EX-99.1 2 a5320948ex99_1.txt EXHIBIT 99.1 PRESS RELEASE Exhibit 99.1 G&K Services Reports Fiscal 2007 Second Quarter Results MINNEAPOLIS--(BUSINESS WIRE)--Jan. 30, 2007--G&K Services, Inc. (Nasdaq:GKSR), today reported revenue for the second quarter ended December 30, 2006 of $230.8 million, a 5.2 percent increase from prior-year revenue of $219.3 million. Growth in both rental and direct sales contributed to the increase in revenue over the prior-year. Earnings per diluted share totaled $0.45 for the quarter compared to $0.48 during the prior-year period. Second quarter earnings were consistent with management's previous guidance and reflect incremental earnings from revenue growth, productivity improvements and lower energy costs. These gains were offset by higher initial merchandise costs resulting from record new account sales written over the last twelve months, expenses associated with investments in sales, marketing and technology initiatives and a higher effective tax rate. "We continue to put tremendous focus on improving the fundamentals of our business while executing our strategic initiatives," said Richard Marcantonio, G&K's chairman and chief executive officer. "The investments we're making will provide a superior value proposition for our customers and strengthen our foundation to drive long-term revenue and earnings growth for our shareholders." Income Statement Review Second quarter revenue from G&K's rental business increased to $209.1 million, up 4.9 percent over the prior-year period. The company's organic industrial rental growth rate was approximately 4.5 percent in the second quarter, an improvement of 100 basis points compared to the prior-year period. Rental organic growth was slightly below expectations due to economic softness in certain traditional rental uniform wearing industries, particularly the automotive sector. In addition, unseasonably warm weather resulted in lower than expected growth of entrance mat products during the quarter. Direct sale revenue, driven almost entirely by organic growth, increased to $21.6 million, up 8.2 percent over the prior-year second quarter. The company's annual outerwear promotion and continued momentum in the Lion Uniform Group contributed to the direct sale revenue growth. The organic revenue 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 35.5 percent compared to 36.0 percent in the prior-year period. Improvements in production and delivery productivity and lower energy costs during the quarter were offset by increased merchandise costs associated with record new account growth achieved during the last twelve months. Gross margin from direct sales was 27.8 percent compared to 29.2 percent in the prior-year period. Selling, general and administrative expenses were 21.7 percent of consolidated revenue for the quarter, down from 21.8 percent in the year-earlier period. Selling expenses as a percent of consolidated revenue were higher than the year ago period as a result of the expansion in the company's sales force during the last nine months. This increase was offset by lower administrative expenses due to office productivity savings driven by the company's handheld initiative, leverage due to improved revenue growth and lower retirement plan expenses. The effective tax rate for the second quarter increased to 38.0 percent from 34.9 percent in the year-earlier period. The company's effective tax rate in the prior-year quarter was lower due to the reduction of tax reserves no longer required. Balance Sheet and Cash Flow Statement Review The company's balance sheet remains strong. As of December 30, 2006, the company had total borrowings of $198.3 million, down from $238.7 million a year ago. Total debt as a percent of total capitalization was 26.1 percent. Total stockholders' equity increased to $561.1 million. Cash provided by operating activities for the six months ended December 30, 2006 was $28.0 million compared to $24.1 million in the prior-year period. Cash used for property, plant and equipment during the six month period totaled $18.4 million compared to $16.5 million in the previous year. Free cash flow, defined as cash flow from operations less capital expenditures, totaled $9.7 million for the first six months of fiscal 2007 compared to $7.6 million in the same period of fiscal 2006. Outlook The company expects fiscal 2007 third quarter revenue to range from $232.0 million to $235.0 million and earnings per diluted share from $0.49 to $0.53. The revenue guidance represents a rental organic growth rate consistent with the second quarter of fiscal 2007 and an increase from the third quarter of fiscal 2006. The earnings guidance reflects a continued sequential improvement in operating margin and a lower income tax rate. 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 March 1, 2007. 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 1, 2006. 