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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 – Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 30, 2002 | Commission file number 0-4063 |
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA (State or other jurisdiction of incorporation or organization) | 41-0449530 (I.R.S. Employer Identification No.) |
5995 OPUS PARKWAY, SUITE 500
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices and zip code)
(952) 912-5500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES | ![]() | NO | ![]() |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
CLASS A Common Stock, par value $0.50 per share | Outstanding May 9, 2002 19,211,437 |
CLASS B Common Stock, par value $0.50 per share | Outstanding May 9, 2002 1,474,996 |
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G&K Services, Inc.
Form 10-Q
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PART I | PAGE | ||||
Item 1. | Financial Statements | ||||
Consolidated Condensed Balance Sheets as of March 30, 2002 and June 30, 2001 | 3 | ||||
Consolidated Statements of Operations for the three and nine months ended March 30, 2002 and March 31, 2001 | 4 | ||||
Consolidated Condensed Statements of Cash Flows for the nine months ended March 30, 2002 and March 31, 2001 | 5 | ||||
Notes to Consolidated Condensed Financial Statements | 6 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | |||
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 12 | |||
PART II | |||||
Other Information | 13 | ||||
Signatures | 14 |
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
March 30, | June 30, | |||||||||
2002 | 2001 | |||||||||
(In thousands) | ||||||||||
(Unaudited) | ||||||||||
ASSETS | ||||||||||
Current Assets | ||||||||||
Cash and cash equivalents | $ | 12,051 | $ | 15,317 | ||||||
Accounts receivable, less allowance for doubtful accounts of $3,785 and $2,613 | 68,227 | 66,911 | ||||||||
Inventories | 90,161 | 90,085 | ||||||||
Prepaid expenses | 10,783 | 16,358 | ||||||||
Total current assets | 181,222 | 188,671 | ||||||||
Property, Plant and Equipment, net | 229,416 | 225,965 | ||||||||
Goodwill, net | 198,360 | 148,080 | ||||||||
Other Assets | 64,491 | 57,247 | ||||||||
$ | 673,489 | $ | 619,963 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
Current Liabilities | ||||||||||
Accounts payable | $ | 18,507 | $ | 18,622 | ||||||
Accrued expenses | 51,690 | 48,266 | ||||||||
Deferred income taxes | 13,844 | 12,961 | ||||||||
Current maturities of long-term debt | 118,373 | 59,220 | ||||||||
Total current liabilities | 202,414 | 139,069 | ||||||||
Long-Term Debt, net of current maturities | 113,570 | 148,951 | ||||||||
Deferred Income Taxes | 16,122 | 16,168 | ||||||||
Other Noncurrent Liabilities | 15,138 | 14,508 | ||||||||
Stockholders’ Equity | 326,245 | 301,267 | ||||||||
$ | 673,489 | $ | 619,963 | |||||||
The accompanying notes are an integral part of these consolidated condensed financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
G&K Services, Inc. and Subsidiaries
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||
Mar 30, | Mar 31, | Mar 30, | Mar 31, | |||||||||||||||
(In thousands, except per share data) | 2002 | 2001 | 2002 | 2001 | ||||||||||||||
Revenues | ||||||||||||||||||
Rental operations | $ | 150,362 | $ | 147,010 | $ | 451,785 | $ | 433,717 | ||||||||||
Direct sales | 4,709 | 4,477 | 16,045 | 14,750 | ||||||||||||||
Total revenues | 155,071 | 151,487 | 467,830 | 448,467 | ||||||||||||||
Operating Expenses | ||||||||||||||||||
Cost of rental operations | 87,103 | 85,619 | 263,205 | 252,810 | ||||||||||||||
Cost of direct sales | 3,343 | 3,569 | 11,422 | 11,447 | ||||||||||||||
Selling and administrative | 36,447 | 35,174 | 109,305 | 99,389 | ||||||||||||||
Depreciation and amortization | 8,939 | 9,603 | 26,540 | 28,768 | ||||||||||||||
Total operating expenses | 135,832 | 133,965 | 410,472 | 392,414 | ||||||||||||||
Income from Operations | 19,239 | 17,522 | 57,358 | 56,053 | ||||||||||||||
Interest expense | 3,113 | 4,211 | 10,235 | 13,006 | ||||||||||||||
Income before Income Taxes | 16,126 | 13,311 | 47,123 | 43,047 | ||||||||||||||
Provision for income taxes | 6,370 | 5,324 | 18,614 | 17,248 | ||||||||||||||
Net Income | $ | 9,756 | $ | 7,987 | $ | 28,509 | $ | 25,799 | ||||||||||
Basic weighted average number of shares outstanding | 20,518 | 20,479 | 20,494 | 20,479 | ||||||||||||||
Basic Earnings per Common Share | $ | 0.48 | $ | 0.39 | $ | 1.39 | $ | 1.26 | ||||||||||
Diluted weighted average number of shares outstanding | 20,760 | 20,482 | 20,610 | 20,493 | ||||||||||||||
Diluted Earnings per Common Share | $ | 0.47 | $ | 0.39 | $ | 1.38 | $ | 1.26 | ||||||||||
The accompanying notes are an integral part of these consolidated condensed financial statements.
