Page 51
Exhibit 13
CONSOLIDATED BALANCE SHEETS
National Service Industries, Inc.
August 31
In thousands, except share and per share data) 1998 1997
Assets
Current Assets:
Cash and cash equivalents $ 19,146 $ 57,123
Short-term investments - 205,302
Receivables, less reserves for doubtful accounts of $4,631 in 1998 and $4,302 in 1997 307,140 258,689
Inventories, at the lower of cost (on a first-in, first-out basis) or market 197,950 179,046
Linens in service, net of amortization 58,826 60,805
Deferred income taxes 17,542 13,077
Prepayments 6,447 6,716
Total Current Assets 607,051 780,758
Property, Plant, and Equipment, at cost:
Land 21,450 19,911
Buildings and leasehold improvements 150,326 138,933
Machinery and equipment 485,271 434,194
Total Property, Plant, and Equipment 657,047 593,038
Less - Accumulated depreciation and amortization 385,176 356,308
Property, Plant, and Equipment - net 271,871 236,730
Other Assets:
Goodwill and other intangibles 88,280 50,166
Other 43,482 38,698
Total Other Assets 131,762 88,864
Total Assets $1,010,684 $1,106,352
Page 52
Exhibit 13
CONSOLIDATED BALANCE SHEETS (continued)
National Service Industries, Inc.
August 31
(In thousands, except share and per share data) 1998 1997
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 98 $ 116
Notes payable 7,883 5,773
Accounts payable 95,217 101,512
Accrued salaries, commissions, and bonuses 34,820 34,776
Current portion of self-insurance reserves 11,253 12,540
Accrued taxes payable - 38,351
Other accrued liabilities 72,724 88,932
Total Current Liabilities 221,995 282,000
Long-Term Debt, less current maturities 78,092 26,197
Deferred Income Taxes 40,404 34,093
Self-Insurance Reserves, less current portion 44,573 57,056
Other Long-Term Liabilities 46,719 35,193
Commitments and Contingencies (Note 4)
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 in 1998 and 1997 57,919 57,919
Paid-in capital 28,521 25,521
Retained earnings 892,617 841,045
979,057 924,485
Less - Treasury stock, at cost (16,457,340 shares in 1998 and 13,719,834 shares in 1997) 400,156 252,672
Total Stockholders' Equity 578,901 671,813
Total Liabilities and Stockholders' Equity $1,010,684 $1,106,352
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
Page 53
Exhibit 13
CONSOLIDATED STATEMENTS OF INCOME
National Service Industries, Inc.
Years Ended August 31
(In thousands, except per share data) 1998 1997 1996
Sales and Service Revenues:
Net sales of products $1,718,564 $1,542,644 $1,482,937
Service revenues 312,746 493,535 530,625
Total Revenues 2,031,310 2,036,179 2,013,562
Costs and Expenses:
Cost of products sold 1,044,215 945,794 933,405
Cost of services 183,470 283,024 304,381
Selling and administrative expenses 634,061 633,740 616,513
Interest expense, net 749 1,624 1,565
Gain on sale of businesses (2,449) (75,097) (7,579)
Restructuring expense, asset impairments, and other charges - 63,091 -
Other (income) expense, net (1,857) 4,925 3,429
Total Costs and Expenses 1,858,189 1,857,101 1,851,714
Income before Provision for Income Taxes 173,121 179,078 161,848
Provision for Income Taxes 64,401 71,800 60,700
Net Income $ 108,720 $ 107,278 $ 101,148
Basic Earnings per Share $ 2.56 $ 2.37 $ 2.11
Basic Weighted Average Number of Shares Outstanding 42,462 45,191 47,941
Diluted Earnings per Share $ 2.53 $ 2.36 $ 2.10
Diluted Weighted Average Number of Shares Outstanding 43,022 45,534 48,189
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 54
Exhibit 13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
National Service Industries, Inc.
(In thousands, except share and per share data) Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
Balance August 31, 1995 $57,919 $ 8,065 $746,256 $ (67,836)$ 744,404
Treasury stock purchased (1) - - - (75,223) (75,223)
Stock options exercised (2) - 2,956 - 760 3,716
Net income - - 101,148 - 101,148
Cash dividends of $1.15 per share paid on common stock - - (55,272) - (55,272)
Adjustment to recognize net increase in pension liability - - (23) - (23)
Foreign currency translation adjustment - - (742) - (742)
Balance August 31, 1996 57,919 11,021 791,367 (142,299) 718,008
Treasury stock purchased (3) - - - (121,668) (121,668)
Stock options exercised (4) - 2,588 - 2,685 5,273
Treasury stock issued in connection with acquisition (5) - 11,912 - 8,610 20,522
Net income - - 107,278 - 107,278
Cash dividends of $1.19 per share paid on common stock - - (54,222) - (54,222)
Foreign currency translation adjustment - - (3,378) - (3,378)
Balance August 31, 1997 57,919 25,521 841,045 (252,672) 671,813
Treasury stock purchased (6) - - - (154,032) (154,032)
Stock options exercised (7) - 625 - 3,305 3,930
Treasury stock issued in connection with acquisition (8) ` - 2,104 - 2,896 5,000
Employee Stock Purchase Plan issuances (9) - 271 - 347 618
Net income - - 108,720 - 108,720
Cash dividends of $1.23 per share paid on common stock - - (52,603) - (52,603)
Adjustment to recognize net increase in pension liability - - (17) - (17)
Foreign currency translation adjustment - - (4,528) - (4,528)
Balance August 31, 1998 $57,919 $28,521 $892,617 $(400,156)$ 578,901
(1)2,000,000 shares. (2)185,044 shares. (3)3,000,000 shares. (4)190,330 shares.
(5)536,872 shares. (6) 3,025,162 shares. (7) 142,568 shares. (8) 130,804 shares.
(9) 14,284 shares.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 55
Exhibit 13
CONSOLIDATED STATEMENTS OF CASH FLOWS
National Service Industries, Inc.
Years Ended August 31
(In thousands) 1998 1997 1996
Cash Provided by (Used for) Operating Activities
Net income $108,720 $107,278 $ 101,148
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 48,846 57,981 58,428
Provision for losses on accounts receivable 3,558 2,276 2,708
(Gain) loss on the sale of property, plant, and equipment (3,400) 1,233 (1,652)
Gain on the sale of businesses (2,449) (75,097) (7,579)
Restructuring expense, asset impairments, and other charges - 63,091 -
Change in non-current deferred income taxes 6,311 (25,219) 1,864
Change in assets and liabilities net of effect of acquisitions and divestitures -
Receivables (46,151) (11,993) (7,343)
Inventories and linens in service, net (15,647) (11,286) 5,308
Current deferred income taxes (4,383) (10,926) 8,069
Prepayments 578 47 (940)
Accounts payable and accrued liabilities (65,696) 30,941 (6,117)
Self-insurance reserves and other long-term liabilities (957) (758) (895)
Net Cash Provided by Operating Activities 29,330 127,568 152,999
Cash Provided by (Used for) Investing Activities
Change in short-term investments 205,302 (204,751) 3,047
Purchases of property, plant, and equipment (82,034) (48,806 (65,499)
Sale of property, plant, and equipment 6,814 5,370 9,105
Sale of businesses 3,064 311,382 15,250
Acquisitions (45,305) (4,320) (600)
Change in other assets (5,381) 2,972 (3,071)
Net Cash Provided by (Used for) Investing Activities $ 82,460 $ 61,847 $ (41,768)
Page 56
Exhibit 13
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
National Service Industries, Inc.
Years Ended August 31
(In thousands) 1998 1997 1996
Cash Provided by (Used for) Financing Activities
Borrowings (repayments) of short-term debt, net $ 805 $ (11,021)$ -
Borrowings (repayments) of long-term debt, net 51,043 (4,627) (1,897)
Recovery of investment in tax benefits - 661 1,720
Deferred income taxes from investment in tax benefits - (1,972) (4,273)
Purchase of treasury stock, net (144,484) (116,395) (71,507)
Cash dividends paid (52,603) (54,222) (55,272)
Net Cash Used for Financing Activities (145,239) (187,576) (131,229)
Effect of Exchange Rate Changes on Cash (4,528) (3,378) (742)
Net Change in Cash and Cash Equivalents (37,977) (1,539) (20,740)
Cash and Cash Equivalents at Beginning of Year 57,123 58,662 79,402
Cash and Cash Equivalents at End of Year $ 19,146 $ 57,123 $ 58,662
Supplemental Cash Flow Information:
Income taxes paid during the year $ 100,270 $ 68,475 $ 58,974
Interest paid during the year 7,025 5,614 4,994
Noncash Investing and Financing Activities:
Noncash aspects of sale of businesses-
Receivables incurred $ - $ 391 $ 234
Liabilities assumed 166 22,637 1,009
Noncash aspects of acquisitions -
Liabilities assumed or incurred $ 5,885 $ 22,440 $ 6
Treasury stock issued 5,000 20,522 -
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 57
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
National Service Industries, Inc.
