G&K Services Reports Fiscal 2010 First Quarter Results

October 27, 2009 7:30 AM EDT

Company Executing New Game Plan;

Continues to Generate Solid Free Cash Flow

MINNEAPOLIS--(BUSINESS WIRE)-- G&K Services, Inc. (NASDAQ: GKSR), today reported first quarter fiscal 2010 revenue of $208.1 million, which compares to revenue of $245.2 million in the prior-year period. The company reported first quarter net earnings of $0.18 per diluted share, compared to $0.08 per diluted share in the prior year. Current year earnings included severance and other costs associated with staff reductions in the company's corporate headquarters, divestiture activity and eliminating the company's former regional office structure, which totaled approximately $0.04 per diluted share. Prior-year first quarter earnings included cost reduction actions and the establishment of, or increase to, reserves for certain environmental and compensation matters, which totaled approximately $0.42 per diluted share.

"We're moving aggressively to improve results by executing our new game plan," said Douglas A. Milroy, G&K's chief executive officer. "The team has embraced our new direction and we're running the company differently. Foremost, we're redoubling our focus on customer service. At the same time, we're increasing our cost management focus. During the first quarter we significantly reduced corporate staffing, streamlined our U.S. rental operations and closed several regional administrative offices. These actions are consistent with reshaping G&K to move activities and resources closer to our customers and run lean. Additionally, as part of our new game plan, we also continue to address underperforming locations. Recently, we divested two small non-core businesses and restructured other locations to improve our overall level of profitability. We're encouraged by the progress we're making against our plan."

Income Statement Review

First quarter revenue from rental operations decreased to $195.7 million, down from $229.1 million in the prior-year period. The company's rental organic growth rate was negative 14.0 percent in the quarter, and reflects continued deterioration in customer employment levels, increased customer financial difficulties, lower pricing and decreased new account sales. For the quarter, direct sale revenue was also lower than the prior-year period, due to continued weak economic conditions and the non-renewal of one large customer.

First quarter adjusted earnings of $0.22 per diluted share compare to adjusted earnings of $0.50 per diluted share in the prior-year period. Current year adjusted earnings were driven by a reduction in production, selling and administrative expenses as a result of lower staffing levels, efficient utilization of merchandise and lower energy costs. These earnings improvements were offset by a reduction in fixed cost absorption due to lower rental and direct sale revenue. Current year earnings also benefited slightly from a lower effective tax rate and a small reduction in share count, which were partially offset by a slight increase in interest expense.

Financial Strength

The company's balance sheet remains strong. As of September 26, 2009, the company had total borrowings of $226.1 million and a debt to capitalization ratio of 33.6 percent. As previously disclosed during the quarter the company completed a new three-year $300.0 million credit facility with a syndicate of strong banking institutions. This new credit facility maintains the company's solid liquidity position and increases its financial flexibility.

The company continued to generate strong cash flow from operations and has reduced its debt, net of cash, by $61.9 million during the past year. Cash provided by operating activities for the quarter was $10.2 million, driven by solid working capital management. For the quarter, free cash flow, defined as cash flow from operations less capital expenditures, was $6.7 million.

Outlook

The company expects second quarter revenue to be consistent with first quarter revenue. Second quarter operating income margin and earnings per diluted share are expected to improve slightly from first quarter results primarily due to recent staffing reductions at the company's corporate and regional offices and location specific profitability actions.

As previously disclosed, the company does not provide a specific quarterly range for anticipated revenue or earnings due primarily to prolonged difficult economic and employment conditions and numerous operating changes currently being executed as part of the company's new game plan.

Conference Call Information

The company will host a conference call today at 10:00 a.m. (CDT) to discuss its financial results and outlook. The call will be webcast and is available on the Investor Relations section of the company's website at www.gkservices.com (click on webcast icon and follow the instructions). A replay of the call will be available on the company's website through November 27, 2009.

Safe Harbor for Forward-Looking Statements

Statements made in this press release concerning the company's intentions, expectations or predictions about future results or events are "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. These statements reflect the company's current expectations or beliefs, and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations, which could be material and adverse. You are cautioned not to place undue reliance on these statements, and the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Information concerning potential factors that could affect future financial results is included in the company's Annual Report on Form 10-K for the fiscal year ended June 27, 2009.

About G&K Services, Inc.

G&K Services, Inc. is a market leader in branded identity apparel programs and facility services in the United States, and is the largest such provider in Canada. Headquartered in Minneapolis, Minnesota, G&K Services has nearly 8,500 employees serving approximately 175,000 customers from over 170 facilities in North America and Europe. G&K Services is a publicly held company traded over the NASDAQ Global Select Market under the symbol GKSR and is a component of the Standard & Poor's SmallCap 600 Index. For more information on G&K Services, visit the company's website at www.gkservices.com.

