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 27, 1999 Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0449530
- -------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5995 OPUS PARKWAY, SUITE 500
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices and zip code)
(612) 912-5500
(Registrant's telephone number, including zip 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 X 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 Outstanding May 6, 1999
Common Stock, par value $.50 per share 19,043,395
CLASS B Outstanding May 6, 1999
Common Stock, par value $.50 per share 1,474,996
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
G & K SERVICES, INC. AND SUBSIDIARIES
March 27,
1999 June 27,
ASSETS (In thousands, except share data) (Unaudited) 1998
- -----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 5,643 $ 11,975
Accounts receivable, less allowance for doubtful
accounts of $3,335 and $2,392 59,954 56,933
Inventories 82,366 77,210
Prepaid expenses 6,163 7,295
- -----------------------------------------------------------------------------------------------------------------
Total current assets 154,126 153,413
- -----------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 25,844 25,801
Buildings and improvements 91,265 89,683
Machinery and equipment 177,442 154,048
Automobiles and trucks 38,246 36,531
Less accumulated depreciation (135,654) (118,378)
- -----------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 197,143 187,685
- -----------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net 128,242 131,899
Restrictive covenants and customer lists, net 38,893 42,310
Other, principally retirement plan assets 13,995 16,535
- -----------------------------------------------------------------------------------------------------------------
Total other assets 181,130 190,744
- -----------------------------------------------------------------------------------------------------------------
$ 532,399 $ 531,842
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 15,300 $ 16,103
Accrued expenses
Salaries and employee benefits 18,802 18,077
Other 15,724 17,849
Deferred income taxes 12,948 13,036
Current maturities of long-term debt 30,000 15,000
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 92,774 80,065
LONG-TERM DEBT, LESS CURRENT MATURITIES 196,905 234,843
DEFERRED INCOME TAXES 9,308 9,483
OTHER NONCURRENT LIABILITIES 10,252 9,331
- -----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 19,043,291
and 19,011,952 shares issued and outstanding 9,522 9,506
Class B, 10,000,000 shares authorized, 1,474,996
and 1,474,996 shares issued and outstanding 738 738
Additional paid-in capital 24,648 23,644
Retained earnings 200,930 174,660
Deferred compensation (2,495) (1,973)
Accumulated other comprehensive income (10,183) (8,455)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 223,160 198,120
- -----------------------------------------------------------------------------------------------------------------
$ 532,399 $ 531,842
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements
2
CONSOLIDATED STATEMENTS OF INCOME
G & K SERVICES, INC. AND SUBSIDIARIES
(Unaudited)
For the Three Months Ended For the Nine Months Ended
- -------------------------------------------------------------------------------------------------
March 27, March 28, March 27, March 28,
(In thousands, except per share data) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
REVENUES
Rental operations $ 126,569 $ 123,015 $ 374,388 $ 360,309
Direct sales 4,578 4,456 12,746 13,849
- -------------------------------------------------------------------------------------------------
Total revenues 131,147 127,471 387,134 374,158
- -------------------------------------------------------------------------------------------------
EXPENSES
Cost of rental operations 71,531 71,882 210,833 209,059
Cost of direct sales 3,256 3,224 8,830 9,934
Selling and administrative 28,037 25,145 83,144 75,530
Depreciation 7,010 6,871 20,051 19,308
Amortization of intangibles 2,142 2,305 6,424 7,104
- -------------------------------------------------------------------------------------------------
Total operating expenses 111,976 109,427 329,282 320,935
- -------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 19,171 18,044 57,852 53,223
Interest expense 4,180 5,418 13,201 16,299
Other income, net (581) (500) (521) (1,292)
- -------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 15,572 13,126 45,172 38,216
Provision for income taxes 6,151 5,155 17,826 15,013
- -------------------------------------------------------------------------------------------------
NET INCOME $ 9,421 $ 7,971 $ 27,346 $ 23,203
- -------------------------------------------------------------------------------------------------
Basic Weighted Average Number
of Shares Outstanding 20,412 20,367 20,407 20,367
BASIC EARNINGS PER COMMON SHARE $ 0.46 $ 0.39 $ 1.34 $ 1.14
- -------------------------------------------------------------------------------------------------
Diluted Weighted Average Number
of Shares Outstanding 20,527 20,446 20,512 20,439
DILUTED EARNINGS PER COMMON SHARE $ 0.46 $ 0.39 $ 1.33 $ 1.14
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
G & K SERVICES, INC. AND SUBSIDIARIES
(Unaudited)
For the Three Months Ended For the Nine Months Ended
--------------------------- -------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $ 9,421 $ 7,971 $ 27,346 $ 23,203
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 9,152 9,176 26,475 26,412
Deferred income taxes 27 463 (263) (320)
Changes in current operating items-
Inventories (2,411) (74) (5,383) (4,687)
Accounts receivable and prepaid expenses 1,620 9,789 (1,934) (6,067)
Accounts payable and other current liabilities (4,671) (2,359) (1,707) 15,841