(In thousands, except share and per share data)
Note 1: Summary of Accounting Policies
Description of Business
The company operates in four business segments - lighting equipment, chemicals,
textile rental, and envelopes - which are leading competitors in their
respective markets. The lighting equipment segment produces a variety of
fluorescent and non-fluorescent fixtures for markets throughout the United
States, Canada, Mexico, and overseas. The chemical segment produces maintenance,
sanitation, and water treatment products for customers throughout the United
States, Canada, Puerto Rico, Western Europe, and Australia. The textile rental
segment provides linens and dust control products to healthcare, lodging, and
dining customer segments in the United States. The envelope segment produces
business and specialty envelopes in the Northeast, South, and Southwest.
Principles of Consolidation
The consolidated financial statements include the accounts of the company and
all subsidiaries after elimination of significant intercompany transactions and
accounts.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash, Cash Equivalents, and Short-Term Investments
Cash in excess of daily requirements is invested in time deposits and marketable
securities and is included in the balance sheet at market value. The company
considers time deposits and marketable securities purchased with an original
maturity of three months or less to be cash equivalents. Investments purchased
with a maturity of more than three months and less than a year are considered
short-term investments. There were no short-term investments at August 31, 1998.
The carrying amount of short-term investments at August 31, 1997 approximated
fair value and consisted primarily of corporate debt securities and commercial
paper. In accordance with the criteria specified by Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," these investments were classified as "available for
sale."
Concentrations of Credit Risk
Concentrations of credit risk with respect to receivables are limited due to the
wide variety of customers and markets into which the company's products and
services are provided, as well as their dispersion across many different
geographic areas. As a result, as of August 31, 1998, the company does not
consider itself to have any significant concentrations of credit risk.
Inventories and Linens in Service
Inventories are valued at the lower of cost (on a first-in, first-out basis) or
market and consisted of the following at August 31, 1998 and 1997:
1998 1997
Raw materials and supplies $ 78,730 $ 71,266
Work in progress 10,725 10,572
Finished goods 108,495 97,208
$ 197,950 $ 179,046
Linens in service are recorded at cost and are amortized over their
estimated useful lives of 15 to 50 months.
Goodwill and Other Intangibles
Goodwill of $3,460 was recognized in connection with a 1969 acquisition and is
not being amortized. Remaining amounts of goodwill ($71,059 in 1998 and $34,974
in 1997) and other intangible assets are being amortized on a straight-line
basis over various periods ranging from 10 to 40 years.
The company periodically evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful lives of goodwill and
other long-lived assets or whether the remaining balance of goodwill should be
evaluated for possible impairment. The company uses an estimate of related
undiscounted cash flows over the remaining life of the goodwill in measuring
whether the goodwill is recoverable. During fiscal 1997, goodwill and other
intangibles of $8,800 were written off due to the impairment of long-lived
assets (See Note 5: Restructuring Expense and Asset Impairments).
Depreciation
For financial reporting purposes, depreciation is determined principally on a
straight-line basis using estimated useful lives of plant and equipment (25 to
45 years for buildings and 3 to 16 years for machinery and equipment) while
accelerated depreciation methods are used for income tax purposes. Leasehold
improvements are amortized over the life of the lease or the useful life of the
improvement, whichever is shorter.
Page 58
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
National Service Industries, Inc.
Foreign Currency Translation
The functional currency for the company's foreign operations is the local
currency. The translation of foreign currencies into U.S. dollars is performed
for balance sheet accounts using exchange rates in effect at the balance sheet
date and for revenue and expense accounts using a weighted average exchange rate
during the period. The gains or losses, net of applicable income taxes,
resulting from the translation are included in retained earnings and are
excluded from net income.
Gains or losses resulting from foreign currency transactions are included
in "Other (income) expense, net" in the consolidated statements of income and
are not material.
Postretirement Healthcare and Life Insurance Benefits
The company's retiree medical plans are financed entirely by retiree
contributions; therefore, the company has no liability in connection with them.
Several programs provide limited retiree life insurance benefits. The liability
for these plans is not material.
Postemployment Benefits
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," requires the
accrual of the estimated cost of benefits provided by an employer to former or
inactive employees after employment but before retirement. The company's
accrual, which is not material, relates primarily to severance agreements and
the liability for life insurance coverage for certain eligible employees.
Pension and Profit Sharing Plans
The company has several pension plans covering hourly and salaried employees.
Benefits paid under these plans are based generally on employees' years of
service and/or compensation during the final years of employment. The company
makes annual contributions to the plans to the extent indicated by actuarial
valuations. Plan assets are invested primarily in equity and fixed income
securities.
Net pension income for 1998, 1997, and 1996 included the following
components:
1998 1997 1996
Service cost of benefits earned during the
period $ 3,091 $ 3,636 $ 2,719
Interest cost on projected benefit obligation 8,509 8,505 7,438
Return on plan assets (26,435) (12,393) (28,255)
Net amortization and deferral 13,459 (768) 17,383
Net pension income $ (1,376) $ (1,020) $ (715)
The following schedule reconciles the funded status of the plans as of June
1, 1998 and 1997, with amounts reported in the company's consolidated balance
sheets at August 31, 1998 and 1997:
1998 1997
Plan Accumulated Plan Accumulated
Assets Benefit Assets Benefit
Exceed Obligation Exceed Obligation
Accumulated Exceeds Accumulated Exceeds
Benefit Plan Benefit Plan
Obligation Assets Obligation Assets
Actuarial present value of benefit
obligations
as of June 1:
Vested $(102,101) $ (5,804) $(87,929)$ (5,123)
Nonvested (8,507) (104) (10,180) (20)
Accumulated benefit obligation (110,608) (5,908) (98,109) (5,143)
Effect of projected salary increases (5,852) (2,177) (5,379) (1,195)
Total projected benefit obligation (116,460) (8,085) (103,488) (6,338)
Fair value of plan assets 150,101 - 133,214 -
Plan assets greater (less) than
projected benefit obligation 33,641 (8,085) 29,726 (6,338)
Unrecognized transition (asset)liability (5,089) 49 (7,059) 61
Unrecognized prior service cost obligation 1,755 2,393 1,873 2,208
Unrecognized net loss (gain) 8,829 34 9,891 (896)
Adjustment required to recognize
minimum liability - (892) - (596)
Prepaid (accrued) pension expense at
August 31 $39,136 $ (6,501) $ 34,431 $ (5,561)
For all periods presented, the assumed growth rate of compensation is 5.5
percent and the expected long-term rate of return on plan assets is 9.5 percent.
During 1998, the discount rate used to determine the projected benefit
obligation was decreased from 8 percent to 7 percent to more closely approximate
rates on high-quality, long-term obligations.
The company also has profit sharing and 401(k) plans to which both
employees and the company contribute. At August 31, 1998, assets of the 401(k)
plans included shares of the company's common stock with a market value of
approximately $14,797. The company's cost of these plans was $4,292 in 1998,
$5,020 in 1997, and $4,595 in 1996.
Page 59
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
National Service Industries, Inc.
Interest Expense, Net
Interest expense, net, is comprised primarily of interest expense on long-term
debt, credit facility borrowings, and line of credit borrowings offset by
interest income on cash, cash equivalents, and short-term investments.
Other (Income) Expense, Net
Other (income) expense, net, is comprised primarily of amortization of
intangible assets net of gains resulting from the sale of fixed assets in 1998,
1997, and 1996. Other (income) expense, net, also included casualty loss
insurance proceeds in 1996.
Accounting Standards Yet to Be Adopted
During fiscal 1999, the company is required to adopt SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires the reporting of a measure of all
changes in equity of an entity that result from recognized transactions and
other economic events other than transactions with owners in their capacity as
owners. In the opinion of management, the adoption of SFAS No. 130 is not
expected to have a material impact on the company's manner of reporting the
components of comprehensive income.
During fiscal 1999, the company is required to adopt SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS No.
131 requires the reporting of financial information on the basis that it is used
internally for evaluating segment performance and the allocation of resources to
segments. In the opinion of management, the adoption of SFAS No. 131 is not
expected to have a material impact on the company's manner of reporting
information about its segments.
During fiscal 1999, the company is required to adopt SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 132 amends SFAS Nos. 87, 88, and 106 by standardizing the disclosure
requirements for pensions and other postretirement benefits, requiring
additional information on changes in benefit obligations and fair values of plan
assets, and eliminating certain other disclosures.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June of 1998 and is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. However, the company does not
currently participate in any hedging activities, nor does it utilize any other
derivative financial instruments.
Reclassifications
Certain amounts in the financial statements and notes have been reclassified to
conform with the 1998 presentation.
Note 2: Long-Term Debt and Lines of Credit
Long-term debt at August 31, 1998 and 1997, consisted of the following:
1998 1997
6.5% to 9.25% mortgage notes, payable in installments through
2000 (secured in part by property, plant, and equipment
having a net book value of $228 at August 31, 1998) $ 45 $ 86
3.4% to 8.5% other notes, payable in installments to 2026 78,145 26,227
78,190 26,313
Less-Amounts payable within one year included in current
liabilities 98 116
$78,092 $26,197
The annual principal payments of long-term debt for the five-year period
ending August 31, 2003 are: 1999 - $98; 2000 - $108; 2001 - $106; 2002 - $95;
2003 - $102.
