Page 1 of 61
Exhibit Index on Page 16
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For quarter ended May 31, 1999 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.
Common Stock - $1.00 Par Value - 40,445,220 shares as of June 30, 1999.
- --------------------------------------------------------------------------------
Page 2
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS-
MAY 31, 1999 AND AUGUST 31, 1998 3
CONSOLIDATED STATEMENTS OF INCOME-
THREE MONTHS AND NINE MONTHS ENDED
MAY 31, 1999 AND 1998 4
CONSOLIDATED STATEMENTS OF CASH FLOWS-
NINE MONTHS ENDED MAY 31, 1999 AND 1998 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10-13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16-17
Page 3
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per share data)
May 31, August 31,
1999 1998
--------------- ---------------
Assets
Current Assets:
Cash and cash equivalents $ 62,893 $ 19,146
Receivables, less reserves for doubtful accounts of $5,784 at May 31, 1999 and
$4,631 at August 31, 1998 333,236 307,140
Inventories, at the lower of cost (on a first-in, first-out basis) or market 202,002 197,950
Linens in service, net of amortization 58,054 58,826
Deferred income taxes 10,544 17,542
Prepayments 8,941 6,447
--------------- ---------------
Total Current Assets 675,670 607,051
--------------- ---------------
Property, Plant, and Equipment, at cost:
Land 19,321 21,450
Buildings and leasehold improvements 156,227 150,326
Machinery and equipment 530,456 485,271
--------------- ---------------
Total Property, Plant, and Equipment 706,004 657,047
Less-Accumulated depreciation and amortization (413,028) (385,176)
--------------- ---------------
Property, Plant, and Equipment-net 292,976 271,871
--------------- ---------------
Other Assets:
Goodwill and other intangibles 124,211 88,280
Other 46,529 43,482
--------------- ---------------
Total Other Assets 170,740 131,762
--------------- ---------------
Total Assets $1,139,386 $1,010,684
=============== ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 101 $ 98
Notes payable 11,225 7,883
Accounts payable 95,358 95,217
Accrued salaries, commissions, and bonuses 32,852 34,820
Current portion of self-insurance reserves 9,663 11,253
Accrued taxes payable 426 -
Other accrued liabilities 78,431 72,724
--------------- ---------------
Total Current Liabilities 228,056 221,995
--------------- ---------------
Long-Term Debt, less current maturities 185,628 78,092
--------------- ---------------
Deferred Income Taxes 41,131 40,404
--------------- ---------------
Self-Insurance Reserves, less current portion 42,525 44,573
--------------- ---------------
Other Long-Term Liabilities 56,854 46,719
--------------- ---------------
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, 120,000,000 shares authorized, 57,918,978 shares issued 57,919 57,919
Paid-in capital 29,010 28,521
Retained earnings 946,068 903,974
Accumulated other comprehensive income items (8,867) (11,357)
--------------- ---------------
1,024,130 979,057
Less-Treasury stock, at cost (17,477,738 shares at May 31, 1999 and 16,457,340
shares at August 31, 1998) 438,938 400,156
--------------- ---------------
Total Stockholders' Equity 585,192 578,901
--------------- ---------------
Total Liabilities and Stockholders' Equity $1,139,386 $1,010,684
=============== ===============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
Page 4
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31 MAY 31
----------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- ----------------
Sales and Service Revenues:
Net sales of products $ 489,787 $ 442,144 $ 1,369,808 $ 1,253,529
Service revenues 80,051 79,464 229,315 235,073
-------------- -------------- -------------- ----------------
Total Revenues 569,838 521,608 1,599,123 1,488,602
-------------- -------------- -------------- ----------------
Costs and Expenses:
Cost of products sold 301,328 269,019 836,864 765,854
Cost of services 44,762 45,270 134,107 136,366
Selling and administrative expenses 173,605 161,618 499,114 464,757
Interest expense (income), net 3,340 1,304 8,219 (1,092)
Gain on sale of businesses (2,303) (442) (5,814) (2,404)
Restructuring expense, asset impairments, and
other charges - - (2,216) -
Other (income) expense, net 471 50 (143) 665
-------------- -------------- -------------- ----------------
Total Costs and Expenses 521,203 476,819 1,470,131 1,364,146
-------------- -------------- -------------- ----------------
