National Service Industries, Inc. Business Information, Profile, and History

Company Perspectives:

NSI recently completed the first year as a new, smaller, and more focused company. Today, there is more authority, responsibility, and higher accountability for performance at the business unit level. We've reduced corporate headcount, consolidated services where it makes sense, and pooled resources to strengthen our core linen and envelope manufacturing businesses. We have adapted to changing economic times. Many things have changed, but one thing remains the same: our business is relationships--with our shareholders, our customers, and our employees.

History of National Service Industries, Inc.

A much more diversified conglomerate prior to 2001, National Service Industries, Inc. (NSI) now concentrates on just two areas: textile rental and envelope manufacturing. Responsible for about 59 percent of NSI revenues is National Linen Service, a leading U.S. textile rental business with operations in 22 states, primarily in the Southeast. National serves more than 45,000 customers in the dining, healthcare, and lodging markets, renting table and bed linens, uniforms, towels, and mops. Atlantic Envelope Company generates the remaining 41 percent of revenues from the manufacture and sale of custom business and courier envelopes and specialty filing products (custom-printed file folders, guides, and indexes).

Linen Service Roots in the Early 1900s

The history of National Service Industries begins with Isadore M. Weinstein, who was born in New York City and raised in Cleveland, Ohio, where he eventually began working for a towel supply firm. He went to Atlanta in 1908 to look into establishing a branch there but instead decided to start his own towel supply company. World War I intervened to delay his plans, but upon returning from service he recommitted himself to his entrepreneurial project. By this time, he had decided that he should rent linens and uniforms in addition to towels. The inspiration for this decision was said to have come to him during a stay at a French hospital where he was recovering from wounds he suffered from machine gun fire. During his recuperation, he had noticed piles of clean, ironed towels, sheets, and nurses' uniforms.

On April 1, 1919, Weinstein and a partner, Herman Gross, formed the Atlanta Linen Supply Company, with total start-up capital of $1,700. Gross sold out to his partner in 1920, but Weinstein quickly secured two new partners, Abraham J. Weinberg, an owner of a drugstore who also had been an Atlanta Linen customer, and Joseph Jacobs. In 1922 Jacobs opened the company's first branch in Birmingham, Alabama. This led the company to change its name to Southern Linen Service Corporation. More branches soon were opened in Georgia, Tennessee, North Carolina, Florida, Louisiana, and Alabama.

In 1928 the company's stock began trading over the counter, and the name was changed again, to National Linen Service Corporation. The next decade saw the firm open a number of additional branches, including outlets in Virginia, South Carolina, and Kentucky. In 1939 National Linen expanded even further geographically by opening offices in Dallas, Fort Worth, Houston, and Los Angeles. National Linen gained a listing on the New York Stock Exchange in 1944.

By this time, National Linen Service had developed into a formidable force in the linen supply industry; in addition to having a workforce of more than 4,700, the company had expanded into manufacturing--making its own linens and garments, towel cabinets, delivery truck bodies, and soap. Positioned as one of the few large, publicly traded companies competing in a highly fragmented and densely populated industry, National Linen Service grew to such an extent that the U.S. Department of Justice intervened in the 1950s, filing an antitrust suit against the company. The suit was settled in 1956 with a consent decree that set stringent restrictions on the company's further expansion. Although the company, then led by Milton N. Weinstein, son of the founder, would continue to acquire small linen supply companies, the ruling by the Justice Department led to its diversification into other business lines, marking a significant turning point in the company's history and forever changing the scope of its operations.

Diversifying Widely in the 1960s

Other leading linen supply companies were diversifying, too, enriched by the dramatic growth of the textile rental industry, which nearly doubled in size between the 1950s and the 1960s as the concept of renting rather than buying durable goods became popular following World War II. Of these other leading linen supply companies, perhaps none were as successful in their diversification efforts outside the industry as National Linen Service, which entered the 1960s entirely devoted to renting linen and uniforms and exited as a full-fledged conglomerate with multifarious investments in service and manufacturing. Instrumental to this transformation was a former neighbor of Milton Weinstein's named Erwin Zaban, the president of National Linen Service's first acquisition outside its field of expertise, Zep Manufacturing Company.

