999.
Capital expenditures were $78.8 million in the first nine months of fiscal 2000,
compared with $48.3 million in the first nine months of fiscal 1999. Capital
spending during the first three quarters 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 manufacturing process improvements,
new folding capacity, and information systems. The textile rental segment's
expenditures related to replacing old equipment and to delivery truck purchases
and refurbishments. The lighting equipment segment's capital expenditures in the
respective prior-year period related to the purchase of land and buildings for a
new plant, manufacturing improvements and upgrades for capacity expansion, and
implementation of new technology. Expenditures in the textile rental segment in
fiscal 1999 were for implementation of new technology, production enhancements,
and delivery truck purchases and refurbishments. The envelope segment's
expenditures in the prior year related primarily to manufacturing process
improvements, information systems, facility expansion, and new folding capacity.
Page 12
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 provided by financing activities increased $25.4 million to $59.0 million
in the first three quarters of fiscal 2000 primarily as a result of the
suspension of the company's share repurchase program in the third quarter of
fiscal 1999, offset somewhat by a decrease in cash provided by debt. Although
the company has a standing annual authorization to repurchase 2.0 million shares
plus the number of shares issued or reissued in any one year for acquisitions
and under benefit plans, the company does not plan to purchase additional shares
until its ratio of total debt to capitalization is within the company's stated
objective of 30 to 40 percent. For the nine months ended May 31, 2000, net
borrowings provided cash of $95.9 million compared with cash provided by net
borrowings of $110.9 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 May 31,
2000 and August 31, 1999, approximately $250 million in commercial paper was
classified as long-term, as the company had the ability to refinance the
commercial paper on a long-term basis. Funds borrowed during the first three
quarters of fiscal 1999 were used primarily to finance acquisitions, share
repurchases, and internal growth. Year-to-date dividend payments totaled $39.9
million, or 98 cents per share, compared with $38.9 million, or 95 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 July 14, 2000, all of the company's mission critical systems have been tested
and are fully operational.
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 $483.1 million at May 31, 2000.
Based on outstanding borrowings at quarter end, a 10 percent adverse change in
effective market interest rates at May 31, 2000 would result in additional
annual after-tax interest expense of approximately $2.0 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 May
31, 2000 would decrease the fair value of these notes to approximately $133.3
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 nine months of fiscal 2000, primarily in the lighting equipment
and chemical segments, represented less than 10 percent of revenue, operating
profit, and 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.
Page 13
Cautionary Statement Regarding Forward-Looking Information
From time to time, information provided by the company may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve risks
and uncertainties. Consequently, actual results may differ materially from those
indicated by the forward-looking statements. Statements herein which may be
considered forward-looking include those regarding: (a) 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; (b) the resolution and possible future impact of
production issues in the lighting equipment segment; and (c) management's
intentions or expectations with regard to debt-to-capitalization objectives,
future earnings, projected capital expenditures, future cash flows, debt
refinancing, and share repurchases. 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; (b) the ability to realize the anticipated benefits of 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; (c) the successful completion of
changes to manufacturing operations; (d) unexpected outcomes in the company's
future legal proceedings; and (e) the ability of the company to pass raw
material price increases on to its customers.
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) A Form 8-K was filed on May 24, 2000 in regards to the company's revised
third quarter earnings outlook.
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 July 14, 2000 /s/ KEN MURPHY
KEN MURPHY
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
DATE July 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) (a) Amendment No. 3 to Restated and Amended Supplemental Retirement 16
Plan for Executives of National Service Industries, Inc., Dated
September 18, 1996
(b) Amendment No. 4 to Restated and Amended Supplemental Retirement 18
Plan for Executives of National Service Industries, Inc., Dated
December 1, 1996
(c) Appendix D to Restated and Amended Supplemental Retirement Plan 20
for Executives of National Service Industries, Inc., Effective
October 18, 1996
(d) Appendix G to Restated and Amended Supplemental Retirement Plan 21
for Executives of National Service Industries, Inc., Effective
May 15, 2000
(2) Employment Letter Agreement between National Service Industries, 22
Inc. and Joseph G. Parham, Jr., Dated May 3, 2000
(3) Severance Protection Agreement between National Service Industries, Reference is made to
Inc. and Joseph G. Parham, Jr., Effective May 15, 2000 Exhibit 10(iii)A(34) of
registrant's Form 10-K
for the fiscal year
ended August 31, 1999,
which is incorporated
herein by reference.
(4) Bonus Letter Agreement between National Service Industries, Inc. and Reference is made to
Joseph G. Parham, Jr., Effective May 15, 2000 Exhibit 10(iii)A(35) of
registrant's Form 10-K
for the fiscal year
ended August 31, 1999,
which is incorporated
herein by reference.
(5) Incentive Stock Option Agreement for Executive Officers Effective 26
beginning May 15, 2000 between National Service Industries, Inc. and
Joseph G. Parham, Jr.
(6) Aspiration Achievement Incentive Award Agreement for the Performance 33
Cycle beginning September 1, 1998 between National Service
Industries, Inc. and Joseph G. Parham, Jr., Dated May 15, 2000
[a confidential portion of which has been omitted and filed separately
with the Securities and Exchange Commission]
(7) Aspiration Achievement Incentive Award Agreement for the Performance 42
Cycle beginning September 1, 1999 between National Service
Industries, Inc. and Joseph G. Parham, Jr., Dated May 15, 2000
[a confidential portion of which has been omitted and filed separately
with the Securities and Exchange Commission]
EXHIBIT 12 Ratio of Earnings to Fixed Charges 52
EXHIBIT 27 Financial Data Schedule 53