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
(Unaudited)
For the Nine Months Ended | |||||||||||
March 30, | March 31, | ||||||||||
(In thousands) | 2002 | 2001 | |||||||||
Operating Activities: | |||||||||||
Net income | $ | 28,509 | $ | 25,799 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities - | | | | | | | | | |||
Depreciation and amortization | 26,540 | 28,768 | |||||||||
Deferred income taxes | (3,910 | ) | (1,034 | ) | |||||||
Changes in current operating items, exclusive of acquisitions | 12,679 | 697 | |||||||||
Other, net | 2,057 | 922 | |||||||||
Net cash provided by operating activities | 65,875 | 55,152 | |||||||||
Investing Activities: | |||||||||||
Property, plant and equipment additions, net | (21,598 | ) | (25,519 | ) | |||||||
Acquisition of business assets and other | (69,724 | ) | (13,348 | ) | |||||||
Net cash used for investing activities | (91,322 | ) | (38,867 | ) | |||||||
Financing Activities: | |||||||||||
Proceeds from debt financing | 86,014 | 69,900 | |||||||||
Repayments of debt financing | (62,788 | ) | (84,770 | ) | |||||||
Cash dividends paid | (1,084 | ) | (1,078 | ) | |||||||
Sale of common stock | 334 | 37 | |||||||||
Net cash provided by (used for) financing activities | 22,476 | (15,911 | ) | ||||||||
Increase (Decrease) in Cash and Cash Equivalents | (2,971 | ) | 374 | ||||||||
Effect of Exchange Rates on Cash | (295 | ) | (421 | ) | |||||||
Cash and Cash Equivalents: | |||||||||||
Beginning of period | 15,317 | 6,420 | |||||||||
End of period | $ | 12,051 | $ | 6,373 | |||||||
Supplemental Cash Flow Information: | |||||||||||
Cash paid for - | |||||||||||
Interest | $ | 12,756 | $ | 11,637 | |||||||
Income taxes | $ | 25,249 | $ | 13,899 | |||||||
The accompanying notes are an integral part of these consolidated condensed financial statements.
