-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBh5J9xHkQfZDOt0XZac08qYNFq3i1vhGrbpiLos+eYYi5Yhs0o5mL7gs7X9KDNB JrMyT/npeaZ3rZkTngXxYA== 0000070538-99-000006.txt : 19990415 0000070538-99-000006.hdr.sgml : 19990415 ACCESSION NUMBER: 0000070538-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL SERVICE INDUSTRIES INC CENTRAL INDEX KEY: 0000070538 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 580364900 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03208 FILM NUMBER: 99593475 BUSINESS ADDRESS: STREET 1: 1420 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30309 BUSINESS PHONE: 4048531000 MAIL ADDRESS: STREET 1: 1420 PEACHTREE ST NE CITY: ATLANTA STATE: GA ZIP: 30309 10-Q 1 NATIONAL SERVICE INDUSTRIES, INC. 10-Q Page 1 of 16 Exhibit Index on Page 15 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 February 28, 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 Incorporation or Organization) (I.R.S. Employer Identification Number) 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 - 40,846,538 shares as of March 31, 1999. Page 2 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS- FEBRUARY 28, 1999 AND AUGUST 31, 1998 3 CONSOLIDATED STATEMENTS OF INCOME- THREE MONTHS AND SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998 4 CONSOLIDATED STATEMENTS OF CASH FLOWS- SIX MONTHS ENDED FEBRUARY 28, 1999 AND 1998 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10-12 FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13 SIGNATURES 14 EXHIBIT INDEX 15
Page 3 NATIONAL SERVICE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) February 28, August 31, 1999 1998 --------------- --------------- Assets (Unaudited) Current Assets: Cash and cash equivalents $ 62,426 $ 19,146 Receivables, less reserves for doubtful accounts of $5,939 at February 28, 1999 and $4,631 at August 31, 1998 308,856 307,140 Inventories, at the lower of cost (on a first-in, first-out basis) or market 215,177 197,950 Linens in service, net of amortization 57,669 58,826 Deferred income taxes 15,697 17,542 Prepayments 9,319 6,447 --------------- --------------- Total Current Assets 669,144 607,051 --------------- --------------- Property, Plant, and Equipment, at cost: Land 21,349 21,450 Buildings and leasehold improvements 152,873 150,326 Machinery and equipment 514,488 485,271 --------------- --------------- Total Property, Plant, and Equipment 688,710 657,047 Less-Accumulated depreciation and amortization (401,274) (385,176) --------------- --------------- Property, Plant, and Equipment-net 287,436 271,871 --------------- --------------- Other Assets: Goodwill and other intangibles 111,369 88,280 Other 44,880 43,482 --------------- --------------- Total Other Assets 156,249 131,762 =============== =============== Total Assets $1,112,829 $1,010,684 =============== =============== Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term debt $ 100 $ 98 Notes payable 10,621 7,883 Accounts payable 90,909 95,217 Accrued salaries, commissions, and bonuses 26,441 34,820 Current portion of self-insurance reserves 10,654 11,253 Other accrued liabilities 69,493 72,724 --------------- --------------- Total Current Liabilities 208,218 221,995 --------------- --------------- Long-Term Debt, less current maturities 185,635 78,092 --------------- --------------- Deferred Income Taxes 41,345 40,404 --------------- --------------- Self-Insurance Reserves, less current portion 42,332 44,573 --------------- --------------- Other Long-Term Liabilities 53,753 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 28,885 28,521 Retained earnings 928,488 903,974 Accumulated other comprehensive income items (9,691) (11,357) --------------- --------------- 1,005,601 979,057 Less-Treasury stock, at cost (17,072,940 shares at February 28, 1999 and 16,457,340 shares at August 31, 1998) 424,055 400,156 --------------- --------------- Total Stockholders' Equity 581,546 578,901 =============== =============== Total Liabilities and Stockholders' Equity $1,112,829 $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 SIX MONTHS ENDED FEBRUARY 28 FEBRUARY 28 ----------------------------- ------------------------------- 1999 1998 1999 1998 -------------- -------------- -------------- ---------------- Sales and Service Revenues: Net sales of products $436,564 $401,867 $880,021 $811,385 Service revenues 73,795 77,544 149,264 155,610 -------------- -------------- -------------- ---------------- Total Revenues 510,359 479,411 1,029,285 966,995 -------------- -------------- -------------- ---------------- Costs and Expenses: Cost of products sold 268,540 247,415 535,536 496,506 Cost of services 45,608 45,947 89,345 91,095 Selling and administrative expenses 160,597 150,851 325,509 303,479 Interest expense (income), net 2,537 (402) 4,879 (2,404) Gain on sale of businesses (3,511) (950) (3,511) (1,961) Restructuring expense, asset impairments, and other charges (2,216) -- (2,216) -- Other (income) expense, net (623) (762) (614) 613 -------------- -------------- -------------- ---------------- Total Costs and Expenses 470,932 442,099 948,928 887,328 -------------- -------------- -------------- ---------------- Income before Provision for Income Taxes 39,427 37,312 80,357 79,667 Provision for Income Taxes 14,665 13,824 29,891 29,511 -------------- -------------- -------------- ---------------- Net Income $ 24,762 $ 23,488 $ 50,466 $ 50,156 ============== ============== ============== ================ Per Share: Basic Earnings per Share $ .60 $ .55 $ 1.22 $ 1.16 ============== ============== ============== ================ Basic Weighted Average Number of Shares Outstanding 41,046 42,765 41,219 43,260 ============== ============== ============== ================ Diluted Earnings per Share $ .60 $ .54 $ 1.22 $ 1.15 ============== ============== ============== ================ Diluted Weighted Average Number of Shares Outstanding 41,227 43,318 41,412 43,752 ============== ============== ============== ================