In 1996, the company negotiated a $250,000 multi-currency committed credit
facility (the "Credit Facility") with ten domestic and international banks. The
Credit Facility has a term of five years, expiring in July 2001, with no
provision for reduction in commitments. The Credit Facility contains
restrictions on the incurrence of indebtedness by subsidiaries, as well as
financial and other covenants, including restrictions that the company's ratio
of total debt to capitalization may not exceed 60 percent at any time.
The company has complimentary lines of credit totaling $122,000 for general
operating purposes, of which $22,000 is available on a multi-currency basis. On
August 31, 1998, the company borrowed $52,000 under the $100,000 domestic line
of credit. Subsequent to the company's fiscal year end, these borrowings were
repaid through borrowings on the Credit Facility. This borrowing has been
classified as noncurrent because it is the company's intention to refinance this
obligation on a long-term basis. In addition, $28,390 in letters of credit were
outstanding at August 31, 1998 under the domestic line of credit. At August 31,
1998, the company had foreign currency short-term bank borrowings under the
$22,000 line of credit equivalent to $7,883 at a weighted average interest rate
of 4.91 percent.
Long-term debt recorded in the accompanying consolidated balance sheets
approximates fair value based on the borrowing rates currently available to the
company for bank loans with similar terms and average maturities.
Page 60
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
National Service Industries, Inc.
Note 3: Common Stock and Related Matters
Shareholder Rights Plan
The company has a shareholder rights plan under which one preferred stock
purchase right is presently attached to and trades with each outstanding share
of the company's common stock. The plan, which was to have expired May 19, 1998,
was amended and extended to May 19, 2008.
The rights become exercisable and transferable apart from the common stock
(a) on the date that a person or group announces that they have acquired 15
percent or more of the company's common stock or (b) ten days after a person or
group makes an unsolicited offer to acquire beneficial ownership of, or the
right to obtain beneficial ownership of, 15 percent or more of the company's
common stock (unless such date is extended by the Board of Directors) or (c) 20
business days before the date on which a business combination is reasonably
expected to be consummated involving a person who, if the business combination
is consummated, has or would acquire beneficial ownership of, or the right to
obtain beneficial ownership of, 15 percent or more of the company's common stock
and that person has directly or indirectly nominated a director of the company
at the time the business combination is considered. The rights are not triggered
if the Board of Directors is notified that reaching the trigger threshold was
inadvertent and divestiture of sufficient stock is thereafter made. Once
exercisable, each right entitles the holder to purchase one one-thousandth share
of Series A Participating Preferred Stock at an exercise price of $160, subject
to adjustment to prevent dilution. The rights have no voting power and, until
exercised, no dilutive effect on net income per common share. The rights expire
on May 19, 2008, and are redeemable under certain circumstances.
If a person acquires 15 percent ownership, except in an offer approved
under the plan by a majority of the nonemployee directors, each right not owned
by the acquirer or related parties will entitle its holder to purchase, at the
right's exercise price, common stock or common stock equivalents having a market
value immediately prior to the triggering of the right of twice that exercise
price. In addition, after an acquirer obtains 15 percent ownership, if the
company is involved in certain mergers, business combinations, or asset sales,
each right not owned by the acquirer or related persons will entitle its holder
to purchase, at the right's exercise price, shares of common stock of the other
party to the transaction having a market value immediately prior to the
triggering of the right of twice that exercise price. Rights may not be redeemed
for a 365-day period following a change in the majority of the Board of
Directors if the redemption would facilitate a transaction with the person who
caused the change of control of the Board of Directors.
Preferred Stock
The company has 1,000,000 shares of preferred stock authorized, 500,000 of which
have been reserved for issuance under the shareholder rights plan. No shares of
preferred stock had been issued at August 31, 1998 and 1997.
Earnings per Share
During fiscal 1998, the company adopted SFAS No. 128, "Earnings per Share." SFAS
No. 128 supersedes Accounting Principles Board ("APB") 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. Upon adoption, the
company was 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 did not have a material impact on the computation or manner of
presentation of the company's earnings per share as previously presented under
APB 15.
The following table represents a reconciliation of basic and diluted
earnings per share at August 31:
1998 1997 1996
Basic weighted average shares outstanding 42,462 45,191 47,941
Add: Shares of common stock assumed issued upon
exercise of stock options 560 343 248
Diluted weighted average shares outstanding 43,022 45,534 48,189
Net earnings used in the computation of
basic and diluted earnings per
share $ 108,720 $ 107,278 $ 101,148
Earnings per Share:
Basic $ 2.56 $ 2.37 $ 2.11
Diluted $ 2.53 $ 2.36 $ 2.10
Stock-based Compensation
In 1990, the stockholders approved the National Service Industries, Inc.
Long-Term Incentive Program for the benefit of officers and other key employees.
There were 1,750,000 treasury shares reserved for issuance under the program.
In 1997, the stockholders approved the National Service Industries, Inc.
Long-Term Achievement Incentive Plan for the benefit of officers and other key
employees. There were 1,750,000 treasury shares reserved for issuance under that
plan.
Page 61
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
National Service Industries, Inc.
The stock options granted under both the incentive programs become
exercisable in four equal annual installments beginning one year from the date
of the grant.
In January 1993, the stockholders approved the National Service Industries,
Inc. 1992 Nonemployee Directors' Stock Option Plan, under which 100,000 treasury
shares were reserved for issuance. The stock options granted under that plan
become exercisable one year from the date of the grant.
Under all stock option plans, the options expire ten years from the date of
the grant and have an exercise price equal to the fair market value of the
company's stock on the date of the grant. At August 31, shares available for
issuance under all plans were 1,236,574 in 1998, 1,732,574 in 1997, and 300,408
in 1996.
Stock option transactions for the stock option plans and stock option
agreements during the years ended August 31, 1998, 1997, and 1996 were as
follows:
Outstanding Exercisable
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
Outstanding at August 31, 1995 1,088,773 $ 24.89
Granted 513,200 $ 32.06
Exercised (185,044) $ 24.01
Cancelled (150,886) $ 26.19
Outstanding at August 31, 1996 1,266,043 $ 27.74 466,377 $ 25.76
Granted 324,500 $ 37.96
Exercised (196,115) $ 25.96
Cancelled (7,214) $ 31.46
Outstanding at August 31, 1997 1,387,214 $ 30.35 731,914 $ 27.11
Granted 500,000 $ 44.50
Exercised (142,568) $ 26.32
Cancelled - -
Outstanding at August 31, 1998 1,744,646 $ 34.74 876,721 $ 29.05
Range of option exercise prices:
$19.75-$39.75
(average life-6.3 years) 1,247,646 $ 30.85 876,721 $ 29.05
$44.25-$59.44
(average life-9.1 years) 497,000 $ 44.50 - -
During fiscal 1997, the company adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for these stock option plans. Had
compensation cost for the company's stock option plans been determined based on
the fair value at the grant date for awards in fiscal years 1998, 1997, and 1996
consistent with the provisions of SFAS No. 123, the company's net income and
earnings per share would have been reduced to the following pro forma amounts:
1998 1997 1996
Pro Forma Information:
Net income $106,297 $105,793 $100,284
Basic earnings per share $ 2.50 $ 2.34 $ 2.09
Diluted earnings per share $ 2.47 $ 2.32 $ 2.08
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. The weighted average grant date
fair value of options was $12.23, $9.69, and $6.08 for 1998, 1997, and 1996,
respectively. The following weighted average assumptions were used to estimate
fair value:
1998 1997 1996
Dividend yield 2.809% 3.350% 4.009%
Expected volatility 18.1% 16.8% 15.3%
Risk-free interest rate 6.10% 6.73% 6.10%
Expected life of options 10 years 10 years 10 years
Turnover rate 5.0% 5.0% 5.0%
Employee Stock Purchase Plan
In 1998, the stockholders approved the National Service Industries, Inc.
Employee Stock Purchase Plan for the benefit of eligible employees. Under the
plan, employees may purchase, through payroll deduction, the company's common
stock at a 15 percent discount. Shares are purchased quarterly at 85 percent of
the lower of the fair market value of the company's common stock on the first
business day of the quarterly plan period or on the last business day of the
quarterly plan period. There were 1,500,000 treasury shares reserved for
purchase under the plan.
Page 62
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
National Service Industries, Inc.
Note 4: Commitments and Contingencies
Self-Insurance
It is the policy of the company to self insure for certain insurable risks
consisting primarily of physical loss to property; business interruptions
resulting from such loss; and workers' compensation, comprehensive general, and
auto liability. Insurance coverage is obtained for catastrophic property and
casualty exposures as well as those risks required to be insured by law or
contract. Based on an independent actuary's estimate of the aggregate liability
for claims incurred, a provision for claims under the self-insured program is
recorded and revised annually.
Leases
The company leases certain of its buildings and equipment under noncancelable
lease agreements. Minimum lease payments under noncancelable leases for years
subsequent to August 31, 1998, are as follows: 1999 - $11,902; 2000 - $9,762;
2001 - $7,201; 2002 - $5,680; 2003 - $4,737; after 2003 - $9,109.
Total rent expense was $12,237 in 1998, $11,327 in 1997, and $10,907 in
1996.