Other, net 317 410 1,421 6,532
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,455 25,376 45,955 60,914
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Property, plant and equipment additions, net (9,009) (11,065) (30,075) (28,996)
Business acquisitions -- (1,285) (155) (281,842)
Net proceeds from sale of assets 2,074 2,433 2,074 2,433
Sales/maturities of investments (208) 9 (567) (403)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (7,143) (9,908) (28,723) (308,808)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from debt financing 11,670 9,583 15,598 366,931
Repayments of debt financing (22,055) (25,479) (38,102) (115,893)
Cash dividends paid (359) (359) (1,076) (1,075)
Sale of common stock 12 98 16 100
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (10,732) (16,157) (23,564) 250,063
- ----------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,420) (689) (6,332) 2,169
CASH AND CASH EQUIVALENTS:
Beginning of period 10,063 9,844 11,975 6,986
- ----------------------------------------------------------------------------------------------------------------------
End of period $ 5,643 $ 9,155 $ 5,643 $ 9,155
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for -
Interest $ 3,985 $ 7,030 $ 12,315 $ 16,907
- ----------------------------------------------------------------------------------------------------------------------
Income taxes $ 5,175 $ 3,474 $ 20,883 $ 12,349
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
4
G&K SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data.)
Three and nine month periods ended March 27, 1999 and March 28, 1998
(Unaudited)
The consolidated financial statements included herein, except for the
June 27, 1998 balance sheet which was extracted from the audited financial
statements of June 27, 1998, 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 financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of March 27, 1999, and June 27,
1998, and the results of operations and the changes in financial position
for the three and nine month periods ended March 27, 1999 and March 28,
1998. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles 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 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 27, 1999, and March 28, 1998, 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 full service uniform rental provider,
including the rental of cleanroom garments. The Company also provides
rental of non-uniform items such as floormats, dustmops and cloths, wiping
towels and selected linen items. In addition, the Company manufactures
uniforms for rental customers as well as uniforms for direct sale.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly
owned. Significant intercompany balances and transactions have been
eliminated in consolidation.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the
management of its interest rate exposure. Amounts to be paid or received
under interest rate swap agreements are accrued as interest rates change
and are recognized over the life of the swap agreements as an adjustment to
interest expense. The related amounts payable to, or receivable from, the
counter-parties are included in other accrued expenses. The fair value of
the swap agreements is not recognized in the consolidated financial
statements, since they are accounted for as hedges.
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
5
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
---------------------------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
---------------------------------------------
Weighted average number of common
shares outstanding 20,412 20,367 20,407 20,367
---------------------------------------------
Shares used in computation of
basic earnings per share 20,412 20,367 20,407 20,367
Weighted average effect of non-vested
restricted stock grants 39 48 37 41
Weighted average common shares
issuable upon the exercise of
stock options 76 31 68 31
---------------------------------------------
Shares used in computation of
diluted earnings per share 20,527 20,446 20,512 20,439
---------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," will be effective for fiscal years beginning after December
15, 1997. SFAS No. 131 requires disclosure of business and geographic
segments in the consolidated financial statements of the Company. The
Company will adopt SFAS No. 131 in fiscal 1999 and is currently analyzing
the impact it will have on the disclosures in its financial statements.
DERIVATIVES
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," will be effective for fiscal years beginning after June 15,
1998. The statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet
as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. The
Company is in the process of quantifying the impact of SFAS No. 133 on the
consolidated financial statements. However, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
2. ACQUISITION OF CERTAIN NATIONAL LINEN SERVICE ASSETS
On July 14, 1997, the Company purchased the uniform rental assets and
selected linen rental assets of National Linen Service (NLS) for
approximately $283,400 in cash. The acquisition was accounted for using
the purchase method and the purchase price was allocated to the acquired
assets and assumed liabilities based on the fair values of the assets
purchased and the liabilities assumed. The purchase price and related
acquisition costs exceeded the fair values assigned to tangible assets by
approximately $160,600, which was assigned to restrictive covenants
($1,100) to be amortized over the contract life of five years, purchased
customer list ($41,600) to be amortized over eleven years and goodwill
($117,900) to be amortized over thirty-five years.
