Page 1 of 34
Exhibit Index on Page 12
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For quarter ended February 28, 1995 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 (applicable only to corporate
issuers).
Common Stock - $1.00 Par Value - 48,348,252 shares as of April 3, 1995.
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS -
FEBRUARY 28, 1995 AND AUGUST 31, 1994 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS AND SIX MONTHS ENDED FEBRUARY 28, 4
1995 AND 1994
CONSOLIDATED STATEMENTS OF CASH FLOWS - 5
SIX MONTHS ENDED FEBRUARY 28, 1995 AND 1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
EXHIBIT INDEX 12
Page 3
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
February 28, August 31,
1995 1994 *
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 52,092 $ 58,619
Short-term investments 5,179 2,579
Receivables, less reserves for doubtful
accounts of $8,992,000 at February 28, 1995
and $7,385,000 at August 31, 1994 242,041 256,051
Inventories, at the lower of cost (on a
first-in, first-out basis) or market 191,126 178,590
Linens in service, net of amortization 87,577 90,037
Prepaid income taxes 9,174 7,978
Prepayments 12,123 8,933
Total Current Assets 599,312 602,787
Property, Plant, and Equipment, at cost:
Land 32,159 32,237
Buildings and leasehold improvements 186,300 186,929
Machinery and equipment 485,961 507,408
Total Property, Plant, and Equipment 704,420 726,574
Less - Accumulated depreciation and
amortization 363,194 378,262
Property, Plant, and Equipment - net 341,226 348,312
Other Assets:
Goodwill and other intangibles 105,652 112,286
Other 37,458 37,876
Total Other Assets 143,110 150,162
Total Assets $1,083,648 $1,101,261
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 298 $ 667
Notes payable 6,360 5,098
Accounts payable 75,206 81,969
Accrued salaries, commissions, and bonuses 33,398 42,624
Current portion of self insurance reserves 14,333 15,403
Other accrued liabilities 43,403 43,912
Total Current Liabilities 172,998 189,673
Long-Term Debt, less current maturities 26,802 26,863
Deferred Income Taxes 71,312 73,319
Self Insurance Reserves, less current portion 66,523 61,081
Other Long-Term Liabilities 23,447 22,940
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, 80,000,000 shares
authorized, 57,918,978 shares issued at February
28, 1995 and August 31, 1994 57,919 57,919
Paid-in capital 7,876 7,684
Retained earnings 717,513 705,504
783,308 771,107
Less - Treasury stock, at cost (9,347,097 shares at
February 28, 1995 and 8,678,666 shares at August
31, 1994) 60,742 43,722
Total Stockholders' Equity 722,566 727,385
Total Liabilities and Stockholders' Equity $1,083,648 $1,101,261
* Certain amounts have been reclassified to conform to current-year
presentation.
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
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NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per-share data)
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28 FEBRUARY 28
1995 1994 1995 1994
Sales and Service Revenues:
Net sales of products $334,059 $308,404 $678,941 $633,617
Service revenues 131,751 130,933 267,853 265,620
Total Revenues 465,810 439,337 946,794 899,237
Costs and Expenses:
Cost of products sold 217,036 204,533 436,223 418,112
Cost of services 73,981 68,722 149,827 139,459
Selling and administrative expenses 144,221 137,842 293,916 279,425
Interest expense 960 1,024 1,790 2,170
Other expense, net 1,581 1,067 3,272 3,119
Total Costs and Expenses 437,779 413,188 885,028 842,285
Income before Provision for Income Taxes 28,031 26,149 61,766 56,952
Provision for (Benefit from) Income Taxes:
Current 10,482 10,894 23,131 23,485
Deferred (29) (1,018) (57) (1,978)
10,453 9,876 23,074 21,507
Net Income $ 17,578 $ 16,273 $ 38,692 $ 35,445
Per Share:
Net income $.36 $.33 $.79 $.72
Cash dividends $.28 $.27 $.55 $.53
Weighted Average Number of Shares
Outstanding (thousands) 48,859 49,572 49,025 49,568
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)
SIX MONTHS ENDED
FEBRUARY 28
1995 1994 *
Cash Provided by (Used for) Operating Activities:
Net income $ 38,692 $ 35,445
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 29,046 30,550
Provision for losses on accounts receivable 2,631 2,427
Gain on the sale of property, plant, and equipment 12 (617)
