G&K Services (GK) 8-K G&K Services Reports Fiscal 2008 Third Quarter Results

Exhibit 99.1

G&K Services Reports Fiscal 2008 Third Quarter Results

Solid increase in revenue;

Strong year-over-year improvement in operating earnings and cash flow

MINNEAPOLIS--(BUSINESS WIRE)--G&K Services, Inc. (NASDAQ: GKSR), today reported revenue for the third quarter ended March 29, 2008 of $251.1 million, a 6.8 percent increase from previous year revenue of $235.2 million. This increase in quarterly revenue was driven by rental organic growth, strong revenue contribution from acquisitions and the benefit of foreign currency translation.

For the quarter, operating income increased 8.1 percent compared to the prior-year period. This increase in operating income was driven by leverage from revenue growth, improved productivity and lower merchandise costs. The improvement in operating income was achieved despite continued economic softness, higher gasoline costs, increased bad debt expense, lower contribution from direct sales and expenses related to systems implementation activities.

The company reported third quarter earnings of $0.54 per diluted share. Prior-year third quarter earnings were $0.57 per diluted share, and reflected an unusually low effective tax rate of 25.4 percent. The lower effective tax rate resulted in a $0.11 per diluted share benefit in the prior-year third quarter.

For the nine months ended March 29, 2008, revenue increased to $750.2 million, up 8.9 percent as compared to the prior-year period. This record level of revenue was driven by rental organic growth, strategic acquisitions and the benefit of foreign currency translation.

For the nine month period, operating income increased 20.6 percent compared to the prior-year period. The increase in year-to-date operating income was driven by overall revenue growth, lower merchandise costs and savings achieved from on-going productivity initiatives. The improvement in operating income was achieved despite continued economic softness, higher gasoline costs, increased bad debt expense, lower contribution from direct sales and systems implementation expenses.

Earnings per diluted share for the first nine months of fiscal 2008 were $1.72, an increase of 18.6 percent over the prior-year period. Earnings in the prior-year period were $1.45 per diluted share, and reflected a lower than normal effective tax rate of 33.8 percent. The lower effective tax rate resulted in a $0.10 per diluted share benefit in the prior-year nine month period.

“We’re pleased to report a solid third quarter and strong year-to-date increases in revenue, operating margins, earnings and cash flow,” said Richard Marcantonio, chairman and chief executive officer. “Importantly, our long-term vision coupled with our focus on strategic initiatives continues to deliver positive momentum in a challenging economic environment. We will continue to execute against a number of growth and productivity initiatives to drive further revenue and earnings acceleration.”

Income Statement Review

Third quarter revenue from G&K’s rental business increased to $233.0 million, up 10.0 percent over the prior-year period. The company’s organic rental growth rate was approximately 2.75 percent in the quarter. Organic rental growth continues to reflect strong new account and route sales performance, offset by an increase in economic-driven customer attrition and a reduction in employment levels within certain industries. Direct sale revenue was $18.1 million, compared to $23.4 million in the prior-year period. Direct sales volume compared to the year-ago period was impacted by softness with certain customers in the transportation industry, the non-renewal of a contract with a large customer, and lower revenue due to systems implementation issues. The organic rental growth rate is calculated using rental revenue, adjusted for foreign currency exchange rate differences and newly acquired revenue compared to prior-period results.

Gross margin from rental operations for the quarter increased to 36.1 percent, up 70 basis points from the prior-year period. The increase in gross margin was a result of improved leverage from overall revenue growth and lower merchandise costs. The improvement in rental gross margin was partially offset by the higher production and delivery costs associated with record energy prices. Gross margin from direct sales was 20.8 percent, compared to 27.7 percent in the prior-year period as a result of expenses associated with systems implementation issues and the impact of fixed cost absorption from lower direct sales volume.

Selling and administrative expenses in the quarter were 21.4 percent of consolidated revenue, up slightly from 21.3 percent in the prior-year period. During the quarter, the company continued to gain positive leverage from revenue growth and productivity savings from the implementation of the company’s handheld technology platform. These gains were offset by increased bad debt expense driven by certain customer insolvencies. The increase in bad debt expense represented 0.6 percent of consolidated third quarter revenue. In addition, administrative expenses increased over the prior-year period due to the on-going investment in systems implementation and acquisition integration activities.

Operating margin for the third quarter increased to 8.6 percent of consolidated revenue, up from 8.5 percent in the prior-year period. This improvement in operating margin was driven by higher gross margins in the company’s rental operations. The increase in operating margin was offset by the increased bad debt expense, record energy costs and the expenses related to systems implementation activities.

The effective tax rate for the third quarter was 39.9 percent, compared to 25.4 percent in the year-earlier period. The prior-year third quarter tax rate was lower than normal due to reductions in tax reserves that were no longer required.

Balance Sheet and Cash Flow Statement Review

The company’s balance sheet remains strong. As of March 29, 2008, the company had total borrowings of $289.3 million and a total debt to total capitalization ratio of 33.9 percent. Total stockholders’ equity at the end of the third quarter was $563.9 million.

Cash provided by operating activities for the nine months ended March 29, 2008 increased to $73.0 million, up 42.6 percent from the prior-year period. Cash provided from operating activities increased compared to the prior-year period due to stronger earnings, higher depreciation and amortization levels and a lower net working capital investment. Cash used for property, plant and equipment during the nine month period totaled $16.6 million, compared to $23.2 million in the prior-year period. Free cash flow, defined as cash flow from operations less capital expenditures, increased to $56.4 million for the first nine months of fiscal 2008, up from $28.0 million in the prior-year period.

