Page 1 of 51
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 November 30, 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 - 42,995,425 shares as of December 31, 1997.
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS -
NOVEMBER 30, 1997 AND AUGUST 31, 1997 3
CONSOLIDATED STATEMENTS OF INCOME -
THREE MONTHS ENDED NOVEMBER 30, 1997 AND 1996 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
THREE MONTHS ENDED NOVEMBER 30, 1997 AND 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, except per-share data)
November 30, August 31,
1997 1997
(Unaudited)
Current Assets:
Cash and cash equivalents $ 8,001 $ 57,123
Short-term investments 152,086 205,302
Receivables, less reserves for doubtful
accounts of $5,593 at November 30, 1997
and $4,302 at August 31, 1997 262,144 258,689
Inventories, at the lower of cost (on a
first-in, first-out basis) or market 198,284 179,046
Linens in service, net of amortization 61,330 60,805
Deferred income taxes 18,701 13,077
Prepayments 10,302 6,716
Total Current Assets 710,848 780,758
Property, Plant, and Equipment, at cost:
Land 20,465 19,911
Buildings and leasehold improvements 141,661 138,933
Machinery and equipment 446,004 434,194
Total Property, Plant, and Equipment 608,130 593,038
Less-Accumulated depreciation and
amortization 366,971 356,308
Property, Plant, and Equipment-net 241,159 236,730
Other Assets:
Goodwill and other intangibles 54,955 50,166
Other 37,119 38,698
Total Other Assets 92,074 88,864
Total Assets $1,044,081 $1,106,352
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 92 $ 116
Notes payable 7,187 5,773
Accounts payable 95,321 101,512
Accrued salaries, commissions, and bonuses 30,880 34,776
Current portion of self-insurance reserves 12,928 12,540
Accrued taxes payable 9,601 38,351
Other accrued liabilities 96,783 88,932
Total Current Liabilities 252,792 282,000
Long-Term Debt, less current maturities 26,442 26,197
Deferred Income Taxes 43,058 34,093
Self-Insurance Reserves, less current portion 51,033 57,056
Other Long-Term Liabilities 38,599 35,193
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 57,919 57,919
Paid-in capital 25,443 25,521
Retained earnings 854,225 841,045
937,587 924,485
Less - Treasury stock, at cost (14,884,919
shares at November 30, 1997 and 13,719,834
shares at August 31, 1997) 305,430 252,672
Total Stockholders' Equity 632,157 671,813
Total Liabilities and Stockholders' Equity $1,044,081 $1,106,352
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
NOVEMBER 30
(In thousands, except per-share data) 1997 1996
Sales and Service Revenues:
Net sales of products $ 409,518 $ 381,763
Service revenues 78,066 130,130
Total Revenues 487,584 511,893
Costs and Expenses:
Cost of products sold 249,091 236,604
Cost of services 45,148 75,578
Selling and administrative expenses 152,628 158,382
Interest (income) expense, net (2,002) 1,341
Other expense, net 364 648
Total Costs and Expenses 445,229 472,553
Income before Provision for Income Taxes 42,355 39,340
Provision for Income Taxes 15,687 14,506
Net Income $ 26,668 $ 24,834
Per Share:
Net income $ .61 $ .54
Cash dividends $ .30 $ .29
Weighted Average Number of Shares
Outstanding (thousands) 43,600 45,957
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)
THREE MONTHS ENDED
NOVEMBER 30
1997 1996
Cash Provided by (Used for) Operating Activities
Net income $ 26,668 $ 24,834
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 11,831 14,832
Provision for losses on accounts receivable 1,172 1,254
Gain on the sale of property, plant,
and equipment (2,106) (222)
Gain on the sale of businesses (1,011) (401)
Change in assets and liabilities net of
effect of acquisitions and divestitures-
Receivables (3,716) 888
Inventories and linens in service, net (19,795) (1,408)
Deferred income taxes 3,423 (2,568)
Prepayments and other (3,529) (3,985)
Accounts payable and accrued liabilities (31,056) 12,690
Self-insurance reserves and other
long-term liabilities (2,616) 832
Net Cash Provided by (Used for)
Operating Activities (20,735) 46,746
Cash Provided by (Used for) Investing Activities
Change in short-term investments 53,216 --
Purchases of property, plant, and equipment (14,034) (9,830)
Sale of property, plant, and equipment 1,499 1,816
Sale of businesses 1,440 1,989
Acquisitions (6,077) (1,876)
Change in other assets 1,809 687
Net Cash Provided by (Used for)
Investing Activities 37,853 (7,214)
Cash Provided by (Used for) Financing Activities
Change in notes payable 109 --
Repayment of long-term debt (25) (30)
Recovery of investment in tax benefits -- 397
Deferred income taxes from investment in
tax benefits -- (1,183)
Purchase of treasury stock, net (52,836) (33,429)
Cash dividends paid (13,301) (13,435)
Net Cash Used for Financing Activities (66,053) (47,680)
Effect of Exchange Rate Changes on Cash (187) 336
Net Change in Cash and Cash Equivalents (49,122) (7,812)
Cash and Cash Equivalents at Beginning of Period 57,123 58,662
Cash and Cash Equivalents at End of Period $ 8,001 $ 50,850
Supplemental Cash Flow Information:
Income taxes paid during the period $ 38,017 $ 7,305
Interest paid during the period 1,822 1,238
Noncash Investing and Financing Activities:
Noncash aspects of sale of businesses--
Receivables incurred $ -- $ 347
Liabilities assumed -- 10
Noncash aspects of acquisitions--
Liabilities assumed or incurred $ 2,061 $ 300
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, 1997 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, 1997, the consolidated results of
operations for the three months ended November 30, 1997 and 1996, and the
consolidated cash flows for the three months ended November 30, 1997 and 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, 1997.