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) SIX MONTHS ENDED FEBRUARY 28 -------------------------------------- 1999 1998 ------------------- ------------------ Cash Provided by (Used for) Operating Activities Net income $ 50,466 $ 50,156 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 28,988 23,817 Provision for losses on accounts receivable 2,055 1,904 Gain on the sale of property, plant, and equipment (410) (2,691) Gain on the sale of businesses (3,511) (1,961) Restructuring expense, asset impairments, and other charges (2,216) - Change in noncurrent deferred income taxes 941 11,666 Change in assets and liabilities net of effect of acquisitions and divestitures- Receivables 4,391 (11,292) Inventories and linens in service, net (8,990) (13,103) Deferred income taxes 1,845 (8,525) Prepayments and other (2,473) (3,215) Accounts payable and accrued liabilities (22,215) (79,154) Self-insurance reserves and other long-term liabilities 4,793 (1,495) ------------------- -------------------- Net Cash Provided by (Used for) Operating Activities 53,664 (33,893) ------------------- -------------------- Cash Provided by (Used for) Investing Activities Change in short-term investments - 205,244 Purchases of property, plant, and equipment (31,973) (38,418) Sale of property, plant, and equipment 931 1,907 Sale of businesses 631 2,464 Acquisitions (39,234) (6,077) Change in other assets (3,201) 1,755 ------------------- -------------------- Net Cash Provided by (Used for) Investing Activities (72,846) 166,875 ------------------- -------------------- Cash Provided by (Used for) Financing Activities Borrowings (repayments) of notes payable, net 2,738 (544) Borrowings (repayments) of long-term debt, net 107,545 (309) Purchase of treasury stock, net (23,535) (93,230) Cash dividends paid (25,952) (26,684) ------------------- -------------------- Net Cash Provided by (Used for) Financing Activities 60,796 (120,767) ------------------- -------------------- Effect of Exchange Rate Changes on Cash 1,666 (308) ------------------- -------------------- Net Change in Cash and Cash Equivalents 43,280 11,907 Cash and Cash Equivalents at Beginning of Period 19,146 57,123 ------------------- -------------------- Cash and Cash Equivalents at End of Period $ 62,426 $ 69,030 =================== ==================== Supplemental Cash Flow Information: Income taxes paid during the period $ 25,941 $ 62,762 Interest paid during the period 5,906 3,502 Noncash Investing and Financing Activities: Noncash aspects of sale of businesses-- Receivables recorded $ 396 $ - Liabilities assumed 326 178 Noncash aspects of acquisitions-- Liabilities assumed or incurred $ 12,027 $ 2,061 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 February 28, 1999, the consolidated results of operations for the three months and six months ended February 28, 1999 and 1998, and the consolidated cash flows for the six months ended February 28, 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 six months ended February 28, 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 Six Months Ended February 28, 1999 Revenues (Loss) Expense Acquisitions -------------- ------------- ---------------- ----------------- Lighting Equipment $ 556,665 $ 53,313 $ 12,911 $ 39,741 Chemical 233,440 18,261 4,976 4,323 Textile Rental 149,264 15,934 7,265 9,296 Envelope 89,916 6,654 2,822 17,511 -------------- ------------- ---------------- ---------------- 1,029,285 94,162 27,974 70,871 Corporate (8,926) 1,014 336 Interest income (expense), net (4,879) -------------- ------------- ---------------- ----------------- $1,029,285 $ 80,357 $ 28,988 $ 71,207 ============== ============= ================ ================= Six Months Ended February 28, 1998 Lighting Equipment $ 528,737 $ 50,526 $ 9,617 $ 17,114 Chemical 212,944 17,145 4,613 9,295 Textile Rental 155,610 12,818 6,497 10,135 Envelope 69,704 4,469 1,949 7,607 -------------- ------------- ---------------- ----------------- 966,995 84,958 22,676 44,151 Corporate (7,695) 1,141 344 Interest income (expense), net 2,404 -------------- ------------- ---------------- ----------------- Total $ 966,995 $ 79,667 $ 23,817 $ 44,495 ============== ============= ================ =================
