Page 1 of 42
Exhibit Index on Page 11
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 29, 1996 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 - 48,111,450 shares as of April 5, 1996.
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NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS -
FEBRUARY 29, 1996 AND AUGUST 31, 1995 ........................ 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS AND SIX MONTHS ENDED FEBRUARY 29, ............... 4
1996 AND FEBRUARY 28, 1995
CONSOLIDATED STATEMENTS OF CASH FLOWS - ............................ 5
SIX MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ......................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION ................ 7-8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................... 9
SIGNATURES ............................................................... 10
EXHIBIT INDEX ............................................................ 11
Page 3
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
February 29 August 31,
1996 1995
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents .......................... $ 73,431 $ 79,402
Short-term investments ............................. 2,550 3,598
Receivables, less reserves for doubtful
accounts of $8,256 at February 29, 1996
and $6,467 at August 31, 1995 .................... 252,097 266,056
Inventories, at the lower of cost (on a
first-in, first-out basis) or market ............. 182,428 185,789
Linens in service, net of amortization ............. 91,620 88,605
Deferred income taxes .............................. 15,507 10,221
Prepayments ........................................ 10,325 6,739
Total Current Assets ............................. 627,958 640,410
Property, Plant, and Equipment, at cost:
Land ............................................... 29,608 31,016
Buildings and leasehold improvements ............... 192,860 192,023
Machinery and equipment ............................ 524,436 503,868
Total Property, Plant, and Equipment ............. 746,904 726,907
Less - Accumulated depreciation and
amortization ..................................... 394,620 377,003
Property, Plant, and Equipment - net ........... 352,284 349,904
Other Assets:
Goodwill and other intangibles ..................... 92,656 101,410
Other .............................................. 38,449 39,622
Total Other Assets ............................... 131,105 141,032
Total Assets ................................... $1,111,347 $1,131,346
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ............... $ 72 $ 87
Notes payable ...................................... 6,630 6,399
Accounts payable ................................... 74,982 81,524
Accrued salaries, commissions, and bonuses ......... 32,509 43,944
Current portion of self insurance reserves ......... 16,825 16,276
Other accrued liabilities .......................... 45,777 54,340
Total Current Liabilities ........................ 176,795 202,570
Long-Term Debt, less current maturities .............. 26,741 26,776
Deferred Income Taxes ................................ 61,699 65,756
Self Insurance Reserves, less current portion ........ 62,986 67,830
Other Long-Term Liabilities .......................... 25,656 24,010
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
29, 1996 and August 31, 1995 ..................... 57,919 57,919
Paid-in capital .................................... 10,054 8,065
Retained earnings .................................. 761,241 746,256
829,214 812,240
Less - Treasury stock, at cost (9,631,592 shares at
February 29, 1996 and 9,609,261 shares at August
31, 1995) ........................................ 71,744 67,836
Total Stockholders' Equity ................... 757,470 744,404
Total Liabilities and Stockholders' Equity $ 1,111,347 $1,131,346
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
FEB. 29, FEB. 28, FEB. 29, FEB. 28,
1996 1995 1996 1995
Sales and Service Revenues:
Net sales of products .......................... $ 352,403 $ 334,059 $ 712,245 $ 678,941
Service revenues ............................... 129,803 131,751 262,511 267,853
Total Revenues ............................... 482,206 465,810 974,756 946,794
Costs and Expenses:
Cost of products sold .......................... 227,098 217,036 454,537 436,223
Cost of services ............................... 74,850 73,981 149,214 149,827
Selling and administrative expenses ............ 150,660 144,221 303,043 293,916
Interest expense ............................... 1,019 960 2,098 1,790