6
In connection with the asset purchase from NLS, nine of the purchased
linen rental facilities were identified as assets held for sale. The net
cash flows from (i) operations of these facilities from the date of
acquisition until the date of sale (holding period, not to exceed one
year), (ii) interest on incremental debt incurred during the holding period
to finance the purchase of these facilities, and (iii) proceeds from the
sale were considered in the allocation of the purchase price to the
acquired assets and liabilities. Accordingly, earnings or losses from these
nine facilities have been excluded from the consolidated statement of
income. For the three month period ended March 28, 1998, losses excluded
from the Company's consolidated statement of income totaled $412, including
allocated interest expense of $1,103. For the nine month period ended March
28, 1998, losses excluded from the Company's consolidated statement of
income totaled $169, including allocated interest expense of $3,134.
The pro forma results of operations for the three and nine month
periods ended March 27, 1999 and March 28, 1998 are not materially
different from the actual results of operations.
3. COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 requires the Company to
report and display comprehensive income and its components. For the three
and nine month periods ended March 27, 1999 and March 28, 1998, the
components of comprehensive income were as follows:
Three Months Ended Nine Months Ended
(In thousands) (In thousands)
------------------------------------------------
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
------------------------------------------------
Net income $ 9,421 $7,971 $ 27,346 $ 23,203
Other comprehensive income, net of tax
Foreign currency translation adjustments 1,296 655 (1,986) (1,437)
Unrealized gain (loss) on investments 55 129 258 93
held for sale
------------------------------------------------
Comprehensive income $10,772 $8,755 $ 25,618 $ 21,859
------------------------------------------------
4. DEBT
The Company maintains a $425,000 term loan and revolving credit
facility. On December 30, 1998 the credit facility was amended to revise
certain restricted covenants. Under the amended credit facility, the
Company is required to maintain a minimum interest coverage ratio, minimum
stockholders' equity and a maximum leverage ratio, all as defined. The
credit facility also limits additional indebtedness, investments, capital
expenditures and cash dividends. As of March 27, 1999, the Company was in
compliance with all debt covenants. On March 18, 1999 the Company received
a full release of collateral based on the Company having met certain
financial covenants.
5. SALE OF ASSETS
On March 27, 1999, the Company sold selected linen assets for
approximately $2,100 in cash. These assets, including original purchase
goodwill, had a book value of approximately $2,000. This transaction
completes the sale of the nine linen facilities acquired from NLS that were
held for sale.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The percentage relationships to net sales of certain income and expense
items for the three and nine month periods ended March 27, 1999 and March 28,
1998, and the percentage changes in these income and expense items between
periods are contained in the following table:
THREE MONTHS NINE MONTHS PERCENTAGE
ENDED ENDED CHANGE
----------------------------------------------------- --------------------------------
Three Months Nine Months
March 27, March 28, March 27, March 28, FY 1999 FY 1999
1999 1998 1999 1998 vs. FY 1998 vs. FY 1998
----------------------------------------------------- --------------------------------
Revenues:
Rental 96.5% 96.5% 96.7% 96.3% 2.9% 3.9%
Direct 3.5 3.5 3.3 3.7 2.7 (8.0)
------------------------------------------------------
Total Revenues 100.0 100.0 100.0 100.0 2.9 3.5
Expenses:
Cost of Rental Sales 56.5 58.4 56.3 58.0 (0.5) 0.8
Cost of Direct Sales 71.1 72.4 69.3 71.7 1.0 (11.1)
------------------------------------------------------
Total Cost of Sales 57.0 58.9 56.7 58.5 (0.4) 0.3
Selling and Administrative 21.4 19.7 21.5 20.2 11.5 10.1
Depreciation 5.3 5.4 5.2 5.2 2.0 3.8
Amortization of Intangibles 1.7 1.8 1.7 1.9 (7.1) (9.6)
------------------------------------------------------
Income from Operations 14.6 14.2 14.9 14.2 6.2 8.7
Interest Expense 3.2 4.3 3.4 4.3 (22.8) (19.0)
Other (Income) Expense, net (0.5) (0.4) (0.2) (0.3) 16.2 (59.7)
------------------------------------------------------
Income Before Income Taxes 11.9 10.3 11.7 10.2 18.6 18.2
Provision for Income Taxes 4.7 4.0 4.6 4.0 19.3 18.7
------------------------------------------------------
Net Income 7.2% 6.3% 7.1% 6.2% 18.2% 17.9%
------------------------------------------------------
Total revenues for the third quarter of fiscal 1999 increased 2.9% to
$131.1 million from $127.5 million in the third quarter of fiscal 1998 and
increased 3.5% to $387.1 million for the first nine months of fiscal 1999 from
$374.2 million in the same period of fiscal 1998. The first quarter of fiscal
1998 included only eleven weeks of revenues from assets acquired from NLS on
July 14, 1997, including three industrial locations that were later sold in the
fourth quarter of fiscal 1998. Adjusting for these two transactions, total
revenue growth for the third quarter of fiscal 1999 was 5.3% and 4.7% for the
first nine months of fiscal 1999.