By the time National Linen Service acquired Zep Manufacturing, Zaban already had invested 25 years of his life in his family's business, a janitorial supplies company started by his father, Mandle Zaban, in Atlanta in 1937. Zaban began working for his father full-time at an early age, dropping out of high school at age 15 in 1937 to help his father's company withstand the debilitative effects of the Great Depression. The company survived, and by the early 1960s, with Zaban serving as its president, the company had expanded into selling cleaning and sanitation products. This was the company Milton Weinstein selected as National Linen Service's first nonlinen supply acquisition, an acquisition that served as a model for future acquisitions and marked the beginning of a new era for National Linen Service and Erwin Zaban.

Growth would come quickly after the merger of Zep Manufacturing and National Linen Service in 1962, but not at the expense of incurring potentially crippling debt. Virtually every acquisition that brought National Linen Service into a new business line was paid for through stock, the acquisition of Zep Manufacturing being no exception. Zaban's company received 382,218 common shares of National Linen Service stock, giving Zaban and his company's management a vested interest in the future profitability of National Linen Service. This financial stake was particularly important to the future success of National Linen Service, because with each acquisition the acquired company's management was absorbed as well and granted virtual autonomy in the running of their company. Again, the acquisition of Zep Manufacturing was no exception to this acquisitive philosophy. Not only was Zaban allowed to retain control of the successor to his father's business, but within four years he was selected as president of the parent company, by then known as National Service Industries.

The name change from National Linen Service Corporation to National Service Industries, Inc. occurred two years after the acquisition of Zep Manufacturing, in 1964, when National Linen Service acquired Atlanta Envelope Co. and Southern Envelope Manufacturers, Inc., which would form the foundation of the company's envelope manufacturing division. One month after acquiring these two companies, paid for with 116,000 common shares, National Linen Service effected the name change in recognition of its more diversified interests. These interests then represented three separate business lines: the mainstay linen supply business, Zep Manufacturing (later organized as part of its chemical division), and the envelope manufacturing operations (which were amalgamated as Atlantic Envelope Company in 1968 to highlight the wider geographic reach of this division).

A fourth line was added in 1966, when National Service Industries ceded 103,736 common shares to acquire North Brothers, Inc., an insulation service company. By this time, NSI was the largest linen supply company in the United States, with roughly $100 million in annual revenues, a total that was nearly twice as much as its closest competitor, F.W. Means & Company. Buoyed by its dominant position in the linen supply industry, NSI augmented its investment in insulation services, a business line entered into with the acquisition of North Brothers, by paying cash for Jackson, Mississippi-based Mid-South Insulation Co. in 1967.

The transition from linen supply to chemicals, envelopes, and insulation appeared void of any synergy and, indeed, Zaban's intent was not to create an assortment of interdependent companies positioned to dominate a particular market, or even dominate four markets. Rather, he focused on acquiring profitable companies, regardless of their expertise, targeting companies with managements compatible with NSI's corporate philosophy, because more often than not acquired companies would continue to be led by extant executive officers.

With these criteria guiding NSI's diversification, the company continued to widen the range of its operations, purchasing Selig Chemical Industries with 88,667 common shares in 1968, which bolstered the company's chemical division. The following year, NSI made a pivotal acquisition, relinquishing $6.2 million and 419,156 shares to obtain Lithonia Lighting, Inc., a manufacturer of lighting fixtures. Lithonia formed NSI's fifth operating division, a division that would later become the company's largest revenue contributor. The company had been formed by Sam Freeman in Lithonia, Georgia, in 1946. At first the firm had a wide product range, encompassing fluorescent and incandescent fixtures for commercial, industrial, and residential use. But starting in 1953, Lithonia began focusing on the commercial and industrial fluorescent market. The company went public in 1961, which provided funding for further growth.

Thriving As a Conglomerate in the 1970s and 1980s

In 1970 NSI's sixth division was added, as the company used 803,891 shares of its stock to acquire Southern Binders Inc., Brown Printing Co., Acme Display Co., Tufted Sample Co., and Southern Sample Service Inc., while forming a marketing services division to provide marketing aids for the carpet, home furnishing, and commercial printing markets.

By 1970, then, National Service Industries had established each of the business lines that would form the core of the company for the next two and a half decades. Diversification also had brought the company into markets it would later abandon. Entering the furniture market in 1969, with the purchase of five furniture manufacturers, NSI formed its Duchess Furniture Division, which was discontinued in 1976. NSI also had formed a packaging division during the late 1960s, beginning with the acquisition of Flexi-Pak, Inc. in 1968 and strengthened by the addition of Color Wrap of Colorado the following year. This division also was sold, as were properties that represented other NSI business lines, including a furniture leasing division and a recreation division.

