Exhibit 99.1
G&K Services Reports Fiscal 2010 Fourth Quarter Results
Company Expands Adjusted Operating Margins by 200 Basis Points;
Continues to Generate Solid Cash Flow and Pay Down Debt
MINNEAPOLIS--(BUSINESS WIRE)--August 17, 2010--G&K Services, Inc. (NASDAQ: GKSR), today reported fourth quarter fiscal 2010 revenue of $220.2 million, which compares to revenue of $218.0 million in the prior-year period. This higher level of revenue resulted from the extra week in our fourth quarter, an accounting change related to certain in-service merchandise items and a stronger Canadian dollar. The extra week accounted for approximately $15.0 million and the accounting change added $6.7 million. These gains in revenue were partially offset by the loss of revenue from continued difficult economic conditions and divestiture activity. The company’s rental revenue, after adjusting for divestiture activity, the accounting change and foreign currency translation, continued to stabilize for the fourth consecutive quarter.
The company reported fourth quarter net earnings of $0.61 per diluted share. This compares to prior-year period earnings of $0.16 per share. The company’s current year fourth quarter included a benefit of $0.23 per diluted share due to an accounting change related to certain in-service inventory items and a gain of $0.02 per diluted share from divestitures and asset sales. The prior-year period included a charge of $0.11 per diluted share related to the company’s leadership transition. Current year fourth quarter adjusted earnings of $0.36 per diluted share, which included an estimated $0.03 per diluted share related to the extra week, increased 33.3 percent compared to adjusted earnings of $0.27 per diluted share in the prior-year period. The increase in earnings was due to lower merchandise expense, production cost efficiencies, reduced administrative spending and increased earnings from specific location profit improvement actions, partially offset by the decline in organic revenue.
“Our fourth quarter performance continues the positive earnings trend driven by our new game plan,” said Douglas A. Milroy, G&K’s chief executive officer. “Our redoubled focus on customer satisfaction, better day-to-day execution, sharpened cost management and improvements in underperforming locations have strengthened our business. We’re particularly pleased with our improved customer retention, increased productivity per employee, significant progress with underperforming locations and strong cash flow. Clearly, our first year of progress substantiates our new game plan.”
Income Statement Review
Fourth quarter revenue from rental operations was $203.5 million, up from $200.7 million in the prior-year period. The company’s rental organic growth rate was negative 6.25 percent, compared to negative 11.5 percent in the prior-year period. The improvement in rental organic growth was driven by improved customer retention and employment levels. Organic growth is calculated using revenue, adjusted for foreign currency exchange rate differences, acquisitions, divestitures, the accounting change and the 53rd week of fiscal 2010. Fourth quarter revenue from direct sales was $16.6 million, compared to $17.3 million in the prior-year period.
Fourth quarter operating margin was 9.8 percent, compared to 3.3 percent in the prior-year period. The current year fourth quarter adjusted operating margin was 6.7 percent when excluding the benefit from the accounting change and net gains from divestiture activity and asset sales. The prior-year period adjusted operating margin was 4.7 percent when excluding the charges from the leadership transition. The 200 basis point expansion in adjusted operating margin resulted from reduced merchandise expense, lower production costs, reduced administrative expenses and the continued specific location profit improvement actions.
Financial Strength
The company’s balance sheet remains strong. As of July 3, 2010, the company had total borrowings of $161.4 million and a debt to capitalization ratio of 25.7 percent. Total shareholders’ equity at the end of the fourth quarter was $466.9 million.
The company continued to generate strong cash flow from operations and has reduced its debt, net of cash, by $66.7 million in the last 12 months. Cash provided by operating activities for the fiscal year ended July 3, 2010 was $72.7 million, driven by continued strong working capital management. In fiscal 2010, the company also generated $21.6 million from the divestiture of business assets. During the fiscal year, free cash flow, defined as cash flow from operations less capital expenditures, was $56.0 million.
Outlook
The company expects first quarter revenue to be down slightly from the prior-year first quarter, after adjusting for divestiture activity. The company also expects first quarter adjusted operating margin to increase modestly as compared to the adjusted operating margin in the prior-year first quarter and be slightly lower than the adjusted operating margin in the company’s fiscal 2010 fourth quarter. The first quarter effective tax rate is expected to increase to approximately 42.0 percent as a result of the expiration of stock options. In addition, the company’s first quarter results will include a benefit from the accounting change of approximately $4.0 million.
Conference Call Information
The company will host a conference call today at 10:00 a.m. (CDT) to discuss its financial results and outlook. The call will be webcast and is available on the Investor Relations section of the company’s website at www.gkservices.com (click on webcast icon and follow the instructions). A replay of the call will be available on the company’s website through September 17, 2010.
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, 2009.
About G&K Services, Inc.
