Exhibit 99.1
G&K Services Reports Fiscal 2007 Third Quarter Results
Earnings exceed expectations;
Operating margins continue to expand
MINNEAPOLIS--(BUSINESS WIRE)--May 1, 2007--G&K Services, Inc.
(Nasdaq:GKSR), today reported revenue for the third quarter ended
March 31, 2007 of $235.2 million, a 4.0 percent increase from
prior-year revenue of $226.1 million. Organic rental growth combined
with revenue from acquisitions contributed to the increase in revenue
over the prior-year.
Earnings per diluted share totaled $0.57 for the quarter, a 16.3
percent increase, compared to $0.49 during the prior-year period.
Third quarter earnings exceeded expectations due to improved operating
performance and a lower than anticipated effective tax rate. The
increase in earnings compared to the prior-year, was driven by revenue
growth and productivity improvements, partially offset by continued
investment initiatives.
"We're very pleased to report solid revenue and earnings growth
during the third quarter," said Richard Marcantonio, G&K's chairman
and chief executive officer. "The momentum we've established, along
with the benefits we're achieving from our investments in sales,
marketing and productivity initiatives, will provide for a successful
finish to fiscal 2007 and a strong foundation for the long-term
success of the company."
Income Statement Review
Third quarter revenue from G&K's rental business increased to
$211.8 million, up 5.1 percent over the prior-year period. The
company's organic rental growth rate was approximately 4.0 percent in
the third quarter, an improvement of 50 basis points compared to the
prior-year period. Direct sale revenue for the third quarter was $23.4
million compared to $24.6 million in the prior-year third quarter.
Direct sale revenue was slightly below the record level achieved in
the prior-year period which included the initial rollout of a new
uniform program with a major customer. The organic revenue growth
rates are calculated using 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 increased to
35.4 percent from 34.8 percent in the prior-year period. Higher rental
gross margin during the quarter resulted from the efficiencies gained
from revenue growth and slightly lower energy costs. These
productivity improvements were somewhat offset by increased
merchandise costs associated with continued strong new account growth.
Gross margin from direct sales was 27.7 percent compared to 28.2
percent in the prior-year period.
Selling, general and administrative expenses were 21.3 percent of
consolidated revenue for the quarter, down from 22.0 percent in the
year-earlier period. The prior-year third quarter included expense
from a legal settlement that represented 0.9 percent of consolidated
revenue. Selling expenses as a percent of consolidated revenue were
higher than the year ago period as a result of the expansion in the
company's sales force during the last year. This increase was
partially offset by lower administrative expenses due to office
productivity savings as a result of the company's handheld initiative,
leverage due to improved revenue growth and lower retirement plan
expenses.
Operating margin for the third quarter was 8.5 percent of
consolidated revenue compared to 7.3 percent in the prior-year period.
The improvement in operating margin was driven by incremental income
from revenue growth and lower administrative and legal expenses.
"As planned, we delivered sequential and year-over-year operating
margin expansion in the third quarter," Marcantonio said. "We continue
to focus on improving margins through increasing top-line revenue
growth and executing our strategic investments. In addition to strong
operating performance, we successfully completed the rollout of our
handheld system, secured several significant customer wins and
acquired two high quality rental businesses that expand our market
coverage."
The effective tax rate for the third quarter increased to 25.4
percent from 21.5 percent in the year-earlier period. The company's
effective tax rate in the third quarter and prior-year period were
lower than statutory rates due to the reduction of tax reserves no
longer required.
Balance Sheet and Cash Flow Statement Review
The company's balance sheet remains strong. As of March 31, 2007,
the company had total borrowings of $221.9 million, down from $230.0
million a year ago. Total debt as a percent of total capitalization
was 27.8 percent. Total stockholders' equity increased to $576.1
million.
Cash provided by operating activities for the nine months ended
March 31, 2007 increased to $51.2 million from $50.0 million in the
prior-year period. Cash used to purchase property, plant and equipment
during the current nine month period totaled $23.2 million compared to
$26.4 million in the prior-year period. Free cash flow, defined as
cash flow from operations less capital expenditures, for the first
nine months of fiscal 2007 increased to $28.0 million from $23.6
million in the prior-year period. Cash flow used for business
acquisitions during the nine month period totaled $47.5 million
compared to $11.3 million in the prior-year period. During the third
quarter, the company acquired two rental businesses and also paid an
outstanding note payable and performance payment associated with a
prior acquisition.
