Exhibit 99.1
G&K SERVICES REPORTS FISCAL 2016 THIRD QUARTER RESULTS
Adjusted Earnings Grow 10 Percent to $0.89 Per Diluted Share
Adjusted Operating Margin Improves 70 Basis Points to 12.7 Percent
Return on Invested Capital Increases to 12.4 Percent
Year to Date Cash Flow from Operations Grows 18 Percent to $96 Million
MINNEAPOLIS, MN, April 26, 2016 - G&K Services, Inc. (NASDAQ: GK) today reported operating results for the third quarter of its fiscal year 2016, which ended on March 26, 2016. Third quarter revenue grew 2.5 percent to $239.3 million, up from $233.5 million in last year’s third quarter. Earnings per diluted share grew 10 percent to $0.89, compared to adjusted earnings of $0.81 per diluted share in the prior year period. Adjusted earnings in the prior year excluded a $0.20 per share charge related to the company’s withdrawal from multi-employer pension plans. Including this charge, prior year earnings were $0.61 per diluted share.
“Our team delivered another strong quarter with double-digit earnings growth, significant margin and ROIC expansion, and increased cash flow,” said Douglas A. Milroy, Chairman and Chief Executive Officer. “While the operating environment remains challenging, we’re staying focused on our Game Plan, which is driving steady progress toward our long-term goals.”
Income Statement Review
The third quarter organic growth rate, which adjusts for the impact of currency exchange, acquisitions and divestitures, was 3.9 percent. Organic growth was partially offset by the negative impact of a lower exchange rate for the Canadian dollar, which reduced total revenue growth by 1.6 percent. Acquisitions added 0.2 percent to third quarter revenue growth.
Operating margin improved to 12.7 percent, up 70 basis points compared to an adjusted operating margin of 12.0 percent in last year’s third quarter. The higher operating margin was primarily driven by lower energy costs, decreased workers compensation expenses, and operating leverage from revenue growth.
Interest expense in the quarter was $1.7 million, unchanged from the prior year. The effective tax rate was 37.6 percent, compared to 37.4 percent in the third quarter last year. The diluted share count was 19.7 million, as stock repurchases lowered the share count from 20.1 million in the prior year quarter.
Balance Sheet and Cash Flow
The company ended the third quarter with total debt, net of cash, of $218.4 million and a ratio of debt to total capital of 37.9 percent. On a three month annualized basis, return on invested capital (ROIC) was 12.4 percent, up 70 basis points compared to the prior year (see table below for calculation).
Cash provided by operating activities for the nine months ended March 26, 2016 was $95.5 million, up 18 percent compared to $80.9 million in the prior year. The increased operating cash flow was primarily due to lower tax payments, reduced investment in inventory, and higher net income. Capital expenditures for the first nine months of the fiscal year were $36.6 million, compared to $40.0 million in the prior year. Fiscal year to date, G&K has returned $47.5 million of cash to shareholders through dividend payments and share repurchases, a 60 percent increase compared to the prior year.
Outlook
With only one quarter remaining in its fiscal year, the company has narrowed its full year guidance. The company now expects fiscal 2016 revenue in the range of $975 million to $980 million and full year diluted earnings per share between $3.52 and $3.58. This compares to the previously announced guidance of revenue between $975 million to $990 million and earnings of $3.50 to $3.60 per diluted share.
The guidance for fiscal 2016 includes one extra week of operations compared to fiscal 2015 due to the timing of the fiscal calendar. The extra week will occur in the company’s fourth quarter. This extra week of operations is expected to add approximately 2 percent to both full year revenue and earnings. The extra week of operations will not recur in fiscal 2017, when the company will return to a normal 52 week fiscal year.
Conference Call Information
The company will host a conference call today at 10:00 a.m. Central Time to discuss its financial results and outlook. The call will be webcast and is available in the Investor Relations section of the company’s website at investors.gkservices.com. A replay of the call will be available on the company’s website through May 26, 2016.
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, 2015 and any subsequent filings with the U.S. Securities and Exchange Commission.
About G&K Services, Inc.
G&K Services, Inc. is a service-focused market leader of branded uniform and facility services programs in the United States and Canada. Headquartered in Minneapolis, Minnesota, G&K Services has 8,000 employees serving approximately 170,000 customer locations from 165 facilities in North America. G&K Services is a publicly held company traded over the NASDAQ Global Select Market under the symbol GK and is a component of the Standard & Poor’s SmallCap 600 Index. For more information visit www.gkservices.com.