The results of operations for the three months ended November 30, 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 November 30
Sales and Service
Revenues Operating Profit
1997 1996 1997 1996
(In thousands)
Lighting Equipment $ 268,658 $ 227,447 $ 27,637 $ 21,372
Chemical 105,859 95,482 8,614 10,923
Textile Rental 78,066 130,130 6,131 8,137
Envelope 35,001 31,351 2,534 2,113
Other -- 27,483 -- 1,579
$ 487,584 $ 511,893 44,916 44,124
Corporate (4,563) (4,134)
Interest income (expense), net 2,002 (650)
Total $ 42,355 $ 39,340
3. INVENTORIES:
Major classes of inventory as of November 30, 1997 and August 31, 1997 were as
follows:
November 30, August 31,
1997 1997
(In thousands)
Raw Materials and Supplies $ 78,272 $ 71,266
Work-in-Process 10,142 10,572
Finished Goods 109,870 97,208
Total $ 198,284 $ 179,046
Page 7
4. NEW ACCOUNTING STANDARD
During the quarter ending February 28, 1998, the company is required to adopt
Statement of Financial Accounting Standards No. 128, "Earnings per Share." SFAS
No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings per
Share," and promulgates new accounting standards for the computation and manner
of presentation of the company's earnings per share. Earlier application is not
permitted; however, upon adoption, the company will be required to restate
previously reported annual and interim earnings per share in accordance with the
provisions of SFAS No. 128. The adoption of SFAS No. 128 will not have a
material impact on the computation or manner of presentation of the company's
earnings per share as currently or previously presented under APB 15. The
following table represents a reconciliation of basic and diluted weighted
average shares and a pro forma calculation of earnings per share using the
guidelines of SFAS No. 128.
Three Months Ended
November 30
1997 1996
(In thousands, except per-share data)
Basic weighted average shares outstanding,
including shares contingently issuable 43,652 45,957
Add: Shares of common stock assumed issued
upon exercise of stock options using
the "Treasury Stock" method as it applies
to the computation of diluted earnings
per share 452 258
Diluted weighted average shares outstanding 44,104 46,215
Net earnings used in the computation of basic
and diluted earnings per share $26,668 $24,834
Pro Forma Earnings per Share:
Basic $.61 $.54
Diluted $.60 $.54
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' financial position remained strong at November 30,
1997. Net working capital was $458.1 million, compared with $498.8 million at
August 31, 1997, and the current ratio was 2.8, the same as at year end. Cash
and short-term investments were $160.1 million, compared with $262.4 million at
August 31. During the first quarter, the company invested $20.1 million in
capital expenditures and acquisitions. The company also repurchased $55.0
million of its common stock. The percent of debt to total capitalization was 5.1
percent, up from 4.6 percent at August 31. Operating activities consumed $20.7
million in cash due largely to investment in inventories to support increased
sales and the payment of taxes associated with the gain on the 1997 disposal of
linen plants. Cash provided by operating activities was $46.7 million for the
first quarter last year.
Capital expenditures, exclusive of acquisition spending, were $14.0 million for
the first quarter this year and $9.8 million for the same period a year ago.
Current-year spending consisted primarily of facility expansions and
manufacturing process improvements in the lighting equipment segment, efficiency
improvements and replacements of processing equipment and information systems in
the textile rental segment, and facility and machinery replacements in the
envelope segment. In the prior-year quarter, 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 $6.1 million was due to the chemical
segment's purchase of Pure Corporation, a specialty chemical company with its
core businesses in Indiana, Pennsylvania, and New York. Acquisition spending of
$1.9 million in the prior year was primarily the result of the chemical
segment's purchase of an Ohio-based chemical products company.
During the quarter, fiscal 1997 year-end restructuring reserves were reduced by
$2.7 million primarily for exit costs associated with the disposal of facilities
and consolidation of operations and a minor amount of severance-related costs.
Dividend payments totaled $13.3 million, or 30 cents per share, compared with
$13.4 million, or 29 cents per share, for the prior-year period. Effective
January, 1998, the regular quarterly dividend rate was increased 3.3 percent to
31 cents per share, or an annual calendar year rate of $1.24 per share. During
the quarter, the company repurchased 1.2 million of its common shares.
