G&K Services Reports Fiscal 2013 Second Quarter Results

G&K Services Reports Fiscal 2013 Second Quarter Results

G&K Achieves First of Its 10/10 Financial Goals

Quarterly Operating Margin Reaches 10 Percent, the Highest Level in a Decade


Earnings Per Share Grow 33 Percent to $0.68

G&K Increases Full-Year Revenue and Earnings Guidance

MINNEAPOLIS--(BUSINESS WIRE)-- G&K Services, Inc. (Nasdaq: GK) today reported operating results for the second quarter of its fiscal year 2013, which ended on December 29, 2012. Second quarter revenue grew by 5.6 percent to $229.2 million, up from $217.1 million in last year's second quarter, driven by solid growth in both rental operations and direct sales. Second quarter net earnings per diluted share grew 33 percent to $0.68, from earnings of $0.51 per diluted share in the prior-year period. The company's quarterly operating margin improved to 10.0 percent, up from 7.8 percent in last year's second quarter, reaching the highest level in ten years.

"Achieving our 10 percent operating margin goal is a tremendous accomplishment for our entire team," said Douglas A. Milroy, Chief Executive Officer. "We have now more than doubled the company's operating margin since we initiated our game plan. We're as excited as ever about G&K's future and continue to see opportunities to drive further operating margin expansion, earnings growth, and improvements in return on invested capital."

Income Statement Review
Second quarter revenue from rental operations grew 5.6 percent to $207.9 million, up from $196.8 million in the prior-year quarter. The rental organic growth rate, which adjusts for the impact of currency exchange rate differences, acquisitions and divestitures, was 4.5 percent. The impact of currency exchange rate differences and acquisitions added 1.1 percent to rental operations growth during the quarter. Second quarter direct sales grew by 5.4 percent to $21.3 million, from $20.2 million in the prior-year.

Operating margin expanded to 10.0 percent, a 220 basis point improvement from the 7.8 percent margin in last year's second quarter. The operating margin increase was primarily driven by increased operating leverage from revenue growth, productivity improvements in rental production and delivery, and improved direct sales gross margin. Selling and administrative costs were also lower as a percentage of revenue than in the prior-year. These improvements were partially offset by an expected increase in rental merchandise expense.

Net earnings also benefited from lower interest expense, which was $1.1 million, down from $1.6 million in the prior-year period, primarily due to a lower effective interest rate, partially offset by higher total debt. The effective tax rate was 39.2 percent, compared to 38.3 percent in last year's second quarter. Diluted shares outstanding increased to 19.1 million, up from 18.7 million in the prior year.

Balance Sheet and Cash Flow
The company ended the second quarter with total debt, net of cash, of $196.6 million, and a debt to total capital ratio of 33.9 percent. Total stockholders' equity at the end of the quarter was $429.5 million.

The company continued to generate strong cash flow. Cash provided by operating activities for the six months ended December 29, 2012 was $40.8 million, compared to $17.8 in the prior year. The stronger cash flow was primarily due to improvements in working capital, higher net income, and a lower contribution to the company's pension plan than in the prior year, partially offset by higher tax payments in the current year. Capital expenditures for the first six months of the fiscal year were $18.0 million, consistent with the prior year period.

During the quarter the company completed an acquisition in its rental operations business. The acquisition is expected to deliver significant strategic benefits including expanding the company's presence into new markets and providing synergies with its existing business. The acquisition extends G&K into five of the top one hundred North American markets which it did not previously serve.

Outlook
The company expects to drive continued performance gains in fiscal 2013, despite persistent weakness and uncertainty in the economy. The company is increasing its full-year revenue guidance to a range of $905 million to $915 million, up from the previously announced range of $890 million to $910 million. The company is also raising its full-year earnings guidance to a range of $2.50 to $2.60 per diluted share, up from the previously announced range of $2.25 to $2.45.

Conference Call Information
The company will host a conference call today at 10:00 a.m. Central Time to discuss its financial results and outlook. The call will be webcast and is available in the Investor Relations section of the company's web site at www.gkservices.com. A replay of the call will be available on the company's web site through February 28, 2013.

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 30, 2012.