Income before Provision for Income Taxes 48,635 44,789 128,992 124,456
Provision for Income Taxes 18,094 16,650 47,985 46,161
-------------- -------------- -------------- ----------------
Net Income $ 30,541 $ 28,139 $ 81,007 $ 78,295
============== ============== ============== ================
Per Share:
Basic Earnings per Share $ .75 $ .67 $ 1.97 $ 1.83
============== ============== ============== ================
Basic Weighted Average Number of Shares
Outstanding 40,654 42,001 41,030 42,763
============== ============== ============== ================
Diluted Earnings per Share $ .75 $ .66 $ 1.97 $ 1.81
============== ============== ============== ================
Diluted Weighted Average Number of Shares
Outstanding 40,851 42,659 41,221 43,300
============== ============== ============== ================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 5
NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
NINE MONTHS ENDED
MAY 31
--------------------------------------
1999 1998
------------------- ------------------
Cash Provided by (Used for) Operating Activities
Net income $ 81,007 $ 78,295
Adjustments to reconcile net income to net cash provided by (used for) operating
activities:
Depreciation and amortization 44,033 36,108
Provision for losses on accounts receivable 2,762 3,908
Gain on the sale of property, plant, and equipment (1,164) (3,417)
Gain on the sale of businesses (5,814) (2,404)
Restructuring expense, asset impairments, and other charges (2,216) -
Change in noncurrent deferred income taxes 727 12,216
Change in assets and liabilities net of effect of acquisitions and
divestitures-
Receivables (16,188) (28,309)
Inventories and linens in service, net 5,388 (19,683)
Deferred income taxes 6,998 (4,636)
Prepayments and other (1,550) (971)
Accounts payable and accrued liabilities (6,529) (68,834)
Self-insurance reserves and other long-term liabilities 8,087 (3,841)
------------------- ------------------
Net Cash Provided by (Used for) Operating Activities 115,541 (1,568)
------------------- ------------------
Cash Provided by (Used for) Investing Activities
Change in short-term investments - 205,244
Purchases of property, plant, and equipment (48,298) (56,829)
Sale of property, plant, and equipment 3,487 4,717
Sale of businesses 3,767 3,011
Acquisitions (62,881) (39,424)
Change in other assets (4,034) (6,230)
------------------- --------------------
Net Cash Provided by (Used for) Investing Activities (107,959) 110,489
------------------- --------------------
Cash Provided by (Used for) Financing Activities
Borrowings of notes payable, net 3,343 49,659
Borrowings (repayments) of long-term debt, net 107,538 (910)
Purchase of treasury stock, net (38,293) (145,179)
Cash dividends paid (38,913) (39,842)
------------------- --------------------
Net Cash Provided by (Used for) Financing Activities 33,675 (136,272)
------------------- --------------------
Effect of Exchange Rate Changes on Cash 2,490 (843)
------------------- --------------------
Net Change in Cash and Cash Equivalents 43,747 (28,194)
Cash and Cash Equivalents at Beginning of Period 19,146 57,123
------------------- --------------------
Cash and Cash Equivalents at End of Period $ 62,893 $ 28,929
=================== ====================
Supplemental Cash Flow Information:
Income taxes paid during the period $ 37,888 $ 76,382
Interest paid during the period 9,940 4,929
Noncash Investing and Financing Activities:
Noncash aspects of sale of businesses--
Receivables recorded $ 396 $ -
Liabilities assumed or incurred 326 165
Noncash aspects of acquisitions--
Liabilities assumed or incurred $ 15,574 $ 4,891
Treasury stock issued 845 -
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)
(In thousands, except share and per share data)
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, 1998 has been derived from audited statements. These statements
reflect adjustments, all of which are of a normal, recurring nature, which are,
in the opinion of management, necessary to present fairly the consolidated
financial position as of May 31, 1999, the consolidated results of operations
for the three months and nine months ended May 31, 1999 and 1998, and the
consolidated cash flows for the nine months ended May 31, 1999 and 1998. Certain
reclassifications have been made to the prior year's financial statements to
conform to the current year's presentation. 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,
1998.
