GKSRA G&K Services (MM)

G&K Services, Inc. (Nasdaq:GKSRA), today reported record revenue for the third quarter ended April 2, 2005 of $203.8 million, up 13.8 percent over $179.0 million reported in the third fiscal quarter last year. Earnings per diluted share totaled $0.49 for the quarter, a 14.0 percent increase compared to $0.43 during the prior-year quarter. Earnings for the quarter included a charge of approximately $0.02 per diluted share associated with severance and recruiting costs. This charge was not included in the company's earnings guidance for the third quarter. "Our third quarter results marked continued progress toward our growth and operational objectives," said Richard Marcantonio, G&K's president and chief executive officer. "For the first time in the history of the company, we posted quarterly revenue of more than $200 million. Our revenue growth initiatives, both from acquisitions and improved organic growth, continue to build momentum. From an earnings perspective, we are balancing our goal of increasing earnings with the need to invest in the long-term future of the company." For the nine months ended April 2, 2005, revenue was $581.4 million compared to $540.2 million during the prior-year period, an increase of 7.6 percent. Earnings per diluted share were $1.42, up 14.5 percent over last year. Income Statement Review Third quarter revenue from G&K's rental business increased to $188.1 million, up 8.4 percent over the prior-year period. The company's organic industrial rental growth rate was approximately 1.5 percent in the third quarter, an improvement of 250 basis points compared to the organic growth rate in the second quarter of fiscal 2005. Organic rental growth has continued to improve over the past year as a result of the company's growth initiatives and modest improvements in economic conditions. Direct sale revenue increased to $15.7 million, up 186.6 percent over the prior-year quarter and up approximately 65.0 percent on an organic basis. The growth of direct sale revenue for the quarter was driven by the acquisition of Lion Uniform Group and stronger than normal organic growth in G&K's direct sale unit. 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. "We are pleased to report a strong improvement in our rental organic growth rate, significantly ahead of our stated goal to return to positive growth by the end of fiscal 2005," Marcantonio said. "Over the past year, we have put increasing attention and resources on improving top-line growth in the business. Our efforts allowed us to reach positive organic growth earlier than expected." Gross margin from rental operations for the quarter was 36.6 percent, an improvement over the second quarter of fiscal 2005 and the prior-year quarter. Continued improvements in merchandise costs driven by inventory management initiatives and lower production costs contributed to the increase in gross margin. This benefit was partially offset by increased energy costs compared to the second quarter of fiscal 2005 and the prior-year quarter. Gross margin from direct sales was 23.7 percent compared to 26.1 percent in the prior-year period. Selling, general and administrative expenses were 20.9 percent of consolidated revenue, consistent with the same period last year. In absolute dollars, selling, general and administrative expenses were up 13.8 percent over the prior-year due to the company's investment in growth oriented initiatives, additional expenses related to acquired businesses and cost associated with severance and recruiting. As compared to the second quarter of fiscal 2005, selling, general and administrative costs, as a percent of revenue, declined 20 basis points due to greater leverage on increased revenue. Balance Sheet and Cash Flow Review The company's balance sheet remains strong. Total debt to total capitalization was 33.9 percent as of April 2, 2005 compared to 34.6 percent at the same time last year. Total stockholders' equity increased to $470.0 million. Free cash flow, which is cash provided by operating activities less capital expenditures, was $33.6 million for the nine month period ending April 2, 2005. Cash used for property, plant and equipment during the nine month period totaled $10.2 million, down $2.6 million from the same period last year. Outlook "We remain focused on our strategic vision of being the market leader in enhancing image and safety in the workplace," Marcantonio said. "Our recent performance driven by our internal efforts and the investments we've made over the past couple of years adds to our confidence that we are taking the right steps. Looking forward, the tactical plans to support our strategy require ongoing investment in people, technology and program development. We remain committed to balancing the need to invest in the business with generating earnings growth." The company expects fiscal 2005 fourth quarter revenue to range from $203.0 million to $207.0 million and earnings per diluted share from $0.45 to $0.47. This guidance reflects improvement in both revenue and earnings versus the fourth quarter of fiscal 2004, which included an extra week of operations. On a sequential quarterly basis, the guidance reflects higher energy costs, additional investments in the company's growth initiatives and increased integration costs associated with the acquisitions completed during fiscal 2005. The guidance also includes anticipated benefits of the growth initiatives, gradual improvements in the employment markets, and the Canadian currency translation rate remaining at current levels. The guidance does not include the impact of any future acquisitions. Based on the guidance for the fourth quarter and excluding the extra week of operations during the prior-year, the company expects fiscal 2005 revenue to grow by approximately 9 percent and earnings to increase by roughly 11 percent over fiscal 2004. Conference Call Information The company will conduct a conference call today beginning at 10:00 a.m. Central Time. The call will be webcast and can be accessed through the website www.gkservices.com (on the Investor Relations page, click on the webcast icon and follow the instructions). A replay of the call will be available through June 3, 2005. Safe Harbor for Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") provides companies with a "safe harbor" when making forward-looking statements as a way of encouraging them to furnish their shareholders with information regarding expected trends in their operating results, anticipated business developments and other prospective information. 