Other expense (income), net .................... (2,141) 1,581 (1,951) 3,272
Total Costs and Expenses ..................... 451,486 437,779 906,941 885,028
Income before Provision for Income Taxes ......... 30,720 28,031 67,815 61,766
Provision for (Benefit from) Income Taxes:
Current ........................................ 12,991 10,482 27,218 23,131
Deferred ....................................... (1,521) (29) (1,922) (57)
11,470 10,453 25,296 23,074
Net Income ....................................... $ 19,250 $ 17,578 $ 42,519 $ 38,692
Per Share:
Net income ..................................... $ .40 $ .36 $ .88 $ .79
Cash dividends ................................. $ .29 $ .28 $ .57 $ .55
Weighted Average Number of Shares
Outstanding (thousands) ........................ 48,364 48,859 48,350 49,025
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
FEB. 29, FEB. 28,
1996 1995
Cash Provided by (Used for) Operating Activities:
Net income .......................................................... $ 42,519 $ 38,692
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................... 29,336 29,046
Provision for losses on accounts receivable ..................... 2,256 2,631
Loss (gain) on the sale of property, plant, and equipment........ (1,459) 12
Loss (gain) on the sale of business ............................. (2,946) (1,162)
Change in noncurrent deferred income taxes ...................... (1,922) (57)
Change in assets and liabilities net of effect
of acquisitions-
Receivables ................................................. 11,030 11,686
Inventories and linens in service, net ...................... (913) (11,508)
Current deferred income taxes ............................... (5,286) (1,196)
Prepayments and other ....................................... (3,669) (3,410)
Accounts payable and accrued liabilities .................... (26,686) (17,605)
Net Cash Provided by Operating Activities ................. 42,260 47,129
Cash Provided by (Used for) Investing Activities:
Change in short-term investments .................................... 1,048 (2,600)
Purchase of property, plant, and equipment .......................... (31,100) (22,471)
Sale of property, plant, and equipment .............................. 3,695 5,634
Sale of business .................................................... 11,517 4,626
Acquisitions, net of cash acquired .................................. (600) (304)
Change in other assets .............................................. 957 (409)
Net Cash Used for Investing Activities ............................ (14,483) (15,524)
Cash Provided by (Used for) Financing Activities:
Change in notes payable ............................................. 231 1,262
Repayment of long-term debt ......................................... (50) (430)
Recovery of investment in tax benefits .............................. 860 414
Deferred income taxes from investment in tax benefits ............... (2,136) (1,950)
Issuance (purchase) of treasury stock ............................... (1,919) (16,694)
Change in other long-term liabilities ............................... (3,198) 5,949
Cash dividends paid ................................................. (27,570) (27,030)
Net Cash Used for Financing Activities ............................ (33,782) (38,479)
Effect of Exchange Rate Changes on Cash ............................... 34 347
Net Change in Cash and Cash Equivalents ............................... (5,971) (6,527)
Cash and Cash Equivalents at Beginning of Year ........................ 79,402 58,619
Cash and Cash Equivalents at End of Period ............................ $ 73,431 $ 52,092
Supplemental Cash Flow Information:
Income taxes paid during the period ................................. $ 41,850 $ 25,369
Interest paid during the period ..................................... 2,096 1,712
Noncash Investing and Financing Activities:
Noncash aspects of sale of business -
Receivables incurred ............................................. $ -- $ (893)
Noncash Aspects of Acquisitions:
Liabilities assumed or incurred ..................................... $ 6 $ --
Treasury stock issued (returned)
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, 1995 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, 1996, the consolidated results of
operations for the three months and six months ended February 29, 1996 and
February 28, 1995, and the consolidated cash flows for the six months ended
February 29, 1996 and February 28, 1995. 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,
1995.
