EX-99.1 2 a5389797ex99_1.txt EXHIBIT 99.1 Exhibit 99.1 G&K Services Reports Fiscal 2007 Third Quarter Results Earnings exceed expectations; Operating margins continue to expand MINNEAPOLIS--(BUSINESS WIRE)--May 1, 2007--G&K Services, Inc. (Nasdaq:GKSR), today reported revenue for the third quarter ended March 31, 2007 of $235.2 million, a 4.0 percent increase from prior-year revenue of $226.1 million. Organic rental growth combined with revenue from acquisitions contributed to the increase in revenue over the prior-year. Earnings per diluted share totaled $0.57 for the quarter, a 16.3 percent increase, compared to $0.49 during the prior-year period. Third quarter earnings exceeded expectations due to improved operating performance and a lower than anticipated effective tax rate. The increase in earnings compared to the prior-year, was driven by revenue growth and productivity improvements, partially offset by continued investment initiatives. "We're very pleased to report solid revenue and earnings growth during the third quarter," said Richard Marcantonio, G&K's chairman and chief executive officer. "The momentum we've established, along with the benefits we're achieving from our investments in sales, marketing and productivity initiatives, will provide for a successful finish to fiscal 2007 and a strong foundation for the long-term success of the company." Income Statement Review Third quarter revenue from G&K's rental business increased to $211.8 million, up 5.1 percent over the prior-year period. The company's organic rental growth rate was approximately 4.0 percent in the third quarter, an improvement of 50 basis points compared to the prior-year period. Direct sale revenue for the third quarter was $23.4 million compared to $24.6 million in the prior-year third quarter. Direct sale revenue was slightly below the record level achieved in the prior-year period which included the initial rollout of a new uniform program with a major customer. The organic revenue growth rates are calculated using 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 increased to 35.4 percent from 34.8 percent in the prior-year period. Higher rental gross margin during the quarter resulted from the efficiencies gained from revenue growth and slightly lower energy costs. These productivity improvements were somewhat offset by increased merchandise costs associated with continued strong new account growth. Gross margin from direct sales was 27.7 percent compared to 28.2 percent in the prior-year period. Selling, general and administrative expenses were 21.3 percent of consolidated revenue for the quarter, down from 22.0 percent in the year-earlier period. The prior-year third quarter included expense from a legal settlement that represented 0.9 percent of consolidated revenue. 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 year. This increase was partially offset by lower administrative expenses due to office productivity savings as a result of the company's handheld initiative, leverage due to improved revenue growth and lower retirement plan expenses. Operating margin for the third quarter was 8.5 percent of consolidated revenue compared to 7.3 percent in the prior-year period. The improvement in operating margin was driven by incremental income from revenue growth and lower administrative and legal expenses. "As planned, we delivered sequential and year-over-year operating margin expansion in the third quarter," Marcantonio said. "We continue to focus on improving margins through increasing top-line revenue growth and executing our strategic investments. In addition to strong operating performance, we successfully completed the rollout of our handheld system, secured several significant customer wins and acquired two high quality rental businesses that expand our market coverage." The effective tax rate for the third quarter increased to 25.4 percent from 21.5 percent in the year-earlier period. The company's effective tax rate in the third quarter and prior-year period were lower than statutory rates 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 March 31, 2007, the company had total borrowings of $221.9 million, down from $230.0 million a year ago. Total debt as a percent of total capitalization was 27.8 percent. Total stockholders' equity increased to $576.1 million. Cash provided by operating activities for the nine months ended March 31, 2007 increased to $51.2 million from $50.0 million in the prior-year period. Cash used to purchase property, plant and equipment during the current nine month period totaled $23.2 million compared to $26.4 million in the prior-year period. Free cash flow, defined as cash flow from operations less capital expenditures, for the first nine months of fiscal 2007 increased to $28.0 million from $23.6 million in the prior-year period. Cash flow used for business acquisitions during the nine month period totaled $47.5 million compared to $11.3 million in the prior-year period. During the third quarter, the company acquired two rental businesses and also paid an outstanding note payable and performance payment associated with a prior acquisition. Outlook The company expects fiscal 2007 fourth quarter revenue to range from $237.0 million to $240.0 million and earnings per diluted share from $0.50 to $0.53. The revenue guidance represents a rental organic growth rate above the third quarter of fiscal 2007. The earnings guidance reflects a continued sequential improvement in operating margin and a more normalized statutory income tax rate of 38.0 to 39.0 percent. 