Gain on the sale of business (1,162) (467)
Provision for deferred income taxes (57) (1,975)
Change in assets and liabilities net of effect
of acquisitions-
Receivables 11,686 19,411
Inventories and linens in service, net (11,508) (14,744)
Prepaid income taxes (1,196) 2,261
Prepayments and other (3,410) (2,127)
Accounts payable and accrued liabilities (17,605) (23,898)
Net Cash Provided by Operating Activities 47,129 46,266
Cash Provided by (Used for) Investing Activities:
Change in short-term investments (2,600) 1,853
Purchase of property, plant, and equipment (22,471) (21,865)
Sale of property, plant, and equipment 5,634 1,845
Sale of business 4,626 682
Acquisitions, net of cash acquired (304) (375)
Change in other assets (409) (339)
Net Cash Used for Investing Activities (15,524) (18,199)
Cash Provided by (Used for) Financing Activities:
Change in notes payable 1,262 (345)
- -
Repayment of long-term debt (430) (824)
Recovery of investment in tax benefits 414 1,123
Deferred income taxes from investment in tax benefits (1,950) (2,077)
Issuance (purchase) of treasury stock (16,694) 349
Change in other long-term liabilities 5,949 3,892
Cash dividends paid (27,030) (26,270)
Net Cash Used for Financing Activities (38,479) (24,152)
Effect of Exchange Rate Changes on Cash 347 1,074
Net Change in Cash and Cash Equivalents (6,527) 4,989
Cash and Cash Equivalents at Beginning of Year 58,619 15,853
Cash and Cash Equivalents at End of Period $ 52,092 $ 20,842
Supplemental Cash Flow Information:
Income taxes paid during the period $ 25,369 $ 21,815
Interest paid during the period 1,712 2,440
Noncash Investing and Financing Activities:
Noncash aspects of sale of business -
Receivables incurred $ (893) $ (336)
* Certain amounts have been reclassified to conform to current-year balance
sheet presentation.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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, 1994 has been derived from audited statements. These
statements reflect all adjustments, all of which are of a normal, recurring
nature, which are, in the opinion of management, necessary to present fairly the
consolidated financial position as of February 28, 1995, the consolidated
results of operations for the three months and six months ended February 28,
1995 and 1994, and the consolidated cash flows for the six months ended February
28, 1995 and 1994. Certain prior-year amounts have been reclassified to conform
with current-year 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, 1994.
The results of operations for the three months and six months ended February 28,
1995 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:
Three Months Ended February 28
Sales and Service
Revenues Operating Profit
1995 1994 1995 1994
(In thousands)
Lighting Equipment $200,753 $173,799 $ 12,580 $ 9,460
Textile Rental 131,751 130,933 7,485 11,046
Chemical 80,192 75,599 6,311 6,616
Other 53,114 59,006 3,691 1,772
$465,810 $439,337 30,067 28,894
Corporate (1,076) (1,721)
Interest Expense (960) (1,024)
Total $ 28,031 $ 26,149
Six Months Ended February 28
Sales and Service
Revenues Operating Profit
1995 1994 1995 1994
(In thousands)
Lighting Equipment $404,559 $355,904 $ 26,270 $ 21,359
Textile Rental 267,853 265,620 18,801 22,284
Chemical 168,144 157,881 15,612 15,642
Other 106,238 119,832 6,760 3,285
$946,794 $899,237 67,443 62,570
Corporate (3,887) (3,448)
Interest Expense (1,790) (2,170)
Total $ 61,766 $ 56,952
3. INVENTORIES:
Major classes of inventory as of February 28, 1995 and August 31, 1994 were as
follows:
February 28, August 31,
1995 1994
(In thousands)
Raw Materials and Supplies $ 80,124 $ 72,677
Work-in-Process 9,933 9,918
Finished Goods 101,069 95,995
Total $191,126 $178,590
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4. POSTEMPLOYMENT BENEFITS
During the quarter ended November 30, 1994, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for
Postemployment Benefits," which requires employers to accrue the expected cost
of benefits to be provided to former or inactive employees after employment but
before retirement. The company's liability relates primarily to severance
agreements and to life insurance coverage for certain eligible disabled
employees. The amount is not material to the consolidated financial statements.