The results of operations for the three months and nine months ended May 31,
1999 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
During the first quarter of fiscal 1999, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The objective of SFAS No. 131 is to provide
information about the different types of business activities in which the
company engages. The following have been identified as reportable segments:
lighting equipment, chemical, textile rental, and envelope.
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Nine Months Ended May 31, 1999 Revenues (Loss) Expense Acquisitions
-------------- ------------- ---------------- -----------------
Lighting Equipment $ 862,857 $ 82,270 $19,553 $67,076
Chemical 360,670 29,756 7,562 8,160
Textile Rental 229,315 26,146 10,862 11,955
Envelope 146,281 11,054 4,535 23,592
-------------- ------------- ---------------- -----------------
Subtotal 1,599,123 149,226 42,512 110,783
Corporate (12,015) 1,521 396
Interest income (expense), net (8,219)
-------------- -------------- --------------- -----------------
Total $1,599,123 $128,992 $44,033 $111,179
============== ============= ================ =================
Nine Months Ended May 31, 1998
Lighting Equipment $ 806,233 $ 76,649 $14,362 $ 25,131
Chemical 332,056 28,467 6,944 12,409
Textile Rental 235,073 21,525 9,765 14,594
Envelope 115,240 8,896 3,374 43,640
-------------- ------------- ---------------- -----------------
Subtotal 1,488,602 135,537 34,445 95,774
Corporate (12,173) 1,663 479
Interest income (expense), net 1,092
-------------- ------------- ---------------- -----------------
Total $1,488,602 $124,456 $36,108 $ 96,253
============== ============= ================ =================
Page 7
Depreciation Capital
Sales and Operating and Expenditures
Service Profit Amortization Including
Three Months Ended May 31, 1999 Revenues (Loss) Expense Acquisitions
-------------- ------------- ---------------- -----------------
Lighting Equipment $ 306,192 $ 28,957 $ 6,642 $ 27,335
Chemical 127,230 11,495 2,586 3,837
Textile Rental 80,051 10,212 3,597 2,659
Envelope 56,365 4,400 1,713 6,081
-------------- ------------- ---------------- -----------------
Subtotal 569,838 55,064 14,538 39,912
Corporate (3,089) 507 60
Interest income (expense), net (3,340)
-------------- ------------- ---------------- -----------------
Total $ 569,838 $ 48,635 $15,045 $ 39,972
============== ============= ================ =================
Three Months Ended May 31, 1998
Lighting Equipment $ 277,497 $ 26,123 $ 4,745 $ 8,017
Chemical 119,111 11,321 2,331 3,114
Textile Rental 79,464 8,707 3,268 4,459
Envelope 45,536 4,428 1,425 36,033
-------------- ------------- ---------------- -----------------
Subtotal 521,608 50,579 11,769 51,623
Corporate (4,486) 522 135
Interest income (expense), net (1,304)
-------------- ------------- ---------------- -----------------
Total $ 521,608 $ 44,789 $12,291 $ 51,758
============== ============= ================ =================
Identifiable Assets
----------------------------------------------------
May 31, 1999 August 31, 1998
--------------------- ---------------------
Lighting Equipment $ 461,416 $ 397,962
Chemical 239,415 235,269
Textile Rental 192,409 193,347
Envelope 125,535 103,087
--------------------- ---------------------
Subtotal 1,018,775 929,665
Corporate 120,611 81,019
--------------------- ---------------------
Total $1,139,386 $1,010,684
===================== =====================
3. INVENTORIES
Major classes of inventory as of May 31, 1999 and August 31, 1998 were as
follows:
May 31, August 31,
1999 1998
------------- -------------
Raw materials and supplies $ 81,071 $ 78,730
Work-in-progress 11,052 10,725
Finished goods 109,879 108,495
------------- -------------
Total $ 202,002 $ 197,950
============= =============
4. EARNINGS PER SHARE
During the quarter ended February 28, 1998, the company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Basic
earnings per share is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed similarly but reflects the
potential dilution that could occur if dilutive options were exercised. The
following table calculates basic earnings per common share and diluted earnings
per common share at May 31:
Page 8
Three Months Ended Nine Months Ended
May 31 May 31
----------------------------- --------------------------
1999 1998 1999 1998
------------- ------------ ------------ ----------
