Exhibit 99.1
G&K Services Reports Fiscal 2006 Third Quarter Results;
Record Quarterly Revenues Driven by Strong Direct Sales Performance;
Company Continues to Aggressively Pursue Strategic Vision
MINNEAPOLIS--(BUSINESS WIRE)--May 2, 2006--G&K Services, Inc.
(Nasdaq:GKSR), today reported record revenue for the third quarter ended April
1, 2006 of $226.1 million, up 11.0 percent over $203.8 million reported in the
third fiscal quarter last year. Revenue exceeded expectations due to strong
direct sale volume.
Earnings per diluted share totaled $0.49 for the quarter, a 4.3 percent
increase compared to $0.47 during the prior-year quarter. The increase in
earnings was due to higher sales and a lower effective tax rate, partially
offset by the impact of higher energy costs, continued investments in strategic
initiatives, costs associated with accelerated new account growth and reserves
established for the pending resolution of two specific legal matters.
For the nine months ended April 1, 2006, revenue was $653.4 million
compared to $581.4 million during the prior-year period, an increase of 12.4
percent. Earnings per diluted share were $1.46, up 8.1 percent compared to $1.35
during the same period last year.
"Our results and momentum reflect the continued execution of our new
strategic vision introduced in early fiscal 2005," said Richard Marcantonio,
chairman and chief executive officer. "The early execution of our strategy
continues to produce improved financial performance, despite the effect of the
hurricanes and higher energy costs. Given our success to date in absorbing these
cost pressures, we're confident our on-going strategic investments will deliver
long-term revenue growth and accelerated earnings growth."
Income Statement Review
Third quarter revenue from G&K's rental business increased to $201.6
million, up 7.2 percent over the prior-year period. As expected, the company's
organic industrial rental growth rate was approximately 3.5 percent. This
organic rental growth rate is 200 basis points higher than the prior-year
period. Direct sale revenue increased to $24.6 million, up 56.1 percent over the
prior-year quarter, driven almost entirely by organic growth. The growth of
direct sale revenue for the quarter was driven by continued penetration of the
direct sale market. 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.
"During the third quarter, we continued to drive improved sales within our
rental business," Marcantonio said. "We're especially pleased with our continued
success in further penetrating the opportunity with existing customers as well
as the momentum we have built in winning new business. In addition, we also
delivered extremely strong organic growth in direct sales. Clearly, these
results are a further indication of the success we've achieved by investing in
sales and marketing initiatives."
Gross margin from rental operations for the quarter was 34.8 percent
compared to 36.6 percent in the prior-year period. The change in gross margin
resulted from higher energy costs and costs associated with new customer growth
offset by higher pricing and productivity improvements. Gross margin from direct
sales was 28.2 percent compared to 23.7 percent in the prior-year period. The
increase in gross margin was due primarily to improved efficiencies from higher
volume.
Selling, general and administrative expenses were 22.0 percent of
consolidated revenue for the quarter, up from 21.3 percent in the year-earlier
period. Selling, general and administrative expenses were up over the prior-year
period due to recording certain legal reserves, continued investment in growth
oriented initiatives, costs incurred to enhance information technology systems
and sales expenses associated with new account growth. The legal reserves
accounted for 0.9 percent of consolidated revenue in the third quarter.
The effective tax rate for the third quarter declined to 21.5 percent from
38.1 percent in the year-earlier period. The company's lower effective tax rate
resulted from a reduction in taxes previously provided for as a result of the
expiration of certain statute of limitations as well as adjustments resulting
from the filing of the company's fiscal 2005 tax return.
Third quarter earnings also 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.
Balance Sheet and Cash Flow Statement Review
The company's balance sheet remains strong. As of April 1, 2006, the
company had total borrowings of $230.0 million and a total debt to total
capitalization ratio of 30.5 percent. Total stockholders' equity increased to
$524.1 million.
Cash provided by operating activities was $50.0 million for the nine month
period ending April 1, 2006 compared to $44.4 million in the same period last
year. Cash provided from operating activities increased compared to the
prior-year period due to stronger earnings, higher depreciation and amortization
levels and lower net working capital investment needed to support revenue
growth. Cash used for property, plant and equipment during the nine month period
totaled $26.4 million compared to $10.2 million in the prior-year period. This
increase resulted from the completion of a new processing plant, investments in
information technology initiatives and the impact of the sale of certain plant
assets in the prior-year nine month period.