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 Act. 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. Given that circumstances may change, and new risks to the business may emerge from time to time, having the potential to negatively impact our business in ways we could not anticipate at the time of making a forward-looking statement, 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. Some of the factors that could cause actual results or events to vary from stated expectations include, but are not limited to, the following: unforeseen operating risks; the effects of overall economic conditions and employment; fluctuations in costs of insurance and energy; acquisition integration costs; the performance of acquired businesses; preservation of positive labor relationships; competition, including pricing, within the corporate identity apparel and facility services industry; and the availability of capital to finance planned growth. Additional 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 3, 2004. 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. -0- *T CONSOLIDATED STATEMENTS OF OPERATIONS G&K Services, Inc. and Subsidiaries (Unaudited) For the Three For the Nine Months Ended Months Ended --------------------------------------- (U.S. Dollars, in thousands, April 2, March 27, April 2, March 27, except per share data) 2005 2004 2005 2004 ---------------------------------------------------------------------- Revenues Rental operations $188,064 $173,531 $547,465 $521,431 Direct sales 15,746 5,494 33,912 18,736 ---------------------------------------------------------------------- Total revenues 203,810 179,025 581,377 540,167 ---------------------------------------------------------------------- Operating Expenses Cost of rental operations 119,139 110,382 346,563 331,289 Cost of direct sales 12,011 4,061 25,348 14,145 Selling and administrative 42,518 37,353 122,363 114,677 Depreciation and amortization 10,407 9,865 30,726 29,328 ---------------------------------------------------------------------- Total operating expenses 184,075 161,661 525,000 489,439 ---------------------------------------------------------------------- Income from Operations 19,735 17,364 56,377 50,728 Interest expense 2,891 2,826 8,080 8,914 ---------------------------------------------------------------------- Income before Income Taxes 16,844 14,538 48,297 41,814 Provision for income taxes 6,418 5,524 18,174 15,889 ---------------------------------------------------------------------- Net Income $10,426 $9,014 $30,123 $25,925 ---------------------------------------------------------------------- Basic weighted average number of shares outstanding 20,994 20,767 20,910 20,681 Basic Earnings Per Common Share $0.50 $0.43 $1.44 $1.25 ---------------------------------------------------------------------- Diluted weighted average number of shares outstanding 21,290 20,974 21,186 20,851 Diluted Earnings Per Common Share $0.49 $0.43 $1.42 $1.24 ---------------------------------------------------------------------- Dividends per share $0.0175 $0.0175 $0.0525 $0.0525 CONSOLIDATED CONDENSED BALANCE SHEETS G&K Services, Inc. and Subsidiaries April 2, 2005 July 3, (U.S. dollars, in thousands) (Unaudited) 2004 ---------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $10,864 $26,931 Accounts receivable, net 84,458 71,058 Inventories 115,745 94,476 Prepaid expenses 12,127 14,902 ---------------------------------------------------------------------- Total current assets 223,194 207,367 ---------------------------------------------------------------------- Property, Plant and Equipment, net 242,228 240,609 Other Assets 425,394 354,771 ---------------------------------------------------------------------- $890,816 $802,747 ---------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $21,720 $20,511 Accrued expenses 80,610 76,470 Deferred income taxes 7,836 7,395 Current maturities of long-term debt 25,183 24,018 ---------------------------------------------------------------------- Total current liabilities 135,349 128,394 ---------------------------------------------------------------------- Long-Term Debt, net of current maturities 215,794 184,305 Deferred Income Taxes 40,244 38,256 Other Noncurrent Liabilities 29,413 26,369 Stockholders' Equity 470,016 425,423 ---------------------------------------------------------------------- $890,816 $802,747 ---------------------------------------------------------------------- CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS G&K Services, Inc. and Subsidiaries (Unaudited) For the Nine Months Ended ------------------- April 2, March 27, (U.S. dollars, in thousands) 2005 2004 ---------------------------------------------------------------------- Operating Activities: Net income $30,123 $25,925 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 30,726 29,328 Deferred income taxes 509 671 Amortization of deferred compensation - restricted stock 677 659 Changes in current operating items, exclusive of acquisitions (19,418) 24,758 Other assets and liabilities 1,159 308 ---------------------------------------------------------------------- Net cash provided by operating activities 43,776 81,649 ---------------------------------------------------------------------- Investing Activities: Property, plant and equipment additions, net (10,194) (12,790) Acquisition of business assets and other (74,895) (26,082) ---------------------------------------------------------------------- Net cash used for investing activities (85,089) (38,872) ---------------------------------------------------------------------- Financing Activities: Proceeds from issuance of long-term debt - 1,345 Repayments of long-term debt (21,317) (9,647) Proceeds from (repayments of) short-term borrowings, net 41,200 (24,100) Cash dividends paid (1,100) (1,090) Sale of common stock 4,855 3,714 ---------------------------------------------------------------------- Net cash provided by (used for) financing activities 23,638 (29,778) ---------------------------------------------------------------------- (Decrease) Increase in Cash and Cash Equivalents (17,675) 12,999 Effect of Exchange Rates on Cash 1,608 254 Cash and Cash Equivalents: Beginning of period 26,931 11,504 ---------------------------------------------------------------------- End of period $10,864 $24,757 ---------------------------------------------------------------------- Supplemental Cash Flow Information: Non-Cash Transactions - Debt issued in connection with business acquisitions $11,890 $- ---------------------------------------------------------------------- *T