Basic earnings per common share:
Net income $30,541 $ 28,139 $ 81,007 $ 78,295
Basic weighted average shares outstanding (in thousands) 40,654 42,001 41,030 42,763
------------- ------------ ------------ ----------
Basic earnings per common share $ .75 $ .67 $ 1.97 $ 1.83
============= ============ ============ ==========
Diluted earnings per common share:
Net income $30,541 $ 28,139 $ 81,007 $ 78,295
Basic weighted average shares outstanding (in thousands) 40,654 42,001 41,030 42,763
Add - Shares of common stock issuable upon assumed exercise
of dilutive stock options (in thousands) 197 658 191 537
------------- ------------ ------------ ----------
Diluted weighted average shares outstanding (in thousands) 40,851 42,659 41,221 43,300
------------- ------------ ------------ ----------
Diluted earnings per common share $ .75 $ .66 $ 1.97 $ 1.81
============= ============ ============ ==========
5. COMPREHENSIVE INCOME
The company adopted SFAS No. 130, "Reporting Comprehensive Income," in the first
quarter of fiscal 1999. 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. Other comprehensive income (loss) for the three and nine months ended
May 31, 1999 and 1998 includes only foreign currency translation adjustments.
The calculation of comprehensive income is as follows:
Three Months Ended Nine Months Ended
May 31 May 31
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
Net income $ 30,541 $ 28,139 $ 81,007 $ 78,295
Other comprehensive income (loss) 824 (535) 2,490 (843)
------------ ------------ ------------- ------------
Comprehensive Income $ 31,365 $ 27,604 $ 83,497 $ 77,452
============ ============ ============= ============
6. ENVIRONMENTAL MATTERS
The company's operations, as well as similar operations of other companies, 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 limit 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
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 $11,720 and $12,600 at May 31, 1999
and August 31, 1998, 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.
Page 9
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 potentially
responsible parties ("PRPs") that are financially viable, 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 PRPs, 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 and M&J
Solvents matters 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 and M&J Solvents sites in Georgia, since the matters are
currently in the investigative phase, the company does not know whether its
liability is de minimis but believes that its exposure at each of the sites is
not likely to result in a material adverse effect on the company. For property
which the company owns on Seaboard Industrial Boulevard in Atlanta, Georgia, the
company has conducted an investigation on its and adjoining properties and
submitted a Compliance Status Report ("CSR") to the State of Georgia
Environmental Protection Division ("EPD") pursuant to the Georgia Hazardous Site
Response Act. Until EPD's review of the CSR 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 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. 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 material expenditures to achieve compliance.
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.
The State of New York has filed a lawsuit against the company alleging that the
company is responsible as a successor to Serv-All Uniform Rental Corp. for
certain environmental liabilities in connection with the Blydenburgh Landfill in
Islip, New York. The company believes that it has a strong defense that it is
not a successor to Serv-All Uniform Rental Corp. At this time, it is too early
to quantify the company's potential exposure or the likelihood of an adverse
result.
7. INCREASE IN SHARES AUTHORIZED
On January 6, 1999, the stockholders approved an amendment to the corporation's
Restated Certificate of Incorporation to increase the corporation's authorized
shares of common stock from 80,000,000 to 120,000,000. The additional shares
will be available for potential acquisitions, stock dividends and splits, and
other purposes determined by the board of directors to be in the best interests
of the corporation.
8. SUBSEQUENT EVENTS
On June 21, 1999, the company announced the execution of a definitive agreement
to purchase for cash all outstanding shares of Holophane Corporation
("Holophane") for $38.50 per share, or a total of approximately $450 million.