Many of these other companies were sold during the 1970s, although the company's furniture leasing division continued to grow and operate until 1986, and its Block Industries men's apparel division, established in 1972, remained a part of the company until 1991. These acquisitions underscored Zaban's willingness to acquire any type of company, provided that company was profitable. Once a company became unprofitable it was divested; a simple strategy that meant NSI did not attempt to rescue floundering companies or acquire companies operating at a loss to increase market share in a particular market. Zaban sought only profitable, well-managed companies, which explained a history of acquisitions that otherwise appeared predicated on whimsy.

Those lines that proved most profitable were the five divisions established within the first eight years of his arrival at the company as well as the original line of business, textile rental. In the early 1970s, the company's textile rental division contributed the bulk of its revenues and profits. In 1972, its original linen business generated roughly 40 percent of the company's total revenues and more than 50 percent of its profits. The relative importance of this division would diminish somewhat, however, as NSI augmented its investments in its other primary business lines.

In the late 1970s and early 1980s, National Service Industries increased the magnitude of its lighting division with three acquisitions. In 1979 the company purchased the outdoor aluminum lighting pole business belonging to Kaiser Aluminum in Louisville, Kentucky. The following year, the company purchased the indoor lighting business of ITT Corp. In 1981, it purchased the assets of Major Corp., a Chicago-based supplier of anodized parts. Also during this time, NSI acquired a linen supply company, Champa Linen Service, and Robert P. Gillote & Co., a distributor of filing systems, which the company added to its envelope division. Subsequent additions to the lighting and insulation divisions included the Acme Manufacturing Co., a manufacturer of commercial and residential fluorescent lighting fixtures, and Extol of Georgia, a manufacturer of pipe covering and insulation materials.

As acquisitions continued unabated throughout the 1980s, NSI benefited from the fundamental advantage of existing as a conglomerate, yet avoided the usual trap that stifled a conglomerate's growth. Its diverse business mix shielded it from pernicious economic cycles to a great degree, with one division compensating for losses suffered by another, giving the company the financial stability to enable further acquisitions. At the same time, its diversity did not engender superfluous, bureaucratic layers of management, as Zaban emphasized maintaining profitability and retaining existing management.

1990s: Management Changes and a Reduction in Core Divisions

In 1987 the company's stewardship passed from Zaban to Sidney Kirschner, who was selected as National Service Industries' CEO that year. Kirschner had joined the company in 1973 and, consequently, owned a substantial amount of NSI stock. After becoming chairperson in 1992, when Zaban retired because of health problems, Kirschner surprised many at NSI by abruptly resigning, giving up his positions as the company's president, CEO, and chairman. In an interview with the Wall Street Journal, Kirschner enigmatically related that his decision to leave was "a choice I made that I'd rather do something else."

Zaban, by then 71 years old, came out of retirement to fill the void created by Kirschner's departure and served as the company's president, CEO, and chair until a successor was found later that year. Elected as CEO in January 1993, D. Raymond Riddle, NSI's banker for many years, assumed control of the company as it emerged from the economic recession of the early 1990s. Riddle became chairman as well in September 1994 when Zaban again retired, though he remained on the board of directors as chairman emeritus.

During this time, National Service Industries generated the bulk of its revenue and profits from three of its six divisions: lighting equipment, textile rental, and chemicals. The greatest contributor, the company's lighting equipment division, generated 38.4 percent of NSI's total annual revenue and 29.4 percent of its operating income, while National Linen Service, the company's linen supply business, contributed 30.3 percent of the total revenues and 37.4 percent of its operating income. The company's chemical division, consisting of Zep Manufacturing, Selig Chemical Industries, and National Chemical, supplied 17.6 percent of National Service's revenue and 25.4 percent of its operating income, more than three times the amount of income generated by National Service's three smaller divisions: insulation service, envelopes, and marketing services.