The results of operations for the three and six months ended February 29, 1996
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 Feb. 29, 1996 and Feb. 28, 1995
Sales and Service
Revenues Operating Profit
1996 1995 1996 1995
(In thousands)
Lighting Equipment ................................................................ $ 206,454 $ 200,753 $ 13,776 $ 12,580
Textile Rental .................................................................... 129,803 131,751 9,247 7,485
Chemical .......................................................................... 84,355 80,192 6,222 6,311
Other ............................................................................. 61,594 53,114 3,052 3,691
$ 482,206 $ 465,810 32,297 30,067
Corporate and other ............................................................... (558) (1,076)
Interest Expense .................................................................. (1,019) (960)
Total ............................................................................. $ 30,720 $ 28,031
Six Months Ended Feb. 29, 1996 and Feb. 28, 1995
Sales and Service
Revenues Operating Profit
1996 1995 1996 1995
(In thousands)
Lighting Equipment ................................................................ $ 414,732 $ 404,559 $ 30,154 $ 26,270
Textile Rental .................................................................... 262,511 267,853 19,000 18,801
Chemical .......................................................................... 176,462 168,144 15,927 15,612
Other ............................................................................. 121,051 106,238 6,142 6,760
$ 974,756 $ 946,794 71,223 67,443
Corporate and other ............................................................... (1,310) (3,887)
Interest Expense .................................................................. (2,098) (1,790)
Total ............................................................................. $ 67,815 $ 61,766
3. INVENTORIES:
Major classes of inventory as of February 29, 1996 and August 31, 1995 were as
follows:
February 29, August 31,
1996 1995
(In thousands)
Raw Materials and Supplies ................... $ 80,493 $ 87,470
Work-in-Process .............................. 9,501 9,879
Finished Goods ............................... 92,434 88,440
Total ................................... $182,428 $185,789
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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
29, 1996. Net working capital was $451.1 million, compared with $437.8 million
at August 31, 1995, and the current ratio was 3.6, up from 3.2 at year end. Cash
and short-term investments were $76.0 million compared with $83.0 million at
August 31. For the first half ended February 29, the company invested $31.7
million in capital expenditures and acquisitions. Long-term debt and other
long-term liabilities were 13.2 percent of total capitalization, down from 13.7
percent at August 31. Cash provided by operating activities was $42.3 million,
compared with $47.1 million for the first half last year.
Capital expenditures, exclusive of acquisition spending, were $31.1 million for
the first six months this year and $22.5 million for the prior-year period. The
lighting equipment division continued its investment in equipment replacement
and process improvements and tooling for new products. For the six months,
textile rental division spending consisted primarily of replacement and
improvement of facilities, equipment and vehicles. Prior-year spending included
the lighting equipment division's manufacturing equipment replacements and
improvements and construction of the Mexican production facility and the textile
rental division's fleet upgrades and facility improvements. Acquisition spending
was minimal in both periods.
Dividend payments for the first half totaled $27.6 million, or 57 cents per
share, compared with $27.0 million, or 55 cents per share, for the prior-year
period. Effective January, 1996, the regular quarterly dividend rate was
increased 3.6 percent to 29 cents per share, or an annual rate of $1.16 per
share. During the second quarter, the company repurchased 125,000 of its shares
under the board approved 2.0 million share standing authorization. The company
announced plans to accelerate this program.
For the periods presented, capital expenditures, working capital needs,
dividends, acquisitions, and share repurchases were financed primarily with
internally generated funds. European operations were supplemented by short-term
borrowings in the European market. Contractual commitments for capital and
acquisition spending during the coming twelve months total $16 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 $59 million in 1995, $43 million in 1994, and $36 million in
1993. Current liquid assets and internally generated funds are expected to be
more than adequate to meet anticipated general operating cash requirements for
the next twelve months. 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' earnings per share for the second quarter ended
February 29, 1996 increased 10.6 percent to 40 cents. Sales for the quarter
increased 3.5 percent to $482 million. Net income of $19.3 million was 9.5
percent higher than the $17.6 million reported in last year's second quarter.
Since there were, on average, 495,000 fewer shares outstanding during this
year's quarter, earnings per share increased at the greater rate of 10.6
percent.