Reconciliation 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 provide a 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 amounts that impact comparability of the results. A reconciliation of operating income, net income and earnings per diluted share on a GAAP basis to adjusted earnings per diluted share on a non-GAAP basis is presented in the table below:
All results reported in the tables below are only from our continuing operations | |||||||||||||||||||||||||
Three Months Ended | Three Months Ended | ||||||||||||||||||||||||
March 26, 2016 | March 28, 2015 | ||||||||||||||||||||||||
(U.S. Dollars, in thousands, except per share data) | Revenue | Operating Income | Net Income | Earnings Per Share | Revenue | Operating Income | Net Income | Earnings Per Share | |||||||||||||||||
As Reported | $ | 239,307 | $ | 30,360 | $ | 17,854 | $ | 0.89 | $ | 233,514 | $ | 21,601 | $ | 12,429 | $ | 0.61 | |||||||||
Add: Impact of pension withdrawal and associated expenses (1) | — | — | — | — | — | 6,500 | 4,069 | 0.20 | |||||||||||||||||
As Adjusted | $ | 239,307 | $ | 30,360 | $ | 17,854 | $ | 0.89 | $ | 233,514 | $ | 28,101 | $ | 16,498 | $ | 0.81 | |||||||||
Nine Months Ended | Nine Months Ended | ||||||||||||||||||||||||
March 26, 2016 | March 28, 2015 | ||||||||||||||||||||||||
(U.S. Dollars, in thousands, except per share data) | Revenue | Operating Income | Net Income | Earnings Per Share | Revenue | Operating Income | Net Income | Earnings Per Share | |||||||||||||||||
As Reported | $719,538 | $89,723 | $52,611 | $ | 2.61 | $ | 701,065 | $ | 77,075 | $ | 45,750 | $ | 2.24 | ||||||||||||
Add: Impact of pension withdrawal and associated expenses (1) | — | — | — | — | — | 6,500 | 4,069 | 0.21 | |||||||||||||||||
As Adjusted | $719,538 | $89,723 | $52,611 | $ | 2.61 | $ | 701,065 | $ | 83,575 | $ | 49,819 | $ | 2.45 |
(1) In the third quarter of fiscal 2015, we increased our estimated liability associated with the withdrawal from certain MEPPs by $6,500. |
These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, GAAP 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.
Return on Invested Capital
Return on invested capital (ROIC) is a non-GAAP financial measure and may not be defined and calculated by other companies in the same manner. The company uses ROIC as a measure of the effectiveness of its use of capital.
The company defines ROIC as annualized adjusted income from operations after tax, divided by the sum of total debt less cash, plus stockholders’ equity. The company assumes an average effective income tax rate of 37.5 percent. The company previously assumed an average effective income tax rate of 38.5 percent in its ROIC calculation. Beginning in the first quarter of fiscal year 2016, the assumed tax rate was changed to better reflect the company’s expectations about its tax rate in future periods.
The following table provides a calculation of ROIC on a 3-month annualized basis, for the periods ending March 26, 2016 and March 28, 2015.
(unaudited) | For the Three Months Ended | ||||
March 26, | March 28, | ||||
(U.S. Dollars, in thousands) | 2016 | 2015 | |||
Numerator: | |||||
Income from operations | 30,360 | 21,601 | |||
Add: Impact of pension withdrawal and associated expenses | — | 6,500 | |||
Adjusted income from operations | 30,360 | 28,101 | |||
Income taxes at 37.5 percent | 11,385 | 10,538 | |||
Adjusted income from operations after tax | 18,975 | 17,563 | |||
Annualized adjusted income from operations after tax | 75,900 | 70,252 | |||
Denominator: | |||||
Current maturities of long-term debt | — | 337 | |||
Long-term debt | 240,448 | 229,000 | |||
Total stockholders' equity | 394,056 | 386,612 | |||
Less: cash and cash equivalents | (22,011 | ) | (13,328 | ) | |
Total capital | 612,493 | 602,621 | |||
Return on invested capital | 12.4 | % | 11.7 | % |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||||
G&K Services, Inc. and Subsidiaries | |||||||||||||||
(unaudited) | |||||||||||||||
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||
(U.S. Dollars, in thousands, except per share data) | March 26, 2016 | March 28, 2015 | March 26, 2016 | March 28, 2015 | |||||||||||
Rental and direct sale revenue | $ | 239,307 | $ | 233,514 | $ | 719,538 | $ | 701,065 | |||||||
Cost of rental and direct sale revenue | 157,586 | 154,573 | 473,704 | 463,018 | |||||||||||
Gross margin | 81,721 | 78,941 | 245,834 | 238,047 | |||||||||||
Pension withdrawal and associated expenses | — | 6,500 | — | 6,500 | |||||||||||
Selling and administrative | 51,361 | 50,840 | 156,111 | 154,472 | |||||||||||
Income from Operations | 30,360 | 21,601 | 89,723 | 77,075 | |||||||||||
Interest expense | 1,749 | 1,745 | 5,032 | 5,463 | |||||||||||
Income before Income Taxes | 28,611 | 19,856 | 84,691 | 71,612 | |||||||||||
Provision for income taxes | 10,757 | 7,427 | 32,080 | 25,862 | |||||||||||