Collective Bargaining Agreements
Approximately 50 percent of the company's total work force is covered by
collective bargaining agreements. Collective bargaining agreements representing
30 percent of the company's total work force will expire within one year.
Litigation
The company is involved in various legal matters primarily arising in the normal
course of business. In the opinion of management, the company's liability in any
of these matters will not have a material adverse effect on its financial
condition or results of operations.
Environmental Matters
The company's operations, as well as other similar operations, are subject to
comprehensive laws and regulations relating to the generation, storage,
handling, transportation, and disposal of hazardous substances and solid and
hazardous wastes and to the remediation of contaminated sites. Permits and
environmental controls are required for certain of the company's operations to
prevent air and water pollution, and these permits are subject to modification,
renewal, and revocation by issuing authorities. The company believes that it is
in substantial compliance with all material environmental laws, regulations, and
its permits. On an ongoing basis, the company incurs capital and operating costs
relating to environmental compliance. Environmental laws and regulations have
generally become stricter in recent years, and the cost of responding to future
changes may be substantial.
The company's environmental reserves totaled $12,600 and $17,100 at August
31, 1998 and 1997, respectively. The actual cost of environmental issues may be
substantially lower or higher than that reserved due to the difficulty in
estimating such costs, potential changes in the status of government
regulations, and the inability to determine the extent to which contributions
will be available from other parties. The company does not believe that any such
amount below or in excess of that accrued is reasonably estimable.
Certain environmental laws, such as Superfund, can impose liability for the
entire cost of site remediation upon each of the current or former owners or
operators of a site or parties who sent waste to a site where a release of a
hazardous substance has occurred regardless of fault or the lawfulness of the
original disposal activity. Generally, where there are a number of financially
viable potentially responsible parties ("PRPs"), liability has been apportioned
based on the type and amount of waste disposed of by each party at such disposal
site and the number of financially viable parties, although no assurance can be
given as to any particular site.
The company is currently a party to, or otherwise involved in, legal
proceedings in connection with several state and federal Superfund sites, two of
which are located on property owned by the company. Except for the Crymes
Landfill matter in Georgia, the company believes its liability is de minimis at
each of the sites which it does not own where it has been named as a PRP. At the
Crymes Landfill Site, since the matter is currently in the investigative phase,
the company does not know whether its liability is de minimis but believes that
its exposure at the site is not likely to result in a material adverse effect on
the company. For the property which the company owns on Seaboard Industrial
Boulevard in Atlanta, Georgia, the company has agreed to conduct an
investigation on its and adjoining properties pursuant to the Georgia Hazardous
Site Response Act. Until that investigation is completed, the company will not
be able to determine if remediation will be required, if the company will be
solely responsible for the cost of such remediation, or whether such cost is
likely to result in a material adverse effect on the company. For the property
which the company owns on East Paris Street in Tampa, Florida, the company has
been requested by the State of Florida to clean up chlorinated solvent
contamination in the groundwater on the property and on surrounding property
known as Seminole Heights Solvent Site and to reimburse costs already incurred
by the State of Florida in connection with such
Page 63
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
National Service Industries, Inc.
contamination. The company believes that it has a strong defense due to likely
off- site sources of the contamination and because contamination from the
property, if any, was due to prior owners and not the company's operations. The
company plans to meet with the State of Florida in the near future regarding
this matter. At this time, it is too early to quantify the company's potential
exposure or the likelihood of an adverse result.
The company is currently evaluating emissions of volatile organic compounds
from its manufacturing operations in the Atlanta area to determine whether it
will need to install pollution control equipment or modify its operations to
comply with federal and state air pollution regulations. Until the current
evaluations are completed, the company is not able to quantify the possible cost
of compliance. However, based upon currently available information, the company
does not expect any expenditures which may have to be made to achieve compliance
to be material.
In connection with the sale of the North Bros. business and 29 of the
company's textile rental plants in 1997, the company has retained certain
environmental liabilities. The company has received notice from the buyer of the
textile rental plants of the alleged presence of perchloroethylene contamination
on one of the properties involved in the sale. The company has since asserted an
indemnification claim against the company from which it bought the property. At
this time, it is too early to quantify the company's potential exposure in this
matter, the likelihood of an adverse result, or the possibility that the company
may be fully or partially indemnified.
In November 1997, the Environmental Protection Agency ("EPA") proposed
stringent new wastewater discharge limits, which would become effective in the
future, that could apply to certain facilities operated by the company. While
the company does not believe that these regulations should apply to its
operations, if the regulations are adopted as proposed, following adoption, the
company's cost to comply with them could be as much as $6,000 to $9,000 of
equipment expenditures spread over a three-year period, which the company does
not believe would be material to its financial condition or results of
operations.
Note 5: Restructuring Expense and Asset Impairments
During 1997, the company conducted reviews of the textile rental, European
chemical, and corporate operations as a part of management's strategic
initiatives to examine under-performing operations and to position the company
for growth. As a result of the reviews, the company approved a significant
restructuring program and recorded a related charge of $9,600 during the fourth
quarter. The accrual included severance and union-related costs totaling $2,950
for 120 employees of the textile rental, chemical, and envelope segments and
$6,650 in exit expenses to close certain facilities and consolidate the
operations of others in the textile rental segment. Exit expenses include costs
of unexpired leases, costs to dispose of facilities, and costs of personnel to
effect the closures and consolidations. The severance accrual was reduced by
payments of $205 in 1997 and $2,115 in 1998. Plant consolidation payments were
$1,910 in 1997 and $390 in 1998.
As a further result of the 1997 reviews, the company recognized long-lived
asset impairments totaling $43,500. Textile rental assets to be disposed of in
under-performing branches were reduced by $22,300 to state them at their
estimated fair value less costs to sell. The remaining net book value of these
assets is immaterial. Fixed assets held for use by the textile rental, European
chemical, and corporate units were reduced by $12,400 and related intangibles
were reduced by $8,800. Impairments were recognized for those assets where the
sum of estimated undiscounted future cash flows was less than the carrying
amount of the assets, including related goodwill. Fair market values were
established based on independent appraisals, comparable sales or purchases, and
expected future cash flows discounted at the company's cost of capital. Factors
leading to the impairments were a combination of the results of the reviews
discussed above, historical losses, anticipated future losses, and inadequate
cash flows.
The losses resulting from the accruals and impairments are included in
"Restructuring expense, asset impairments, and other charges" in the
consolidated statements of income.
Note 6: Acquisitions and Divestitures
Acquisition spending in 1998 totaled $45,305 and was primarily related to the
chemical and envelope segments. In November 1997, the chemical segment purchased
Pure Corporation, a specialty chemical company with its core businesses in
Indiana, Pennsylvania, and New York. In March 1998, the envelope segment
purchased Allen Envelope Corporation, a single-plant, Pennsylvania-based
envelope manufacturer, providing the segment with access to markets in the
Northeast. In July 1998, the company purchased Calman Australia Pty Ltd
("Calman"). Calman, located in Victoria, Australia is a manufacturer of
cleaning, maintenance, sanitation and industrial products, chemicals, supplies,
and accessories. Additionally, the company paid certain performance payments
associated with a prior year chemical acquisition. Divestitures during 1998
related to the textile rental segment and excess properties and were not
material.
Page 64
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
National Service Industries, Inc.
In February 1997, the company sold the North Bros. insulation business for
$27,113 in cash. An immaterial gain was realized on the sale. The business had
1997 sales of $57,000 and operating income of $1,900. Additionally, immaterial
gains were recognized as the company divested several non-strategic textile
rental locations.
In July 1997, the company sold 29 textile rental plants to G & K Services,
Inc. at a pretax gain of $74,044. The following condensed pro forma consolidated
statements of income present reported results for the respective fiscal years to
remove both the gain on the transaction and the results of the operations sold:
Condensed Pro Forma Consolidated Statements of Income 1997 1996
(Unaudited)
Sales and Service Revenues $1,859,653 $1,803,034
Other Costs and Expenses 1,708,672 1,648,460
Restructuring Expense, Asset Impairments, and Other
Charges 63,091 --
Income before Provision for Income Taxes 87,890 154,574
Provision for Income Taxes 32,172 57,988
Net Income $ 55,718 $ 96,586
Basic Earnings per Share $1.23 $2.01
Basic Weighted Average Number of Shares Outstanding
(thousands) 45,191 47,941
Diluted Earnings per Share $ 1.22 $ 2.00
Diluted Weighted Average Number of Shares Outstanding
(thousands) 45,534 48,189
The pro forma statements are not necessarily indicative of the financial
position and results of operations that would have been attained had the
divestiture been consummated on the dates indicated or that may be attained in
the future.
In 1997, cash acquisition spending totaled $4,320 and 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 a small emergency
lighting products manufacturer in Canada. The company also issued 536,872 shares
valued at $20,522 to acquire Enforcer Products, Inc. ("Enforcer"), a specialty
chemical company with a retail focus. The operating results of Enforcer were
included in the chemical segment beginning with the third quarter of fiscal
1997.
Acquisitions during 1996 related to the textile rental segment and were
not material. During 1996, the company divested several non-strategic or
unprofitable businesses, primarily in the textile rental segment, generating
cash of $15,250.