Outlook
The company expects fiscal 2006 fourth 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 in the
rental business and strong direct sale revenues. The earnings guidance reflects
the company's ongoing efforts to improve operational efficiency offset by
investments in growth and technology initiatives, costs associated new account
growth and higher energy costs. Fourth 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 fourth
quarter of fiscal 2005, when adjusted for SFAS 123(r), were $0.43.
For full-year fiscal 2006, the fourth quarter guidance implies revenue and
earnings growth of approximately 11 and 9.5 percent, respectively, over fiscal
2005.
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 June 2, 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 Months For the Nine Months
Ended Ended
-----------------------------------------
(U.S. Dollars, in thousands, April 1, April 2, April 1, April 2,
except per share data) 2006 2005 2006 2005
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(Restated) (Restated)
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Revenues
Rental operations $201,562 $188,064 $594,985 $547,465
Direct sales 24,579 15,746 58,452 33,912
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Total revenues 226,141 203,810 653,437 581,377
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Operating Expenses
Cost of rental operations 131,387 119,139 383,565 346,563
Cost of direct sales 17,659 12,011 42,015 25,348
Selling and administrative 49,619 43,283 141,219 124,577
Depreciation and
amortization 10,883 10,407 32,126 30,726
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Total operating expenses 209,548 184,840 598,925 527,214
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Income from Operations 16,593 18,970 54,512 54,163
Interest expense 3,395 2,891 9,712 8,080
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Income before Income Taxes 13,198 16,079 44,800 46,083
Provision for income taxes 2,840 6,129 13,837 17,338
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Net Income $10,358 $9,950 $30,963 $28,745
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Basic weighted average
number of shares
outstanding 21,132 20,994 21,069 20,910
Basic Earnings Per Common
Share $0.49 $0.47 $1.47 $1.37
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Diluted weighted average
number of shares
outstanding 21,311 21,322 21,228 21,362
Diluted Earnings Per Common
Share $0.49 $0.47 $1.46 $1.35
======================================================================
Dividends per share $ 0.0175 $ 0.0175 $ 0.0525 $ 0.0525
CONSOLIDATED CONDENSED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
April 1, July 2,
2006 2005
(U.S. dollars, in thousands) (Unaudited) (Restated)
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ASSETS
Current Assets
Cash and cash equivalents $21,960 $15,345
Accounts receivable, net 95,426 83,459
Inventories 137,290 121,120
Prepaid expenses 14,630 16,587
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Total current assets 269,306 236,511
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Property, Plant and Equipment, net 249,896 243,307
Other Assets 428,978 423,351
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$948,180 $903,169
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $32,874 $25,695
Accrued expenses 66,877 71,483
Deferred income taxes 9,201 8,971
Current maturities of long-term debt 17,925 26,537
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Total current liabilities 126,877 132,686
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Long-Term Debt, net of current maturities 212,066 210,462
Deferred Income Taxes 30,756 30,887
Other Noncurrent Liabilities 54,427 47,691
Stockholders' Equity 524,054 481,443
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$948,180 $903,169
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
(Unaudited)
For the Nine Months Ended
--------------------------
April 1 , April 2,
(U.S. dollars, in thousands) 2006 2005
(Restated)
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Operating Activities:
Net income $30,963 $28,745
Adjustments to reconcile net income to
net cash provided by operating
activities -
Depreciation and amortization 32,126 30,726
Stock-based compensation 3,060 2,891
Deferred income taxes 354 1,095
Changes in current operating items,
exclusive of acquisitions (17,320) (20,253)
Other, net 829 1,159
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Net cash provided by operating activities 50,012 44,363
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Investing Activities:
Property, plant and equipment additions,
net (26,414) (10,194)
Acquisition of business assets and other (13,020) (74,895)
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Net cash used for investing activities (39,434) (85,089)
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Financing Activities:
Repayments of long-term debt (7,661) (21,317)
Proceeds from short-term borrowings, net 2,050 41,200
Cash dividends paid (1,112) (1,100)
Sale of common stock 2,395 4,268
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Net cash (used for) provided by financing
activities (4,328) 23,051
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Increase (Decrease) in Cash and Cash
Equivalents 6,250 (17,675)
Effect of Exchange Rates on Cash 365 1,608
Cash and Cash Equivalents:
Beginning of period 15,345 26,931
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End of period $21,960 $10,864
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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