Rental revenue growth for the third quarter accounted for $3.6 million, or
a 2.9% increase and for the first nine months it accounted for $14.1 million, or
a 3.9% increase. U.S. rental revenues increased 5.4% (adjusted for the timing
of the NLS asset purchase and the sale of three industrial locations) and
Canadian rental revenues in U.S. dollars increased 5.0% for the third quarter
and increased 5.5% and 2.3% respectively, for the first nine months. The growth
in rental revenue, which is below historical growth patterns, was influenced by
several factors, including lower growth rates in the southeastern part of the
U.S. that were impacted by continuing NLS acquisition integration activities, a
sharp downturn in the semi-conductor industry and a decline in the value of the
Canadian dollar.
Total direct sales to outside customers increased 2.7% to $4.6 million for
the third quarter of fiscal 1999 compared to $4.5 million in the same period of
fiscal 1998 and decreased 8.0% to $12.7 million for the first nine months of
fiscal 1999 from $13.8 million in the same period of fiscal 1998. This decrease
is primarily the result of
8
shifting garment manufacturing capacity from sales to external customers to
internal use by the Company for rental customers. Cost of direct sales, as a
percentage of direct sales, decreased to 71.1% for the third quarter of
fiscal 1999 from 72.4% in the same period of fiscal 1998 and decreased to
69.3% for the first nine months of fiscal 1999 from 71.7% for the same period
of fiscal 1998.
Cost of rental operations decreased 0.5% to $71.5 million for the third
quarter of fiscal 1999 from $71.9 million in the same period of fiscal 1998 and
rose 0.8% to $210.8 million for the first nine months of fiscal 1999 from $209.1
million in the same period of fiscal 1998. As a percentage of rental revenues,
these costs decreased to 56.5% for the third quarter of fiscal 1999 from 58.4%
in the same period of fiscal 1998 and decreased to 56.3% for the first nine
months of fiscal 1999 from 58.0% in the same period of fiscal 1998. The Company
attributes this decrease as a percent of revenue to improvements in all
components of rental operations (merchandise, production and delivery costs),
primarily at locations acquired in the NLS transaction.
Selling and administrative expenses increased 11.5% to $28.0 million in the
third quarter of fiscal 1999 from $25.1 million in the same period of fiscal
1998 and increased 10.1% to $83.1 million for the first nine months of fiscal
1999 from $75.5 million in the same period of fiscal 1998. As a percentage of
revenues, selling and administrative expenses increased to 21.4% in the third
quarter of fiscal 1999 from 19.7% in the same period of fiscal 1998 and
increased to 21.5% in the nine month period of fiscal 1999 from 20.2% in the
same period of fiscal 1998. The increase as a percent of revenue is due to
several factors, including higher selling expenses in the locations acquired in
fiscal 1998, increased information technology costs, expenses associated with
Year 2000 readiness, additions to corporate senior management and other
corporate initiatives.
Depreciation expense increased 2.0% to $7.0 million in the third quarter of
fiscal 1999 from $6.9 million in the same period of fiscal 1998 and increased
3.8% to $20.1 million for the first nine months of fiscal 1999 from $19.3
million in the same period of fiscal 1998. As a percentage of revenues,
depreciation expense decreased to 5.3% in the third quarter of fiscal 1999 from
5.4% in the same period of fiscal 1998 and remained constant at 5.2% for the
nine month period of fiscal 1999 compared to 5.2% for the same period in fiscal
1998. Capital expenditures, excluding acquisition of businesses, were $9.0
million in the third quarter of fiscal 1999 compared to $11.1 million in the
prior year's quarter, and for the nine month period they were $30.1 million
compared to $29.0 million in the prior year.