Note 7: Income Taxes
The company accounts for income taxes using the asset and liability approach.
This approach requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Using the enacted tax rates in effect for
the year in which the differences are expected to reverse, deferred tax
liabilities and assets are determined based on the differences between the
financial reporting and the tax basis of an asset or liability.
The provision for income taxes consists of the following components:
1998 1997 1996
Provision for current Federal taxes $ 54,997 $ 94,426 $ 52,809
Provision for current state taxes 3,143 11,994 5,275
Provision for current foreign taxes 1,952 1,598 1,073
Provision (credit) for deferred taxes 4,309 (36,218) 1,543
Total provision for income taxes $ 64,401 $ 71,800 $ 60,700
A reconciliation from the Federal statutory rate to the total provision
for income taxes is as follows:
1998 1997 1996
Federal income tax computed at statutory rate $ 60,592 $ 62,677 $ 56,647
State income tax, net of Federal income tax benefit 2,144 5,960 3,489
Foreign and other, net 1,665 3,163 564
Total provision for income taxes $64,401 $ 71,800 $ 60,700
Page 65
Exhibit 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
National Service Industries, Inc.
Components of the net deferred income tax liability at August 31, 1998 and
1997 include:
1998 1997
Deferred tax liabilities:
Depreciation $26,837 $28,839
Amortization of linens 21,017 16,951
Pension 12,835 12,015
Other 26,640 30,596
Total deferred tax liabilities 87,329 88,401
Deferred tax assets:
Self-insurance (24,753) (27,054)
Deferred compensation (10,393) (8,698)
Bonuses (2,609) (3,035)
Foreign tax losses (1,014) (605)
Restructuring and asset impairment (14,594) (15,049)
Asset disposition reserves (4,365) (5,723)
Other assets (6,739) (7,221)
Total deferred tax assets (64,467) (67,385)
Net deferred tax liability $22,862 $21,016
At August 31, 1998, the company had foreign net operating loss
carryforwards of $2,784 expiring in fiscal years 1999 through 2004.
Note 8: Quarterly Financial Data (Unaudited)
Sales and Income Basic Diluted
Service Gross before Net Earnings Earnings
Revenues Profit Taxes Income per Share per Share
1998
1st Quarter $487,584 $193,345 $42,355 $26,668 $.61 $.60
2nd Quarter 479,411 186,049 37,312 23,488 .55 .54
3rd Quarter 521,608 207,319 44,789 28,139 .67 .66
4th Quarter 542,707 216,912 48,665 30,425 .73 .72
1997
1st Quarter $511,893 $199,711 $39,340 $24,834 $.54 $.54
2nd Quarter 499,236 188,726 32,187 20,345 .45 .45
3rd Quarter 515,279 210,864 46,808 29,434 .65 .65
4th Quarter (1) 509,771 208,060 60,743 32,665 .73 .72
(1) Results for the fourth quarter included the gain on the sale of textile
rental plants of $75,097 and charges for restructuring and other reserves
of $19,600 and asset impairments of $43,500.
Note 9: Business Segment Information
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Identifiable Amortization Including
Revenues (Loss) Assets Expense Acquisitions
1998
Lighting Equipment $1,105,255 $ 109,286 $ 397,962 $ 19,114 $ 37,541
Chemical 454,532 36,460 235,269 9,194 20,217
Textile Rental (1) 312,746 29,734 193,347 13,912 21,595
Envelope 158,777 13,293 103,087 4,383 47,111
2,031,310 188,773 929,665 46,603 126,464
Corporate (14,903) 81,019 2,243 875
Interest Expense, net (749)
$2,031,310 $ 173,121 $1,010,684 $ 48,846 $127,339
1997
Lighting Equipment $ 952,026 $ 92,372 $ 353,224 $ 16,722 $ 21,688
Chemical (2) 402,569 31,647 202,769 8,679 12,875
Textile Rental (1) 493,535 60,792 190,139 27,014 13,050
Envelope (3) 131,015 10,190 55,271 3,297 7,159
Other 57,034 1,906 - 611 509
2,036,179 196,907 801,403 56,323 55,281
Corporate (4) (16,205) 304,949 1,658 1,709
Interest Expense, net (1,624)
$2,036,179 $ 179,078 $1,106,352 $ 57,981 $ 56,990
1996
Lighting Equipment $ 867,771 $ 76,085 $ 332,006 $ 15,224 $ 20,800
Chemical 367,682 38,611 170,327 8,127 5,744
Textile Rental (1) 530,625 42,198 420,169 29,753 28,418
Envelope 125,834 10,041 51,258 2,741 5,759
Other 121,650 5,242 29,436 1,410 1,221
2,013,562 172,177 1,003,196 57,255 61,942
Corporate (8,764) 91,450 1,173 3,624
Interest Expense, net (1,565)
$2,013,562 $ 161,848 $1,094,646 $ 58,428 $ 65,566
(1) Textile rental segment 1997 operating profit included one-time charges of
$17,800 for restructuring and other and $31,800 for asset impairments.
Gains resulting from the sale of businesses were $2,449 in 1998, $75,097 in
1997, and $7,800 in 1996.
(2) Chemical segment operating profit included one-time charges of $1,500 for
restructuring and $8,100 for asset impairments.
(3) Envelope segment operating profit included one-time charges of $230 for
restructuring.
(4) Corporate operating profit included one-time charges of $3,700 for asset
impairments.
Page 66
Exhibit 13
REPORT OF MANAGEMENT
National Service Industries, Inc.
The management of National Service Industries, Inc. is responsible for the
integrity and objectivity of the financial information in this annual report.
These financial statements are prepared in conformity with generally accepted
accounting principles, using informed judgments and estimates where appropriate.
The information in other sections of this report is consistent with the
financial statements. The company maintains a system of internal controls and
accounting policies and procedures designed to provide reasonable assurance that
assets are safeguarded and transactions are executed and recorded in accordance
with management's authorization. The audit committee of the Board of Directors,
composed entirely of outside directors, is responsible for monitoring the
company's accounting and reporting practices. The audit committee meets
regularly with management, the internal auditors, and the independent public
accountants to review the work of each and to assure that each performs its
responsibilities. Both the internal auditors and Arthur Andersen LLP have
unrestricted access to the audit committee allowing open discussion, without
management's presence, on the quality of financial reporting and the adequacy of
internal accounting controls.
/s/ James S. Balloun /s/ Brock A. Hattox /s/ Mark R. Bachmann
James S. Balloun Brock A. Hattox Mark R. Bachmann
Chairman, President, and Executive Vice President and Vice President and
Chief Executive Officer Chief Financial Officer Controller
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of National Service Industries, Inc.:
We have audited the accompanying consolidated balance sheets of National Service
Industries, Inc. (a Delaware corporation) and subsidiaries as of August 31, 1998
and 1997 and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended August
31, 1998. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of National Service Industries,
Inc. and subsidiaries as of August 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
October 9, 1998
Page 67
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
National Service Industries, Inc.
National Service Industries is a diversified service and manufacturing company
operating in four segments: lighting equipment, chemicals, textile rental, and
envelopes. The company continued to be in strong financial condition at August
31, 1998. Net working capital was $385.1 million, down from $498.8 million at
August 31, 1997, and the current ratio was 2.7, compared with 2.8 at the prior
year-end. The decrease in net working capital was the result of the company's
utilization of approximately $325 million of cash, generated from the 1997
divestiture of several non-strategic assets, to fund acquisitions, capital
expenditures, share repurchases, and payment of dividends. At August 31, 1998,
the company's debt to capitalization increased according to plan to 12.9 percent
compared with 4.6 percent at the prior year-end.
Strategic Transactions
The company periodically implements strategic transactions that, it believes,
afford it the opportunity to redeploy resources to create value and position the
company for future growth. During the three-year period ending 1998, the
following transactions occurred:
Acquisitions
Acquisition spending in 1998 totaled $45.3 million and was primarily related to
the chemical and envelope segments. In November 1997, the chemical segment
purchased Pure Corporation, a specialty chemical company with its core
businesses in Indiana, Pennsylvania, and New York. In March 1998, the envelope
segment purchased Allen Envelope Corporation, a single-plant, Pennsylvania-based
envelope manufacturer, providing the segment with access to markets in the
Northeast. In July 1998, the company purchased Calman Australia Pty Ltd
("Calman"). Calman, located in Victoria, Australia, is a manufacturer of
cleaning, maintenance, sanitation and industrial products, chemicals, supplies,
and accessories. Additionally, the company paid certain performance payments
associated with a prior year chemical acquisition.
In 1997, acquisition spending totaled $4.3 million and resulted from the
chemical segment's purchase of chemical products companies in Ohio and Canada
and the lighting equipment segment's acquisition of a small emergency lighting
products manufacturer in Canada. In March 1997, the company also issued 536,872
shares valued at $20.5 million to acquire Enforcer Products, Inc. ("Enforcer"),
a specialty chemical company with a retail focus. In 1996, the company made
minor acquisitions related to the textile rental segment.
Divestitures
In 1998, divestitures of non-strategic textile rental operations and excess
properties resulted in net proceeds of $3.1 million and pretax gains of $2.4
million.