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G&K SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
Three and nine month periods ended March 30, 2002 and March 31, 2001
(Unaudited)
The consolidated condensed financial statements included herein, except for the June 30, 2001 balance sheet which was extracted from the audited consolidated financial statements for the fiscal year ended June 30, 2001, have been prepared by G&K Services, Inc. (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 30, 2002, the results of its operations for the three and nine months ended and its cash flows for the nine months ended March 30, 2002 and March 31, 2001. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual report. |
The results of operations for the three and nine month periods ended March 30, 2002 and March 31, 2001 are not necessarily indicative of the results to be expected for the full year. |
1. Summary of Significant Accounting Policies
Accounting policies followed by the Company are set forth in Note 1 to the Company’s Annual Consolidated Financial Statements. |
Nature of Business | |
G&K Services, Inc. is a market leader in providing corporate identity apparel and facility services programs to a wide variety of industrial, service and high-technology companies. The Company’s programs provide rental-lease or purchase options as well as non-apparel items such as floormats, dustmops and cloths, wiping towels, selected linen items and several restroom products. The Company also manufactures certain uniform garments that it uses to support its garment rental programs. |
Principles of Consolidation | |
The accompanying consolidated condensed financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Intercompany balances and transactions have been eliminated in consolidation. |
Derivative Financial Instruments | |
The Company uses derivative financial instruments principally to manage the risk that changes in interest rates will affect the amount of its future interest payments. Interest rate swap contracts are used to adjust the proportion of total debt that is subject to variable and fixed interest rates. The interest rate swap contracts are reflected at fair value in the consolidated condensed balance sheet and the related gains or losses on these contracts are deferred in stockholders’ equity (as a component of other comprehensive income). Amounts to be paid or received under the contracts are accrued as interest rates change and are recognized over the life of the contracts as an adjustment to interest expense. The net effect of this accounting is that interest expense on the portion of variable rate debt being hedged is generally recorded based on fixed interest rates. |
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Per Share Data | |
Basic earnings per common share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share was computed similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other dilutive securities (including nonvested restricted stock) using the treasury stock method. |
Three Months Ended | Nine Months Ended | |||||||||||||||
Mar 30, | Mar 31, | Mar 30, | Mar 31, | |||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
Weighted average number of common shares outstanding | 20,518,000 | 20,479,000 | 20,494,000 | 20,479,000 | ||||||||||||
Shares used in computation of basic earnings per share | 20,518,000 | 20,479,000 | 20,494,000 | 20,479,000 | ||||||||||||
Weighted average effect of non-vested restricted stock grants and exercise of options | 242,000 | 3,000 | 116,000 | 14,000 | ||||||||||||
Shares used in computation of diluted earnings per share | 20,760,000 | 20,482,000 | 20,610,000 | 20,493,000 | ||||||||||||
2. Comprehensive Income
For the three and nine month periods ended March 30, 2002 and March 31, 2001, the components of comprehensive income were as follows: |
Three Months Ended | Nine Months Ended | ||||||||||||||||
Mar 30, | Mar 31, | Mar 30, | Mar 31, | ||||||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||||||||
Net income | $ | 9,756 | $ | 7,987 | $ | 28,509 | $ | 25,799 | |||||||||
Other comprehensive income | |||||||||||||||||
Foreign currency translation adjustments, net of tax | 75 | (2,817 | ) | (3,533 | ) | (4,130 | ) | ||||||||||