For the fiscal first half, sales increased $28.0 million, or 3.0 percent, to
$975 million. Net income increased $3.8 million, or 9.9 percent, to $42.5
million. Earnings per share increased 11.4 percent to 88 cents.
The lighting equipment division led second quarter performance and continued its
growth with sales advancing 2.8 percent to $206 million from $201 million last
year. For the six months, sales increased 2.5 percent to $415 million. Increases
in both periods were reflective of pricing gains offset somewhat by lower unit
volumes. For the quarter, operating income advanced 9.5 percent to 6.7 percent
of revenues, compared with 6.3 percent the year earlier. For the first half,
operating income grew 14.8 percent to 7.3 percent of revenues, compared with 6.5
percent the prior year. Better pricing, a more favorable product mix and cost
reduction efforts increased profit margins in both periods.
The textile rental sector experienced a 1.5 percent decrease in sales for the
second quarter, from $132 million to $130 million, and a 2.0 percent decrease
for the half, from $268 million to $263 million. The declines in both periods
were due
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to a combination of inclement weather and branches divested late last year.
Income improved 23.5 percent to $9.2 million for the quarter as two
non-strategic branches were sold. Operating income increased only slightly from
the prior-year first half as the healthcare market remained under pressure, but
the company continued to build its hospitality and uniform businesses.
Chemical segment sales, benefiting from both improved pricing and unit volume
gains, advanced 5.2 percent to $84 million for the quarter and 4.9 percent to
$176 million for the first half. Operating income declined to 7.4 percent of
revenues for the quarter and 9.0 percent for the half, from 7.9 percent and 9.3
percent the respective prior-year periods, almost entirely as a result of raw
material prices.
The insulation and envelope divisions combined for a sales increase of 16.0
percent for the quarter and 13.9 percent for the six months. Operating profits
decreased by 17.3 percent for the quarter and 9.1 percent year-to-date largely
from an unfavorable product mix in the insulation business.
Corporate expense was lower in both current-year periods due to interest earned
on higher average investment levels. Last year's first half was also higher due
to the company's first quarter adoption of Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits."
The resulting accrual related primarily to severance agreements and the
liability for life insurance coverage for certain eligible disabled employees.
Interest expense on European loans was higher than in the prior-year period due
to increased borrowings at somewhat higher average interest rates.
The provision for income taxes was 37.3 percent of pretax income for both the
quarter and first half, compared with 37.3 percent and 37.4 percent for the
respective periods the prior year. Changes in the comparative year-to-date
effective rates resulted from variations in the relative amounts of tax exempt
income.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 11).
(b) There were no reports on Form 8-K for the three months ended February 29,
1996.
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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 12, 1996 /s/ DAVID LEVY
DAVID LEVY
EXECUTIVE VICE PRESIDENT, ADMINISTRATION
AND COUNSEL
DATE April 12, 1996 /S/ J. ROBERT HIPPS
J. ROBERT HIPPS
SENIOR VICE PRESIDENT, FINANCE
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INDEX TO EXHIBITS
Page No.
EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements:
(a)-Employment Letter Agreement between National
Service Industries, Inc. and James S. Balloun dated
February 1, 1996 .................................... 12
(b)-Nonqualified Stock Option Agreement Effective
January 3, 1996 between National Service Industries,
Inc. and James S. Balloun ........................... 17
(c)-Severance Protection Agreement between National
Service Industries, Inc. and James S. Balloun dated
February 1, 1996 .................................... 23
(d)-Bonus Letter Agreement between National Service
Industries, Inc. and James S. Balloun dated February 1,
1996 ................................................ 38
(e)-Appendix B to Restated and Amended Supplemental
Retirement Plan for Executives of National Service
Industries, Inc. (Supplemental Pension Plan) Effective
February 1, 1996 .................................... 40
EXHIBIT 11 - Computation of Net Income per Share of Common Stock.. 41
EXHIBIT 27 - Financial Data Schedules ............................ 42