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. Headquartered in Minneapolis, Minnesota, G&K Services employs nearly 7,500 employees serving approximately 165,000 customers from over 160 facilities in North America and Europe. G&K Services is a publicly held company traded over the NASDAQ Global Select Market under the symbol GKSR and is a component of the Standard & Poor’s SmallCap 600 Index. For more information on G&K Services, visit the company’s website at www.gkservices.com.
Comparison 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, which exclude non-cash impairment and certain other charges, may provide a more 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 costs 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:
Three Months Ended July 3, 2010 | Three Months Ended June 27, 2009 | |||||||||||||||||||||||||
Operating | Net | Earnings | Operating | Net | Earnings | |||||||||||||||||||||
(U.S. Dollars, in thousands, except per share data) | Income | Income | Per Share | Income | Income | Per Share | ||||||||||||||||||||
As Reported | $ | 21,543 | $ | 11,141 | $ | 0.61 | $ | 7,289 | $ | 2,843 | $ | 0.16 | ||||||||||||||
Add: Leadership transition changes | - | - | - | 2,986 | 2,019 | 0.11 | ||||||||||||||||||||
Less: Change in accounting | (6,651 | ) | (4,199 | ) | (0.23 | ) | - | - | - | |||||||||||||||||
Less: Divestitures of business assets | (578 | ) | (357 | ) | (0.02 | ) | - | - | - | |||||||||||||||||
As Adjusted | $ | 14,314 | $ | 6,585 | $ | 0.36 | $ | 10,275 | $ | 4,862 | $ | 0.27 | ||||||||||||||
Twelve Months Ended July 3, 2010 | Twelve Months Ended June 27, 2009 | |||||||||||||||||||||||||
Operating | Net | Earnings | Operating | Net | Earnings | |||||||||||||||||||||
(U.S. Dollars, in thousands, except per share data) | Income | Income | Per Share | Income | Income | Per Share | ||||||||||||||||||||
As Reported | $ | 59,621 | $ | 28,612 | $ | 1.56 | $ | (76,043 | ) | $ | (72,464 | ) | $ | (3.94 | ) | |||||||||||
Add: Goodwill and other impairment charges | - | - | - | 126,719 | 94,358 | 5.13 | ||||||||||||||||||||
Add: Cost reduction activities and reserves for certain matters | 1,114 | 688 | 0.04 | 10,358 | 7,838 | 0.43 | ||||||||||||||||||||
Add: Leadership transition changes | 2,986 | 2,019 | 0.11 | |||||||||||||||||||||||
Less: Change in accounting | (6,651 | ) | (4,199 | ) | (0.23 | ) | - | - | - | |||||||||||||||||
Less: Divestitures of business assets | (5,118 | ) | (3,836 | ) | (0.21 | ) | - | - | - | |||||||||||||||||
As Adjusted | $ | 48,966 | $ | 21,265 | $ | 1.16 | $ | 64,020 | $ | 31,751 | $ | 1.73 | ||||||||||||||
These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, generally accepted accounting principles 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.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS | ||||||||||||||
G&K Services, Inc. and Subsidiaries | ||||||||||||||
(Subject to Reclassification) | ||||||||||||||
For the Three Months Ended | For the Twelve Months Ended | |||||||||||||
July 3, | June 27, | July 3, | June 27, | |||||||||||
(U.S. Dollars, in thousands, except per share | 2010 | 2009 | 2010 | 2009 | ||||||||||
data) | ||||||||||||||
Revenues | ||||||||||||||
Rental operations | $ | 203,512 | $ | 200,710 | $ | 776,098 | $ | 860,921 | ||||||
Direct sales | 16,643 | 17,274 | 57,494 | 75,044 | ||||||||||
Total revenues | 220,155 | 217,984 | 833,592 | 935,965 | ||||||||||
Operating Expenses | ||||||||||||||
Cost of rental operations | 136,805 | 142,612 | 539,711 | 603,524 | ||||||||||
Cost of direct sales | 12,300 | 12,828 | 42,555 | 55,650 | ||||||||||
Selling and administrative | 49,507 | 55,255 | 191,705 | 226,115 | ||||||||||
Goodwill and other impairment charges | - | - | - | 126,719 | ||||||||||
Total operating expenses | 198,612 | 210,695 | 773,971 | 1,012,008 | ||||||||||
Income/(Loss) from Operations | 21,543 | 7,289 | 59,621 | (76,043 | ) | |||||||||
Interest expense | 3,174 | 3,315 | 13,849 | 13,996 | ||||||||||
Income/(Loss) before Income Taxes | 18,369 | 3,974 | 45,772 | (90,039 | ) | |||||||||
Provision for income taxes | 7,228 | 1,131 | 17,160 | (17,575 | ) | |||||||||