Net unrealized holding gain (loss), net of tax | 537 | (592 | ) | 56 | (1,681 | ) | |||||||||||
Comprehensive income | $ | 10,368 | $ | 4,578 | $ | 25,032 | $ | 19,988 | |||||||||
3. Goodwill and Intangible Assets
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives will no longer be amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be |
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amortized over their useful lives (but with no maximum life). The Company has adopted the provisions of SFAS No. 141 and SFAS No. 142 effective July 1, 2001. |
Upon adoption of SFAS No. 142, the Company discontinued the amortization of goodwill. The following table presents a reconciliation of net income and earnings per share adjusted for the exclusion of goodwill, net of tax: |
Three Months Ended | Nine Months Ended | |||||||||||||||
Mar 30, | Mar 31, | Mar 30, | Mar 31, | |||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
Reported net income | $ | 9,756 | $ | 7,987 | $ | 28,509 | $ | 25,799 | ||||||||
Add: Goodwill amortization, net of tax | — | 736 | — | 2,171 | ||||||||||||
Adjusted net income | $ | 9,756 | $ | 8,723 | $ | 28,509 | $ | 27,970 | ||||||||
Reported basic earnings per share | $ | 0.48 | $ | 0.39 | $ | 1.39 | $ | 1.26 | ||||||||
Add: Goodwill amortization, net of tax | — | 0.04 | — | 0.11 | ||||||||||||
Adjusted basic earnings per share | $ | 0.48 | $ | 0.43 | $ | 1.39 | $ | 1.37 | ||||||||
Reported diluted earnings per share | $ | 0.47 | $ | 0.39 | $ | 1.38 | $ | 1.26 | ||||||||
Add: Goodwill amortization, net of tax | — | 0.04 | — | 0.11 | ||||||||||||
Adjusted diluted earnings per share | $ | 0.47 | $ | 0.43 | $ | 1.38 | $ | 1.37 | ||||||||
The changes in the carrying amount of goodwill for the nine months ended March 30, 2002, by operating segment, are as follows: |
United States | Canada | Total | ||||||||||
Balance as of June 30, 2001 | $ | 122,080 | $ | 26,000 | $ | 148,080 | ||||||
Goodwill acquired during the period | 50,889 | 425 | 51,314 | |||||||||
Other, primarily foreign currency translation | — | (1,034 | ) | (1,034 | ) | |||||||
Balance as of March 30, 2002 | $ | 172,969 | $ | 25,391 | $ | 198,360 | ||||||
Information regarding the Company’s other intangible assets are as follows: |
As of March 30, 2002 | ||||||||||||
Carrying | Accumulated | |||||||||||
Amount | Amortization | Net | ||||||||||
Restrictive Covenants | $ | 7,957 | $ | 4,032 | $ | 3,925 | ||||||
Customer Lists | 65,959 | 23,238 | 42,721 | |||||||||
Total | $ | 73,916 | $ | 27,270 | $ | 46,646 | ||||||
As of June 30, 2001 | ||||||||||||
Carrying | Accumulated | |||||||||||
Amount | Amortization | Net | ||||||||||
Restrictive Covenants | $ | 7,693 | $ | 3,479 | $ | 4,214 | ||||||
Customer Lists | 55,226 | 19,550 | 35,676 | |||||||||
Total | $ | 62,919 | $ | 23,029 | $ | 39,890 | ||||||
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Amortization expense for the nine months ended March 30, 2002 was $4,427. Estimated amortization expense for the remaining quarter of fiscal 2002 and each of the five succeeding fiscal years based on the intangible assets as of March 30, 2002 is as follows: |
2002 | $ | 1,771 | ||
2003 | 6,519 | |||
2004 | 6,519 | |||
2005 | 6,445 | |||
2006 | 6,285 | |||
2007 | 6,085 | |||
4. Segment Information
The Company has two operating segments under the guidelines of SFAS No. 131: United States and Canada. Each operating segment derives revenues from the corporate identity apparel and facility services industry, which includes garment rental and non-apparel items such as floormats, dust mops and cloths, wiping towels and selected linen items. No one customer’s transactions account for 1% or more of the Company’s revenues. |
The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1). Financial information by geographic location for the three and nine month periods ended March 30, 2002 and March 31, 2001 is as follows: |
United | |||||||||||||
For the Three Months Ended | States | Canada | Total | ||||||||||
Mar 30, 2002 | |||||||||||||
Revenues | $ | 136,113 | $ | 18,958 | $ | 155,071 | |||||||
Income from operations | 14,901 | 4,338 | 19,239 | ||||||||||
Capital expenditures | 6,685 | 1,256 | 7,941 | ||||||||||