In February 1997, the company sold the North Bros. insulation business for
cash of $27.1 million, recognizing an immaterial gain. The business had 1997
sales of $57.0 million and operating income of $1.9 million through the date of
sale.
In July 1997, the company sold 29 textile rental plants to G&K Services,
Inc. for approximately $280 million, recognizing a pretax gain of $74.0 million.
The divested locations had 1997 sales of $176.5 million and operating income of
$9.4 million through the date of sale.
Additionally, in 1997 and 1996, the company divested other non-strategic
businesses, primarily in the textile rental segment, generating cash of $4.3
million and $15.3 million, respectively.
Liquidity and Capital Resources
Operating Activities
Operations provided cash of $29.3 million in 1998, compared with cash provided
of $127.6 million in 1997 and $153.0 in 1996. The decrease in 1998 was primarily
the result of increased tax payments associated with the divestiture of 29
textile plants in July 1997 and an increase in accounts receivable commensurate
with the increased revenue in the lighting equipment and chemical segments. The
1997 decrease compared with 1996 resulted primarily from investment in
inventories to support increased sales of the lighting equipment segment and
changes in deferred taxes associated with the textile rental plant divestiture.
Investing Activities
Investing activities provided cash of $82.5 million and $61.8 million in 1998
and 1997, respectively, and used cash of $41.8 million in 1996. The increase in
1998 is the result of the liquidation of $205.3 million of short-term
investments, generated by 1997 divestitures, to fund acquisitions, capital
expenditures, share repurchases, and payment of dividends. Capital expenditures
were $82.0 million in 1998, compared with $48.8 million in 1997 and $65.5
million in 1996. During 1998, the lighting equipment segment invested in
facility expansions and manufacturing process improvements, the textile rental
segment invested in a merchandise tracking system and fleet refurbishment, and
the envelope segment invested in facility and machinery replacements. Capital
spending in 1997 and 1996 consisted primarily of lighting equipment segment
facilities and process improvements, equipment replacements, and tooling for new
products and textile rental segment facilities improvements and equipment
replacements. Additionally, in 1996, the lighting equipment segment expanded its
production facility in Monterrey, Mexico. As noted under "Acquisitions" and
"Divestitures," the company has engaged in a number of strategic transactions.
The company spent $45.3 million, $4.3 million, and $0.6 million in 1998, 1997,
and 1996, respectively, on acquisitions. Additionally, the company received $3.1
million, $311.4 million, and $15.3 million in connection with dispositions of
non-strategic assets in 1998, 1997, and 1996, respectively. In 1999, capital
expenditures are expected to approximate $85 million as the company continues to
invest capital in technology and facilities. Contractual commitments for capital
and acquisition spending for fiscal year 1999 approximate $27 million.
Page 68
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
National Service Industries, Inc.
Financing Activities
Financing activities used $145.2 million, $187.6 million, and $131.2 million in
1998, 1997, and 1996, respectively. In the three years ending August 31, 1998,
the company distributed approximately $510 million to stockholders through share
repurchases and dividends. Cash of $154.0 million, $121.7 million, and $75.2
million was utilized in 1998, 1997, and 1996, respectively, for share
repurchases of 3.0 million, 3.0 million, and 2.0 million shares, respectively.
The company has a standing annual authorization to repurchase 2.0 million shares
plus the number of new shares issued in any one year. Included in the 1998 and
1997 amounts was a supplemental authorization for the repurchase of 1.25 million
shares granted as a result of the textile rental divestiture transaction.
Additionally, the company distributed cash of $52.6 million, $54.2 million, and
$55.3 million in 1998, 1997, and 1996, respectively, to the company's
stockholders in the form of dividends. The increase in dividends to $1.23 per
share in 1998 from $1.19 per share in 1997 represented an increase of 3.4
percent, marking the sixty-second consecutive year of quarterly dividends
without a decrease.
During the fourth quarter of 1998, the company filed a registration
statement (the "shelf registration"), which became effective September 8, 1998,
with the Securities and Exchange Commission to allow the company to offer for
sale, from time to time, up to $400 million of unsecured senior debt securities
or unsecured senior subordinated debt securities (the "Debt Securities")
consisting of notes, debentures, or other evidence of indebtedness. The Debt
Securities may be convertible into or exchangeable for shares of the company's
common stock, shares of its preferred stock, or other Debt Securities. The Debt
Securities may be offered as a single series or as two or more separate series
in amounts, at prices and on terms to be determined at the time of the offering.
The Debt Securities may be sold to or through one or more agents designated from
time to time.
In 1996, the company negotiated a $250 million multi-currency committed
credit facility (the "Credit Facility") with ten domestic and international
banks. The Credit Facility has a term of five years, expiring in July 2001, with
no provision for reduction in commitments. The Credit Facility contains
restrictions on the incurrence of indebtedness by subsidiaries, as well as
financial and other covenants, including restrictions that the company's ratio
of total debt to capitalization may not exceed 60 percent at any time.
The company has complimentary lines of credit totaling $122.0 million for
general operating purposes, of which $22.0 million is available on a
multi-currency basis. On August 31, 1998, the company borrowed $52.0 million
under the $100.0 million domestic line of credit. Subsequent to the company's
fiscal year end, these borrowings were repaid through borrowings on the Credit
Facility. This borrowing has been classified as noncurrent because it is the
company's intention to refinance this obligation on a long-term basis. In
addition, $28.4 million in letters of credit were outstanding at August 31, 1998
under the domestic line of credit. At August 31, 1998, the company had foreign
currency short-term bank borrowings under the $22.0 million line of credit
equivalent to $7.9 million at a weighted average interest rate of 4.91 percent.
Management believes current cash balances, anticipated cash flows from
operations, and available funds from the Credit Facility, complimentary lines of
credit, and the shelf registration are sufficient to meet the company's planned
level of capital spending and general operating cash requirements for the next
twelve months.
Results of Operations
Years Ended August 31
(in millions, except per 1998 1997 1996
share amounts)
Sales and Service Revenue:
Lighting Equipment $1,105.3 $ 952.0 $ 867.8
Chemical 454.5 402.6 367.7
Textile Rental 312.7 493.5 530.6
Envelope 158.8 131.0 125.8
Other - 57.1 121.7
$2,031.3 $2,036.2 $2,013.6
Operating Profit (Loss):
Lighting Equipment $ 109.3 $ 92.4 $ 76.1
Chemical 36.5 31.6 38.6
Textile Rental 29.7 60.8 42.2
Envelope 13.3 10.2 10.0
Other - 1.9 5.3
188.8 196.9 172.2
Corporate (14.9) (16.2) (8.8)
Interest expense, net (0.8) (1.6) (1.6)
$ 173.1 $ 179.1 $ 161.8
Net Income $ 108.7 $107.3 $101.1
Earnings per Share:
Basic $ 2.56 $ 2.37 $ 2.11
Diluted 2.53 2.36 2.10
National Service Industries posted revenues of $2.0 billion for the fiscal
year ended August 31, 1998. The slight revenue decline in 1998 in comparison
with the prior year resulted from increased lighting equipment, chemical, and
envelope revenues of approximately $233 million offset primarily by revenues not
included in 1998 as a result of 1997 divestitures. Revenues in 1997 increased
$22.6 million, or 1.1 percent, as a result of higher volumes in the lighting
equipment, chemical, and envelope segments partially offset by revenues from
businesses divested.
Net income for 1998 increased $1.4 million, or 1.3 percent, to a record
level of $108.7, or $2.56 per basic share, $2.53 diluted. Earnings per share
grew at the higher rate of 8.0 percent per basic share and 7.2 percent per
diluted share due to a reduction of 2.7 million basic and 2.5 million diluted
average shares outstanding. Net income in 1997 increased $6.2 million, or 6.1
percent, to $107.3 million, or $2.37 per basic share, $2.36 diluted.
Lighting equipment segment sales grew $153.3 million, or 16.1 percent, to
$1.1 billion in 1998. Strong demand in the non-residential construction market
and increased volumes resulting from new products contributed to the growth in
sales. As a result of the increased sales and ongoing productivity improvements,
operating profit increased 18.3 percent in 1998. Sales for 1997 increased 9.7
percent due primarily to higher unit volumes in the non-residential construction
markets. Operating profit for 1997 increased 21.4 percent as a result of the
increased sales, improved product mix, and lower manufacturing costs.
Page 69
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
National Services Industries, Inc.
Chemical segment revenues for 1998 increased $51.9 million, or 12.9
percent, to $454.5 million. Incremental revenues were a result of the inclusion
of a full year of Enforcer as well as increased retail volumes of Enforcer and
Zep Manufacturing Company. Operating profit increased $4.9 million, or 15.5
percent, to $36.5 million as a result of the increased revenues and the impact
of the 1997 restructuring charge on 1997 operating profit. These increases to
operating profit were somewhat offset by additional severance costs and
increased selling expenses incurred in the industrial chemical channel of the
segment. Revenues in 1997 increased 9.5 percent, as a result of incremental
volumes from U.S. and Canadian acquisitions. Operating profit in 1997 declined
18.1 percent, as a study of the segment's European operations resulted in a
severance-related charge of $1.5 million for operational reorganizations and an
asset impairment loss of $8.1 million resulting from historical losses and
inadequate future cash flows. Additionally in 1997, higher manufacturing costs
and investments to increase the size and capability of the segment's fully
commissioned sales force offset the profits resulting from revenue gains.