Page 7 Depreciation Capital Sales and Operating and Expenditures Service Profit Amortization Including Three Months Ended February 28, 1999 Revenues (Loss) Expense Acquisitions -------------- ------------- ---------------- ----------------- Lighting Equipment $ 272,588 $ 23,834 $ 6,454 $ 6,430 Chemical 116,696 9,725 2,531 2,016 Textile Rental 73,795 9,215 3,632 3,547 Envelope 47,280 3,118 1,422 15,142 -------------- ------------- ---------------- ----------------- 510,359 45,892 14,039 27,135 Corporate (3,928) 505 290 Interest income (expense), net (2,537) -------------- ------------- ---------------- ----------------- Total $ 510,359 $ 39,427 $ 14,544 $ 27,425 ============== ============= ================ ================= Three Months Ended February 28, 1998 Lighting Equipment $ 260,079 $ 22,889 $4,802 $11,105 Chemical 107,085 8,531 2,372 2,642 Textile Rental 77,544 6,687 3,250 5,900 Envelope 34,703 1,935 992 4,448 -------------- ------------- ---------------- ----------------- 479,411 40,042 11,416 24,095 Corporate (3,132) 570 289 Interest income (expense), net 402 -------------- ------------- ---------------- ----------------- Total $ 479,411 $ 37,312 $ 11,986 $ 24,384 ============== ============= ================ =================
Identifiable Assets ---------------------------------------------------- February 28, 1999 August 31, 1998 --------------------- --------------------- Lighting Equipment $ 439,713 $ 397,962 Chemical 234,120 235,269 Textile Rental 191,813 193,347 Envelope 123,580 103,087 --------------------- --------------------- 989,226 929,665 Corporate 123,603 81,019 --------------------- --------------------- Total $1,112,829 $1,010,684 ===================== =====================
3. INVENTORIES: Major classes of inventory as of February 28, 1999 and August 31, 1998 were as follows: February 28, August 31, 1999 1998 ------------- ------------- Raw materials and supplies $ 85,500 $ 78,730 Work-in-progress 10,751 10,725 Finished goods 118,926 108,495 ------------- ------------- Total $ 215,177 $ 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 February 28: Page 8 Three Months Ended Six Months Ended February 28 February 28 ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Basic earnings per common share: Net income $ 24,762 $ 23,488 $ 50,466 $ 50,156 Basic weighted average shares outstanding, including shares contingently issuable (in thousands) 41,046 42,765 41,219 43,260 ------------ ------------ ------------ ------------ Basic earnings per common share $ .60 $ .55 $ 1.22 $ 1.16 ============ ============ ============ ============ Diluted earnings per common share: Net income $ 24,762 $ 23,488 $ 50,466 $ 50,156 Basic weighted average shares outstanding (in thousands) 41,046 42,765 41,219 43,260 Add - Shares of common stock issuable upon assumed exercise of dilutive stock options (in thousands) 181 553 193 492 ------------ ------------ ------------ ------------ Diluted weighted average shares outstanding (in thousands) 41,227 43,318 41,412 43,752 ----------- ------------ ------------ ------------ Diluted earnings per common share $ .60 $ .54 $ 1.22 $ 1.15 =========== ============ ============ ============
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 six months ended February 28, 1999 and 1998 includes only foreign currency translation adjustments. The calculation of comprehensive income is as follows: Three Months Ended Six Months Ended February 28 February 28 ---------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------- ------------ Net income $ 24,762 $ 23,488 $ 50,466 $ 50,156 Other comprehensive income (loss) (367) (121) 1,666 (308) ------------ ------------ ------------- ------------ Comprehensive Income $ 24,395 $ 23,367 $ 52,132 $ 49,848 ============ ============ ============= ============
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 $11,872 and $12,600 at February 28, 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 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 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 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 future wastewater discharge limits that could apply to certain facilities operated by the company. While the company does not believe that these regulations will apply to its operations, if the regulations are adopted as proposed, 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. 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. 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 February 28, 1999. Net working capital was $460.9 million, up from $385.1 million at August 31, 1998, and the current ratio was 3.2 compared with 2.7 at August 31, 1998. At February 28, 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 $510.4 million and $1,029.3 million in the three and six months ended February 28, 1999, respectively, compared with revenue of $479.4 million and $967.0 million in the three and six months ended February 28, 1998, respectively. Revenue primarily increased due to 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, which were not included in the prior-year results. Additionally, the revenue increase was due in part to higher revenue in the base business of the lighting equipment and chemical segments. Net income totaled $24.8 million and $50.5 million, or $.60 and $1.22 per diluted share, for the three and six months ended February 28, 1999, respectively, compared to net income of $23.4 million and $50.2 million, or $.54 and $1.15 per diluted share, for the three and six months ended February 28, 1998, respectively. The increase was the result of improved operating margins and a non-recurring $3.5 million net pretax gain in the textile rental segment