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 Months Ended For the Six Months Ended ---------------------------------------------------- (U.S. Dollars, in thousands, except December 30, December 31, December 30, December 31, per share data) 2006 2005 2006 2005 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Revenues Rental operations $209,130 $199,355 $416,431 $393,423 Direct sales 21,634 19,993 37,461 33,873 ---------------------------------------------------------------------- Total revenues 230,764 219,348 453,892 427,296 ---------------------------------------------------------------------- Operating Expenses Cost of rental operations 134,833 127,672 266,485 252,178 Cost of direct sales 15,617 14,155 27,656 24,356 Selling and administrative 50,042 47,855 99,921 91,600 Depreciation and amortization 11,232 10,644 22,450 21,243 ---------------------------------------------------------------------- Total operating expenses 211,724 200,326 416,512 389,377 ---------------------------------------------------------------------- Income from Operations 19,040 19,022 37,380 37,919 Interest expense 3,486 3,302 6,879 6,317 ---------------------------------------------------------------------- Income before Income Taxes 15,554 15,720 30,501 31,602 Provision for income taxes 5,910 5,486 11,665 10,997 ---------------------------------------------------------------------- Net Income $9,644 $10,234 $18,836 $20,605 ---------------------------------------------------------------------- Basic weighted average number of shares outstanding 21,190 21,083 21,187 21,037 Basic Earnings Per Common Share $0.46 $0.49 $0.89 $0.98 ---------------------------------------------------------------------- Diluted weighted average number of shares outstanding 21,385 21,221 21,374 21,185 Diluted Earnings Per Common Share $0.45 $0.48 $0.88 $0.97 ---------------------------------------------------------------------- Dividends per share $0.0400 $0.0175 $0.0800 $0.0350 ---------------------------------------------------------------------- CONSOLIDATED CONDENSED BALANCE SHEETS G&K Services, Inc. and Subsidiaries December 30, July 1, 2006 2006 (U.S. dollars, in thousands) (Unaudited) ---------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $14,032 $19,690 Accounts receivable, net 101,418 94,964 Inventories 139,870 141,031 Prepaid expenses 12,700 15,552 ---------------------------------------------------------------------- Total current assets 268,020 271,237 ---------------------------------------------------------------------- Property, Plant and Equipment, net 248,465 249,001 Other Assets 430,837 430,854 ---------------------------------------------------------------------- $947,322 $951,092 ---------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $27,074 $27,404 Accrued expenses 72,155 72,999 Deferred income taxes 10,197 10,419 Current maturities of long-term debt 71,143 18,199 ---------------------------------------------------------------------- Total current liabilities 180,569 129,021 ---------------------------------------------------------------------- Long-Term Debt, net of current maturities 127,200 195,355 Deferred Income Taxes 31,700 34,343 Other Noncurrent Liabilities 46,787 44,985 Stockholders' Equity 561,066 547,388 ---------------------------------------------------------------------- $947,322 $951,092 ---------------------------------------------------------------------- CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS G&K Services, Inc. and Subsidiaries (Unaudited) For the Six Months Ended ------------------------- December 30, December 31, (U.S. dollars, in thousands) 2006 2005 ---------------------------------------------------------------------- Operating Activities: Net income $18,836 $20,605 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 22,450 21,243 Stock-based compensation 2,070 2,118 Deferred income taxes (338) 371 Changes in current operating items, exclusive of acquisitions (16,260) (21,198) Other assets and liabilities 1,276 977 ---------------------------------------------------------------------- Net cash provided by operating activities 28,034 24,116 ---------------------------------------------------------------------- Investing Activities: Property, plant and equipment additions, net (18,355) (16,482) Acquisition of business assets 50 (11,515) Purchase of investments, net (1,393) (1,248) --------------------------------------------------------------------- Net cash used for investing activities (19,698) (29,245) ---------------------------------------------------------------------- Financing Activities: Repayments of long-term debt (7,440) (7,484) Proceeds from (repayments of) short-term borrowings, net (7,759) 10,550 Cash dividends paid (857) (747) Sale of common stock 2,743 1,250 ---------------------------------------------------------------------- Net cash (used for) provided by financing activities (13,313) 3,569 ---------------------------------------------------------------------- Decrease in Cash and Cash Equivalents (4,977) (1,560) Effect of Exchange Rates on Cash (681) 295 Cash and Cash Equivalents: Beginning of period 19,690 15,345 ---------------------------------------------------------------------- End of period $14,032 $14,080 ---------------------------------------------------------------------- Supplemental Cash Flow Information: Non-Cash Transactions - Debt issued in connection with business acquisitions $- $(1,419) ---------------------------------------------------------------------- CONTACT: G&K Services, Inc. Jeffrey L. Wright, Senior Vice President and Chief Financial Officer, 952-912-5500 or Glenn L. Stolt, Vice President and Treasurer, 952-912-5500 or Shayn R. Carlson, Director of Investor Relations, 952-912-5500