Exhibit 99.1
G&K Services Reports Fiscal 2006 Second Quarter Results
MINNEAPOLIS--(BUSINESS WIRE)--Jan. 31, 2006--
Revenue and earnings exceed expectations;
Organic rental revenue growth continues to improve
G&K Services, Inc. (Nasdaq:GKSR), today reported record revenue for the
second quarter ended December 31, 2005 of $219.3 million, up 12.4 percent over
$195.1 million reported in the second fiscal quarter last year. Revenue exceeded
expectations due to continued improvement in organic rental growth and strong
direct sales.
Earnings per diluted share totaled $0.48 for the quarter, a 6.7 percent
increase compared to $0.45 during the prior-year quarter. Second quarter
earnings also exceeded expectations despite the impact of the hurricanes, higher
energy costs, strategic investments and the initial selling costs and
merchandise expense associated with accelerated new account growth.
Earnings for both quarters reflect the requirement to expense stock options
under SFAS 123(r) "Accounting for Stock-Based Compensation." Under this
standard, G&K has elected to use the modified retrospective method for
transition. As a result, prior-year financial statements have been adjusted
accordingly.
"We continue to be pleased with the momentum we've created in our organic
rental growth over the last six quarters," said Richard Marcantonio, G&K's
chairman and chief executive officer. "During the second quarter, we recorded
the highest level of new sales in the history of the company, a strong testament
to the execution of our strategy. We'll continue to make strategic investments
to further improve revenue and earnings growth."
For the six months ended December 31, 2005, revenue was $427.3 million
compared to $377.6 million during the prior-year period, an increase of 13.2
percent. Earnings per diluted share were $0.97, up over 10 percent compared to
$0.88 during the same period last year.
"Successfully delivering solid financial performance during the first half
of fiscal 2006 is a significant accomplishment," Marcantonio said. "Our focus on
the fundamentals of the business continues to generate positive returns and has
helped to offset margin pressures from cost increases and growth investments."
Income Statement Review
Second quarter revenue from G&K's rental business increased to $199.4
million, up 8.9 percent over the prior-year period. The company's organic
industrial rental growth rate was approximately 3.5 percent. This continued
improvement in organic rental growth is 450 basis points higher than the
prior-year period. Direct sale revenue increased to $20.0 million, up 66.3
percent over the prior-year quarter and up approximately 6.5 percent on an
organic basis. The growth of direct sale revenue for the quarter was driven by
record sales from the company's annual outerwear promotion and revenue from Lion
Uniform Group which was acquired during the second quarter of fiscal 2005. The
organic growth rates are calculated using industrial rental and direct sale
revenue, respectively, adjusted for foreign currency exchange rate differences
and revenue from newly acquired locations compared to prior-period results.
Gross margin from rental operations for the quarter was 36.0 percent
compared to 36.4 percent in the prior-year period. Gross margin for the quarter
declined due to higher energy costs, costs associated with new customer growth
and the impact of the hurricanes, offset by higher pricing and productivity
improvements. Gross margin from direct sales was 29.2 percent compared to 29.8
percent in the prior-year period.
Selling, general and administrative expenses were 21.8 percent of
consolidated revenue for the quarter, up from 21.5 percent in the year-earlier
period. Selling, general and administrative expenses were up over the prior-year
period due to the company's investment in growth oriented initiatives,
additional expenses related to acquired businesses and selling expenses
associated with new account growth.
The effective tax rate for the second quarter declined to 34.9 percent from
37.2 percent in the year-earlier period due to reductions of taxes previously
provided and a favorable mix of income earned in various taxing jurisdictions,
including foreign operations, with different tax rates.
Balance Sheet and Cash Flow Statement Review
The company's balance sheet remains strong. As of December 31, 2005, the
company had cash of $14.1 million and a total debt to total capitalization ratio
of 31.8 percent. Total stockholders' equity increased to $511.9 million.
Cash provided by operating activities was $24.1 million for the six month
period ending December 31, 2005 compared to $29.7 million in the same period
last year. Cash provided from operating activities was down compared to the
prior-year period due to the working capital needed to support organic growth.
Cash used for property, plant and equipment during the six month period totaled
$16.5 million compared to $4.1 million in the six month period from the prior
year. The prior year six month period included proceeds from the sale of
selected plant assets.
Outlook
The company expects fiscal 2006 third quarter revenue to range from $221.0
million to $224.0 million and earnings per diluted share from $0.47 to $0.50.
