Page 1 of 96
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 November 30, 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 - 45,339,395 shares as of December 31, 1996.
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS -
NOVEMBER 30, 1996 AND AUGUST 31, 1996 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 5
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)
November 30, August 31,
1996 1996
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents ........................... $ 50,850 $ 58,662
Short-term investments .............................. 551 551
Receivables, less reserves for doubtful
accounts of $6,891 at November 30, 1996
and $5,807 at August 31, 1996 .................... 268,328 269,971
Inventories, at the lower of cost (on a
first-in, first-out basis) or market ............. 171,662 169,813
Linens in service, net of amortization ............. 96,290 97,710
Deferred income taxes ............................... 4,719 2,152
Prepayments ......................................... 11,449 7,522
Total Current Assets .............................. 603,849 606,381
Property, Plant, and Equipment, at cost:
Land ................................................ 28,904 29,062
Buildings and leasehold improvements ................ 191,608 194,219
Machinery and equipment ............................. 533,716 542,056
Total Property, Plant, and Equipment ............. 754,228 765,337
Less - Accumulated depreciation and
amortization ...................................... 400,701 407,941
Property, Plant, and Equipment - net ........... 353,527 357,396
Other Assets:
Goodwill and other intangibles ...................... 87,888 89,427
Other ............................................... 40,462 41,442
Total Other Assets ................................ 128,350 130,869
Total Assets .................................... $1,085,726 $1,094,646
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ................ $ 47 $ 46
Notes payable ....................................... 6,474 6,696
Accounts payable .................................... 77,159 79,851
Accrued salaries, commissions, and bonuses ......... 38,951 42,788
Current portion of self insurance reserves .......... 15,909 15,396
Other accrued liabilities ........................... 72,041 52,649
Total Current Liabilities ......................... 210,581 197,426
Long-Term Debt, less current maturities .............. 24,889 24,920
Deferred Income Taxes ................................. 62,164 63,347
Self Insurance Reserves, less current portion ........ 63,369 63,369
Other Long-Term Liabilities ........................... 28,408 27,576
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 November
30, 1996 and August 31, 1996 ..................... 57,919 57,919
Paid-in capital ..................................... 11,681 11,021
Retained earnings ................................... 803,103 791,367
872,703 860,307
Less - Treasury stock, at cost (12,391,884 shares at
November 30, 1996 and 11,447,036 shares at August
31, 1996) ........................................ 176,388 142,299
Total Stockholders' Equity .................... 696,315 718,008
Total Liabilities and Stockholders' Equity .. $1,085,726 $1,094,646
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
NOVEMBER 30
1996 1995
Sales and Service Revenues:
Net sales of products ........................... $ 381,763 $ 359,842
Service revenues ................................ 130,130 132,708
Total Revenues ................................ 511,893 492,550
Costs and Expenses:
Cost of products sold ........................... 236,604 227,439
Cost of services ................................ 75,578 74,364
Selling and administrative expenses ............. 158,382 152,220
Interest expense ................................ 1,341 1,242
Other expense, net ............................. 648 190
Total Costs and Expenses ...................... 472,553 455,455
Income before Provision for Income Taxes .......... 39,340 37,095
Provision for (Benefit from) Income Taxes:
Current ......................................... 14,506 14,227
Deferred ........................................ -- (401)
14,506 13,826
Net Income ........................................ $ 24,834 $ 23,269
Per Share:
Net income ...................................... $ .54 $ .48
Cash dividends .................................. $ .29 $ .28
Weighted Average Number of Shares
Outstanding (thousands) ......................... 45,957 48,343
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)
THREE MONTHS ENDED
NOVEMBER 30
1996 1995
Cash Provided by (Used for) Operating Activities:
Net income ........................................... $ 24,834 $ 23,269
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 14,832 14,394
Provision for losses on accounts receivable ...... 1,254 1,161
Loss (gain) on the sale of property, plant,
and equipment ................................... (222) (932)
Loss (gain) on the sale of business .............. (401) 63
Change in noncurrent deferred income taxes ....... -- (401)
Change in assets and liabilities net of effect
of acquisitions-