Holophane is a leading manufacturer and marketer of premium quality, highly
engineered lighting fixtures and systems for a wide range of industrial,
commercial, and outdoor applications. The company commenced a tender offer for
all of Holophane's outstanding shares on June 25, 1999. The transaction is
subject to a majority of Holophane's shares being tendered in the offer and
customary closing conditions. The transaction is expected to be completed in the
fourth quarter of NSI's fiscal 1999 and will be accounted for using the purchase
method of accounting.
In June, 1999, the company sold the envelope segment's Techno-Aide/Stumb Metal
Products ("Techno-Aide") business to BSC Enterprises, LLC. Techno-Aide is a
leading manufacturer and marketer of accessory products for users of X-ray
equipment with annual revenues of approximately $4.0 million. The envelope
segment realized a pretax gain of $2.0 million on the transaction.
Page 10
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.
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 May 31,
1999. Net working capital was $447.6 million, up from $385.1 million at August
31, 1998, and the current ratio was 3.0 compared with 2.7 at August 31, 1998. At
May 31, 1999, the company's debt to capitalization increased to 25.2 percent
compared with 12.9 percent at August 31, 1998.
Results of Operations
National Service Industries generated revenue of $569.8 million and $1.6 billion
in the three and nine months ended May 31, 1999, respectively, compared with
revenue of $521.6 million and $1.5 billion in the three and nine months ended
May 31, 1998, respectively. Revenue increased primarily due to the April 1999
acquisition of Peerless Lighting Corporation ("Peerless"), the February 1999
acquisition of Gilmore Envelope Corporation ("Gilmore"), the September 1998
acquisition of GTY Industries (d/b/a "Hydrel"), the July 1998 acquisition of
Calman Australia Pty Ltd, and the March 1998 acquisition of Allen Envelope
("Allen"). Additionally, the revenue increase was due in part to higher revenue
in the base business of the lighting equipment and chemical segments.
Third quarter 1999 net income totaled $30.5 million, or $.75 per diluted share,
compared to net income of $28.1 million, or $.66 per diluted share, for the same
period in the prior year. The increase in income related to the base business
and acquisitions was offset by an increase in net interest expense.
Additionally, the current quarter included a $2.3 million pretax gain on the
sale of industrial contracts in the textile rental segment. Net income for the
nine months ended May 31, 1999 increased 3.5 percent to $81.0 million, or $1.97
per diluted share, primarily due to increased volume in the base business,
income from acquisitions not included in the prior year results, a non-recurring
$3.5 million net pretax gain in the textile rental segment, and a $2.3 million
pretax gain on the sale of industrial contracts in the textile rental segment.
These items were partially offset by an increase in net interest expense and
gains recorded on the sale of businesses in the prior year. Diluted earnings per
share also increased due to the reduction of diluted average shares outstanding
for the three and nine months ended May 31, 1999 by 1.8 million and 2.1 million,
respectively.
The lighting equipment segment reported revenue of $306.2 million and $862.9
million for the three and nine months ended May 31, 1999, respectively, which is
an increase of 10.3 percent and 7.0 percent over the same periods in the prior
year. This increase resulted from continued strength in the non-residential
construction market and the acquisitions of Peerless and Hydrel, offset
partially by competitive pricing measures. Operating profit increased 10.8
percent to $29.0 million for the quarter and 7.3 percent to $82.3 million for
the nine months ended May 31, 1999 primarily related to the additional sales and
lower material costs.
Chemical segment revenue increased 6.8 percent to $127.2 million for the third
quarter and 8.6 percent to $360.7 million for the nine months ended May 31, 1999
primarily due to continued growth in the retail channel, higher revenue from the
industrial and institutional distribution channels, and acquired international
revenue. Operating profit of $11.5 million and $29.8 million in the three and
nine months ended May 31, 1999, respectively, was slightly higher than last
year's results as increased revenues were offset by higher selling and other
operating costs.