Amortization expense decreased 7.1% to $2.1 million in the third quarter of
fiscal 1999 from $2.3 million in the third quarter of fiscal 1998 and decreased
9.6% to $6.4 million in the first nine months of fiscal 1999 from $7.1 million
in the same period of fiscal 1998. This decrease is attributable to the sale of
acquired industrial facilities and the related intangible assets during the
third and fourth quarters of fiscal 1998.
Income from operations increased 6.2% to $19.2 million in the third quarter
of fiscal 1999 from $18.0 million in the same period of fiscal 1998 and
increased 8.7% to $57.9 million for the first nine months of fiscal 1999 from
$53.2 million in the same period of fiscal 1998. Operating margins increased to
14.6% for the third quarter of fiscal 1999 from 14.2% in the same period of
fiscal 1998 and increased to 14.9% for the nine month period of fiscal 1999 from
14.2% in the same period of fiscal 1998. U.S. operating margins increased to
12.8% for the third quarter of fiscal 1999 from 12.7% in the same period of
fiscal 1998 and increased to 13.2% for the nine month period of fiscal 1999 from
12.7% in the same period of fiscal 1998.
Interest expense was $4.2 million for the third quarter of fiscal 1999,
down from $5.4 million in the same period of fiscal 1998 and was $13.2 million
for the first nine months of fiscal 1999, down from $16.3 million in the same
period of fiscal 1998. The Company's effective tax rate increased to 39.5% in
the third quarter of fiscal 1999 from 39.3% in the same period of fiscal 1998
and it increased to 39.5% in the nine month period of fiscal 1999 from 39.3% in
the same period of fiscal 1998.
Net income rose 18.2% to $9.4 million in the third quarter of fiscal 1999
from $8.0 million in the same period of fiscal 1998 and rose 17.9% to $27.3
million in the first nine months of fiscal 1999 from $23.2 million in the first
nine months of fiscal 1998. Basic and diluted earnings per share for the third
quarter of fiscal 1999 were $.46 per share compared with $.39 for third quarter
of fiscal 1998. Basic and diluted earnings per share for the first nine months
of 1999 increased to $1.34 and $1.33 respectively from $1.14 for the first nine
months of fiscal 1998.
9
Net income margins increased to 7.2% for the third quarter of fiscal 1999
compared with 6.3% in the third quarter of fiscal 1998 and increased to 7.1%
for the nine month period of fiscal 1999 compared with 6.2% in the nine month
period of fiscal 1998.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $13.5 million in the third quarter
of fiscal 1999 and $25.4 million in the same period of fiscal 1998. Cash flow
from operating activities was $46.0 million in the nine month period of fiscal
1999 and $60.9 million in the same period of fiscal 1998. The fiscal 1999
decrease resulted from increases in inventories and decreases in accounts
payable, partially offset by increases in net income and decreases in accounts
receivable when compared to the third quarter of 1998. Working capital at March
27, 1999 was $61.4 million, down 16.4% from $73.3 million at June 27, 1998.
Cash used in investing activities was $7.1 million in the third quarter of
fiscal 1999 and $9.9 million in the third quarter of fiscal 1998. Cash used in
investing activities was $28.7 million in the nine month period of fiscal 1999
and $308.8 million in the same period of fiscal 1998. The decrease is primarily
due to the acquisition of the NLS assets in the first quarter of fiscal 1998.
Cash used for financing activities was $10.7 million in the third quarter
of fiscal 1999 and $16.2 million in the same period of fiscal 1998. Cash used
for financing activities was $23.6 million in the nine month period of fiscal
1999 and cash provided by financing activities was $250.1 million in the same
period of fiscal 1998. $355.8 million of cash was obtained by issuing debt
primarily for the acquisition of selected assets of NLS in the first quarter of
fiscal 1998. The Company's ratio of debt to total capitalization decreased to
50.4% at the end of the third quarter of fiscal 1999 from 55.8% at June 27,
1998.
Stockholders' equity grew 12.6% to $223.2 million at March 27, 1999,
compared with $198.1 million at the end of fiscal 1998. G&K's return on average
equity increased to 13.0% in the nine month period of fiscal 1999 compared with
12.9% for the same period of fiscal 1998.