In the early 1990s, then, NSI was looking to strengthen its investments in each of its operating divisions rather than to diversify into new business lines. As it planned for the future, the company's management envisioned a greater presence in Europe, where it maintained a foothold in the European chemical market through Zep Manufacturing. This stake overseas was increased significantly in September 1992, when the company acquired Graham Group, Europe's second largest specialty chemicals company and NSI's first solo venture overseas. Graham Group, which had annual revenues of $62 million, was absorbed by NSI's chemical division. Also in September 1992, the chemical division acquired Kleen Canada, Inc., a Canadian manufacturer of specialty chemicals.

During 1994 the number of divisions was trimmed to five with the divestment of the marketing services division. The division had recorded a small operating loss for fiscal 1994 on revenues of just $32 million. In May of the following year, Lithonia Lighting purchased another Canadian company, Infranor Canada, Inc., a maker of high-performance outdoor lighting products based in Saint-Hyacinthe, Quebec. Lithonia also expanded into Mexico that year by building a 100,000-square-foot fluorescent lighting plant that would serve all of North America. During 1996 the plant, built near Monterey, was expanded by an additional 96,000 square feet. In February of that year, James S. Balloun was named chairman and CEO of NSI, replacing the retiring Riddle. Balloun had been a top consultant with McKinsey & Company, Inc.

When Balloun came onboard in the mid-1990s, NSI was experiencing a period of stagnation, with little growth in either sales or earnings. The new chief initiated a thoroughgoing, yearlong review of the various divisions. This review resulted in a series of additions and subtractions completed in the late 1990s that significantly altered the composition of the company. On the divestment side, the North Bros. insulation service business was sold for $27.1 million in February 1997, leaving NSI with four divisions: lighting, textile rental, chemicals, and envelopes. The National Linen Service textile rental unit was substantially reduced in size in July 1997 when 29 underperforming plants and related assets were sold to G&K Services, Inc. of Minneapolis, Minnesota, for about $287 million. Through this divestment, National Linen Service exited from the industrial uniform rental sector and for the most part returned to a geographic focus on the southeastern United States. The deal also reduced the revenues of National Linen by about 40 percent, from $540 million to $310 million.

Several of the late 1990s' acquisitions bolstered the chemical division. In early 1997 NSI gained a new channel into The Home Depot and other retailers by acquiring Enforcer Products, Inc. for $20 million. Enforcer, based in Emerson, Georgia, produced home pesticide, pet care, and cleaning products. Specialty chemical producer Pure Corporation was acquired in November 1997, and in July 1998 NSI bought Calman Australia Pty Ltd, a manufacturer of cleaning, maintenance, sanitation and industrial products, chemicals, supplies, and accessories based in Victoria, Australia. In July 2000 the NSI Chemicals Group was formed to provide support functions for the three companies in the chemical division: Zep Manufacturing, Selig Chemical Industries, and Enforcer Products. The three companies retained their separate brand identities and sales forces.

NSI's lighting unit, meantime, was enlarged through acquisitions of four small lighting companies from March 1997 to July 1999 and, most important, through the purchase of Holophane Corporation in the largest acquisition in NSI history. Acquired for $470.8 million in July 1999 and based in Columbus, Ohio, Holophane was a major manufacturer of outdoor and industrial lighting equipment. The firm achieved 1998 sales of $215 million. In a move similar to the one that formed the NSI Chemicals Group, the Lithonia Lighting Group was formed in June 2000 to support the operations of Lithonia Lighting and Holophane.

Atlantic Envelope, which had long operated in the shadows of NSI's "big three" units, finally gained some attention during this period thanks to two acquisitions on either coast. Atlantic gained access to markets in the Northeast through the March 1998 purchase of Allen Envelope Corporation, an envelope manufacturer based near Philadelphia that operated one plant and had annual revenues of $30 million. Expansion into the western states was achieved through the February 1999 purchase of Gilmore Envelope Corporation, a firm based in Los Angeles with 1998 sales of $40 million. The buying spree vaulted Atlantic Envelope into the number three position among U.S. custom printed envelope makers and also increased the unit's revenues from $131 million in 1997 to $221.9 million in 2000.

Concentrating on Textile Rental and Envelopes in the New Millennium

Overall, the string of acquisitions helped reignite revenue growth at NSI, with sales increasing 9 percent in fiscal 1999, to a record $2.22 billion, and 15.6 percent the following year, to $2.57 billion, another record. Profits came under pressure during the latter year, however, as the company struggled to manage the heavy debt load taken on to acquire Holophane and Atlantic Envelope saw its earnings suffer as a result of industry overcapacity.