Textile rental segment revenue was $80.1 million for the quarter compared with
$79.5 million for the three months ended May 31, 1998 while third quarter
operating income increased to $10.2 million from last year's $8.7 million. The
increase in operating income for the three months ended May 31, 1999 primarily
relates to a $2.3 million pretax gain associated with the sale of certain
industrial customer contracts partially offset by non-operating gains recognized
during the same period of the prior year. Revenue for the nine months ended May
31, 1999 decreased 2.4 percent to $229.3 million primarily as a result of the
sale of several industrial contracts and the rationalization of unprofitable
accounts in fiscal 1998. Year to date 1999 revenue was also affected by the
temporary, negative impact of two hurricanes on nine southeastern plants.
Operating income for the nine months ended May 31, 1999 increased to $26.1
million from $21.5 million for the same period in the prior year. Year to date
1999 operating income includes a $5.7 million gain associated with the 1997
uniform plants divestiture and restructuring activities offset by a $2.2 million
write-off for merchandise inventory previously used by unprofitable accounts.
Additionally, year to date income includes a $2.3 million gain on the sale of
industrial contracts. Excluding non-recurring items in the current and prior
year, operating margins for the quarter and year to date increased due to the
segment's focus on lowering merchandise costs and improving production
efficiencies through the daily tracking of operational performance measures.
Page 11
During the second quarter of 1999, management performed an extensive review of
the liabilities recorded in 1997 in connection with the textile rental segment's
uniform plants divestiture and restructuring activities. In 1997, the textile
rental segment accrued for items related to the sale of its uniform plants
including environmental exposures, severance agreements, and costs to return
leased facilities to pre-lease condition. The company has realized lower costs
than originally anticipated associated with these items and, as a result, has
reduced the liability and recorded a gain of $3.5 million during the second
quarter of 1999. Additionally, in 1997 the textile rental segment recorded an
impairment charge and accrued for items related to restructuring activities that
primarily related to branch consolidations and asset dispositions. As the
company has realized lower than anticipated costs, the reserve was reduced and
income of $2.2 million was recorded during the second quarter of 1999. During
the current year, the restructuring reserves were also reduced by a minimal
amount for payments related to plant consolidations.
Envelope segment revenue increased 23.8 percent to $56.4 million for the three
months ended May 31, 1999 primarily due to the Gilmore acquisition. Year to date
1999 revenue increased 26.9 percent to $146.3 million, largely due to the Allen
and Gilmore acquisitions. Operating profit remained relatively unchanged at $4.4
million for the quarter and increased 24.3 percent to $11.1 million for the nine
months as increased volumes and materials cost savings were partially offset by
gains realized in 1998 on the sale of idle equipment.
Corporate expenses were lower during the three months ended May 31, 1999
compared to the same period in the prior year, primarily due to a gain
recognized on the sale of a building in the third quarter of 1999. Corporate
expenses during the nine month period approximated last year.
Net interest expense was $3.3 million and $8.2 million in the three and nine
months ended May 31, 1999, respectively, compared with $1.3 million of net
interest expense and $1.1 million of net interest income for the three and nine
months ended May 31, 1998, respectively. The increase in net interest expense is
due to lower interest income, resulting from the use of the short-term
investments generated from the textile rental segment's 1997 divestiture
proceeds, combined with higher interest expense from increased borrowing. The
increased borrowing is the result of the issuance of $160 million in publicly
traded notes in the second quarter of 1999 to fund acquisitions, share
repurchases, and internal growth. See "Financing Activities" below for further
discussion.
The provision for income taxes was 37.2 percent of pretax income for the three
and nine months ended May 31, 1999 compared with 37.2 percent for the prior
third quarter and 37.1 percent for the prior year to date.
Liquidity and Capital Resources
Operating Activities
Operations provided cash of $115.5 million during the first nine months of
fiscal 1999 and used cash of $1.6 million during the nine months ended May 31,
1998. The increase in operating cash flow is primarily due to improved working
capital management in the lighting equipment and chemical segments. The
remaining improvement relates to additional tax payments of $38.5 million made
during 1998 primarily related to the 1997 textile rental segment divestitures
that are not repeated in current year results.