Receivables .................................. 888 9,518
Inventories and linens in service, net ....... (1,408) (5,824)
Current deferred income taxes ................ (2,568) 896
Prepayments and other ........................ (3,985) (4,127)
Accounts payable and accrued liabilities ..... 12,690 (2,694)
Changes in self-insurance reserves and other
long-term liabilities ........................ 832 484
Net Cash Provided by Operating Activities .. 46,746 35,807
Cash Provided by (Used for) Investing Activities:
Change in short-term investments ..................... -- 1,049
Purchase of property, plant, and equipment .......... (9,830) (14,338)
Sale of property, plant, and equipment .............. 1,816 1,548
Sale of business .................................... 1,989 --
Acquisitions, net of cash acquired .................. (1,876) (278)
Change in other assets .............................. 687 1,154
Net Cash Used for Investing Activities ............. (7,214) (10,865)
Cash Provided by (Used for) Financing Activities:
Repayment of long-term debt .......................... (30) (35)
Recovery of investment in tax benefits ............... 397 430
Deferred income taxes from investment in tax benefits (1,183) (1,068)
Issuance (purchase) of treasury stock ................ (33,429) 1,590
Cash dividends paid .................................. (13,435) (13,538)
Net Cash Used for Financing Activities ............. (47,680) (12,621)
Effect of Exchange Rate Changes on Cash ................ 336 846
Net Change in Cash and Cash Equivalents ................ (7,812) 13,167
Cash and Cash Equivalents at Beginning of Year ......... 58,662 79,402
Cash and Cash Equivalents at End of Period ............. $ 50,850 $ 92,569
Supplemental Cash Flow Information:
Income taxes paid during the period .................. $ 7,035 $ 12,330
Interest paid during the period ...................... 1,238 1,031
Noncash Investing and Financing Activities:
Noncash aspects of sale of business -
Receivables incurred .............................. $ (347) $ --
Liabilities assumed (removed) ...................... (10)
Noncash Aspects of Acquisitions:
Liabilities assumed or incurred ...................... $ (300) $ --
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, 1996 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 November 30, 1996, the consolidated results of
operations for the three months ended November 30, 1996 and 1995, and the
consolidated cash flows for the three months ended November 30, 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, 1996.
The results of operations for the three months ended November 30, 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 November 30
Sales and Service
Revenues Operating Profit
1996 1995 1996 1995
(In thousands)
Lighting Equipment ........... $ 227,447 $ 208,278 $ 21,372 $ 16,378
Textile Rental ............... 130,130 132,708 8,137 9,753
Chemical ..................... 95,482 92,107 10,923 9,705
Envelopes .................... 31,351 29,483 2,113 2,116
Other ........................ 27,483 29,974 1,579 974
$ 511,893 $ 492,550 44,124 38,926
Corporate .................... (4,134) (1,573)
Interest expense, net ........ (650) (258)
Total ........................ $ 39,340 $ 37,095
3. INVENTORIES:
Major classes of inventory as of November 30, 1996 and August 31, 1996 were as
follows:
November 30, August 31,
1996 1996
(In thousands)
Raw Materials and Supplies ................... $ 71,799 $ 73,236
Work-in-Process .............................. 8,882 9,679
Finished Goods ............................... 90,981 86,898
Total ................................... $171,662 $169,813
4. ACCOUNTING STANDARDS ADOPTED
During the first quarter of fiscal 1997, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
requires that long-lived assets and certain intangibles be reviewed whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. During the quarter ended November 30, 1996, there were
no circumstances indicating impairment of assets.
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 strong financial condition at
November 30, 1996. Net working capital was $393.3 million, compared with $409.0
million at August 31, 1996, and the current ratio was 2.9, compared with 3.1 at
year end. Cash and short-term investments were $51.4 million compared with $59.2
million at August 31. For the first quarter, the company invested $11.7 million
in capital expenditures and acquisitions. The percent of debt to total
capitalization was 4.3 percent, up slightly from 4.2 percent at August 31. Cash
provided by operating activities was $46.7 million, up from $35.8 million for
the first quarter last year.
Capital expenditures, exclusive of acquisition spending, were $9.8 million
for the first quarter this year and $14.3 million for the same period a year
ago. In both periods, the lighting equipment segment invested in facilities
improvements, equipment replacements, process improvements, and tooling for new
products while textile rental segment spending consisted primarily of
improvement of facilities and replacement of equipment and vehicles.