Depreciation and amortization expense | 8,097 | 842 | 8,939 | ||||||||||
Mar 31, 2001 | |||||||||||||
Revenues | $ | 131,965 | $ | 19,522 | $ | 151,487 | |||||||
Income from operations | 12,870 | 4,652 | 17,522 | ||||||||||
Capital expenditures | 6,977 | 1,989 | 8,966 | ||||||||||
Depreciation and amortization expense | 8,460 | 1,143 | 9,603 | ||||||||||
United | |||||||||||||
For the Nine Months Ended | States | Canada | Total | ||||||||||
Mar 30, 2002 | |||||||||||||
Revenues | $ | 410,801 | $ | 57,029 | $ | 467,830 | |||||||
Income from operations | 43,477 | 13,881 | 57,358 | ||||||||||
Capital expenditures | 19,920 | 1,678 | 21,598 | ||||||||||
Depreciation and amortization expense | 23,962 | 2,578 | 26,540 | ||||||||||
Mar 31, 2001 | |||||||||||||
Revenues | $ | 390,885 | $ | 57,582 | $ | 448,467 | |||||||
Income from operations | 42,172 | 13,881 | 56,053 | ||||||||||
Capital expenditures | 22,432 | 3,087 | 25,519 | ||||||||||
Depreciation and amortization expense | 25,329 | 3,439 | 28,768 | ||||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
The percentage relationships to net sales of certain income and expense items for the three and nine month periods ended March 30, 2002 and March 31, 2001, and the percentage changes in these income and expense items between periods are presented in the following table:
Three Months | Nine Months | Percentage | ||||||||||||||||||||||||
Ended | Ended | Change | ||||||||||||||||||||||||
Three Months | Nine Months | |||||||||||||||||||||||||
Mar 30, | Mar 31, | Mar 30, | Mar 31, | FY 2002 | FY 2002 | |||||||||||||||||||||
2002 | 2001 | 2002 | 2001 | vs. FY 2001 | vs. FY 2001 | |||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||
Rental | 97.0 | % | 97.0 | % | 96.6 | % | 96.7 | % | 2.3 | % | 4.2 | % | ||||||||||||||
Direct | 3.0 | 3.0 | 3.4 | 3.3 | 5.2 | 8.8 | ||||||||||||||||||||
Total revenues | 100.0 | 100.0 | 100.0 | 100.0 | 2.4 | 4.3 | ||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||
Cost of rental sales | 57.9 | 58.2 | 58.3 | 58.3 | 1.7 | 4.1 | ||||||||||||||||||||
Cost of direct sales | 71.0 | 79.7 | 71.2 | 77.6 | (6.3 | ) | (0.2 | ) | ||||||||||||||||||
Total cost of sales | 58.3 | 58.9 | 58.7 | 58.9 | 1.4 | 3.9 | ||||||||||||||||||||
Selling and administrative | 23.5 | 23.2 | 23.4 | 22.2 | 3.6 | 10.0 | ||||||||||||||||||||
Depreciation and amortization | 5.8 | 6.3 | 5.6 | 6.4 | (6.9 | ) | (7.7 | ) | ||||||||||||||||||
Income from operations | 12.4 | 11.6 | 12.3 | 12.5 | 9.8 | 2.3 | ||||||||||||||||||||
Interest expense | 2.0 | 2.8 | 2.2 | 2.9 | (26.1 | ) | (21.3 | ) | ||||||||||||||||||
Income before income taxes | 10.4 | 8.8 | 10.1 | 9.6 | 21.1 | 9.5 | ||||||||||||||||||||
Provision for income taxes | 4.1 | 3.5 | 4.0 | 3.8 | 19.6 | 7.9 | ||||||||||||||||||||
Net income | 6.3 | % | 5.3 | % | 6.1 | % | 5.8 | % | 22.1 | % | 10.5 | % | ||||||||||||||
Total revenues for the third quarter of fiscal 2002 increased 2.4% to $155.1 million from $151.5 million in the third quarter of fiscal 2001 and increased 4.3% to $467.8 million for the first nine months of fiscal 2002 from $448.5 million in the same period of fiscal 2001. Rental revenue growth for the third quarter accounted for $3.4 million, or a 2.3% increase and for the first nine months of fiscal 2002 it accounted for $18.1 million or a 4.2% increase. The rental growth was influenced by several factors including the Company’s focus on new product promotions, continued success in signing national accounts and acquisitions.
Total direct sales increased 5.2% to $4.7 million for the third quarter of fiscal 2002 compared to $4.5 million in the same period of fiscal 2001 and increased 8.8% to $16.0 million for the first nine months of fiscal 2002 from $14.8 million in the same period of fiscal 2001. Direct sale revenue is up for the nine-month period largely due to several large customers programs that were completed in the first quarter. Cost of direct sales, as a percentage of direct sales, decreased to 71.0% for the third quarter of fiscal 2002 from 79.7% in the same period of fiscal 2001 and decreased to 71.2% for the first nine months of fiscal 2002 from 77.6% in the same period of fiscal 2001. The improvement in gross margin was due to improvements in merchandise costs and in the fulfillment operation.