Investing Activities
Investing activities used cash of $108.0 million for the nine months ended May
31, 1999 compared with cash provided of $110.5 million in the nine months ended
May 31, 1998. The cash flow in the first three quarters of fiscal 1998 was
higher because of the liquidation of short-term investments. Additionally,
acquisition spending in the first three quarters of fiscal 1999 totaled $62.9
million compared to $39.4 million during the respective prior year period.
Current year acquisition spending was primarily related to the September 1998
purchase by the lighting equipment segment of the assets of Hydrel, a
manufacturer of architectural-grade light fixtures for landscape, in-grade, and
underwater applications; the February 1999 purchase by the envelope segment of
Gilmore, an envelope manufacturer headquartered in Los Angeles, California; and
the April 1999 purchase by the lighting equipment segment of Peerless, a
manufacturer of high performance indirect/direct suspended lighting products.
The company also made minor acquisitions related to the chemical and textile
rental segments. Prior-year acquisition spending of $39.4 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; the envelope
segment's purchase of Allen Envelope Corporation, a single-plant,
Pennsylvania-based envelope manufacturer serving markets in the Northeast; and
performance payments associated with a 1997 chemical acquisition.
Capital expenditures were $48.3 million in the first nine months of fiscal 1999
compared with $56.8 million in the first nine months of fiscal 1998. Capital
spending in the first three quarters of fiscal 1999 was primarily attributable
to the lighting equipment, textile rental, and envelope segments. The lighting
equipment segment's capital expenditures related to the purchase of land and
buildings for a new plant, manufacturing improvements and upgrades for capacity
expansion, and implementation of
Page 12
new technology. Expenditures in the textile rental segment were for
implementation of new technology, production enhancements, and delivery truck
purchases and refurbishments. The envelope segment's expenditures related
primarily to manufacturing process improvements, information systems, facility
expansion, and new folding capacity. Capital spending in the first three
quarters of fiscal 1998 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. Capital expenditures for fiscal 1999 are estimated to be $81
million.
Financing Activities
Cash provided by financing activities was $33.7 million in the first three
quarters of fiscal 1999 compared with cash used of $136.3 million in the first
three quarters of fiscal 1998. Contributing to the change were net purchases of
treasury stock which were $38.3 million in the current year versus $145.2
million in the prior year. During the first three quarters of 1999 the company
repurchased approximately 1.2 million of its common shares.
In the second quarter, the company successfully completed the issuance of $160
million in ten-year publicly traded notes bearing a coupon rate of 6.0 percent.
Proceeds were used for the repayment of $80.0 million in short-term borrowings,
with the remainder available for general corporate purposes including working
capital requirements, capital expenditures, acquisitions, repayment of
outstanding indebtedness, and share repurchases. Dividend payments totaled $38.9
million, or 95 cents per share, compared with $39.8 million, or 92 cents per
share, for the prior-year period. On January 6, 1999, the regular quarterly
dividend rate was increased 3.2 percent to 32 cents per share, or an annual
calendar year rate of $1.28 per share.
Management believes the company's planned level of acquisition and capital
spending and general operating cash requirements for the next twelve months will
be sufficiently covered by current cash balances, anticipated cash flows from
operations, available funds from the existing five-year revolving credit
facility, the company's active shelf registration, complementary lines of
credit, and a new 364-day revolving credit facility which is expected to be
executed in late July 1999.
As discussed in Note 8 to the financial statements, the company commenced a
tender offer for the outstanding shares of Holophane for a total of
approximately $450 million. The company will initially finance the transaction
with short-term debt.
Environmental Matters
See Note 6 to the financial statements for a discussion of the company's
environmental matters.
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 May 31, 1999, all areas of
the company had completed the first three phases and implementation of the plan
was approximately 92 percent complete. Management estimates that the total cost
to be incurred in connection with the Year 2000 Issue will range from $4 million
to $6 million, and substantially all mission critical systems are expected to be
in compliance prior to the end of calendar year 1999. 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. At May
31, 1999, the company had spent approximately $4.0 million on the Year 2000
Issue. The cost of the project is being funded through operating cash flows.
