Page 1 of 14
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, 1997 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 - 45,128,138 shares as of March 31, 1997.
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS -
FEBRUARY 28, 1997 AND AUGUST 31, 1996 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS AND SIX MONTHS ENDED FEBRUARY 28, 1997
AND FEBRUARY 29, 1996 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
SIX MONTHS ENDED FEBRUARY 28, 1997 AND
FEBRUARY 29, 1996 5
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,
1997 1996
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents ........................... $ 30,648 $ 58,662
Short-term investments .............................. 551 551
Receivables, less reserves for doubtful
accounts of $6,587 at February 28, 1997
and $5,807 at August 31, 1996 .................... 239,789 269,971
Inventories, at the lower of cost (on a
first-in, first-out basis) or market ............. 164,903 169,813
Linens in service, net of amortization ............. 96,390 97,710
Deferred income taxes ............................... 10,030 2,152
Prepayments ......................................... 11,318 7,522
Total Current Assets .............................. 553,629 606,381
Property, Plant, and Equipment, at cost:
Land ................................................ 27,591 29,062
Buildings and leasehold improvements ................ 184,425 194,219
Machinery and equipment ............................. 523,391 542,056
Total Property, Plant, and Equipment ............. 735,407 765,337
Less - Accumulated depreciation and
amortization ...................................... 391,020 407,941
Property, Plant, and Equipment - net ........... 344,387 357,396
Other Assets:
Goodwill and other intangibles ...................... 85,538 89,427
Other ............................................... 35,733 41,442
Total Other Assets ................................ 121,271 130,869
Total Assets .................................... $1,019,287 $1,094,646
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ................ $ 5,566 $ 46
Notes payable ....................................... 5,657 6,696
Accounts payable .................................... 85,522 79,851
Accrued salaries, commissions, and bonuses ......... 29,944 42,788
Current portion of self insurance reserves .......... 18,118 15,396
Other accrued liabilities ........................... 40,054 52,649
Total Current Liabilities ......................... 184,861 197,426
Long-Term Debt, less current maturities .............. 26,262 24,920
Deferred Income Taxes ................................. 56,630 63,347
Self Insurance Reserves, less current portion ........ 60,228 63,369
Other Long-Term Liabilities ........................... 28,437 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 February
28, 1997 and August 31, 1996 ..................... 57,919 57,919
Paid-in capital ..................................... 11,976 11,021
Retained earnings ................................... 807,318 791,367
877,213 860,307
Less - Treasury stock, at cost (13,364,809
shares at February 28, 1997 and 11,447,036
shares at August 31, 1996) ....................... 214,344 142,299
Total Stockholders' Equity .................... 662,869 718,008
Total Liabilities and Stockholders' Equity .. $1,019,287 $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 SIX MONTHS ENDED
FEB. 28, FEB. 29, FEB. 28, FEB. 29,
1997 1996 1997 1996
Sales and Service Revenues:
Net sales of products ................ $ 371,384 $ 352,403 $ 753,147 $ 712,245
Service revenues ....................... 127,852 129,803 257,982 262,511
Total Revenues ....................... 499,236 482,206 1,011,129 974,756
Costs and Expenses:
Cost of products sold .................. 235,313 227,098 471,917 454,537
Cost of services ....................... 75,197 74,850 150,775 149,214
Selling and administrative expenses .... 155,148 150,514 313,530 302,734
Interest expense, net ................. 950 340 1,600 598
Other expense, net .................... 441 (1,316) 1,780 (142)
Total Costs and Expenses ............. 467,049 451,486 939,602 906,941
Income before Provision for Income Taxes . 32,187 30,720 71,527 67,815
Provision for (Benefit from) Income Taxes:
Current ................................ 10,459 12,991 24,965 27,218
Deferred ............................... 1,383 (1,521) 1,383 (1,922)
11,842 11,470 26,348 25,296
Net Income ............................... $ 20,345 $ 19,250 $ 45,179 $ 42,519
Per Share:
Net income ............................. $ .45 $ .40 $ .99 $ .88
Cash dividends ......................... $ .30 $ .29 $ .59 $ .57
Weighted Average Number of Shares
Outstanding (thousands) ................ 44,994 48,364 45,468 48,350
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)
SIX MONTHS ENDED
FEB. 28 FEB. 29
1997 1996
Cash Provided by (Used for) Operating Activities:
Net income ........................................... $ 45,179 $ 42,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 29,507 29,336
Provision for losses on accounts receivable ...... 2,283 2,256
Gain on the sale of property, plant, and equipment (243) (1,459)
Gain on the sale of business ..................... (924) (2,946)
Change in noncurrent deferred income taxes ....... 1,383 (1,922)
Change in assets and liabilities net of effect
of acquisitions-
Receivables .................................. 12,220 11,030
Inventories and linens in service, net ....... 321 (913)
Current deferred income taxes ................ (7,879) (5,286)
Prepayments and other ........................ (5,370) (3,669)
Accounts payable and accrued liabilities ..... (17,426) (26,686)
Changes in self-insurance reserves and
other long-term liabilities .................. (2,280) (3,198)
Net Cash Provided by Operating Activities .. 56,771 39,062
Cash Provided by (Used for) Investing Activities:
Change in short-term investments ..................... -- 1,048
Purchase of property, plant, and equipment ........... (20,190) (31,100)
Sale of property, plant, and equipment ............... 2,833 3,695
Sale of business ..................................... 31,259 11,517
Acquisitions, net of cash acquired ................... (3,609) (600)
Change in other assets ............................... 729 957
Net Cash Used for Investing Activities ............. 11,022 (14,483)
Cash Provided by (Used for) Financing Activities:
Change in notes payable .............................. (1,039) 231
Issuance (repayment) of long-term debt ............... 6,862 (50)
Recovery of investment in tax benefits ............... 661 860
Deferred income taxes from investment
in tax benefits ...................................... (1,972) (2,136)
Purchase of treasury stock ........................... (71,090) (1,919)
Cash dividends paid .................................. (27,079) (27,570)
Net Cash Used for Financing Activities ............. (93,657) (30,584)
Effect of Exchange Rate Changes on Cash ................ (2,150) 34
Net Change in Cash and Cash Equivalents ................ (28,014) (5,971)
Cash and Cash Equivalents at Beginning of Year ......... 58,662 79,402
Cash and Cash Equivalents at End of Period ............. $ 30,648 $ 73,431
Supplemental Cash Flow Information:
Income taxes paid during the period .................. $ 38,296 $ 41,850
Interest paid during the period ...................... 2,862 2,096
Noncash Investing and Financing Activities:
Noncash aspects of sale of business -
Receivables incurred .............................. $ (347) $ --
Liabilities assumed (removed) ...................... (507)
Noncash Aspects of Acquisitions:
Liabilities assumed or incurred ...................... $ (886) $ 6
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 February 28, 1997, the consolidated results of
operations for the three months and six months ended February 28, 1997 and
February 29, 1996, and the consolidated cash flows for the six months ended
February 28, 1997 and February 29, 1996. 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 six months ended February 28, 1997 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. 28, 1997 and Feb. 29, 1996
Sales and Service
Revenues Operating Profit
1997 1996 1997 1996
(In thousands)
Lighting Equipment ... $ 223,721 $ 206,454 $ 20,645 $ 13,776
Textile Rental ....... 127,852 129,803 7,301 9,247
Chemical ............. 87,695 84,355 6,624 6,222
Envelopes ............ 33,410 30,482 2,638 2,046
Other ................ 26,558 31,112 (632) 1,006
$ 499,236 $ 482,206 36,576 32,297
Corporate ............ (3,439) (1,237)
Interest expense, net (950) (340)
Total ................ $ 32,187 $ 30,720
Six Months Ended Feb. 28, 1997 and Feb. 29, 1996
Sales and Service
Revenues Operating Profit
1997 1996 1997 1996
(In thousands)
Lighting Equipment ... $ 451,168 $ 414,732 $ 42,017 $ 30,154
Textile Rental ....... 257,982 262,511 15,438 19,000
Chemical ............. 183,177 176,462 17,547 15,927
Envelopes ............ 64,761 59,965 4,751 4,162
Other ................ 54,041 61,086 947 1,980
$ 1,011,129 $ 974,756 80,700 71,223
Corporate ............ (7,573) (2,810)
Interest expense, net (1,600) (598)
Total ................ $ 71,527 $ 67,815
Page 7
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (CONTINUED)
3. INVENTORIES
Major classes of inventory as of February 28, 1997 and August 31, 1996 were
as follows:
February 28, August 31,
1997 1996
(In thousands)
Raw Materials and Supplies ............. $ 62,108 $ 73,236
Work-in-Process ........................ 10,120 9,679
Finished Goods ......................... 92,675 86,898
Total ............................. $164,903 $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. The adoption of SFAS No. 121 did not have a significant
impact on the company's financial statements. During the three months and six
months ended February 28, 1997, there were no circumstances indicating
impairment of assets.