About G&K Services, Inc.
G&K Services, Inc. is a service-focused market leader of branded uniform and facility services programs in the United States, and is the largest such provider in Canada. Headquartered in Minneapolis, Minnesota, G&K Services has nearly 7,800 employees serving approximately 165,000 customers from 160 facilities in North America. G&K Services is a publicly held company traded over the NASDAQ Global Select Market under the symbol GK and is a component of the Standard & Poor's SmallCap 600 Index. For more information on G&K Services, visit the company's web site at www.gkservices.com.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

G&K Services, Inc. and Subsidiaries

(Subject to Reclassification)

For the Three Months Ended

For the Six Months Ended

(U.S. Dollars, in thousands, except per share data)

December 29, 2012

December 31, 2011

December 29, 2012

December 31, 2011

REVENUES

Rental operations

$

207,852

$

196,832

$

411,311

$

390,833

Direct sales

21,322

20,232

40,291

35,954

Total revenues

229,174

217,064

451,602

426,787

OPERATING EXPENSES

Cost of rental operations

141,768

136,350

280,440

269,937

Cost of direct sales

15,554

16,252

29,887

28,167

Selling and administrative

48,996

47,508

98,871

96,254

Total operating expenses

206,318

200,110

409,198

394,358

INCOME FROM OPERATIONS

22,856

16,954

42,404

32,429

Interest expense

1,111

1,607

2,147

3,260

INCOME BEFORE INCOME TAXES

21,745

15,347

40,257

29,169

Provision for income taxes

8,524

5,881

15,142

11,410

NET INCOME

$

13,221

$

9,466

$

25,115

$

17,759

BASIC EARNINGS PER COMMON SHARE

$

0.69

$

0.51

$

1.32

$

0.96

DILUTED EARNINGS PER COMMON SHARE

$

0.68

$

0.51

$

1.30

$

0.95

Earnings available to common stockholders:

Net income

$

13,221

$

9,466

$

25,115

$

17,759

Less: Income allocable to participating securities

(205

)

-

(380

)

-

Earnings available to common stockholders

$

13,016

$

9,466

$

24,735

$

17,759

Weighted average number of shares outstanding, basic

18,841

18,493

18,761

18,462

Weighted average number of shares outstanding, diluted

19,099

18,660

19,024

18,635

Dividends declared per share

$

0.195

$

0.130

$

0.390

$

0.260

CONDENSED CONSOLIDATED BALANCE SHEETS

G&K Services, Inc. and Subsidiaries

(Subject to Reclassification)

(U.S. Dollars, in thousands)

December 29, 2012

June 30, 2012

ASSETS

Current Assets

Cash and cash equivalents

$

23,715

$

19,604

Accounts receivable, net

98,636

93,064

Inventories, net

174,441

178,226

Other current assets

11,621

12,239

Total current assets

308,413

303,133

Property, Plant, Equipment, net

195,387

187,840

Goodwill

336,746

325,336

Other Assets

61,516

57,422

Total assets

$

902,062

$

873,731

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities

Accounts payable

$

37,565

$

41,358

Accrued expenses

65,232

69,902

Deferred income taxes

8,735

8,439

Current maturities of long-term debt

23,815

206

Total current liabilities

135,347

119,905

Long-Term Debt, net of Current Maturities

196,500

218,018

Deferred Income Taxes

14,321

5,473

Accrued Income Taxes

11,478

11,339

Pension Withdrawal Liability

23,550

23,562

Other Noncurrent Liabilities

91,385

92,375

Stockholders' Equity

429,481

403,059

Total Liabilities and stockholders' equity

$

902,062

$

873,731

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

G&K Services, Inc. and Subsidiaries

(Subject to Reclassification)

For the Six Months Ended

December 29,

December 31,

(U.S. Dollars, in thousands)

2012

2011

Operating Activities:

Net income

$

25,115

$

17,759

Adjustments to reconcile net income to net cash provided by operating activities -

Depreciation and amortization

16,066

17,153

Deferred income taxes

5,588

5,257

Share-based compensation

2,673

2,128

Changes in current operating items, exclusive of acquisitions

Accounts receivable and prepaid expenses

(3,512

)

(3,679

)

Inventories

6,038

(13,312

)

Accounts payable and other accrued expenses

(9,341

)

(1,011

)

Other

(1,786

)

(6,516

)

Net cash provided by operating activities

40,841

17,779

Investing Activities:

Property, plant and equipment additions, net

(17,952

)

(18,025

)

Acquisition of business, net of cash

(18,663

)

-

Net cash used for investing activities

(36,615

)

(18,025

)

Financing Activities:

Payments of long-term debt

(184

)

(402

)

Proceeds from (Payments on) revolving credit facilities, net

2,275

(3,900

)

Cash dividends paid

(7,447

)

(4,891

)

Net Issuance of common stock, under stock option plans

5,677

799

Purchase of common stock

(734

)

(614

)

Net cash used for financing activities

(413

)

(9,008

)

Increase (Decrease) in Cash and Cash Equivalents

3,813

(9,254

)

Effect of Exchange Rates on Cash

298

(123

)

Cash and Cash Equivalents:

Beginning of period

19,604

22,974