Current year acquisition spending of $1.9 million was primarily the result
of the chemical segment's purchase of an Ohio-based chemical products company.
Acquisition spending was minimal in the prior-year period.
During the quarter, the textile rental segment divested several
non-strategic businesses, generating cash of $2.0 million. There were no
divestitures during the prior-year first quarter.
Dividend payments totaled $13.4 million, or 29 cents per share, compared
with $13.5 million, or 28 cents per share, for the prior-year period. Effective
January, 1997, the regular quarterly dividend rate was increased 3.4 percent to
30 cents per share, or an annual rate of $1.20 per share. During the quarter,
the company repurchased 1.0 million of its common shares. The Board has
clarified that the standing authority is to reduce outstanding shares by 2.0
million per year. The company expects to repurchase the remaining 1.0 million
shares during the second fiscal quarter.
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 $13 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 $66 million in 1996, $59 million in 1995, and $43 million in
1994. Late in fiscal 1996, the company negotiated a $250 million multi-currency
committed credit facility, of which $187.5 million has been provided through
domestic banks and $62.5 million through foreign banks. The company has
complimentary lines of credit totaling $132 million, of which $110 million has
been provided domestically and $22 million is available on a multi-currency
basis primarily from a European bank. Current liquid assets, internally
generated funds, and the available credit are expected to meet most of the
anticipated general operating cash requirements for the next twelve months.
Results of Operations
National Service Industries' earnings per share for the first quarter ended
November 30, 1996 increased 12.3 percent to 54 cents compared with the same
quarter a year ago. Sales for the quarter increased 3.9 percent to $512 million.
Net income of $24.8 million was 6.7 percent higher than the $23.3 million
reported in last year's first quarter. First quarter 1997 pretax earnings
included gains of $0.5 million on asset sales, compared with $0.7 million in
1996, and a $1.8 million reduction in self insurance reserves due to improved
1995 workers' compensation claims experience. Earnings per share increased at a
greater rate of 12.3 percent due to 2.4 million fewer average shares outstanding
compared to the first quarter a year ago.
Page 8
The lighting equipment segment grew sales by 9.2 percent to $227 million
from $208 million the prior year. The stronger sales increase is attributable to
higher non-residential construction awards. Operating income advanced 30.5
percent to 9.4 percent of revenues, compared with 7.9 percent the year earlier,
due to higher volume, favorable product mix, and lower manufacturing costs.
Sales in the textile rental segment were down 1.9 percent from $133 million
to $130 million as a result of previously divested plants. Operating income
declined 16.6 percent to $8.1 million. Operating income included gains of $0.5
million on asset sales and a $1.1 million reduction in self insurance reserves
due to improved 1995 workers' compensations claims experience. In 1996 operating
income included $0.7 million in gains on asset sales. Although the performance
of this segment continues to be disappointing, progress has been made in
improving customer retention and pricing. Costs associated with merchandise
placed in service, plant operations and customer service programs increased due
to planned retention and quality initiatives. During the quarter the segment
consolidated three branches, sold one facility and three idle properties, and
reduced personnel at its headquarters and field operations.
Chemical segment sales advanced 3.7 percent to $95 million from $92 million
the prior year. Operating income grew 12.6 percent to 11.4 percent of revenues
from 10.5 percent the prior-year period. The gains resulted from improved
domestic volume, lower costs, and stronger international performance.
The envelope segment increased sales by 6.3 percent to $31 million from $29
million the prior year. Operating profit was even at $2.1 million.
A letter of intent was signed with Performance Contracting Group to sell
the insulation business at slightly over its book value. Sales for this segment
were $27 million and operating profits increased to $1.6 million due to lower
material and operating costs. The anticipated second quarter sale is forecast to
slightly reduce total year earnings per share, since the immediate returns of
the reinvested proceeds will not be able to offset the operating profits of the
business.
Corporate expenses were up $2.6 million due to accrued long-term incentive
plan costs and consulting expenses for introducing economic profit and refining
strategic planning. These expenditures are intended to accelerate the company's
profitable growth. Net interest increased slightly due to the share repurchase
initiatives.