partially offset by an increase in net interest expense. Diluted earnings per share increased due to a reduction of 2.1 million and 2.3 million diluted average shares outstanding for the three and six months ended February 28, 1999, respectively. The lighting equipment segment reported revenue of $272.6 million and $556.7 million for the three and six months ended February 28, 1999, respectively, which is an increase of 4.8 percent and 5.3 percent over the same periods in the prior year. This increase resulted from continued strength in the non-residential construction market and the acquisition of Hydrel, offset partially by competitive pricing measures. Operating profit increased 4.1 percent and 5.5 percent for the three and six months ended February 28, 1999, respectively, primarily related to the additional sales and lower materials cost. Chemical segment revenue increased 9.0 percent to $116.7 million for the second quarter and 9.6 percent to $233.4 million for the first half of the year primarily due to continued growth in the retail channel and higher revenue from the industrial and institutional distribution channels. Operating profit of $9.7 million and $18.3 million in the three and six months ended February 28, 1999, respectively, was higher than last year's results due to cost saving initiatives and increased sales productivity. Textile rental segment revenue decreased 4.8 percent to $73.8 million for the second quarter and 4.1 percent to $149.3 million for the six months. The decrease in revenue was related in part to sales of several industrial contracts and rationalization of unprofitable accounts in fiscal 1998. Revenue for the first half of 1999 was also affected by the temporary, negative impact of two hurricanes on nine southeastern plants. Operating income increased to $9.2 million from last year's $6.7 million for the second quarter and to $15.9 million from $12.8 million for the first half of the year. Operating income for the three and six months ended February 28, 1999 included 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 rationalized last year. Excluding non-recurring items in current and prior year, operating margins increased due to the segment's focus on lowering merchandise costs and improving production efficiencies through daily tracking of operational performance measures. During the second quarter of 1999, management performed an extensive review of the liabilities recorded in connection with the textile rental segment's 1997 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. 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 by $2.2 Page 11 million and income recorded during the second quarter of 1999. During the current year, fiscal 1997 year-end restructuring reserves were also reduced by a minimal amount for payments related to plant consolidations. Envelope segment revenue increased 36.2 percent to $47.3 million for the three months ended February 28, 1999 and increased 29.0 percent to $89.9 million for the six months ended February 28, 1999. Revenue increased due primarily to additional sales resulting from the Allen Envelope and Gilmore acquisitions and additional volume in the base business, which was offset by the effect of lower paper prices that were passed along to customers. Operating profit increased 61.1 percent for the quarter and 48.9 percent for the first half of the year. The increase in operating profit was due to the increased volumes and incremental material cost savings. Corporate expenses were slightly higher in the three and six months ended February 28, 1999 as compared to the same period in the prior year as a result of increased expenses to support corporate growth. Net interest expense was $2.5 million and $4.9 million in the three and six months ended February 28, 1999, respectively, compared with $0.4 million and $2.4 million of net interest income for the three and six months ended February 28, 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 to fund acquisitions, share repurchases, and internal growth. The increased borrowing is the result of the issuance of $160 million in publicly traded notes in the second quarter of 1999. See "Financing Activities" below for further discussion. The provision for income taxes was 37.2 percent of pretax income for the three and six months ended February 28, 1999 compared with 37.0 percent in the prior-year periods. Liquidity and Capital Resources Operating Activities Operations provided cash of $53.7 million during the first six months of fiscal 1999 and used cash of $33.9 million during the first six months of fiscal 1998. The 1998 cash flow was lower because of tax payments of $36.8 million related to the 1997 textile rental segment divestitures. Additionally, cash provided by accounts receivable in 1999 increased $15.7 million over the prior year and the cash used for accounts payable and accrued liabilities decreased $20.1 million, excluding the reduction in tax payments, over the prior year. Investing Activities Investing activities used cash of $72.8 million for the six months ended February 28, 1999 compared with cash provided of $166.9 million in the six months ended February 28, 1998. The cash flow in the first half of fiscal 1998 was higher because of the liquidation of short-term investments. Additionally, acquisition spending in the first half of fiscal 1999 totaled $39.2 million compared to $6.1 million in the first half of the prior year. 