Management believes that cash flows generated from operations and borrowing
capability under its credit facilities should provide adequate funding for its
current businesses and planned expansion of operations or any future
acquisitions.
YEAR 2000 READINESS DISCLOSURE
The Company utilizes both information technology ("IT") and non-IT systems
and assets throughout its U.S. and Canadian operations that will be affected by
the date change in the year 2000. The Company began an extensive review of its
business in January, 1998, to determine whether or not its IT and non-IT systems
and assets were year 2000 ready, as well as the remedial action and related
costs associated with required modifications or replacements. The Company's
goal is to ensure current business operations will continue to function
accurately with minimal disruption through the year end change. The Company is
continuing discussions with its significant suppliers to determine the readiness
of those suppliers to correct year 2000 issues where their systems and products
interface with the Company's systems or otherwise impact its operations. The
Company has assessed the extent to which its operations are vulnerable and has
created contingency plans should those suppliers not succeed to properly prepare
their systems. The Company believes these actions with key suppliers should
minimize the risks. The scope of the year 2000 readiness effort includes (i)
information technology such as software and hardware, (ii) non-information
systems or embedded technology such as micro controllers contained in various
equipment, safety systems, facilities and utilities and (iii) readiness of key
third-party suppliers. The Company has committed resources and leveraged
previous investments in existing technologies in an effort to achieve these
objectives.
10
The Company has a documented process through which all IT and non-IT
systems and assets have been reviewed with reference to year 2000 date issues.
This methodology takes each system and asset through the following lifecycle:
- Awareness - Educate employees about year 2000 issues.
- Assessment - Conduct an inventory and impact analysis of the
business, operations, and systems. Identify priorities and plan.
- Analysis - Analyze the asset(s) to determine the tasks, resources
and duration required to ensure compliance.
- Contingency Planning - Identify alternative solutions to maintain
operational and financial results.
- Conversion - Renovation plan is finalized, approved and
implemented.
- Testing - Approved validation plans are implemented and testing
occurs.
- Rollout - Implementation plan is approved, and tested compliance
solution is fully implemented into production.
The Company's key systems and assets are as follows:
- Financial systems software - SAP financial systems were
implemented and operational as of June 28, 1998. The Company has
completed year 2000 testing and believes the financial systems
are year 2000 ready.
- Revenue recognition system - Renovation and testing of this
internally developed system are complete. Rollout to all
locations will be completed by the end of May 1999.
- Other IT software, hardware and communications - Eighty percent
(80%) of our systems have been evaluated as Year 2000 ready; the
remaining systems await vendor solutions of updated software or
hardware and are scheduled for completion by September 30, 1999.
- Non-IT plant and related equipment - All production equipment has
been verified for Year 2000 readiness.
- Business processes and procedures - All process flows were
analyzed for risk with appropriate contingency plans created.
Ongoing monitoring throughout the remainder of the calendar year
will occur to ensure contingency plans are implemented as
appropriate on a timely basis.
- Third parties - The Company's supply chain was assessed to ensure
all significant vendors will have the ability to meet the
Company's needs. No disclosures of non-compliant suppliers have
been discovered. All appropriate contingency plans are in place.
The Company will not be deferring any other significant IT projects to
address the year 2000 issues. Because the year 2000 issue is of short duration,
the Company has retained experts and advisors to evaluate year 2000 readiness;
assist in analysis, renovation, and contingency planning; and conduct
independent testing when renovations are completed. The Company's core IT staff
will continue to stay focused on the Company's business needs, as well as assist
with year 2000 analysis and renovation.
The Company is implementing proposed solutions and began to incur expenses
during fiscal 1998 to resolve the year 2000 issue. These expenses will continue
through the year 2000. Maintenance or modification costs are expensed as
incurred, while costs of any new software and equipment are being capitalized
over the asset's useful life, consistent with the Company's financial policies.
The Company has spent approximately $3.5 million related to the year 2000
analysis; $2.0 million of these costs were capitalized. The Company has
budgeted $7.3 million of total expenditures for the year 2000 compliance
activities, of which $4.1 million will be capitalized, although there can be no
assurance the year 2000 related expenditures will not be materially higher. The
Company's current estimates of the amount of time and costs necessary to modify
and test its computer systems are based upon assumptions regarding future
events, including the continued availability of certain resources, year 2000
modification plans and other factors. New developments may occur that could
affect the Company's estimates of the amount of time and costs necessary to
modify and test its systems for year 2000 readiness. These developments
include, but are not limited to (i) the availability and cost of personnel
trained in this area, (ii) the ability to locate and correct all relevant
computer codes and equipment and (iii) the year 2000 readiness success that key
suppliers attain.