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 $17 million. The
company expects actual capital expenditures in 1998 to be somewhat higher than
the 1997 level. Capital expenditures, excluding acquisition spending, were $49
million in 1997, $66 million in 1996, and $59 million in 1995. Late in fiscal
1996, the company negotiated a $250 million multi-currency committed credit
facility with eleven domestic and international banks. The company has
complimentary lines of credit totaling $62 million, of which $40 million is
available 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.
Over the past year, the company has devoted significant internal resources in
addressing the expected impact of the Year 2000 issue on its information
technology infrastructure. At this point in time, the company does not believe
that the Year 2000 issue will have a material impact on its financial position,
results of operations, liquidity, or future business strategy.
Results of Operations
National Service Industries' earnings per share for the first quarter ended
November 30, 1997 increased 13.0 percent to 61 cents compared with the same
quarter a year ago. First quarter sales decreased 4.7 percent to $488 million.
Net income of $26.7 million was 7.4 percent higher than a year ago. The higher
net income and a 2.4 million reduction in average shares outstanding allowed
earnings per share to increase 13.0 percent over last year's first quarter
results.
Page 9
The lighting equipment segment led the company in performance with reported
sales of $268.7 million, an increase of 18.1 percent over the last year's first
quarter sales of $227.4 million. Operating income increased 29.3 percent to
$27.6 million, or 10.3 percent of revenues, compared with 9.4 percent of
revenues the year earlier. The strong growth in sales and income reflected
continued demand in the non-residential construction market. Another key
contributor to the exceptional sales growth was the market acceptance of a newly
redesigned fluorescent parabolic fixture along with related revenues from
associated products.
First quarter chemical segment sales increased 10.9 percent to $105.9 million,
due largely to the Enforcer acquisition in last year's third quarter. Operating
income decreased to $8.6 million from last year's $10.9 million due in part to
anticipated seasonal losses in the retail distribution channel. Also
contributing to the reduced profitability were higher manufacturing costs,
up-front expenses associated with increased penetration of the retail sales
channel, and initiatives to improve the effectiveness of the sales force.
Textile rental segment sales declined 40.0 percent from last year's sales of
$130.1 million as a result of the divestiture of the segment's uniform plants
late in fiscal 1997. Operating income declined to $6.1 million from last year's
$8.1 million. Excluding the divested units, sales of $78.0 million were even
with last year. Related operating income increased by $1.0 million, and related
operating profit margins improved to 7.9 percent from 6.5 percent. The margin
improvement was due to incremental pricing and improved costs. Since the 1997
divestiture, the segment is operating more efficiently and is delivering
positive economic profit.
Envelope segment sales increased 11.6 percent to $35.0 million, and operating
profits increased 19.9 percent to $2.5 million due largely to higher sales unit
volume.
Interest income improved due to the proceeds derived from the sale of the
textile rental and insulation assets in 1997.
The provision for income taxes was 37.0 percent of pretax income for the
quarter, compared with 36.9 percent the prior-year period.
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,
enhanced sales force, new products, and improved customer service; share
repurchases; and acquisitions.
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 November 30,
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 January 14, 1998 /s/ David Levy
DAVID LEVY
EXECUTIVE VICE PRESIDENT, ADMINISTRATION
AND COUNSEL
DATE January 14, 1998 /s/ Brock Hattox
BROCK HATTOX
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Page 12
INDEX TO EXHIBITS
Page No.
EXHIBIT 10 (iii)A (1)-Nonemployee Directors' Stock Reference is made to
Option Agreement between National Exhibit 10(iii)A(q)
Service Industries, Inc. and of registrant's Form
(a) Barrie A. Wigmore 10-K for the fiscal
(b) Thomas C. Gallagher year ended August 31,
1994, which is
incorporated herein
by reference.
(2)-Employment Letter Agreement 14
between National Service Industries,
Inc. and James S. Balloun, Dated
February 1, 1996
[refiled to disclose confidential
information previously omitted and
filed separately with the Securities
and Exchange Commission]
(3)-Amendment No. 2 to Benefits 19
Protection Trust Agreement
between National Service Industries,
Inc. and Wachovia Bank and Trust
Company Dated September 23, 1997
(4)-Amended Schedule 1 of Benefits 23
Protection Trust Agreement between
National Service Industries, Inc.
and Wachovia Bank and Trust Company
Dated September 23, 1997
(5)-Amended Schedule 1 of Executive 24
Benefits Trust Agreement between
National Service Industries, Inc.
and Wachovia Bank and Trust Company
Dated September 23, 1997
(6)-Amendment No. 1 to National 25
Service Industries, Inc. Nonemployee
Director Deferred Stock Unit Plan
Effective December 1, 1997
(7)-Incentive Stock Option Agreement 27
Effective Beginning September 23,
1997 between National Service
Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(d) Stewart A. Searle III
(8)-Nonqualified Stock Option 33
Agreement For Executive Officers
Effective Beginning September 23,
1997 between National Service
Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(d) Stewart A. Searle III
Page 13
INDEX TO EXHIBITS
Page No.
EXHIBIT 10 (iii)A (9)-Aspiration Achievement Incentive 39
Award Agreements 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]
EXHIBIT 11 Computations of Net Income per 50
Share of Common Stock
EXHIBIT 27 Financial Data Schedules 51