The provision for income taxes was 36.9 percent of pretax income for the
quarter, compared with 37.3 percent the prior-year period. Changes in the
comparative year-to-year effective rates resulted from variations in the
relative amounts of tax exempt income.
From time to time, the company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the company notes that a variety of factors
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 that may affect the
operations, performance, development and results of the company's business
include without limitation the following: (a) the uncertainty of general
business and economic conditions, particularly the potential for a slow down in
nonresidential construction awards; (b) the ability to achieve strategic
initiatives, including but not limited to the ability to achieve sales growth
across the business segments through a combination of increased pricing, sales
force, and new products and improved customer service.
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 November 30,
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 January 14, 1997 /S/ DAVID LEVY
DAVID LEVY
EXECUTIVE VICE PRESIDENT, ADMINISTRATION
AND COUNSEL
DATE January 14, 1997 /S/ BROCK HATTOX
BROCK HATTOX
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Page 11
INDEX TO EXHIBITS
Page No.
EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements:
(1) - Severance Protection Agreements between National Reference is made to Exhibit
Service Industries, Inc. and 10(iii)A(c) of registrant's Form
(a) James S. Balloun (February 1, 1996) 10-Q for the quarter ended February
(b) Stewart A.Searle III (June 19, 1996) 29, 1996, which is incorporated
(c) Brock A. Hattox (September 9, 1996) herein by reference.
(2) - Bonus Letter Agreements between National Reference is made to Exhibit
Service Industries, Inc. and 10(iii)A(j) of registrant's Form 10-K
(a) James S. Balloun (February 1, 1996) for the fiscal year ended August 31,
(b) David Levy (October 1, 1989) 1989 and to Exhibit 10(iii)A(d) of
(c) Stewart A. Searle III (June 19, 1996) registrant's Form 10-Q for the
(d) Brock A. Hattox (September 9, 1996) quarter ended February 29, 1996,
which are incorporated herein by
reference.
(3) - Incentive Stock Option Agreements between Reference is made to Exhibit
National Service Industries, Inc. and 10(iii)A(l) of registrant's Form
(a) D. Raymond Riddle 10-K for the fiscal year ended
(b) Don W. Hubble August 31, 1989, which is
(c) David Levy incorporated herein by reference.
(d) J. Robert Hipps
(e) Stewart A. Searle III
(f) Brock A. Hattox
(4) - Nonqualified Stock Option Agreement for Corporate Reference is made to Exhibit
Officers Effective Beginning September 21, 1994 10(iii)A(j) of registrant's Form
between National Service Industries, Inc. and 10-K for the fiscal year ended
(a) D. Raymond Riddle August 31, 1992, which is
(b) Don W. Hubble incorporated herein by reference.
(c) David Levy
(d) Brock A. Hattox
(5) - Incentive Stock Option Agreement Effective 13
Beginning September 17, 1996 between National
Service Industries, Inc. and
(a) James S. Balloun
(b) David Levy
(c) Stewart A. Searle III
(6) - Nonqualified Stock Option Agreement for Executive 19
Officers Effective Beginning September 17, 1996
between National Service Industries, Inc. and
(a) James S. Balloun
(b) David Levy
(c) Stewart A. Searle III
(d) Brock A. Hattox
Page 12
INDEX TO EXHIBITS
Page No.
(7) - National Service Industries, Inc. Long-Term 25
Achievement Incentive Plan Effective
September 17, 1996
(8) - Aspiration Achievement Incentive Award Agreements 47
between National Service Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(d) Stewart A. Searle III
[a confidential portion of which has been omitted
and filed separately with the Securities and
Exchange Commission]
(9) - National Service Industries, Inc. 62
Supplemental Deferred Savings Plan
Effective September 18, 1996
(10) - Letter Agreement Between National Service 93
Industries, Inc. and Don W. Hubble Dated
October 18, 1996, amending as of that date
the Incentive Stock Option Agreement
Dated September 15, 1993, the Incentive
Stock Option Agreement Dated September
21, 1994, the Nonqualified Stock Option
Agreement Dated September 21, 1994, the
Incentive Stock Option Agreement Dated
September 20, 1995, and the Nonqualified
Stock Option Agreement Dated September
20, 1995
EXHIBIT 11 Computation of Net Income per Share of 95
Common Stock
EXHIBIT 27 Financial Data Schedules 96