Net Income | $ | 17,854 | $ | 12,429 | $ | 52,611 | $ | 45,750 | |||||||
Basic Earnings per Common Share | $ | 0.90 | $ | 0.62 | $ | 2.64 | $ | 2.29 | |||||||
Diluted Earnings per Common Share | $ | 0.89 | $ | 0.61 | $ | 2.61 | $ | 2.24 | |||||||
Earnings available to common stockholders: | |||||||||||||||
Net income | $ | 17,854 | $ | 12,429 | $ | 52,611 | $ | 45,750 | |||||||
Less: Income allocable to participating securities | (270 | ) | (235 | ) | (768 | ) | (771 | ) | |||||||
Net income available to common stockholders | $ | 17,584 | $ | 12,194 | $ | 51,843 | $ | 44,979 | |||||||
Weighted average number of shares outstanding, basic | 19,529 | 19,679 | 19,640 | 19,653 | |||||||||||
Weighted average number of shares outstanding, diluted | 19,728 | 20,074 | 19,867 | 20,037 | |||||||||||
Dividends Declared per Share | $ | 0.37 | $ | 0.31 | $ | 1.11 | $ | 0.93 | |||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||
G&K Services, Inc. and Subsidiaries | |||||||
March 26, 2016 | June 27, 2015 | ||||||
(U.S. Dollars, in thousands) | (Unaudited) | ||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 22,011 | $ | 16,235 | |||
Accounts receivable, net | 99,763 | 100,402 | |||||
Inventory | 41,012 | 36,258 | |||||
Merchandise in service, net | 130,611 | 133,942 | |||||
Other current assets | 15,859 | 30,383 | |||||
Total current assets | 309,256 | 317,220 | |||||
Property, plant and equipment, net | 229,072 | 222,056 | |||||
Goodwill | 323,018 | 325,183 | |||||
Other noncurrent assets | 57,108 | 64,406 | |||||
Total assets | $ | 918,454 | $ | 928,865 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable | $ | 47,580 | $ | 51,616 | |||
Accrued expenses and other current liabilities | 67,205 | 71,739 | |||||
Deferred income taxes | 31,648 | 31,097 | |||||
Current maturities of long-term debt | — | 169 | |||||
Total current liabilities | 146,433 | 154,621 | |||||
Long-term debt, net of current maturities | 240,448 | 243,600 | |||||
Deferred income taxes | 36,911 | 28,851 | |||||
Other noncurrent liabilities | 100,606 | 107,443 | |||||
Stockholders' Equity | 394,056 | 394,350 | |||||
Total liabilities and stockholders' equity | $ | 918,454 | $ | 928,865 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
G&K Services, Inc. and Subsidiaries | |||||||
(unaudited) | |||||||
For the Nine Months Ended | |||||||
March 26, | March 28, | ||||||
(U.S. Dollars, in thousands) | 2016 | 2015 | |||||
Operating Activities: | |||||||
Net income | $ | 52,611 | $ | 45,750 | |||
Adjustments to reconcile net income to net cash provided by operating activities - | |||||||
Depreciation and amortization | 26,435 | 23,873 | |||||
Pension withdrawal and associated expenses | — | 6,500 | |||||
Deferred income taxes | 12,020 | 3,624 | |||||
Share-based compensation | 5,236 | 5,320 | |||||
Changes in operating items, exclusive of acquisitions and divestitures- | |||||||
Accounts receivable | (540 | ) | 268 | ||||
Inventory and merchandise in service | (1,772 | ) | (9,518 | ) | |||
Accounts payable | (1,689 | ) | 6,224 | ||||
Other current assets and liabilities | 15,476 | 5,969 | |||||
Multi-employer pension plan settlement payment | (5,425 | ) | — | ||||
Other | (6,813 | ) | (7,144 | ) | |||
Net cash provided by operating activities | 95,539 | 80,866 | |||||
Investing Activities: | |||||||
Capital expenditures | (36,603 | ) | (40,022 | ) | |||
Acquisition of business | (2,206 | ) | — | ||||
Net cash used for investing activities | (38,809 | ) | (40,022 | ) | |||
Financing Activities: | |||||||
Repayments of long-term debt | (75,168 | ) | (675 | ) | |||
Proceeds from (repayments of) revolving credit facilities, net | 71,848 | (36,962 | ) | ||||
Cash dividends paid | (22,118 | ) | (18,542 | ) | |||
Proceeds from issuance of common stock under stock option plans | 1,324 | 4,107 | |||||
Repurchase of common stock | (25,388 | ) | (11,158 | ) | |||
Shares withheld for taxes under equity compensation plans | (3,002 | ) | (1,600 | ) | |||
Excess tax benefit of shared-based compensation | 2,040 | 3,676 | |||||
Net cash used for financing activities | (50,464 | ) | (61,154 | ) | |||
Effect of Exchange Rates on Cash | (490 | ) | (3,480 | ) | |||
Increase (Decrease) in Cash and Cash Equivalents | 5,776 | (23,790 | ) | ||||
Cash and Cash Equivalents: | |||||||
Beginning of period | 16,235 | 37,118 | |||||
End of period | $ | 22,011 | $ | 13,328 | |||
Supplemental Cash Flow Information: | |||||||
Cash paid for- | $ | (3,969 | ) | $ | (4,123 | ) | |
Interest | $ | (3,191 | ) | $ | (13,187 | ) | |
Income taxes | |||||||
Supplemental Non-cash Investing Information: | |||||||
Capital expenditures included in accounts payable | $ | 1,647 | $ | 2,862 |
Contacts:
G&K Services, Inc.
Jeff Huebschen, 952-912-5773
Director, Investor Relations
jeff.huebschen@gkservices.com