5. RECLASSIFICATIONS
Certain amounts in the 1996 financial statements and notes have been
reclassified to conform with the 1997 presentation.
Page 8
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, 1997. Net working capital was $368.8 million, compared with $409.0 million
at August 31, 1996, and the current ratio was 3.0, compared with 3.1 at year
end. Cash and short-term investments were $31.2 million compared with $59.2
million at August 31. For the six months ended February 28, the company invested
$23.8 million in capital expenditures and acquisitions. The percent of debt to
total capitalization was 5.4 percent, up from 4.2 percent at August 31. Cash
provided by operating activities was $56.8 million, up from $39.1 million for
the first half last year.
Capital expenditures, exclusive of acquisition spending, were $20.2 million for
the first half this year and $31.1 million for the same period a year ago. In
both periods, the lighting equipment segment invested in facility improvements,
equipment replacements, process improvements, and tooling for new products and
textile rental segment spending consisted primarily of improvement of facilities
and replacement of equipment. Prior year textile rental spending also included
fleet replacements.
Current year acquisition spending of $3.6 million was the result of the chemical
segment's purchase of chemical products companies in Ohio and Canada and the
lighting equipment segment's acquisition of Lumaid, Inc., a small emergency
lighting products manufacturer in Canada. During the quarter, the company agreed
to purchase for stock Enforcer Products, Inc., a specialty chemical company with
a retail focus. The acquisition was completed during the third quarter.
Acquisition spending was minimal in the prior-year period.
Cash from divestitures totaled $31.3 million for the first half. During the
quarter, the insulation business was sold for $27.1 million. The textile rental
segment divested non-strategic businesses in both the current and prior year,
generating cash of $4.1 million and $11.5 million, respectively.
Dividend payments totaled $27.1 million, or 59 cents per share, compared with
$27.6 million, or 57 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 completed the repurchase of 2.0 million of its common shares. The
Board had previously clarified that the standing authority is to reduce
outstanding shares by 2.0 million per year, net of shares reissued. In the third
quarter, the company plans to repurchase stock to offset the dilution caused by
the $20 million in shares initially issued to purchase Enforcer.
For the periods presented, capital expenditures, working capital needs,
dividends, acquisitions, and share repurchases were financed primarily with
internally generated funds and some interim borrowing against the committed
credit facility. 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 $20 million. For the current
fiscal year, the company expects actual capital expenditures to be comparable to
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 the $250 million multi-currency committed credit facility
with eleven domestic and international 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 the anticipated general operating cash
requirements for the next twelve months.
Results of Operations
National Service Industries' earnings per share for the second quarter ended
February 28, 1997 increased 12.5 percent to 45 cents compared with the same
quarter a year ago. Sales for the quarter increased 3.5 percent to $499 million.
Net income of $20.3 million was 5.7 percent higher than the $19.3 million
reported in last year's second quarter. Second quarter 1997 pretax earnings
included gains of $0.5 million on asset sales and $1.8 million from improved
1995 workers' compensation claims experience. The second quarter of 1996
included gains of $3.5 million on asset sales. Earnings per share increased at a
greater rate of 12.5 percent due to 3.4 million fewer average shares outstanding
compared to the second quarter a year ago.
