Page 1 of 21
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 May 31, 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 - 47,532,030 shares as of June 30, 1996.
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS -
MAY 31, 1996 AND AUGUST 31, 1995 ............................. 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS AND NINE MONTHS ENDED MAY 31, ................... 4
1996 AND 1995
CONSOLIDATED STATEMENTS OF CASH FLOWS - ............................ 5
NINE MONTHS ENDED MAY 31, 1996 AND 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ......................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 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)
May 31, August 31,
1996 1995
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 79,307 $ 79,402
Short-term investments ............................. 2,551 3,598
Receivables, less reserves for doubtful
accounts of $8,981 at May 31, 1996
and $6,467 at August 31, 1995 .................... 255,564 266,056
Inventories, at the lower of cost (on a
first-in, first-out basis) or market ............. 177,503 185,789
Linens in service, net of amortization ............. 94,833 88,605
Deferred income taxes .............................. 7,145 10,221
Prepayments ........................................ 8,997 6,739
Total Current Assets ............................. 625,900 640,410
Property, Plant, and Equipment, at cost:
Land ............................................... 29,587 31,016
Buildings and leasehold improvements ............... 194,197 192,023
Machinery and equipment ............................ 536,071 503,868
Total Property, Plant, and Equipment ............. 759,855 726,907
Less - Accumulated depreciation and
amortization ..................................... 403,873 377,003
Property, Plant, and Equipment - net ........... 355,982 349,904
Other Assets:
Goodwill and other intangibles ..................... 89,905 101,410
Other .............................................. 39,324 39,622
Total Other Assets ............................... 129,229 141,032
Total Assets ................................... $1,111,111 $1,131,346
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ............... $ 54 $ 87
Notes payable ...................................... 6,529 6,399
Accounts payable ................................... 69,801 81,524
Accrued salaries, commissions, and bonuses ......... 37,469 43,944
Current portion of self insurance reserves ......... 15,769 16,276
Other accrued liabilities........................... 49,973 54,340
Total Current Liabilities ........................ 179,595 202,570
Long-Term Debt, less current maturities .............. 26,737 26,776
Deferred Income Taxes ................................ 61,509 65,756
Self Insurance Reserves, less current portion ........ 68,515 67,830
Other Long-Term Liabilities .......................... 25,999 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 May
31, 1996 and August 31, 1995 ..................... 57,919 57,919
Paid-in capital .................................... 10,830 8,065
Retained earnings .................................. 773,870 746,256
842,619 812,240
Less - Treasury stock, at cost (10,204,248 shares at
May 31, 1996 and 9,609,261 shares at August
31, 1995) ........................................ 93,863 67,836
Total Stockholders' Equity ................... 748,756 744,404
Total Liabilities and Stockholders ......... $1,111,111 $1,131,346
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
Page 4
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per-share data)
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31 MAY 31
1996 1995 1996 1995
Sales and Service Revenues:
Net sales of products ......................... $ 381,114 $ 363,765 $ 1,093,359 $ 1,042,706
Service revenues .............................. 135,756 142,033 398,267 409,886
Total Revenues .............................. 516,870 505,798 1,491,626 1,452,592
Costs and Expenses:
Cost of products sold ......................... 237,414 233,668 691,951 669,891
Cost of services .............................. 77,078 75,227 226,292 225,054
Selling and administrative exp ................ 157,395 153,085 460,438 447,001
Interest expense .............................. 1,082 1,002 3,180 2,792
Other expense (income), net ................... (435) 1,752 (2,386) 5,024
Total Costs and Expenses .................... 472,534 464,734 1,379,475 1,349,762
Income before Provision for Inco ................ 44,336 41,064 112,151 102,830
Provision for (Benefit from) Income Taxes:
Current ....................................... 15,779 18,842 42,997 41,973
Deferred ...................................... 880 (3,405) (1,042) (3,462)
16,659 15,437 41,955 38,511
Net Income ...................................... $ 27,677 $ 25,627 $ 70,196 $ 64,319
Per Share:
Net income .................................... $ .58 $ .53 $ 1.46 $ 1.32
Cash dividends ................................ $ .29 $ .28 $ .86 $ .83
Weighted Average Number of Shares
Outstanding (thousands) ....................... 48,059 48,382 48,240 48,813
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 5
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)
NINE MONTHS ENDED
MAY 31
1996 1995
Cash Provided by (Used for) Operating Activities:
Net income ................................................. $ 70,196 $ 64,319
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 44,184 43,467
Provision for losses on accounts receivable ............ 3,509 3,698
Loss (gain) on the sale of property, plant and equipment (1,718) 137
Loss (gain) on the sale of business .................... (2,946) (1,161)
Change in noncurrent deferred income taxes ............. (1,042) (3,462)
Change in assets and liabilities net of effect
of acquisitions-
Receivables ........................................ 6,311 (1,547)
Inventories and linens in service, net ............. 799 (19,178)
Current deferred income taxes ...................... 3,076 6,657
Prepayments and other .............................. (2,375) (1,970)
Accounts payable and accrued liabilities ........... (23,771) 9,132
Net Cash Provided by Operating Activities ........ 96,223 100,092
Cash Provided by (Used for) Investing Activities:
Change in short-term investments ........................... 1,047 (6,807)
Purchase of property, plant, and equipment ................. (48,367) (39,180)
Sale of property, plant, and equipment ..................... 5,177 6,435
Sale of business ........................................... 11,517 4,626
Acquisitions, net of cash acquired ......................... (600) (2,668)
Change in other assets ..................................... (65) (2,487)
Net Cash Used for Investing Activities ................... (31,291) (40,081)
Cash Provided by (Used for) Financing Activities:
Change in notes payable .................................... 130 1,425
Repayment of long-term debt ................................ (72) (638)
Recovery of investment in tax benefits ..................... 1,290 872
Deferred income taxes from investment in tax benefits ...... (3,205) (2,925)
Issuance (purchase) of treasury stock ...................... (23,262) (23,758)
Change in other long-term liabilities ...................... 2,674 5,121
Cash dividends paid ........................................ (41,458) (40,630)
Net Cash Used for Financing Activities ................... (63,903) (60,533)
Effect of Exchange Rate Changes on Cash ...................... (1,124) 721
Net Change in Cash and Cash Equivalents ...................... (95) 199
Cash and Cash Equivalents at Beginning of Year ............... 79,402 58,619
Cash and Cash Equivalents at End of Period ................... $ 79,307 $ 58,818
Supplemental Cash Flow Information:
Income taxes paid during the period ........................ $ 44,791 $ 34,620
Interest paid during the period ............................ 3,026 2,681
Noncash Investing and Financing Activities:
Noncash aspects of sale of business -
Receivables incurred .................................... $ -- $ (893)
Noncash Aspects of Acquisitions:
Liabilities assumed or incurred ............................ $ 6 $ 468
Treasury stock issued (returned)
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)
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 May 31, 1996, the consolidated results of operations
for the three months and nine months ended May 31, 1996 and 1995, and the
consolidated cash flows for the nine months ended May 31, 1996 and 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 nine months ended May 31, 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 May 31
Sales and Service
Revenues Operating Profit
1996 1995 1996 1995
(In thousands)
Lighting Equipment ......... $ 219,904 $ 215,987 $ 21,596 $ 16,155
Textile Rental ............. 135,756 142,033 11,519 16,005
Chemical ................... 95,657 91,129 9,394 7,407
Other ...................... 65,553 56,649 4,532 3,837
$ 516,870 $ 505,798 47,041 43,404
Corporate and other ........ (1,623) (1,338)
Interest Expense ........... (1,082) (1,002)