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 June 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 For the Nine Months Ended Ended ------------------------------------------ (U.S. Dollars, in thousands, March 31, April 1, March 31, April 1, except per share data) 2007 2006 2007 2006 ---------------------------------------------------------------------- ---------------------------------------------------------------------- Revenues Rental operations $211,842 $201,562 $628,273 $594,985 Direct sales 23,400 24,579 60,861 58,452 ---------------------------------------------------------------------- Total revenues 235,242 226,141 689,134 653,437 ---------------------------------------------------------------------- Operating Expenses Cost of rental operations 136,951 131,387 403,436 383,565 Cost of direct sales 16,923 17,659 44,579 42,015 Selling and administrative 50,110 49,619 150,031 141,219 Depreciation and amortization 11,326 10,883 33,776 32,126 ---------------------------------------------------------------------- Total operating expenses 215,310 209,548 631,822 598,925 ---------------------------------------------------------------------- Income from Operations 19,932 16,593 57,312 54,512 Interest expense 3,647 3,395 10,526 9,712 ---------------------------------------------------------------------- Income before Income Taxes 16,285 13,198 46,786 44,800 Provision for income taxes 4,136 2,840 15,801 13,837 ---------------------------------------------------------------------- Net Income $12,149 $10,358 $30,985 $30,963 ---------------------------------------------------------------------- Basic weighted average number of shares outstanding 21,304 21,132 21,227 21,069 Basic Earnings Per Common Share $0.57 $0.49 $1.46 $1.47 ---------------------------------------------------------------------- Diluted weighted average number of shares outstanding 21,445 21,311 21,394 21,228 Diluted Earnings Per Common Share $0.57 $0.49 $1.45 $1.46 ---------------------------------------------------------------------- Dividends per share $0.0400 $0.0175 $0.1200 $0.0525 CONSOLIDATED CONDENSED BALANCE SHEETS G&K Services, Inc. and Subsidiaries March 31, July 1, 2007 2006 (U.S. dollars, in thousands) (Unaudited) ---------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $16,758 $19,690 Accounts receivable, net 102,168 94,964 Inventories 141,404 141,031 Prepaid expenses 17,377 15,552 ---------------------------------------------------------------------- Total current assets 277,707 271,237 ---------------------------------------------------------------------- Property, Plant and Equipment, net 253,457 249,001 Other Assets 457,943 430,854 ---------------------------------------------------------------------- $989,107 $951,092 ---------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $23,617 $27,404 Accrued expenses 76,791 72,999 Deferred income taxes 10,370 10,419 Current maturities of long-term debt 62,669 18,199 ---------------------------------------------------------------------- Total current liabilities 173,447 129,021 ---------------------------------------------------------------------- Long-Term Debt, net of current maturities 159,269 195,355 Deferred Income Taxes 32,260 34,343 Other Noncurrent Liabilities 48,002 44,985 Stockholders' Equity 576,129 547,388 ---------------------------------------------------------------------- $989,107 $951,092 ---------------------------------------------------------------------- CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS G&K Services, Inc. and Subsidiaries (Unaudited) For the Nine Months Ended ------------------------- March 31, April 1, (U.S. dollars, in thousands) 2007 2006 ---------------------------------------------------------------------- Operating Activities: Net income $30,985 $30,963 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 33,776 32,126 Stock-based compensation 3,597 3,060 Deferred income taxes (257) 354 Changes in current operating items, exclusive of acquisitions (18,772) (17,320) Other, net 1,862 829 ---------------------------------------------------------------------- Net cash provided by operating activities 51,191 50,012 ---------------------------------------------------------------------- Investing Activities: Property, plant and equipment additions, net (23,214) (26,414) Acquisition of business assets, net (47,543) (11,300) Purchase of investments, net (2,043) (1,720) ---------------------------------------------------------------------- Net cash used for investing activities (72,800) (39,434) ---------------------------------------------------------------------- Financing Activities: Repayments of long-term debt (7,579) (7,661) Proceeds from short-term borrowings, net 26,446 2,050 Cash dividends paid (2,575) (1,112) Sale of common stock 3,004 2,395 ---------------------------------------------------------------------- Net cash provided by (used for) financing activities 19,296 (4,328) ---------------------------------------------------------------------- (Decrease) Increase in Cash and Cash Equivalents (2,313) 6,250 Effect of Exchange Rates on Cash (619) 365 Cash and Cash Equivalents: Beginning of period 19,690 15,345 ---------------------------------------------------------------------- End of period $16,758 $21,960 ---------------------------------------------------------------------- Supplemental Cash Flow Information: Non-Cash Transactions - Debt issued to seller 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