Textile rental segment revenues for 1998 decreased 36.6 percent to $312.7
million primarily as a result of the businesses divested in 1997 as described in
"Strategic Transactions" above. Excluding the 1997 divestiture, revenues
declined approximately $4.0 million as the segment continued to eliminate
low-margin customer accounts. Operating profit decreased 51.2 percent to $29.7
million, primarily as a result of the 1997 divestitures. The 1997 sale of
non-strategic assets to G&K Services, Inc., which had 1997 operating profits of
$9.4 million, resulted in gains of $74.0 million. These gains were somewhat
offset in 1997 by restructuring expenses, asset impairment, and other charges
totaling $49.6 million. Excluding the impact on 1997 operating profit of the
gains, restructuring, and loss of revenue from divested facilities, 1997
operating profit would have been approximately $27.0 million. The increase in
operating profit in 1998 after adjusting for the 1997 items is primarily due to
gains on the sale of certain uniform contracts and improved profitability as a
result of tighter inventory control. Segment revenues for 1997 decreased 7.0
percent from 1996 primarily as a result of the businesses divested in 1997.
Operating profit increased 44.1 percent as a result of the gains recognized on
the divestitures discussed above, offset by the restructuring and other charges
recorded in 1997.
A review of the textile rental segment's under-performing and
non-strategic locations during 1997 resulted in a plan to dispose of certain
plants and consolidate the operations of others. Restructuring expenses included
severance and union related expenses of $1.2 million and exit expenses of $6.7
million for unexpired leases, costs to dispose of facilities, and costs of
personnel to effect closures and consolidations. Also as a result of the review
and due to a combination of historical losses, anticipated future losses, and
inadequate cash flows, the segment recorded an impairment loss of $22.3 million
on assets to be disposed of and $9.5 million on assets held for use. After the
impairment charge, the remaining net book value of the assets to be disposed of
was immaterial. The ongoing impact to operating profit as a result of reduced
employee and facility expenses is estimated to be an increase of $4 million to
$5 million annually. The restructuring is not expected to materially impact
future liquidity or other sources and uses of capital.
Envelope segment revenue increased $27.8 million, or 21.2 percent, in 1998
to $158.8 million. The March 1998 purchase of Allen Envelope, as discussed in
"Strategic Transactions," accounted for approximately $18 million of the revenue
increase. The remaining increase is attributable to higher shipment volumes.
Operating profit for the segment increased 30.4 percent to $13.3 million,
primarily as a result of the increased revenues generated by the Allen Envelope
acquisition. Segment revenue in 1997 increased 4.1 percent as volume gains were
offset somewhat by contractual price adjustments. Operating profit in 1997 was
flat in comparison to the prior year as increased revenues were offset by higher
manufacturing costs associated with the segment's growth initiatives.
Revenue and operating profit of the "other" segment have been eliminated as
a result of the February 1997 divestiture of the insulation service business
discussed in "Strategic Transactions."
Corporate expenses decreased $1.3 million in 1998, as 1997 expense included
an asset impairment recorded to reflect the $1.2 million appraised value of an
asset held for sale. Corporate expenses in 1997 were $7.4 million higher than
1996 as a result of the asset impairment and higher accrued incentive plan
costs. Net interest expense decreased $0.8 million in 1998 as the company
benefited from higher average levels of short-term investments, offset slightly
by higher average debt levels.
Consolidated income before taxes decreased $6.0 million, or 3.4 percent, to
$173.1 million primarily due to the effect of the 1997 divestitures and
associated gains included in 1997 amounts, partially offset by increased income
from the lighting segment in 1998. The provision for income taxes was 37.2
percent, 40.1 percent, and 37.5 percent in 1998, 1997, and 1996, respectively.
The increase in the effective rate in 1997 was due primarily to higher rates
applicable to the textile rental divestiture.
Environmental Matters
The company's operations, as well as other similar operations, are subject to
comprehensive laws and regulations relating to the generation, storage,
handling, transportation, and disposal of hazardous substances and solid and
hazardous wastes and to the remediation of contaminated sites. Permits and
environmental controls are required for certain of the company's operations to
prevent air and water pollution, and these permits are subject to modification,
renewal, and revocation by issuing authorities. The company believes that it is
in substantial compliance with all material environmental laws, regulations, and
its permits. On an ongoing basis, the company incurs capital and operating costs
relating to environmental compliance. Environmental laws and regulations have
generally become stricter in recent years, and the cost of responding to future
changes may be substantial.
The company's environmental reserves totaled $12.6 million and $17.1
million at August 31, 1998 and 1997, respectively. The actual cost of
environmental issues may be substantially lower or higher than that reserved due
to the difficulty in estimating such costs, potential changes in the status of
government regulations, and the inability to determine the extent to which
contributions will be available from other parties. The company does not believe
that any such amount below or in excess of that accrued is reasonably estimable.
Certain environmental laws, such as Superfund, can impose liability for
the entire cost of site remediation upon each of the current or former owners or
operators of a site or parties who sent waste to a site where a release of a
hazardous substance has occurred regardless of fault or the lawfulness of the
original disposal activity. Generally, where there are a number of financially
viable potentially responsible parties ("PRPs"), liability has been apportioned
based on the type and amount of waste disposed of by each party at such disposal
site and the number of financially viable parties, although no assurance can be
given as to any particular site.
The company is currently a party to, or otherwise involved in, legal
proceedings in connection with several state and federal Superfund sites, two of
which are located on property owned by the company. Except for the Crymes
Landfill matter in Georgia, the company believes its liability is de minimis at
each of the sites which it does not own where it has been named as a PRP. At the
Crymes Landfill Site, since the matter is currently in the investigative phase,
the company does not know whether its liability is de minimis but believes that
its exposure at the site is not likely to result in a
Page 70
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
National Service Industries, Inc.
material adverse effect on the company. For the property which the company owns
on Seaboard Industrial Boulevard in Atlanta, Georgia, the company has agreed to
conduct an investigation on its and adjoining properties pursuant to the Georgia
Hazardous Site Response Act. Until that investigation is completed, the company
will not be able to determine if remediation will be required, if the company
will be solely responsible for the cost of such remediation, or whether such
cost is likely to result in a material adverse effect on the company. For the
property which the company owns on East Paris Street in Tampa, Florida, the
company has been requested by the State of Florida to clean up chlorinated
solvent contamination in the groundwater on the property and on surrounding
property known as Seminole Heights Solvent Site and to reimburse costs already
incurred by the State of Florida in connection with such contamination. The
company believes that it has a strong defense due to likely off-site sources of
the contamination and because contamination from the property, if any, was due
to prior owners and not the company's operations. The company plans to meet with
the State of Florida in the near future regarding this matter. At this time, it
is too early to quantify the company's potential exposure or the likelihood of
an adverse result.
The company is currently evaluating emissions of volatile organic
compounds from its manufacturing operations in the Atlanta area to determine
whether it will need to install pollution control equipment or modify its
operations to comply with federal and state air pollution regulations. Until the
current evaluations are completed, the company is not able to quantify the
possible cost of compliance. However, based upon currently available
information, the company does not expect any expenditures which may have to be
made to achieve compliance to be material.
In connection with the sale of the North Bros. business and 29 of the
company's textile rental plants in 1997, the company has retained certain
environmental liabilities. The company has received notice from the buyer of the
textile rental plants of the alleged presence of perchloroethylene contamination
on one of the properties involved in the sale. The company has since asserted an
indemnification claim against the company from which it bought the property. At
this time, it is too early to quantify the company's potential exposure in this
matter, the likelihood of an adverse result, or the possibility that the company
may be fully or partially indemnified.
In November 1997, the Environmental Protection Agency ("EPA") proposed
stringent new wastewater discharge limits, which would become effective in the
future, that could apply to certain facilities operated by the company. While
the company does not believe that these regulations should apply to its
operations, if the regulations are adopted as proposed, following adoption, the
company's cost to comply with them could be as much as $6 million to $9 million
of equipment expenditures spread over a three-year period, which the company
does not believe would be material to its financial condition or results of
operations.
Impact of the Year 2000 Issue
The "Year 2000 Issue" resulted from the use of two digits rather than four
digits to define the applicable year in certain computer programs. With the
coming millennium, any of the company's computer programs that have two-digit
date-sensitive software may interpret a date of "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculation
causing disruption of the operation of computer hardware and software, as well
as intelligent manufacturing equipment and processes, and telephony.
Management is addressing the Year 2000 Issue in four phases: awareness,
assessment, action plan, and plan implementation. At August 31, 1998, all areas
of the company had completed the first three phases and implementation of the
plan was approximately 60 percent complete. Management estimates that the total
cost to be incurred in connection with the Year 2000 Issue will range from $3
million to $5 million, and substantially all major systems are expected to be in
compliance prior to the end of calendar year 1999. At August 31, 1998, the
company had spent approximately $1.5 million on the Year 2000 Issue. The cost of
the project is being funded through operating cash flows. Approximately
one-third of the total cost reflects the redeployment of existing internal
information technology resources and should not be incremental costs to the
company.