As previously disclosed, the company initiated a share repurchase program to purchase up to $100.0 million of the company’s outstanding common stock. During the first nine months of fiscal 2008, the company purchased approximately 1.8 million shares of common stock. Since inception of the share repurchase program, the company has bought back approximately 2.0 million shares, or about 9.4 percent of the total shares outstanding at the beginning of the program, at a cost of approximately $78.6 million.

Outlook

The company expects fiscal 2008 fourth quarter revenue to range from $250.0 million to $253.0 million and earnings per diluted share from $0.50 to $0.54. The revenue guidance includes continued strong new account and route sales, offset by the impact of economic conditions on customer retention and employment levels.

The earnings guidance reflects continued efficiencies gained from revenue growth and productivity improvements from on-going operational initiatives. In addition, the earnings guidance includes continued investment in growth and productivity initiatives, higher energy costs, expenses associated with systems implementation activities and on-going acquisition integration costs. The earnings guidance also reflects an effective tax rate of 39.0 to 40.0 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 May 28, 2008.

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 June 30, 2007.

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 160 processing facilities and branch offices, serving more than 160,000 customers.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
G&K Services, Inc. and Subsidiaries
(Subject to Reclassification)
	For the Three Months Ended				For the Nine Months Ended
	March 29,		March 31,		March 29,		March 31,
(U.S. Dollars, in Thousands, except per share data)	2008		2007		2008		2007
REVENUES
Rental operations	$	233,001	$	211,842	$	691,277	$	628,273
Direct sales		18,140		23,400		58,918		60,861
Total revenues		251,141		235,242		750,195		689,134
OPERATING EXPENSES
Cost of rental operations (a)		148,870		136,951		439,927		403,436
Cost of direct sales (a)		14,367		16,923		43,593		44,579
Selling and administrative		53,770		50,110		160,559		150,031
Depreciation and amortization		12,579		11,326		36,993		33,776
Total operating expenses		229,586		215,310		681,072		631,822
INCOME FROM OPERATIONS		21,555		19,932		69,123		57,312
Interest expense		3,828		3,647		11,776		10,526
INCOME BEFORE INCOME TAXES		17,727		16,285		57,347		46,786
Provision for income taxes		7,080		4,136		21,899		15,801
NET INCOME	$	10,647	$	12,149	$	35,448	$	30,985
Basic weighted average number of shares outstanding		19,621		21,304		20,452		21,227
BASIC EARNINGS PER COMMON SHARE	$	0.54	$	0.57	$	1.73	$	1.46
Diluted weighted average number of shares outstanding		19,742		21,445		20,590		21,394
DILUTED EARNINGS PER COMMON SHARE	$	0.54	$	0.57	$	1.72	$	1.45
Dividends per share	$	0.05	$	0.04	$	0.15	$	0.12
(a)Excludes depreciation and intangible amortization

CONSOLIDATED CONDENSED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
(Subject to Reclassification)
	March 29,		June 30,
	2008		2007
(U.S. dollars, in thousands)
ASSETS
Current Assets
Cash and cash equivalents	$	18,038	$	22,759
Accounts receivable, net		112,754		98,276
Inventories, net		139,073		140,780
Prepaid expenses		20,576		14,912
Total current assets		290,441		276,727
Property, Plant and Equipment, net		253,566		255,996
Other Assets		509,584		459,091
	$	1,053,591	$	991,814
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	27,873	$	21,911
Accrued expenses		80,579		68,927
Deferred income taxes		7,400		6,568
Current maturities of long-term debt		7,837		65,838
Total current liabilities		123,689		163,244
Long-Term Debt, net of Current Maturities		281,474		149,005
Deferred Income Taxes		28,443		34,298
Accrued Income Taxes – Long Term		12,319		-
Other Noncurrent Liabilities		43,749		53,279
Stockholders' Equity		563,917		591,988
	$	1,053,591	$	991,814

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
(Subject to Reclassification)
	For the Nine Months Ended
	March 29,	March 31,
(U.S. dollars, in thousands)	2008	2007
Operating Activities:
Net income	$35,448	$30,985
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation and amortization	36,993	33,776
Other adjustments	1,829	3,340
Changes in current operating items, exclusive of acquisitions	(5,504)	(18,772)
Other assets and liabilities	4,211	1,862
Net cash provided by operating activities	72,977	51,191
Investing Activities:
Property, plant and equipment additions, net	(16,576)	(23,214)
Acquisition of business assets, net	(63,687)	(47,543)
Purchase of investments, net	(2,521)	(2,043)
Net cash used for investing activities	(82,784)	(72,800)
Financing Activities:
Repayments of long-term debt	(7,341)	(7,579)
Proceeds from short-term borrowings, net	81,801	26,446
Cash dividends paid	(3,082)	(2,575)
Sale of common stock	4,220	3,004
Repurchase of common stock shares	(70,735)	-
Net cash provided by financing activities	4,863	19,296
Decrease in Cash and Cash Equivalents	(4,944)	(2,313)
Effect of Exchange Rates on Cash	223	(619)
Cash and Cash Equivalents:
Beginning of period	22,759	19,690
End of period	$18,038	$16,758

CONTACT:
G&K Services, Inc.
Jeffrey L. Wright, 952-912-5500
Senior Vice President and Chief Financial Officer
or
Shayn R. Carlson, 952-912-5500
Director of Investor Relations