Total ...................... $ 44,336 $ 41,064
Nine Months Ended May 31
Sales and Service
Revenues Operating Profit
1996 1995 1996 1995
(In thousands)
Lighting Equipment ......... $ 634,636 $ 620,546 $ 51,750 $ 42,425
Textile Rental ............. 398,267 409,886 30,519 34,806
Chemical ................... 272,119 259,273 25,321 23,019
Other ...................... 186,604 162,887 10,674 10,597
$ 1,491,626 $ 1,452,592 118,264 110,847
Corporate and other ........ (2,933) (5,225)
Interest Expense ........... (3,180) (2,792)
Total ...................... $112,151 $102,830
3. INVENTORIES: Major classes of inventory as of May 31, 1996 and August 31,
1995 were as follows:
May 31, August 31,
1996 1995
(In thousands)
Raw Materials and Supplies ................... $ 77,675 $ 87,470
Work-in-Process .............................. 9,140 9,879
Finished Goods ............................... 90,688 88,440
Total ................................... $177,503 $185,789
Page 7
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 continued in solid financial condition at May 31,
1996. Net working capital was $446.3 million, up from $437.8 million at August
31, 1995, and the current ratio was 3.5, compared with 3.2 at year end. Cash and
short-term investments were $81.9 million compared with $83.0 million at August
31. For the nine months ended May 31, the company invested $49.0 million in
capital expenditures and acquisitions. Long-term debt and other long-term
liabilities were 13.9 percent of total capitalization, up slightly from 13.7
percent at August 31. Cash provided by operating activities was $96.2 million,
compared with $100.1 million through the third quarter last year.
Capital expenditures, exclusive of acquisition spending, were $48.4 million for
the first nine months this year and $39.2 million for the nine months last year.
Lighting equipment segment spending included expansion of the Mexican production
facility as well as continued investment in equipment replacements, process
improvements, and tooling for new products. Through the third quarter, textile
rental segment spending consisted primarily of replacement and improvement of
facilities, equipment and vehicles. Prior-year spending included the lighting
equipment segment's manufacturing equipment replacements and improvements and
construction of the Mexican production facility and the textile rental segment's
fleet upgrades, facility improvements, and information systems enhancements.
Acquisition spending in the current year has been minimal. Prior-year spending
of $2.7 million was mainly due to the lighting equipment segment's acquisition
of the assets of Infranor Canada, Inc., a small outdoor lighting products
company.
Dividend payments for the three quarters totaled $41.5 million, or 86 cents per
share, compared with $40.6 million, or 83 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. For the year to date, the company has repurchased 745,400 of its shares
under the board approved 2.0 million share per year standing authorization.
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 $23 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. During the
third quarter, the company has negotiated a $250 million committed credit
facility which is scheduled to close during the fourth quarter. The facility
will enhance the company's financial flexibility and provide resources to fund
future growth.
Results of Operations
National Service Industries' earnings per share for the third quarter ended May
31, 1996 increased 8.7 percent to 58 cents compared with the same quarter a year
ago. Sales for the quarter increased 2.2 percent to $517 million. Net income of
$27.7 million was 8.0 percent higher than the $25.6 million reported in last
year's third quarter. Earnings per share increased at the greater rate of 8.7
percent due to a reduction of 323,000 in average shares outstanding.
The increased third quarter profit was driven by the lighting equipment and
chemical segments. The performance of all four segments was enhanced by improved
workers compensation claims experience.
For the nine months of NSI's fiscal year, sales increased $39.0 million, or 2.7
percent, to $1.49 billion. Net income increased $5.9 million, or 9.1 percent, to
$70.2 million. Earnings per share increased 10.4 percent to $1.46.
Page 8
The lighting equipment segment continued its growth with sales for the third
quarter advancing 1.8 percent to $220 million from $216 million last year. For
the nine months, sales increased 2.3 percent to $635 million from $621 million.