Management has evaluated the potential exposure of the company to related
problems of its customers and suppliers and has implemented a vendor
certification process. While management believes that its plan is sufficient to
address the Year 2000 Issue, a contingency plan is currently being developed to
address the potential for unforeseen issues that may arise. There can be no
assurance, however, that such exposures or the costs of remediating any problems
associated therewith will not materially affect the company's future business,
financial condition, or results of operations.
Outlook
Management continues to execute its strategic plan to grow both internally and
through acquisitions. Fiscal 1999 sales from the existing businesses are
anticipated to grow at a rate in excess of 5.0 percent, led primarily by the
lighting equipment segment through continued lighting equipment market strength
and in the chemical segment by product development and growth in the retail
market. Additionally, subsequent to year-end, the company completed the
acquisition of the assets of GTY Industries, Inc., a manufacturer of
architectural-grade light fixtures for landscape, in-grade, and underwater
applications. Assuming economic conditions similar to the fall of 1998,
management expects earnings growth that is consistent with or slightly higher
than reported 1998 results.
Cautionary Statement Regarding Forward-Looking Information
From time to time, the company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
capital expenditures, 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.
Statements herein which may be considered forward-looking include: (a)
statements made regarding the company's current expectations or beliefs with
respect to the outcome and impact on the company's business, financial
condition, or results of operations of the Year 2000 Issue, environmental
issues, and legal proceedings; (b) statements made concerning management's
expectations with respect to the company's plan for strategic growth; (c)
statements made regarding management's expectations with regard to future cash
flows; and (d) statements made regarding the effect of the 1997 reduction of
employees and facility expenses in the textile rental segment on future
operating profit. 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 non-residential construction awards; and (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, as well as share repurchases and acquisitions.
Page 71
Exhibit 13
TEN-YEAR FINANCIAL SUMMARY
National Service Industries, Inc.
(Dollar amounts in thousands, except per share
data)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Operating Results
Net sales of products $1,718,564 $1,542,644 $1,482,937 $1,424,180 $1,337,410 $1,257,906 $1,189,684 $1,164,181 $1,250,833 $1,183,666
Service revenues 312,746 493,535 530,625 546,447 544,454 546,916 444,127 437,534 396,981 355,845
Total revenues 2,031,310 2,036,179 2,013,562 1,970,627 1,881,864 1,804,822 1,633,811 1,601,715 1,647,814 1,539,511
Cost of products sold 1,044,215 945,794 933,405 908,869 875,055 832,264 810,552 791,355 832,867 800,385
Cost of services 183,470 283,024 304,381 299,687 286,519 281,551 236,474 240,376 219,673 198,262
Selling and administrative
expenses 634,061 633,740 616,513 601,143 576,463 556,162 462,240 456,622 438,949 397,160
Interest expense
(income), net 749 1,624 1,565 1,648 2,788 3,645 (837) (4,332) (3,712) (3,805)
Gain on sale of
business (2,449) (75,097) (7,579) (5,726) (2,249) (1,379) - - - (3,080)
Restructuring expense,
asset impairments, and
other charges - 63,091 - - - - - 63,467 - -
Other (income)
expense, net (1,857) 4,925 3,429 14,509 11,090 13,063 8,474 5,591 4,322 2,571
Income before taxes 173,121 179,078 161,848 150,497 132,198 119,516 116,908 48,636 155,715 148,018
Provision for
income taxes 64,401 71,800 60,700 56,400 49,500 44,400 42,800 16,400 56,000 53,300
Net Income $ 108,720 $ 107,278 $ 101,148 $ 94,097 $ 82,698 $ 75,116 $ 74,108 $ 32,236 $ 99,715 $ 94,718
Per Share Data
Net income: (1)
Basic $ 2.56 $ 2.37 $ 2.11 $ 1.93 $ 1.67 $ 1.52 $ 1.50 $ .65 $ 2.02 $ 1.92
Diluted 2.53 2.36 2.10 1.93 1.67 1.51 1.50 .65 2.02 1.92
Cash dividends 1.23 1.19 1.15 1.11 1.07 1.03 .99 .95 .90 .82
Stockholders' equity 13.96 15.20 15.45 15.41 14.77 14.21 13.79 13.33 13.68 12.44
Financial Ratios
Current ratio 2.7 2.8 3.1 3.2 3.2 2.9 3.5 3.4 4.5 4.8
Net income as a
percent of sales 5.4% 5.3% 5.0% 4.8% 4.4% 4.2% 4.5% 2.0% 6.1% 6.2%
Return on average
stockholders' equity 17.4% 15.5% 13.6% 13.0% 11.6% 10.9% 11.1% 4.8% 15.6% 16.3%
Dividends as a percent of
current year earnings 48.4% 50.5% 54.6% 57.6% 64.1% 67.9% 66.3% 146.2% 44.6% 42.6%
Percent of debt to total
capitalization 12.9% 4.6% 4.2% 4.3% 4.3% 4.7% 4.2% 5.0% 4.2% 3.5%
Page 72
Exhibit 13
TEN-YEAR FINANCIAL SUMMARY (CONTINUED)
National Service Industries, Inc.
(Dollar amounts in thousands, except per share
data)
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Financial Position
Increase (decrease) in:
Cash and cash
equivalents $ (37,977)$ (1,539)$ (20,740)$ 20,783 $ 42,766 $ (85,284)$ 27,617 $ (50,437)$ 23,433 $ 14,612
Short-term investments(205,302) 204,751 (3,047) 1,019 (2,197) (3,736) (5,551) 12,813 (27,247) (19,633)
Net working capital 385,056 498,758 408,955 437,840 413,114 363,575 399,893 386,306 447,800 450,185
Short-term debt $ 7,981 $ 5,889 $ 6,742 $ 6,486 $ 5,765 $ 6,196 $ 1,434 $ 3,254 $ 2,253 $ 1,372
Long-term debt 78,092 26,197 24,920 26,776 26,863 28,418 28,359 31,373 27,465 20,765
Total debt 86,073 32,086 31,662 33,262 32,628 34,614 29,793 34,627 29,718 22,137
Stockholders' equity 578,901 671,813 718,008 744,404 727,385 704,023 682,954 660,567 675,444 612,668
Capitalization $ 664,974 $ 703,899 $ 749,670 $ 777,666 $ 760,013 $ 738,637 $ 712,747 $ 695,194 $ 705,162 $ 634,805
Other Data
Capital expenditures (including
acquisitions) $ 127,339 $ 56,990 $ 65,566 $ 59,910 $ 42,508 $ 82,171 $ 49,789 $ 90,229 82,932 $ 66,491
Depreciation and
amortization 48,846 57,981 47,643 57,130 60,548 62,097 53,816 50,249 42,821 36,260
Total assets 1,010,684 1,106,352 1,094,646 1,131,346 1,101,261 1,081,510 1,036,908 1,008,319 960,622 886,358
Deferred income tax
liability 40,404 34,093 63,347 65,756 73,319 78,286 87,150 96,627 99,277 101,320
Self-insurance reserves,
less current portion 44,573 57,056 63,369 67,830 61,081 56,335 47,638 38,428 15,222 15,213
Other long-term
liabilities 46,719 35,193 27,576 24,010 22,940 27,110 28,677 22,015 16,067 17,964
Weighted average number
of shares outstanding
(in thousands): (1)
Basic 42,462 45,191 47,941 48,696 49,547 49,556 49,539 49,540 49,389 49,255
Diluted 43,022 45,534 48,189 48,797 49,614 49,623 49,566 49,561 49,389 49,255
Stockholders 6,774 7,165 6,281 6,655 7,034 7,262 7,554 7,996 8,248 8,459
Employees 16,700 16,100 20,600 21,100 22,000 22,200 20,100 20,900 21,800 20,800
Use of Total Revenues
Salaries and wages $ 552,816 $ 572,517 $ 580,571 $ 568,616 565,859 $ 572,163 $ 502,709 $ 501,502 $ 491,334 $ 465,522
Materials and supplies 955,307 909,082 875,658 832,668 783,610 760,551 700,338 683,871 713,310 668,655
Other operating expenses 305,888 334,503 348,143 370,575 349,849 301,356 273,330 258,919 246,288 222,350
Taxes and licenses 111,028 124,805 115,621 110,397 102,097 97,015 83,326 59,889 97,167 91,346
Gain on sale
of businesses (2,449) (75,097) (7,579) (5,726) (2,249) (1,379) - - - (3,080)
Restructuring expense,
asset impairments,
and other charges - 63,091 - - - - - 63,467 - -
Dividends paid 52,603 54,222 55,272 54,156 53,042 51,041 49,105 47,124 44,506 40,389
Retained earnings 56,117 53,056 45,876 39,941 29,656 24,075 25,003 (13,057) 55,209 54,329
$2,031,310 $2,036,179 $2,013,562 $1,970,627 $1,881,864 $1,804,822 $1,633,811 $1,601,715 $1,647,814 $1,539,511
(1) In 1998, the company adopted Financial Accounting Standards No. 128,
"Earnings per Share." Prior period amounts have been restated in accordance
with this statement.