EX-99 3 a4557574ex99.txt EXHIBIT 99.1 PRESS RELEASE Exhibit 99.1 G&K Services Reports Fiscal 2004 Second Quarter Results MINNEAPOLIS--(BUSINESS WIRE)--Jan. 27, 2004--G&K Services, Inc. (Nasdaq:GKSRA), today reported revenue for the second quarter ended December 27, 2003, of $182.5 million, up 1.6 percent over the $179.7 million reported in the second fiscal quarter last year. Earnings per diluted share totaled $0.42 for the quarter compared to $0.48 during the prior-year period. Second quarter earnings increased sequentially compared to $0.39 of earnings per share reported in the first quarter of fiscal 2004. "Our second quarter results were consistent with our expectations," said Richard Marcantonio, G&K's president and chief executive officer. "Our primary focus over the past year or so has been on improving earnings quality and cash flow. Among other outcomes, we've made good progress on expanding our national account business, penetrating our customer base with additional products and services, increasing asset utilization through a series of plant closings and significantly improved working capital management. During the second quarter, we continued to build upon these initiatives and began to set the stage for accelerated organic revenue growth." Second quarter revenue from G&K's rental business increased to $174.6 million, up 1.7 percent over the prior-year period. The company's organic industrial rental growth rate was approximately negative 2.0 percent in the second quarter. The organic industrial rental growth is calculated using industrial rental revenue adjusted for foreign currency exchange rate differences and revenue from newly acquired locations compared to prior-period results. Direct sale revenue was essentially flat with the prior-year quarter and up 48.8 percent over the first quarter of fiscal 2004 driven by an annual outerwear promotion. Gross margin from rental operations for the quarter was 36.4 percent compared to 38.2 percent in the prior-year quarter. The decrease compared to the prior-year reflects higher energy costs, employee benefit costs and lost margin from lower employment levels within our customer base. Gross margin from direct sales was 27.0 percent compared to 19.2 percent in the most recently reported first quarter and 32.3 percent in the prior-year period. Increased revenue from the annual outerwear promotion supported the improved margins compared to the first quarter. Revenue mix and pricing pressure contributed to the decline in direct sale margins versus the prior-year quarter. Selling, general and administrative expenses were 21.3 percent of consolidated revenue, down from 21.6 percent in the same period last year. The decline was attributed to a year over year reduction in selling expenses. "As we expected, organic growth remained relatively consistent with the first quarter," Marcantonio said. "We're now beginning to expand our new account sales force. This effort, combined with stronger sales to existing customers, supports our focus on improving our organic revenue growth rate." The company reported substantial cash flow for the quarter. Cash flows from operations totaled $25.3 million. Free cash flow, which is cash provided by operating activities less capital expenditures, was $20.6 million for the quarter compared to $17.2 million during the prior-year period, an increase of 19.5 percent. Capital expenditures for the quarter were $4.8 million compared to $9.1 million in the prior-year period. Outlook "Overall business conditions appear to be improving, although we continue to be adversely affected by weak labor markets," said Marcantonio. "We're not yet experiencing employment growth within our customer base. In the meantime, we're benefiting from our operational initiatives to improve earnings and are now taking action to accelerate revenue growth." The company expects fiscal 2004 third quarter revenue to be in the range of $178.0 million to $181.0 million and earnings per share to be between $0.41 and $0.43. As previously reported, the company changed the classification of certain customer billings. The changes, which did not impact current or historical net income or stockholders' equity, were related to the income statement reclassification of customer billings for lost and damaged merchandise. These billings, which previously were recorded as a reduction of cost of rental operations, are now recorded as rental revenue. This accounting classification is more consistent with recent accounting pronouncements regarding revenue recognition and is also consistent with the treatment used by other large companies in the uniform rental industry. Current year second quarter rental revenue includes $15.8 million of lost and damaged billings. The change of classification resulted in an increase in rental revenue of $13.6 million in the prior-year quarter. All previously reported amounts have been reclassified for comparability. The company will conduct a conference call today beginning at 10:00 a.m. Central Time. The call will be webcast and can be accessed through the website www.gkservices.com (on the Investor Relations page, click on the webcast icon and follow the instructions). A replay of the call will be available through February 24, 2004. Safe Harbor for Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") provides companies with a "safe harbor" when making forward-looking statements as a way of encouraging them to furnish their shareholders with information regarding expected trends in their operating results, anticipated business developments and other prospective information. Statements made in this press release concerning our intentions, expectations or predictions about future results or events are "forward-looking statements" within the meaning of the Act. These statements reflect our 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. Given that circumstances may change, and new risks to the business may emerge from time to time, having the potential to negatively impact our business in ways we could not anticipate at the time of making a forward-looking statement, you are cautioned not to place undue reliance on these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Some of the factors that could cause actual results or events to vary from stated expectations include, but are not limited to, the following: unforeseen operating risks; the effects of overall economic conditions and employment; fluctuations in costs of insurance and energy; acquisition integration costs; the performance of acquired businesses; preservation of positive labor relationships; competition, including pricing, within the corporate identity apparel and facility services industry; and the availability of capital