EX-99.1 2 a5067676ex99_1.txt EXHIBIT 99.1 Exhibit 99.1 G&K Services Reports Fiscal 2006 Second Quarter Results MINNEAPOLIS--(BUSINESS WIRE)--Jan. 31, 2006-- Revenue and earnings exceed expectations; Organic rental revenue growth continues to improve G&K Services, Inc. (Nasdaq:GKSR), today reported record revenue for the second quarter ended December 31, 2005 of $219.3 million, up 12.4 percent over $195.1 million reported in the second fiscal quarter last year. Revenue exceeded expectations due to continued improvement in organic rental growth and strong direct sales. Earnings per diluted share totaled $0.48 for the quarter, a 6.7 percent increase compared to $0.45 during the prior-year quarter. Second quarter earnings also exceeded expectations despite the impact of the hurricanes, higher energy costs, strategic investments and the initial selling costs and merchandise expense associated with accelerated new account growth. Earnings for both quarters reflect the requirement to expense stock options under SFAS 123(r) "Accounting for Stock-Based Compensation." Under this standard, G&K has elected to use the modified retrospective method for transition. As a result, prior-year financial statements have been adjusted accordingly. "We continue to be pleased with the momentum we've created in our organic rental growth over the last six quarters," said Richard Marcantonio, G&K's chairman and chief executive officer. "During the second quarter, we recorded the highest level of new sales in the history of the company, a strong testament to the execution of our strategy. We'll continue to make strategic investments to further improve revenue and earnings growth." For the six months ended December 31, 2005, revenue was $427.3 million compared to $377.6 million during the prior-year period, an increase of 13.2 percent. Earnings per diluted share were $0.97, up over 10 percent compared to $0.88 during the same period last year. "Successfully delivering solid financial performance during the first half of fiscal 2006 is a significant accomplishment," Marcantonio said. "Our focus on the fundamentals of the business continues to generate positive returns and has helped to offset margin pressures from cost increases and growth investments." Income Statement Review Second quarter revenue from G&K's rental business increased to $199.4 million, up 8.9 percent over the prior-year period. The company's organic industrial rental growth rate was approximately 3.5 percent. This continued improvement in organic rental growth is 450 basis points higher than the prior-year period. Direct sale revenue increased to $20.0 million, up 66.3 percent over the prior-year quarter and up approximately 6.5 percent on an organic basis. The growth of direct sale revenue for the quarter was driven by record sales from the company's annual outerwear promotion and revenue from Lion Uniform Group which was acquired during the second quarter of fiscal 2005. The organic growth rates are calculated using industrial rental and direct sale revenue, respectively, adjusted for foreign currency exchange rate differences and revenue from newly acquired locations compared to prior-period results. Gross margin from rental operations for the quarter was 36.0 percent compared to 36.4 percent in the prior-year period. Gross margin for the quarter declined due to higher energy costs, costs associated with new customer growth and the impact of the hurricanes, offset by higher pricing and productivity improvements. Gross margin from direct sales was 29.2 percent compared to 29.8 percent in the prior-year period. Selling, general and administrative expenses were 21.8 percent of consolidated revenue for the quarter, up from 21.5 percent in the year-earlier period. Selling, general and administrative expenses were up over the prior-year period due to the company's investment in growth oriented initiatives, additional expenses related to acquired businesses and selling expenses associated with new account growth. The effective tax rate for the second quarter declined to 34.9 percent from 37.2 percent in the year-earlier period due to reductions of taxes previously provided and a favorable mix of income earned in various taxing jurisdictions, including foreign operations, with different tax rates. Balance Sheet and Cash Flow Statement Review The company's balance sheet remains strong. As of December 31, 2005, the company had cash of $14.1 million and a total debt to total capitalization ratio of 31.8 percent. Total stockholders' equity increased to $511.9 million. Cash provided by operating activities was $24.1 million for the six month period ending December 31, 2005 compared to $29.7 million in the same period last year. Cash provided from operating activities was down compared to the prior-year period due to the working capital needed to support organic growth. Cash used for property, plant and equipment during the six month period totaled $16.5 million compared to $4.1 million in the six month period from the prior year. The prior year six month period included proceeds from the sale of selected plant assets. Outlook The company expects fiscal 2006 third quarter revenue to range from $221.0 million to $224.0 million and earnings per diluted share from $0.47 to $0.50. The revenue guidance reflects the impact of higher new account growth and revenue from the initial rollout of a large direct sale customer. The earnings guidance reflects the company's ongoing efforts to improve operational efficiency offset by investments in growth initiatives, costs associated with new account growth and higher energy costs. Third quarter earnings guidance also incorporates the anticipated impact associated with expensing stock options of approximately $0.02 per diluted share. Earnings per diluted share in the third quarter of fiscal 2005, when adjusted for SFAS 123(r), were $0.47. Conference Call Information The company will conduct a conference call today beginning at 10:00 a.m. Central Time. The call will be webcast. To access the webcast, go to the Investor Relations section of the company's website at www.gkservices.com. Click on the webcast icon and follow the instructions. A replay of the call will be available through February 28, 2006. Safe Harbor for Forward-Looking Statements 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 Private Securities Litigation Reform Act of 1995. 