The increases in both periods resulted from pricing gains, which were offset
somewhat by lower unit volumes. For the third quarter, operating income advanced
33.7 percent to 9.8 percent of revenues, compared with 7.5 percent the year
earlier. For the nine months, operating income grew 22.0 percent to 8.2 percent
of revenues, compared with 6.8 percent the prior year. Better pricing, a more
favorable product mix and cost reduction efforts, in addition to the reduction
in workers compensation costs, continued to benefit profit margins in both
current-year periods.
Sales of the textile rental segment declined 4.4 percent from $142 million to
$136 million for the quarter and 2.8 percent from $410 million to $398 million
for the nine months. The declines in both periods were due largely to lost sales
from previously divested branches. Operating income decreased 28.0 percent to
$11.5 million for the quarter and 12.3 percent to $30.5 million year to date
primarily as a result of lower prices and additional labor, maintenance, and
merchandise costs. Results for both current-year periods benefited from the
reduction in workers compensation costs and year-to-date results included the
sale of two non-strategic branches. The healthcare business continued to remain
under pressure.
Chemical segment sales advanced 5.0 percent to $96 million for the quarter and
$272 million for the nine months due largely to higher unit volumes with some
improvement in pricing. Operating income increased 26.8 percent to 9.8 percent
of revenues for the quarter and 10.0 percent to 9.3 percent of revenues for the
nine months, from 8.1 percent and 8.9 percent the respective prior-year periods.
The improvement resulted almost entirely from volume increases and lower raw
material prices.
Combined sales of the insulation and envelope businesses increased 15.7 percent
for the quarter and 14.6 percent for the year to date. Operating profits
improved by 18.1 percent for the quarter and .7 percent year-to-date. The
quarter's improvement was largely a result of the reduced workers compensation
costs. An unfavorable product mix in the insulation business and higher envelope
manufacturing costs offset the year-to-date workers compensation benefit.
Corporate expense was higher for the third quarter this year due to increased
administrative expenses. Year-to-date expense was lower and benefited from
interest earned on higher average investment levels. Last year's nine-month
expense 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." Last year's 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 37.6 percent of pretax income for the quarter
and 37.4 percent for the year to date, compared with 37.6 percent and 37.5
percent for the respective prior-year periods. Changes in the comparative
year-to-date effective rates resulted from variations in the relative amounts of
tax exempt income.
Page 9
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 May 31, 1996.
Page 10
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 10, 1996 /s/ David Levy
DAVID LEVY
EXECUTIVE VICE PRESIDENT, ADMINISTRATION
AND COUNSEL
DATE July 10, 1996 /s/ Mark R. Bachmann
MARK R. BACHMANN
VICE PRESIDENT, CONTROLLER
Page 11
INDEX TO EXHIBITS
Page No.
EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements:
(a)-Letter Agreement dated March 21, 1996 amending
the Consulting Agreement betweeen National Service
Industries, Inc. and Erwin Zaban dated December
31, 1991 12
(b)-Severance Agreement between National Service
Industries, Inc. and J. Robert Hipps dated May 14,
1996 13
(c)-Letter Agreement between National Service
Industries Inc. and J. Robert Hipps dated May 24,
1996, amending as of that date the Incentive Stock
Option Agreement dated September 19, 1990; the
Incentive Stock Option Agreement dated December
18, 1991; the Incentive Stock Option Agreement
dated September 16, 1992; the Nonqualified Stock
Option Agreement dated September 16, 1992; the
Incentive Stock Option Agreement dated September
15, 1993; the Nonqualified Stock Option Agreement
dated September 15, 1993; the Nonqualified Stock
Option Agreement dated September 21, 1994; and the
Nonqualified Stock Option Agreement dated
September 20, 1995 17
(d)-Appendix C to Restated and Amended Supplemental
Retirement Plan for Executives of National Service
Industries, Inc. (Supplemental Pension Plan)
Effective May 31, 1996 19
EXHIBIT 11 - Computations of Net Income per Share of
Common Stock 20
EXHIBIT 27 - Financial Data Schedules 21