Contingency plans have been developed for all areas of the business. The
Company used a weighted system to evaluate and determine this level of risk in
each of five areas: Operational, Facility Safety, Financial
11
Management, Legal Implication and Organizational Implication. Where
necessary, the Company is implementing various contingency plans that will
include, but are not limited to, the following:
- Secondary vendors for garments and other significant non-uniform
inventories
- Modifying inventory ordering practices during the year end
transition.
- Manual work-arounds for less critical computerized systems
- Staffing of management response teams during critical date
changes, such as our fiscal year change on June 27, 1999 and the
calendar year change on January 1, 2000.
While the Company has exercised its best efforts to identify and remedy any
potential year 2000 exposures within its control, the largest risks are expected
with utilities in the form of water and power which, to a significant extent,
are beyond the immediate control of the Company. To date, the Company has not
identified any suppliers who will not be year 2000 compliant; however the
Company has developed appropriate contingency plans.
While the Company believes its planning efforts are adequate to address its
year 2000 concerns, the year 2000 readiness of the Company's suppliers and
business partners may lag behind the Company's efforts. Although the Company
does not believe the year 2000 matters discussed above should have a material
impact on its business, financial condition and results of operations, it is
uncertain as to what extent the Company may be affected by such matters.
MARKET RISK SENSITIVITY
The Company uses financial instruments, including fixed and variable rate
debt, as well as 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 27, 1999.
Statements in this document regarding ongoing trends and expectations
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known and
unknown risks, which may cause the Company's actual results in the future to
differ materially from expected results. These risks and uncertainties include,
but are not limited to, those expectations related to the acquisition of assets
from NLS; unforeseen operating risks; the availability of capital to finance
planned growth; competition within the uniform leasing industry; and the effects
of economic conditions.
12
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Form of Change of Control Agreement between Registrant and
each of Richard Fink, Thomas Moberly, Joseph L. Rotunda,
Martin S. Reader, Timothy W. Kuck and Jeffrey L. Wright, dated
February 24, 1999. *
10.2 First Amendment, dated December 30, 1998, to Credit Agreement
dated July 14, 1997, among G&K Services, Inc., Work Wear
Corporation of Canada Ltd., as Borrowers, various banks, and
Norwest Bank Minnesota, National Association, and NBD Bank and
First Chicago NBD Bank, Canada.
10.3 Non-Competition and Confidentiality Agreement between
Registrant and Joseph L. Rotunda dated December 7, 1998. *
10.4 Non-Competition and Confidentiality Agreement between
Registrant and Jeffrey L. Wright dated February 8, 1999. *
27 Financial Data Schedule (for SEC use only)
*Compensatory plan or arrangement
b. Reports on Form 8-K.
None
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
G&K SERVICES, INC.
(Registrant)
Date: May 11, 1999 s/Jeffrey L. Wright
------------------ -------------------------------
Jeffrey L. Wright
Chief Financial Officer
(Principal Financial Officer)
s/Michael F. Woodard
-------------------------------
Michael F. Woodard
Controller
(Principal Accounting Officer)
14
EXHIBIT INDEX
10.1 Form of Change of Control Agreement between Registrant
and each of Richard Fink, Thomas Moberly, Joseph L.
Rotunda, Martin S. Reader, Timothy W. Kuck and Jeffrey
L. Wright, dated February 24, 1999. * 17
10.2 First Amendment, dated December 30, 1998, to Credit
Agreement dated July 14, 1997, among G&K Services,
Inc., Work Wear Corporation of Canada Ltd., as
Borrowers, various banks, and Norwest Bank Minnesota,
National Association, and NBD Bank and First Chicago
NBD Bank, Canada. 19
10.3 Non-Competition and Confidentiality Agreement between
Registrant and Joseph L. Rotunda dated December 7,
1998. * 27
10.4 Non-Competition and Confidentiality Agreement between
Registrant and Jeffrey L. Wright dated February 8,
1999. * 31
27 Financial Data Schedule (for SEC use only)
*Compensatory plan or arrangement
15