Comparison of GAAP to Non-GAAP Financial Measures

The company reports its consolidated financial results in accordance with generally accepted accounting principles (GAAP). To supplement these consolidated financial results, management believes that certain non-GAAP operating results, which exclude non-cash impairment and certain other charges, may provide a more meaningful measure on which to compare the company's results of operations between periods. The company believes these non-GAAP results provide useful information to both management and investors by excluding certain costs that impact comparability of the results. A reconciliation of first quarter earnings per diluted share on a GAAP basis to adjusted earnings per diluted share on a non-GAAP basis are presented in the table below:

              Three Months Ended September 26,  Three Months Ended September 27,
              2009                              2008

(U.S.
Dollars, in   Operating  Net      Earnings      Operating  Net      Earnings
thousands,    Income     Income   Per           Income     Income   Per
except per                        Share                             Share
share data)

As reported   $ 9,846    $ 3,268  $ 0.18        $ 9,429    $ 1,458  $ 0.08

Add: Cost
reduction
activities      1,082      668      0.04          10,358     7,838    0.42
and reserves
for certain
matters

As Adjusted   $ 10,928   $ 3,936  $ 0.22        $ 19,787   $ 9,296  $ 0.50

These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. Investors should consider non-GAAP measures in addition to, and not as a substitute for, or superior to, financial performance measures prepared in accordance with GAAP.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

G&K Services, Inc. and Subsidiaries

(Subject to Reclassification)

                                               For the Three Months Ended

                                               September 26,  September 27,

(U.S. Dollars, in thousands, except per share  2009           2008
data)

REVENUES

 Rental operations                             $ 195,666      $ 229,133

 Direct sales                                    12,465         16,103

 Total revenues                                  208,131        245,236

OPERATING EXPENSES

 Cost of rental operations                       138,430        161,832

 Cost of direct sales                            9,405          12,084

 Selling and administrative                      50,450         61,891

 Total operating expenses                        198,285        235,807

INCOME FROM OPERATIONS                           9,846          9,429

 Interest expense                                3,711          3,597

INCOME BEFORE INCOME TAXES                       6,135          5,832

 Provision for income taxes                      2,867          4,374

NET INCOME                                     $ 3,268        $ 1,458

 Basic weighted average number                   18,223         18,662
 of shares outstanding

BASIC EARNINGS PER COMMON SHARE                $ 0.18         $ 0.08

 Diluted weighted average number                 18,269         18,793
 of shares outstanding

DILUTED EARNINGS PER COMMON SHARE              $ 0.18         $ 0.08

Dividends per share                            $ 0.075        $ 0.070

CONSOLIDATED CONDENSED BALANCE SHEETS

G&K Services, Inc. and Subsidiaries

(Subject to Reclassification)

                                             September 26,  June 27,

                                             2009           2009

(U.S. dollars, in thousands)

ASSETS

Current Assets

 Cash and cash equivalents                   $ 9,419        $ 13,136

 Accounts receivable, net                      83,065         85,209

 Inventories, net                              131,747        135,492

 Other current assets                          23,117         21,241

Total current assets                           247,348        255,078

Property, Plant and Equipment, net             212,507        216,736

Goodwill                                       323,329        319,942

Other Assets                                   62,920         59,412

Total assets                                 $ 846,104      $ 851,168

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities

 Accounts payable                            $ 25,915       $ 29,134

 Accrued expenses                              73,068         79,010

 Deferred income taxes                         3,606          3,414

 Current maturities of long-term debt          7,541          7,744

Total current liabilities                      110,130        119,302

Long-Term Debt, net of Current Maturities      218,552        224,781

Deferred Income Taxes                          1,968          1,893

Accrued Income Taxes - Long Term               12,022         12,016

Other Noncurrent Liabilities                   56,573         55,820

Stockholders' Equity                           446,859        437,356

 Total liabilities and stockholders' equity  $ 846,104      $ 851,168

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

G&K Services, Inc. and Subsidiaries

(Subject to Reclassification)

                                                  For the Three Months Ended

                                                  September 26,  September 27,

(U.S. dollars, in thousands)                      2009           2008

Operating Activities:

 Net income                                       $ 3,268        $ 1,458

 Adjustments to reconcile net income to net cash
 provided by operating activities -

 Depreciation and amortization                      10,243         11,422

 Other adjustments                                  873            2,177

 Changes in current operating items                 (4,394  )      (6,092 )

 Other assets and liabilities                       226            2,744

Net cash provided by operating activities           10,216         11,709

Investing Activities:

 Property, plant and equipment additions, net       (3,520  )      (6,420 )

 Divestitures of business assets, net               1,402          14

Net cash used for investing activities              (2,118  )      (6,406 )

Financing Activities:

 Payments of long-term debt                         (7,238  )      (7,141 )

 (Payments of)/ Proceeds from revolving credit      (2,967  )      18,500
 facilities, net

 Cash dividends paid                                (1,385  )      (1,328 )

 Net issuance of common stock, primarily under      -              207
 stock option plans

 Purchase of common stock                           (363    )      (6,776 )

Net cash (used)/provided by financing activities    (11,953 )      3,462

(Decrease)/Increase in Cash and Cash Equivalents    (3,855  )      8,765

Effect of Exchange Rates on Cash                    138            (298   )

Cash and Cash Equivalents:

 Beginning of period                                13,136         12,651

 End of period                                    $ 9,419        $ 21,118

    Source: G&K Services, Inc.

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