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, and the February 1999 purchase by the envelope segment of Gilmore, an envelope manufacturer headquartered in Los Angeles, California. The company also made minor acquisitions related to the textile rental segment. Prior-year acquisition spending of $6.1 million was due to the chemical segment's purchase of Pure Corporation, a specialty chemical company with its core businesses in Indiana, Pennsylvania, and New York. Capital expenditures were $32.0 million in the first six months of fiscal 1999 compared with $38.4 million in the first six months of fiscal 1998. Capital spending in the first half 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 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 half 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 $90 million. Management believes current cash balances, anticipated cash flows from operations, and available funds from the credit facility, complementary lines of credit, and the company's active shelf registration are sufficient to meet the company's planned level of capital spending and general operating cash requirements for the next twelve months. Page 12 Financing Activities Cash provided by financing activities was $60.8 million in the first half of fiscal 1999 compared with cash used of $120.8 million in the first half of fiscal 1998. Contributing to the change were net purchases of treasury stock which were $23.5 million in the current year versus $93.2 million in the prior year. During the first half of 1999 the company repurchased 713,700 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 $26.0 million, or 63 cents per share, compared with $26.7 million, or 61 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. Environmental Matters See Note 6: Environmental Matters for a discussion of the company's environmental issues. 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 February 28, 1999, all areas of the company had completed the first three phases and implementation of the plan was approximately 85 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 major 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 February 28, 1999, the company had spent approximately $3.2 million on the Year 2000 Issue. The cost of the project is being funded through operating cash flows. 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. 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; and (c) statements made regarding management's expectations with regard to projected capital expenditures and future cash flows. 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 13 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of stockholders held January 6, 1999, all nominees for director were elected to the board without opposition and Arthur Andersen LLP was appointed as independent auditor for the current fiscal year. In addition, stockholders voted on the following: Votes Cast ---------------------------------------------------------------- Affirmative Negative Abstentions Proposal to amend the Restated Certificate of Incorporation to increase the authorized common stock of the Corporation to 120,000,000 shares 28,706,028 2,259,445 138,684 Proposal to approve the amended and restated National Service Industries, Inc. Management Compensation and Incentive Plan 27,971,244 2,810,268 322,645
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits are listed on the Index to Exhibits (page 15). (b) There were no reports on Form 8-K for the three months ended February 28, 1999. Page 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL SERVICE INDUSTRIES, INC. REGISTRANT DATE April 14, 1999 /s/ David Levy DAVID LEVY EXECUTIVE VICE PRESIDENT, ADMINISTRATION AND COUNSEL DATE April 14, 1999 /S/ Brock Hattox BROCK HATTOX EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Page 15 INDEX TO EXHIBITS Page No. EXHIBIT 4 Second Amendment dated as of January 6, 1999 between National Reference is made to Exhibit 1 of Service Industries Inc. and First Chicago Trust Company of registrant's Form 8-A/A-4 as filed New York, to the Amended and Restated Rights Agreement, with the Commission on January 12, dated as of December 17, 1997 between National Service 1999, which is incorporated herein Industries, Inc. and First Chicago Trust Company of New York, by reference. as Rights Agent, as amended. EXHIBIT 27 Financial Data Schedule 16
EX-27 2 FDS --
5 Page 16 Exhibit 27 Financial Data Schedule Quarter Ended February 28, 1999 Pursuant to Section 601(c) of Regulation S-K This schedule contains summary financial information extracted from National Service Industries, Inc. consolidated balance sheet as of February 28, 1999 and the consolidated statement of income for the six months ended February 28, 1999, and is qualified in its entirety by reference to such financial statements. 6-MOS AUG-31-1998 SEP-01-1998 FEB-28-1998 62,426 0 314,795 5,939 215,177 669,144 688,710 401,274 1,112,829 208,218 185,635 0 0 57,919 523,627 1,112,829 880,021 1,029,285 535,536 624,881 315,925 2,055 6,067 80,357 29,891 50,466 0 0 0 50,466 1.22 1.22
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