The revenue guidance reflects the impact of higher new account growth and
revenue from the initial rollout of a large direct sale customer. The earnings
guidance reflects the company's ongoing efforts to improve operational
efficiency offset by investments in growth initiatives, costs associated with
new account growth and higher energy costs. Third quarter earnings guidance also
incorporates the anticipated impact associated with expensing stock options of
approximately $0.02 per diluted share. Earnings per diluted share in the third
quarter of fiscal 2005, when adjusted for SFAS 123(r), were $0.47.
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 February 28, 2006.
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
July 2, 2005.
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 140
processing facilities and branch offices, serving more than 160,000 customers.
CONSOLIDATED STATEMENTS OF OPERATIONS
G&K Services, Inc. and Subsidiaries
(Unaudited)
For the Three For the Six
Months Ended Months Ended
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(U.S. Dollars, in thousands, Dec. 31, Jan. 1, Dec. 31, Jan. 1,
except per share data) 2005 2005 2005 2005
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(Restated) (Restated)
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Revenues
Rental operations $199,355 $183,110 $393,423 $359,401
Direct sales 19,993 12,025 33,873 18,166
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Total revenues 219,348 195,135 427,296 377,567
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Operating Expenses
Cost of rental operations 127,672 116,415 252,178 227,424
Cost of direct sales 14,155 8,441 24,356 13,337
Selling and administrative 47,855 41,980 91,600 81,294
Depreciation and amortization 10,644 10,161 21,243 20,319
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Total operating expenses 200,326 176,997 389,377 342,374
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Income from Operations 19,022 18,138 37,919 35,193
Interest expense 3,302 2,641 6,317 5,189
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Income before Income Taxes 15,720 15,497 31,602 30,004
Provision for income taxes 5,486 5,769 10,997 11,209
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Net Income $10,234 $9,728 $20,605 $18,795
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Basic weighted average number
of shares outstanding 21,083 20,911 21,037 20,868
Basic Earnings Per Common Share $0.49 $0.46 $0.98 $0.90
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Diluted weighted average
number of shares outstanding 21,221 21,678 21,185 21,378
Diluted Earnings Per Common
Share $0.48 $0.45 $0.97 $0.88
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Dividends per share $0.0175 $0.0175 $0.0350 $0.0350
CONSOLIDATED CONDENSED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
December 31, July 2,
2005 2005
(U.S. dollars, in thousands) (Unaudited) (Restated)
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ASSETS
Current Assets
Cash and cash equivalents $14,080 $15,345
Accounts receivable, net 94,651 83,459
Inventories 131,501 121,120
Prepaid expenses 15,107 16,587
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Total current assets 255,339 236,511
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Property, Plant and Equipment, net 248,234 243,307
Other Assets 430,260 423,351
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$933,833 $903,169
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $26,091 $25,695
Accrued expenses 75,434 81,523
Deferred income taxes 9,212 8,971
Current maturities of long-term debt 7,595 26,537
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Total current liabilities 118,332 142,726
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Long-Term Debt, net of current maturities 231,073 210,462
Deferred Income Taxes 30,735 30,887
Other Noncurrent Liabilities 41,771 37,651
Stockholders' Equity 511,922 481,443
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$933,833 $903,169
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
(Unaudited)
For the Six
Months Ended
-----------------------
December 31, January 1,
(U.S. dollars, in thousands) 2005 2005
(Restated)
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Operating Activities:
Net income $20,605 $18,795
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 21,243 20,319
Stock-based compensation 2,118 1,972
Deferred income taxes 371 922
Changes in current operating items, exclusive
of acquisitions (21,198) (13,111)
Other, net 977 838
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Net cash provided by operating activities 24,116 29,735
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Investing Activities:
Property, plant and equipment additions, net (16,482) (4,095)
Acquisition of business assets and other (12,763) (36,038)
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Net cash used for investing activities (29,245) (40,133)
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Financing Activities:
Repayments of long-term debt (7,484) (17,114)
Proceeds from short-term borrowings, net 10,550 7,400
Cash dividends paid (747) (732)
Sale of common stock 1,250 3,251
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Net cash provided by (used for) financing
activities 3,569 (7,195)
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Decrease in Cash and Cash Equivalents (1,560) (17,593)
Effect of Exchange Rates on Cash 295 1,620
Cash and Cash Equivalents:
Beginning of period 15,345 26,931
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End of period $14,080 $10,958
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Supplemental Cash Flow Information:
Non-Cash Transactions -
Debt issued in connection with business
acquisitions $(1,419) $11,890
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CONTACT: G&K Services, Inc., Minneapolis
Jeffrey L. Wright, 952-912-5500
or
Glenn L. Stolt, 952-912-5500
or
Shayn R. Carlson, 952-912-5500