Net Income/(Loss) | $ | 11,141 | $ | 2,843 | $ | 28,612 | $ | (72,464 | ) | |||||
Basic weighted average number | ||||||||||||||
of shares outstanding | 18,307 | 18,216 | 18,299 | 18,389 | ||||||||||
Basic Earnings per Common Share | $ | 0.61 | $ | 0.16 | $ | 1.56 | $ | (3.94 | ) | |||||
Diluted weighted average number | ||||||||||||||
of shares outstanding | 18,386 | 18,216 | 18,348 | 18,389 | ||||||||||
Diluted Earnings per Common Share | $ | 0.61 | $ | 0.16 | $ | 1.56 | $ | (3.94 | ) | |||||
Dividends per share | $ | 0.075 | $ | 0.070 | $ | 0.300 | $ | 0.280 | ||||||
CONSOLIDATED CONDENSED BALANCE SHEETS | |||||||||||||||
G&K Services, Inc. and Subsidiaries | |||||||||||||||
(Subject to Reclassification) | |||||||||||||||
July 3, | June 27, | ||||||||||||||
2010 | 2009 | ||||||||||||||
(U.S. Dollars, in thousands) |
| ||||||||||||||
ASSETS | |||||||||||||||
Current Assets | |||||||||||||||
Cash and cash equivalents | $ | 8,774 | $ | 13,136 | |||||||||||
Accounts receivable, net | 82,754 | 85,209 | |||||||||||||
Inventories, net | 126,325 | 141,616 | |||||||||||||
Other current assets | 21,279 | 21,241 | |||||||||||||
Total current assets | 239,132 | 261,202 | |||||||||||||
Property, Plant and Equipment, net | 194,988 | 216,736 | |||||||||||||
Goodwill | 323,055 | 319,942 | |||||||||||||
Other Assets | 56,693 | 59,412 | |||||||||||||
Total assets | $ | 813,868 | $ | 857,292 | |||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||
Current Liabilities | |||||||||||||||
Accounts payable | $ | 25,944 | $ | 29,134 | |||||||||||
Accrued expenses | 71,478 | 85,134 | |||||||||||||
Deferred income taxes | 3,557 | 3,414 | |||||||||||||
Current maturities of long-term debt | 1,023 | 7,744 | |||||||||||||
Total current liabilities | 102,002 | 125,426 | |||||||||||||
Long-Term Debt, net of Current Maturities | 160,398 | 224,781 | |||||||||||||
Deferred Income Taxes | 1,242 | 1,893 | |||||||||||||
Accrued Income Taxes – Long Term | 10,113 | 12,016 | |||||||||||||
Other Noncurrent Liabilities | 73,217 | 55,820 | |||||||||||||
Stockholders' Equity | 466,896 | 437,356 | |||||||||||||
Total liabilities and stockholders’ equity | $ | 813,868 | $ | 857,292 | |||||||||||
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS | ||||||||
G&K Services, Inc. and Subsidiaries | ||||||||
(Subject to Reclassification) | ||||||||
For the Twelve Months Ended | ||||||||
July 3, | June 27, | |||||||
(U.S. Dollars, in thousands) | 2010 | 2009 | ||||||
Operating Activities: | ||||||||
Net income/(loss) | $ | 28,612 | $ | (72,464 | ) | |||
Adjustments to reconcile net income/(loss) to net cash | ||||||||
provided by operating activities - | ||||||||
Depreciation and amortization | 40,188 | 44,252 | ||||||
Goodwill and other impairment charges | - | 126,719 | ||||||
Deferred income taxes | (1,824 | ) | (34,999 | ) | ||||
Other adjustments | (636 | ) | 7,856 | |||||
Changes in current operating items | 9,952 | 29,038 | ||||||
Other assets and liabilities | (3,582 | ) | 2,778 | |||||
Net cash provided by operating activities | 72,710 | 103,180 | ||||||
Investing Activities: | ||||||||
Property, plant and equipment additions, net | (16,710 | ) | (23,330 | ) | ||||
Divestitures of business assets, net | 21,620 | - | ||||||
Net cash provided by/(used for) investing activities | 4,910 | (23,330 | ) | |||||
Financing Activities: | ||||||||
Payments of long-term debt | (7,535 | ) | (7,740 | ) | ||||
Payments of revolving credit facilities, net | (68,710 | ) | (48,500 | ) | ||||
Cash dividends paid | (5,579 | ) | (5,213 | ) | ||||
Net issuance of common stock, primarily under stock option plans | 384 | 210 | ||||||
Purchase of common stock | (395 | ) | (17,047 | ) | ||||
Net cash used for financing activities | (81,835 | ) | (78,290 | ) | ||||
(Decrease)/Increase in Cash and Cash Equivalents | (4,215 | ) | 1,560 | |||||
Effect of Exchange Rates on Cash | (147 | ) | (1,075 | ) | ||||
Cash and Cash Equivalents: | ||||||||
Beginning of period | 13,136 | 12,651 | ||||||
End of period | $ | 8,774 | $ | 13,136 | ||||
CONTACT:
G&K Services, Inc.
Jeffrey L. Wright, 952-912-5500
Executive Vice President and Chief Financial Officer
or
Shayn R. Carlson, 952-912-5500
Director of Investor Relations