to finance planned growth. Additional information concerning potential factors that could affect future financial results is included in our Annual Report on Form 10-K for the fiscal year ended June 28, 2003. About G&K Services, Inc. Headquartered in Minneapolis, Minnesota, G&K Services, Inc. is a market leader in corporate identity apparel programs and facility services in the United States, and is the largest such provider in Canada. G&K operates over 130 processing facilities and branch offices, serving more than 160,000 customers. Financial tables follow.... CONSOLIDATED STATEMENTS OF OPERATIONS G&K Services, Inc. and Subsidiaries (Unaudited) For the Three For the Six Months Ended Months Ended ------------------------------------- (U.S. Dollars, in thousands, Dec. 27, Dec. 28, Dec. 27, Dec. 28, except per share data) 2003 2002 2003 2002 ---------------------------------------------------------------------- Revenues Rental operations $174,620 $171,633 $347,900 $337,084 Direct sales 7,919 8,020 13,242 12,367 ---------------------------------------------------------------------- Total revenues 182,539 179,653 361,142 349,451 ---------------------------------------------------------------------- Operating Expenses Cost of rental operations 111,062 106,090 220,907 207,560 Cost of direct sales 5,783 5,427 10,084 8,928 Selling and administrative 38,791 38,827 77,324 75,482 Depreciation and amortization 9,773 9,454 19,463 18,473 ---------------------------------------------------------------------- Total operating expenses 165,409 159,798 327,778 310,443 ---------------------------------------------------------------------- Income from Operations 17,130 19,855 33,364 39,008 Interest expense 2,933 3,531 6,088 6,792 ---------------------------------------------------------------------- Income before Income Taxes 14,197 16,324 27,276 32,216 Provision for income taxes 5,395 6,366 10,365 12,564 ---------------------------------------------------------------------- Net Income $8,802 $9,958 $16,911 $19,652 ---------------------------------------------------------------------- Basic weighted average number of shares outstanding 20,666 20,567 20,638 20,556 Basic Earnings Per Common Share $0.43 $0.48 $0.82 $0.96 ---------------------------------------------------------------------- Diluted weighted average number of shares outstanding 20,850 20,759 20,789 20,722 Diluted Earnings Per Common Share $0.42 $0.48 $0.81 $0.95 ---------------------------------------------------------------------- Dividends per share $0.0175 $0.0175 $0.0350 $0.0350 Footnote 1: Revenue Recognition During the third quarter of fiscal year 2003, the company changed its income statement classification of customer billings for lost and damaged merchandise to a more preferable method of reporting. These billings, which previously were recorded as a reduction of cost of rental operations, are now recorded as rental revenue. This accounting classification is more consistent with recent accounting pronouncements regarding revenue recognition and is also consistent with the treatment used by other large companies in the uniform rental industry. Current year second quarter rental revenue includes $15,795 of lost and damaged billings. The change of classification resulted in an increase in rental revenue of $13,603 in the prior-year quarter. This reclassification did not impact current or historical net income or stockholders' equity. CONSOLIDATED CONDENSED BALANCE SHEETS G&K Services, Inc. and Subsidiaries December 27, 2003 June 28, (U.S. dollars, in thousands) (Unaudited) 2003 ---------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $17,479 $11,504 Accounts receivable, net 72,196 69,839 Inventories 91,956 95,853 Prepaid expenses 9,694 14,848 ---------------------------------------------------------------------- Total current assets 191,325 192,044 ---------------------------------------------------------------------- Property, Plant and Equipment, net 242,591 250,757 Other Assets 343,680 336,005 ---------------------------------------------------------------------- $777,596 $778,806 ---------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $19,011 $20,228 Accrued expenses 78,103 68,679 Deferred income taxes 13,561 13,459 Current maturities of long-term debt 23,367 14,430 ---------------------------------------------------------------------- Total current liabilities 134,042 116,796 ---------------------------------------------------------------------- Long-Term Debt, net of current maturities 193,487 236,731 Deferred Income Taxes 29,327 28,667 Other Noncurrent Liabilities 18,288 16,343 Stockholders' Equity 402,452 380,269 ---------------------------------------------------------------------- $777,596 $778,806 ---------------------------------------------------------------------- CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS G&K Services, Inc. and Subsidiaries (Unaudited) For the Six Months Ended ------------------------- December 27, December 28, (U.S. dollars, in thousands) 2003 2002 ---------------------------------------------------------------------- Operating Activities: Net income $16,911 $19,652 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 19,463 18,473 Deferred income taxes 562 (331) Amortization of deferred compensation - restricted stock 467 544 Changes in current operating items, exclusive of acquisitions 15,314 8,782 Other, net 197 240 ---------------------------------------------------------------------- Net cash provided by operating activities 52,914 47,360 ---------------------------------------------------------------------- Investing Activities: Property, plant and equipment additions, net (8,372) (18,074) Acquisition of business assets and other (7,137) (71,797) ---------------------------------------------------------------------- Net cash used for investing activities (15,509) (89,871) ---------------------------------------------------------------------- Financing Activities: Proceeds from debt financing 65,775 163,209 Repayments of debt financing (99,557) (112,839) Cash dividends paid (726) (725) Sale of common stock 2,703 384 ---------------------------------------------------------------------- Net cash provided by (used for) financing activities (31,805) 50,029 ---------------------------------------------------------------------- Increase in Cash and Cash Equivalents 5,600 7,518 Effect of Exchange Rates on Cash 375 69 Cash and Cash Equivalents: Beginning of period 11,504 9,986 ---------------------------------------------------------------------- End of period $17,479 $17,573 ---------------------------------------------------------------------- CONTACT: G&K Services, Inc., Minnetonka Jeffrey L. Wright, 952-912-5500 or Glenn L. Stolt, 952-912-5500