At this time, the company believes its most reasonably likely worst case
scenario is that key suppliers or service providers who have not resolved their
own Year 2000 Issue may cause a disruption of service to the company's critical
business processes. 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, management is currently completing a
contingency plan to address the potential for unforeseen issues that may arise.
These contingency plans include identifying alternative suppliers and increasing
inventory levels. 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.
Page 13
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 and environmental
issues; (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 projected capital expenditures and
future cash flows; and (d) statements made regarding the acquisition of
Holophane. 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; (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; (c)
unforeseen competitive reactions to the Holophane acquisition; and (d) loss of
key sales and management personnel due to the acquisition of Holophane.
Page 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 16).
(b) There were no reports on Form 8-K for the three months ended May 31, 1999.
Page 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL SERVICE INDUSTRIES, INC.
REGISTRANT
DATE July 14, 1999 /s/ David Levy
DAVID LEVY
EXECUTIVE VICE PRESIDENT, ADMINISTRATION
AND COUNSEL
DATE July 14, 1999 /s/ Brock Hattox
BROCK HATTOX
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Page 16
INDEX TO EXHIBITS
Page No.
EXHIBIT 10(iii)A Management Contracts and Compensatory
Arrangements:
(1) Employment Letter Agreement between National 18
Service Industries, Inc. and George H.
Gilmore, Jr., Dated May 5, 1999
(2) Severance Protection Agreement between National Reference is made to Exhibit 10(iii)A(c)
Service Industries, Inc. and George H. Gilmore, Jr., of registrant's Form 10-Q for the quarter
Dated as of June 1, 1999 ended February 29, 1996 and to Exhibit
10(iii)A(6)(b) of registrant's Form 10-K
for the fiscal year ended August 31, 1996,
which are incorporated herein by reference.
(3) Bonus Letter Agreement between National Service Reference is made to Exhibit 10(iii)A(j) of
Industries, Inc. and George H. Gilmore, Jr., registrant's Form 10-K for the fiscal year
Dated as of June 1, 1999 ended August 31, 1989, to Exhibit
10(iii)A(d) of the registrant's Form 10-Q
for the quarter ended February 29, 1996,
and to Exhibit 10(iii)A(7)(b) of registrant's
Form 10-K for the fiscal year ended August
31, 1996, which are incorporated herein by
reference.
(4) Incentive Stock Option Agreement for 23
Executive Officers Effective Beginning June
1, 1999 between National Service Industries,
Inc. and George H. Gilmore, Jr.
(5) Nonqualified Stock Option Agreement for 30
Executive Officers Effective Beginning June
1, 1999 between National Service Industries,
Inc. and George H. Gilmore, Jr.
(6) Aspiration Achievement Incentive Award 36
Agreement for the Performance Cycle beginning
September 1, 1997 between National Service
Industries, Inc. and George H. Gilmore, Jr.,
Dated June 1, 1999.
[a confidential portion of which has been
omitted and filed separately with the
Securities and Exchange Commission]
(7) Aspiration Achievement Incentive Award 45
Agreement for the Performance Cycle beginning
September 1, 1998 between National Service
Industries, Inc. and George H. Gilmore, Jr.,
Dated June 1, 1999.
[a confidential portion of which has been
omitted and filed separately with the
Securities and Exchange Commission]
Page 17
INDEX TO EXHIBITS (Continued) Page No.
(8) Amendment of Aspiration Achievement Incentive 54
Award Agreement and Election Form for
Performance Cycle Ending August 31, 1999
between National Service Industries, Inc. and
(a) James S. Balloun
(b) Brock A. Hattox
(c) David Levy
(d) Stewart A. Searle III
(9) Amendment No. 1 to National Service 60
Industries, Inc. Long-Term Achievement
Incentive Plan, Dated April 7, 1999
Exhibit 27 Financial Data Schedule 61