Cost of rental operations increased 1.7% to $87.1 million for the third quarter of fiscal 2002 from $85.6 million in the same period of fiscal 2001 and increased 4.1% to $263.2 million for the first nine months of fiscal 2002 from $252.8 million in the same period of fiscal 2001. As a percentage of rental revenues, these costs decreased to 57.9% for the third quarter of fiscal 2002 from 58.2% in the same period of fiscal 2001 and remained constant at 58.3% for the first nine months of fiscal 2002, unchanged from the same period of fiscal 2001. The
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margin impact of lost revenue from reduced customer employment levels was largely offset by improved plant productivity and lower merchandise and energy costs.
Selling and administrative expenses increased 3.6% to $36.4 million in the third quarter of fiscal 2002 from $35.2 million in the same period of fiscal 2001 and increased 10.0% to $109.3 million for the first nine months of fiscal 2002 from $99.4 million in the same period of fiscal 2001. As a percentage of revenues, selling and administrative expenses increased to 23.5% in the third quarter of fiscal 2002 from 23.2% in the same period of fiscal 2001 and increased to 23.4% for the first nine months of fiscal 2002 from 22.2% in the same period of fiscal 2001. The increase as a percent of revenue was driven by sales and marketing expenses focused on revenue growth.
Depreciation and amortization expense decreased 6.9% to $8.9 million in the third quarter of fiscal 2002 from $9.6 million in the same period of fiscal 2001 and decreased 7.7% to $26.5 million for the first nine months of fiscal 2002 from $28.8 million in the same period of fiscal 2001. As a percentage of revenues, depreciation and amortization expense decreased to 5.8% in the third quarter of fiscal 2002 from 6.3% in the same period of fiscal 2001 and decreased to 5.6% for the first nine months of fiscal 2002 from 6.4% in the same period of fiscal 2001. The reduction was driven largely by the Company’s adoption of SFAS No. 142, under which goodwill and intangible assets with indefinite lives will no longer be amortized. The adoption of SFAS No. 142 reduced amortization expense by 0.7% and 0.8% of a percent of revenue for the three and nine month periods, respectively. Capital expenditures, excluding acquisition of businesses, were $7.9 million in the third quarter of fiscal 2002 compared to $9.0 million in the prior year’s quarter and for the nine month period were $21.6 million compared to $25.5 million in the prior year.
Income from operations increased 9.8% to $19.2 million in the third quarter of fiscal 2002 from $17.5 million in the same period of fiscal 2001 and increased 2.3% to $57.4 million for the first nine months of fiscal 2002 from $56.1 million in the same period of fiscal 2001. Operating margins increased to 12.4% for the third quarter of fiscal 2002 from 11.6% in the same period of fiscal 2001 and decreased to 12.3% for the first nine months of fiscal 2002 from 12.5% in the same period of fiscal 2001.
Interest expense was $3.1 million for the third quarter of fiscal 2002, down from $4.2 million in the same period of fiscal 2001 and was $10.2 million for the first nine months of fiscal 2002, down from $13.0 million in the same period of fiscal 2001. The decrease in interest expense is due primarily to lower effective interest rates. The Company’s effective tax rate decreased to 39.5% in the third quarter of fiscal 2002 from 40.0% in the same period of fiscal 2001 and decreased to 39.5% in the nine month period of fiscal 2002 from 40.1% in the same period of fiscal 2001. The decrease was due largely to decreases in Canadian statutory income tax rates.