Outlook
The company expects fiscal 2007 fourth quarter revenue to range
from $237.0 million to $240.0 million and earnings per diluted share
from $0.50 to $0.53. The revenue guidance represents a rental organic
growth rate above the third quarter of fiscal 2007. The earnings
guidance reflects a continued sequential improvement in operating
margin and a more normalized statutory income tax rate of 38.0 to 39.0
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 June 1,
2007.
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 1, 2006.
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
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(U.S. Dollars, in thousands, March 31, April 1, March 31, April 1,
except per share data) 2007 2006 2007 2006
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Revenues
Rental operations $211,842 $201,562 $628,273 $594,985
Direct sales 23,400 24,579 60,861 58,452
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Total revenues 235,242 226,141 689,134 653,437
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Operating Expenses
Cost of rental operations 136,951 131,387 403,436 383,565
Cost of direct sales 16,923 17,659 44,579 42,015
Selling and administrative 50,110 49,619 150,031 141,219
Depreciation and
amortization 11,326 10,883 33,776 32,126
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Total operating expenses 215,310 209,548 631,822 598,925
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Income from Operations 19,932 16,593 57,312 54,512
Interest expense 3,647 3,395 10,526 9,712
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Income before Income Taxes 16,285 13,198 46,786 44,800
Provision for income taxes 4,136 2,840 15,801 13,837
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Net Income $12,149 $10,358 $30,985 $30,963
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Basic weighted average
number of shares
outstanding 21,304 21,132 21,227 21,069
Basic Earnings Per Common
Share $0.57 $0.49 $1.46 $1.47
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Diluted weighted average
number of shares
outstanding 21,445 21,311 21,394 21,228
Diluted Earnings Per Common
Share $0.57 $0.49 $1.45 $1.46
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Dividends per share $0.0400 $0.0175 $0.1200 $0.0525
CONSOLIDATED CONDENSED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
March 31, July 1,
2007 2006
(U.S. dollars, in thousands) (Unaudited)
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ASSETS
Current Assets
Cash and cash equivalents $16,758 $19,690
Accounts receivable, net 102,168 94,964
Inventories 141,404 141,031
Prepaid expenses 17,377 15,552
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Total current assets 277,707 271,237
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Property, Plant and Equipment, net 253,457 249,001
Other Assets 457,943 430,854
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$989,107 $951,092
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $23,617 $27,404
Accrued expenses 76,791 72,999
Deferred income taxes 10,370 10,419
Current maturities of long-term debt 62,669 18,199
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Total current liabilities 173,447 129,021
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Long-Term Debt, net of current maturities 159,269 195,355
Deferred Income Taxes 32,260 34,343
Other Noncurrent Liabilities 48,002 44,985
Stockholders' Equity 576,129 547,388
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$989,107 $951,092
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
(Unaudited)
For the Nine Months Ended
-------------------------
March 31, April 1,
(U.S. dollars, in thousands) 2007 2006
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Operating Activities:
Net income $30,985 $30,963
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 33,776 32,126
Stock-based compensation 3,597 3,060
Deferred income taxes (257) 354
Changes in current operating items,
exclusive of acquisitions (18,772) (17,320)
Other, net 1,862 829
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Net cash provided by operating activities 51,191 50,012
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Investing Activities:
Property, plant and equipment additions,
net (23,214) (26,414)
Acquisition of business assets, net (47,543) (11,300)
Purchase of investments, net (2,043) (1,720)
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Net cash used for investing activities (72,800) (39,434)
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Financing Activities:
Repayments of long-term debt (7,579) (7,661)
Proceeds from short-term borrowings, net 26,446 2,050
Cash dividends paid (2,575) (1,112)
Sale of common stock 3,004 2,395
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Net cash provided by (used for) financing
activities 19,296 (4,328)
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(Decrease) Increase in Cash and Cash
Equivalents (2,313) 6,250
Effect of Exchange Rates on Cash (619) 365
Cash and Cash Equivalents:
Beginning of period 19,690 15,345
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End of period $16,758 $21,960
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Supplemental Cash Flow Information:
Non-Cash Transactions -
Debt issued to seller in connection
with business acquisitions $- $(1,419)
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CONTACT: G&K Services, Inc.
Jeffrey L. Wright, Senior Vice President and Chief
Financial Officer, 952-912-5500
or
Glenn L. Stolt, Vice President and Treasurer,
952-912-5500
or
Shayn R. Carlson, Director of Investor Relations,
952-912-5500