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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.
Financial Condition
National Service Industries maintained a strong financial position at February
28, 1995. Net working capital was $426.3 million, compared with $413.1 million
at August 31, 1994, and the current ratio was 3.5, compared with 3.2 at year
end. Cash and short-term investments were $57.3 million, down slightly from
$61.2 million at August 31. For the six months ended February 28, 1995, the
company invested $22.8 million in capital expenditures and acquisitions.
Long-term debt and other long-term liabilities were 13.9 percent of total
capitalization, up from 13.2 percent at year end. Cash provided by operations
was $47.1 million, compared with $46.3 million for the first half last year.
Capital expenditures, exclusive of acquisition spending, were $22.5 million for
the six months this year and $21.9 million for the prior-year period. During the
second quarter, the lighting equipment division continued to invest in
manufacturing equipment replacements and improvements and the construction of a
production facility in Monterrey, Nuevo Leon, Mexico. The textile rental
division continued its fleet upgrades and facility improvements. Prior-year
spending was attributable to facilities and manufacturing process improvements
in the lighting equipment division, facilities additions and information systems
improvements in the chemical division, and wastewater compliance projects and
fleet upgrades in the textile rental division. Acquisition spending was minimal
in both periods.
Dividend payments for the six months totaled $27.0 million, or 55 cents per
share, compared with $26.3 million, or 53 cents per share, for the same period
last year. Effective January, 1995, the regular quarterly dividend rate was
increased 3.7 percent to 28 cents per share, which is an annual rate of $1.12
per share.
During the three months and six months ended February 28, 1995, the company paid
$16.9 million for 675,000 shares of its common stock. An additional 225,000
shares have been purchased since quarter end. The board of directors, at its
regular meeting in March, 1995, increased the company's standing authority to
purchase shares from the previous two million shares per year to four million
shares for the current fiscal year.
For the periods presented, capital expenditures, working capital needs,
dividends, and acquisitions were financed primarily with internally generated
funds, supplemented by short-term borrowings in the European market. Contractual
commitments for capital spending during the coming twelve months total $12
million. For the current fiscal year, the company expects actual capital
expenditures to be somewhat higher than levels of recent years, which, excluding
acquisition spending, were $43 million in 1994, $36 million in 1993, and $43
million in 1992. Current liquid assets and internally generated funds are
expected to be more than adequate to meet anticipated cash requirements for the
next twelve months, although some interim borrowings might be incurred to meet
short-term needs. The company has complimentary lines of credit totaling $152
million, of which $110 million has been provided domestically and $42 million is
available on a multi-currency basis primarily from a European bank.
Results of Operations
National Service Industries reported a 9.8 percent increase in earnings per
share, from 33 cents to 36 cents, for its second fiscal quarter ended February
28, 1995. Net income for the quarter increased 8.0 percent to $17.6 million. The
percentage increase in earnings per share was somewhat higher because 713,000
fewer shares on average were outstanding compared with last year's second
quarter.
Sales for the quarter totaled $465.8 million, 6.0 percent higher than in the
same period last year. The increase would be 7.9 percent excluding the
prior-year sales of Marketing Services, the division divested at last fiscal
year end.
For the fiscal first half of NSI's fiscal year, sales increased 5.3 percent to
$946.8 million and net income increased 9.2 percent to $38.7 million. Earnings
per share increased 10.3 percent to 79 cents from 72 cents.
Page 9
The lighting equipment division led second quarter results with a sales increase
of 15.5 percent to $200.8 million and a first-half sales increase of 13.7
percent to $404.6 million. The increases in both periods were largely
attributable to unit volume gains. Operating profit increased 33.0 percent for
the quarter to 6.3 percent of revenues, from 5.4 percent last year, and grew
23.0 percent for the six months to 6.5 percent of revenues, up from 6.0 percent
the prior year to date. Both fluorescent and non-fluorescent product groups
participated in operating improvements, which resulted from the volume increases
and some product pricing gains.