For the first half of NSI's fiscal year, sales increased $36 million, or 3.7
percent, to $1.0 billion. Net income increased $2.7 million, or 6.3 percent, to
$45.2 million. The 1997 first half pre-tax earnings included gains of $1.2
million from asset sales and $3.6 million from ongoing favorable workers'
compensation claims experience. Gains on asset sales were $4.4 million in the
first half of 1996. Earnings per share for the first six months increased 12.5
percent to 99 cents.
Page 9
The second quarter performance was led by the lighting equipment segment as a
result of continued strength in non-residential construction, growth in retail
sales and the introduction of new products. Sales advanced 8.4 percent to $224
million for the quarter and 8.8 percent to $451 million for the first half.
Operating income advanced 49.9 percent to $20.6 million for the quarter and 39.3
percent to $42.0 million for the six months as higher volumes, a more favorable
product mix, and lower manufacturing costs increased profits. Lumaid, Inc.,
acquired during the first half, is reported as part of the segment.
For the second quarter and six months, sales in the textile rental segment were
down 1.5 percent to $128 million and 1.7 percent to $258 million, respectively,
as a result of previously divested branches. Operating income declined 21.0
percent to $7.3 million from $9.2 million in the second quarter of 1996 and 18.7
percent to $15.4 million from $19.0 million for the first half of 1996.
Operating income for the quarter included gains of $0.4 million on asset sales,
a $1.1 million reduction in workers' compensation self insurance reserves, and
$2.8 million for accounting policy changes for ancillary linen revenue.
Partially offsetting the gains was a $2.2 million charge for ongoing facility
consolidations. For the first half, operating income included gains of $0.9
million on asset sales, a $2.2 million reduction in workers' compensation self
insurance reserves, and the $2.8 million for accounting policy changes for
ancillary linen revenue. The impact of the accounting changes and workers'
compensation adjustments is anticipated to be repeated in the third and fourth
quarters. The 1996 operating income included gains on asset sales of $3.4
million for the quarter and $4.1 million for the year to date. As previously
reported, the textile rental segment has concentrated on improving revenue
quality through better contract administration, focused sales efforts, and
improved service. In addition, operating costs have been reduced by
approximately $8.0 million per year. As a result of these efforts, the segment
has begun to show improved core operating profit rates. Management is currently
evaluating strategic alternatives to establish a stable operating platform and
anticipates completing this process by year end.
Chemical segment sales advanced 4.0 percent to $88 million during the second
quarter and 3.8 percent to $183 million for the year to date as a result of
improved productivity of the sales force and incremental volumes from U.S. and
Canadian acquisitions. Operating income grew 6.5 percent to 7.6 percent of
revenues from 7.4 percent the prior-year second quarter and 10.2 percent to 9.6
percent of revenues from 9.0 percent the prior first half. The gains resulted
from improved domestic volume. The Enforcer acquisition closed on March 12,
1997, and will be reported as part of the chemical segment in future periods.
The European operations continued to report a small loss for the first half,
which was equal to the loss last year.
The envelope segment increased sales during the quarter by 9.6 percent to $33
million and for the six months by 8.0 percent to $65 million. Operating profit
improved by 28.9 percent to $2.6 million for the quarter and 14.2 percent to
$4.8 million for the first half due to stable paper costs and improved plant
efficiencies.
The insulation business was sold on February 28, 1997, for $27.1 million in
cash. Due to the transition in ownership, sales slipped by 14.6 percent to $27
million resulting in a loss for the quarter of $0.6 million. Year to date, the
operating profit was $0.9 million.
Corporate expenses were up $2.2 million for the second quarter and $4.8 million
year to date due to accrued long-term incentive plan costs and consulting
expenses for refining strategic planning and introducing economic profit. 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 36.8 percent of pretax income for the quarter
and year to date, compared with 37.3 percent for both prior-year periods.
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 slowdown 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 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,
1997.
Page 11
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, 1997 /s/ David Levy
DAVID LEVY
EXECUTIVE VICE PRESIDENT, ADMINISTRATION
AND COUNSEL
DATE April 14, 1997 /s/ Brock Hattox
BROCK HATTOX
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Page 12
INDEX TO EXHIBITS
EXHIBIT 11 Computation of Net Income per Share of 13
Common Stock
EXHIBIT 27 Financial Data Schedules 14