Net income increased 22.1% to $9.8 million in the third quarter of fiscal 2002 from $8.0 million in the same period of fiscal 2001 and increased 10.5% to $28.5 million for the first nine months of fiscal 2002 from $25.8 million in the same period of fiscal 2001. Basic and diluted earnings per share for the third quarter of fiscal 2002 were $0.48 and $0.47 per share, respectively, compared to $0.39 per share for the prior year quarter. Basic and diluted earnings per share for the first nine months of fiscal 2002 were $1.39 and $1.38 per share, respectively, compared to $1.26 per share in the prior year. Net income margins increased to 6.3% for the third quarter of fiscal 2002 compared with 5.3% in the third quarter of fiscal 2001 and increased to 6.1% for the nine month period of fiscal 2002 from 5.8% in the same period of fiscal 2001.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $65.9 million in the nine-month period of fiscal 2002 and $55.2 million in the same period of fiscal 2001. Working capital deficit at March 30, 2002 was $21.2 million, down 142.7% from positive working capital of $49.6 million at June 30, 2001. The decrease was largely driven by incremental debt to fund acquisitions under the revolving credit facilities which are recorded as current maturities of long-term debt as they are within one year of expiration.
Cash used in investing activities was $91.3 million in the nine-month period of fiscal 2002 and $38.9 million in the same period of fiscal 2001. The increase is primarily due to the acquisition of business assets during the nine months ended March 30, 2002 and capital expenditures.
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Cash provided by financing activities was $22.5 million in the nine-month period of fiscal 2002 and cash used for financing activities was $15.9 million in the same period of fiscal 2001. The long-term debt, including current maturities, increased to $231.9 million at March 30, 2002 from $208.2 million at June 30, 2001. The Company paid dividends of $0.4 million during the quarter. The Company’s ratio of total debt to total capitalization increased to 41.6% at the end of the third quarter of fiscal 2002 from 40.9% at June 30, 2001.
The Company maintains a $425.0 million term loan and revolving credit facility. The credit facility includes a $125.0 million revolving credit facility expiring on June 30, 2002. As of March 30, 2002, borrowings outstanding under the revolving credit facility were $65.0 million. The Company plans to refinance this term loan and revolving credit facility prior to the end of fiscal 2002.
The Company’s sources of cash liquidity include cash and cash equivalents, cash from operations, amounts available under current credit facilities and note issuances. Management believes that these sources are sufficient to fund its current businesses and planned expansion of operations or any future acquisitions.
Stockholders’ equity grew 8.3% to $326.2 million at March 30, 2002, compared with $301.3 million at the end of fiscal 2001. G&K’s return on average equity decreased to 11.8% for the nine-month period of fiscal 2002 compared with 12.8% for the same period of fiscal 2001.
Forward-Looking Statements
This document contains “forward-looking statements” within the meaning of the federal securities laws, including statements concerning business strategies and their intended results, and similar statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management’s best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. These risks and uncertainties include, but are not limited to, unforeseen operating risks; the effects of overall economic conditions; fluctuations in costs of insurance and energy; the performance and costs of integration of acquisitions; competition 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 the Company’s Annual Report on Form 10-K for the Fiscal Year Ended June 30, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses financial instruments, including fixed and variable rate debt, as well as interest rate swaps, to finance operations and to hedge interest rate exposures. The swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative purposes, nor is it a party to any leveraged instrument. There has been no material change in the Company’s market risks associated with debt and interest rate swap obligations during the quarter ended March 30, 2002.
The Company is exposed to foreign currency rate risk and substantially all foreign exchange exposure is the Canadian dollar. The Company’s investments in its foreign subsidiary with a functional currency other than the U.S. dollar are not hedged. Any gains or losses in fair value associated with the Canadian dollar are reflected in the consolidated balance sheet as a component of other comprehensive income.
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PART II
OTHER INFORMATION
ITEM 6. | Exhibits and Reports on Form 8-K | ||
a. Exhibits | |||
99.1 Letter from the Registrant to the SEC | |||
b. Reports on Form 8-K | |||
None |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. |
G&K SERVICES, INC. (Registrant) | |||||||
Date: | May 14, 2002 | /s/ Jeffrey L. Wright | |||||
Jeffrey L. Wright | |||||||
Chief Financial Officer and Secretary | |||||||
(Principal Financial Officer) | |||||||
/s/ Michael F. Woodard | |||||||
Michael F. Woodard | |||||||
Controller | |||||||
(Principal Accounting Officer) |
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