Textile rental division revenues were only marginally ahead of both prior-year
periods, at $131.8 million for the second quarter and $267.9 million for the
year to date, as pricing improvements offset unit volume declines. Operating
profit decreased to 5.7 percent of revenues for the quarter and 7.0 percent year
to date, compared with 8.4 percent for both prior-year periods. The division
continued to invest significantly in its sales and marketing programs. Although
results were still disappointing, other initiatives are beginning to improve
performance as February results were stronger than anticipated.
The chemical sector had mixed results. Sales, which have been the focus of the
sector's strategy, advanced 6.1 percent to $80.2 million for the quarter and 6.5
percent to $168.1 million for the six months. However, operating earnings
declined to 7.9 percent of sales for the quarter from 8.8 percent the prior-year
quarter and 9.3 percent of sales for the first half, compared with 9.9 percent a
year ago. The decline was largely the result of increased investment in sales
training and recruitment and slower progress in international markets than had
been anticipated.
As of the beginning of the fiscal year, those businesses comprising NSI's other
segment no longer include Marketing Services. On a comparable-business basis,
the insulation service division and the envelope division combined for modest
sales increases of 3.5 percent for the quarter and 1.6 percent year to date.
Gains in the envelope sector were offset by volume declines in the insulation
service business. Operating income increased 64 percent for the quarter and 73
percent for the six months. The insulation business is enjoying distinctly
higher margins as operating improvements are taking hold. The envelope business,
benefiting from unit volume gains, is experiencing its best year in some time.
Corporate expense for both the second quarter and year to date reflects
increased interest income and reduced administrative expenses. For the six
months, corporate expense was somewhat higher due in large part to the company's
adoption in the first quarter of Statement of Financial Accounting Standards
(SFAS) No. 112, "Employers' Accounting for Postemployment Benefits," requiring
the accrual of the estimated cost of benefits provided by an employer to former
or inactive employees after employment but before retirement. The accrual
relates primarily to severance agreements and the liability for life insurance
coverage for certain eligible disabled employees.
The provision for income taxes was 37.3 percent of pretax income for the second
quarter and 37.4 for the first half, compared with 37.8 for both respective
prior-year periods. The slight reduction in the effective tax rate was the
result of the increase in interest income, which is largely nontaxable.
Page 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 12).
(b) There were no reports on Form 8-K for the three months ended February 28,
1995.
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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, 1995 /S/ DAVID LEVY
DAVID LEVY
EXECUTIVE VICE PRESIDENT, ADMINISTRATION
AND COUNSEL
DATE April 14, 1995 /S/ J. ROBERT HIPPS
J. ROBERT HIPPS
SENIOR VICE PRESIDENT, FINANCE
Page 12
INDEX TO EXHIBITS
Page No.
EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements:
(a)(i) Split-Dollar Agreement among National
Service Industries, Inc., D. Raymond Riddle,
and Wachovia Bank of Georgia, N.A. dated
January 4, 1993 13
(ii) First Amendment to Split-Dollar
Agreement among National Service Industries,
Inc., D. Raymond Riddle, and Wachovia Bank
of Georgia, N.A. effective March 30, 1995 21
(b)Letter Agreement between National Service
Industries, Inc. and D. Raymond Riddle dated
March 28, 1995, amending as of September 21,
1994 the Incentive Stock Option Agreement
dated January 6, 1993, the Nonqualified Stock
Option Agreement dated January 6, 1993, and
the Nonqualified Stock Option Agreement
dated September 15, 1993 between National
Service Industries, Inc. and D. Raymond Riddle 24
(c)Consulting Agreement between National
Service Industries, Inc. and D. Raymond Riddle
dated March 30, 1995 25
(d)Letter Agreement between National Service
Industries, Inc. and D. Raymond Riddle dated
April 10, 1995, amending as of March 15, 1995
the Incentive Stock Option Agreement dated
January 6, 1993, the Nonqualified Stock Option
Agreement dated January 6, 1993, the
Nonqualified Stock Option Agreement dated
September 15, 1993, and the Nonqualified
Stock Option Agreement dated September 21,
1994 between National Service Industries, Inc.
and D. Raymond Riddle 31
EXHIBIT 11 Computations of Net Income per Share of Common
Stock 33
EXHIBIT 27 Financial Data Schedules 34