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. 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. 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 July 2, 2005. About G&K Services, Inc. Headquartered in Minneapolis, Minnesota, 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. G&K operates over 140 processing facilities and branch offices, serving more than 160,000 customers. 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. 31, Jan. 1, Dec. 31, Jan. 1, except per share data) 2005 2005 2005 2005 ---------------------------------------------------------------------- (Restated) (Restated) ---------------------------------------------------------------------- Revenues Rental operations $199,355 $183,110 $393,423 $359,401 Direct sales 19,993 12,025 33,873 18,166 ---------------------------------------------------------------------- Total revenues 219,348 195,135 427,296 377,567 ---------------------------------------------------------------------- Operating Expenses Cost of rental operations 127,672 116,415 252,178 227,424 Cost of direct sales 14,155 8,441 24,356 13,337 Selling and administrative 47,855 41,980 91,600 81,294 Depreciation and amortization 10,644 10,161 21,243 20,319 ---------------------------------------------------------------------- Total operating expenses 200,326 176,997 389,377 342,374 ---------------------------------------------------------------------- Income from Operations 19,022 18,138 37,919 35,193 Interest expense 3,302 2,641 6,317 5,189 ---------------------------------------------------------------------- Income before Income Taxes 15,720 15,497 31,602 30,004 Provision for income taxes 5,486 5,769 10,997 11,209 ---------------------------------------------------------------------- Net Income $10,234 $9,728 $20,605 $18,795 ---------------------------------------------------------------------- Basic weighted average number of shares outstanding 21,083 20,911 21,037 20,868 Basic Earnings Per Common Share $0.49 $0.46 $0.98 $0.90 ---------------------------------------------------------------------- Diluted weighted average number of shares outstanding 21,221 21,678 21,185 21,378 Diluted Earnings Per Common Share $0.48 $0.45 $0.97 $0.88 ---------------------------------------------------------------------- Dividends per share $0.0175 $0.0175 $0.0350 $0.0350 CONSOLIDATED CONDENSED BALANCE SHEETS G&K Services, Inc. and Subsidiaries December 31, July 2, 2005 2005 (U.S. dollars, in thousands) (Unaudited) (Restated) ---------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $14,080 $15,345 Accounts receivable, net 94,651 83,459 Inventories 131,501 121,120 Prepaid expenses 15,107 16,587 ---------------------------------------------------------------------- Total current assets 255,339 236,511 ---------------------------------------------------------------------- Property, Plant and Equipment, net 248,234 243,307 Other Assets 430,260 423,351 ---------------------------------------------------------------------- $933,833 $903,169 ---------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $26,091 $25,695 Accrued expenses 75,434 81,523 Deferred income taxes 9,212 8,971 Current maturities of long-term debt 7,595 26,537 ---------------------------------------------------------------------- Total current liabilities 118,332 142,726 ---------------------------------------------------------------------- Long-Term Debt, net of current maturities 231,073 210,462 Deferred Income Taxes 30,735 30,887 Other Noncurrent Liabilities 41,771 37,651 Stockholders' Equity 511,922 481,443 ---------------------------------------------------------------------- $933,833 $903,169 ---------------------------------------------------------------------- CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS G&K Services, Inc. and Subsidiaries (Unaudited) For the Six Months Ended ----------------------- December 31, January 1, (U.S. dollars, in thousands) 2005 2005 (Restated) ---------------------------------------------------------------------- Operating Activities: Net income $20,605 $18,795 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 21,243 20,319 Stock-based compensation 2,118 1,972 Deferred income taxes 371 922 Changes in current operating items, exclusive of acquisitions (21,198) (13,111) Other, net 977 838 ---------------------------------------------------------------------- Net cash provided by operating activities 24,116 29,735 ---------------------------------------------------------------------- Investing Activities: Property, plant and equipment additions, net (16,482) (4,095) Acquisition of business assets and other (12,763) (36,038) ---------------------------------------------------------------------- Net cash used for investing activities (29,245) (40,133) ---------------------------------------------------------------------- Financing Activities: Repayments of long-term debt (7,484) (17,114) Proceeds from short-term borrowings, net 10,550 7,400 Cash dividends paid (747) (732) Sale of common stock 1,250 3,251 ---------------------------------------------------------------------- Net cash provided by (used for) financing activities 3,569 (7,195) ---------------------------------------------------------------------- Decrease in Cash and Cash Equivalents (1,560) (17,593) Effect of Exchange Rates on Cash 295 1,620 Cash and Cash Equivalents: Beginning of period 15,345 26,931 ---------------------------------------------------------------------- End of period $14,080 $10,958 ---------------------------------------------------------------------- Supplemental Cash Flow Information: Non-Cash Transactions - Debt issued in connection with business acquisitions $(1,419) $11,890 ---------------------------------------------------------------------- CONTACT: G&K Services, Inc., Minneapolis Jeffrey L. Wright, 952-912-5500 or Glenn L. Stolt, 952-912-5500 or Shayn R. Carlson, 952-912-5500