With the company's stock price languishing during fiscal 2001, NSI executives attempted to sell both National Linen Service and Atlantic Envelope but were unable to reach acceptable deals for the units, which were viewed as laggards compared to the faster growing lighting and chemicals divisions. Achieving the same goal in a different manner, NSI announced in June 2001 that it would spin off its two largest units--Lithonia Lighting Group and NSI Chemicals Group--into a new publicly traded company. Upon completion of the spinoff in November 2001, NSI shareholders received one share of stock in the new company--dubbed Acuity Brands, Inc.--for each share of NSI stock they owned. Balloun left NSI to head up the much larger Acuity, while Brock A. Hattox was named chairman, CEO, and president of NSI. Hattox had served as the company's executive vice-president and CFO since 1996.

The "new" NSI had only about 20 percent of the revenues of the old company. But the company was left with very little debt--only about $5 million--allowing the firm room to make acquisitions. Several linen operations were purchased during fiscal 2002. Additional liquidity was gained through the sale of the corporate headquarters building for $22.5 million. Following the sale, NSI began leasing a portion of the building. On the negative side, NSI continued to be saddled with a growing number of claims relating to exposure to asbestos-containing products. The lawsuits stemmed from the company's former North Bros. subsidiary. In November 2002 the company announced that it had entered into an agreement to settle a large number of asbestos claims that were pending in Texas state courts. Charges related to the asbestos claims and to the spinoff led National Service Industries to post a net loss of $6.9 million for fiscal 2002 on revenues of $532.4 million.

Principal Operating Units: National Linen Service; Atlantic Envelope Company.

Principal Competitors: ARAMARK Corporation; Mail-Well, Inc.; Cintas Corporation; Steiner Corporation; National Envelope Corporation; G&K Services, Inc.

Chronology

• Key Dates:
• 1893: Atlanta Envelope Co. is founded.
• 1919: Isadore M. Weinstein founds Atlanta Linen Supply Company.
• 1922: Atlanta Linen opens its first branch in Birmingham, Alabama, prompting the adoption of a new name: Southern Linen Service Corporation.
• 1928: Southern Linen stock begins trading over the counter, and the company changes its name to National Linen Service Corporation.
• 1937: Mandle Zaban forms Atlanta-based Zep Manufacturing Company.
• 1944: National Linen's stock begins trading on the New York Stock Exchange.
• 1946: Lithonia Lighting, Inc. is formed in Lithonia, Georgia, by Sam Freeman.
• 1956: A consent decree ends an antitrust suit brought against National Linen by the U.S. Department of Justice; the decree restricts the future expansion of the company, prompting the firm to diversify.
• 1962: National Linen acquires Zep Manufacturing, maker of cleaning and sanitation products.
• 1964: National Linen acquires Atlanta Envelope Co. and Southern Envelope Manufacturers; the company changes its name to National Service Industries, Inc. (NSI), which now operates as a holding company for several separate businesses, including National Linen Service.
• 1966: NSI acquires North Brothers, Inc., an insulation service company; Erwin Zaban, son of Zep's founder, is named president of NSI.
• 1968: Envelope manufacturing operations are amalgamated under the name Atlantic Envelope Company; Selig Chemical Industries is acquired.
• 1969: NSI purchases Lithonia Lighting, maker of lighting fixtures.
• 1970: The company acquires several firms that form the basis for a marketing services division.
• 1992: Graham Group, the second largest specialty chemicals company in Europe, is acquired.
• 1994: The marketing services division is divested.
• 1997: The North Bros. insulation service division is divested; National Linen Service sells 29 of its plants to G&K Services, Inc.; Enforcer Products, Inc., maker of consumer chemical products, is acquired.
• 1998: Allen Envelope Corporation, based near Philadelphia, is acquired.
• 1999: NSI acquires Holophane Corporation, maker of outdoor and industrial lighting equipment, and Los Angeles-based Gilmore Envelope Corporation.
• 2000: The Lithonia Lighting Group is formed as a unit consisting of Lithonia Lighting and Holophane; similarly, the NSI Chemicals Group is created and consists of Zep Manufacturing, Selig Industries, and Enforcer Products.
• 2001: Lithonia Lighting Group and NSI Chemical Group are spun off into a new company, Acuity Brands, Inc.