GKSRA G&K Services (MM)

G&K Services, Inc. (Nasdaq:GKSRA), today reported revenue for the fiscal fourth quarter ended July 2, 2005 of $207.4 million, up 7.3 percent over the $193.3 million reported in the prior-year period, which included an extra week of operations. Excluding the extra week, fourth quarter revenue increased 15.1 percent. Revenue exceeded expectations on continued improvement in the company's rental organic growth rate and strong direct sales volume. Earnings per diluted share totaled $0.46 for the quarter, compared to $0.45 during the prior-year period. While the prior-year included the benefit of an extra week of operations, it was largely offset by costs associated with the transfer of production within the company's manufacturing facilities and the settlement of a legal dispute. Current year fourth quarter earnings were in-line with the company's previous guidance and reflect the impact of investments in the company's growth initiatives, costs associated with acquisition integration and high energy costs. Revenue for fiscal 2005 reached a record $788.8 million versus $733.4 million last year, up 7.5 percent. Excluding the extra week in fiscal 2004, full-year revenues were up 9.5 percent. Fiscal 2005 earnings per diluted share totaled $1.88 compared to $1.69 last year, an increase of 11.2 percent. Fiscal 2004 earnings were positively impacted by the extra week of operations in the fourth quarter largely offset by the costs and legal settlement described above. "In fiscal 2005, we continued to focus on the fundamentals of our business in addition to driving our new vision to enhance our customers' image and safety through innovation," said Richard Marcantonio, G&K's president and chief executive officer. "We've begun to successfully execute our long-term vision through a number of strategies to enhance the value proposition we provide our customers. We will continue to capitalize on market growth opportunities by delivering innovative solutions that meet the needs of our customers." Income Statement Review Fourth quarter revenue from G&K's rental business increased to $193.2 million, up 10.7 percent over the prior-year period, when excluding the extra week of operations. The company's organic industrial rental growth rate was approximately 2.5 percent in the fourth quarter compared to the year-ago period. Direct sale revenue more than doubled to $14.2 million during the quarter from $5.6 million a year-earlier, when excluding the extra week of operations. The increase in direct sale revenue was driven primarily by the acquisition of the Lion Uniform Group. On an organic basis, direct sales increased 26.1 percent during the quarter. The organic growth rates are calculated using industrial rental and direct sale revenue, respectively, adjusted for foreign currency exchange rate differences, revenue from newly acquired locations and the extra week recorded in the prior-period results. "During fiscal 2005, we continued to focus on delivering earnings momentum in addition to putting increasing emphasis on driving revenue growth," Marcantonio said. "The result of our efforts improved our organic rental growth rate 500 basis points, more than doubled our direct sale business and expanded our market presence through acquisitions. The combination of these accomplishments has increased our current annual revenue run-rate to well over $800 million, and more importantly, has better positioned the company for future growth." Gross margin from rental operations for the quarter was 36.1 percent compared to 37.6 percent in the prior-year quarter. Gross margin for the quarter declined due to higher energy and acquisition integration costs. The fourth quarter of the previous year also benefited from the fixed cost leverage from an extra week of revenue. Gross margin from direct sales was 25.9 percent compared to 20.8 percent in the prior-year period. This increase resulted primarily from the increased level of sales attributed to the Lion Uniform Group and strong organic growth. Selling, general and administrative expenses were 21.0 percent of consolidated revenue, down from 22.4 percent in the same period last year. The decrease was attributed to a pre-tax charge in the prior-year period of approximately $1.25 million for a legal settlement and leverage from additional revenue, partially offset by investments in sales and marketing initiatives. Strong Balance Sheet and Cash Flow The company's balance sheet remains strong. Total debt to total capitalization was 33.3 percent compared to 32.9 percent last year. Total stockholders' equity was $475.4 million. The company also reported strong cash flow for the year. Cash flow from operations totaled $63.0 million driven by stronger earnings offset by working capital investments to support revenue growth and the transition of manufacturing to the company's Dominican Republic facility. Free cash flow, defined as cash provided by operating activities less capital expenditures, was $43.6 million. Capital expenditures for the year were $19.4 million. Outlook The company anticipates fiscal 2006 first quarter revenue to be in the range of $204.0 million to $207.0 million and earnings per diluted share to be between $0.45 and $0.48. The revenue guidance represents a modest improvement in the company's rental organic growth rate and reduced benefit from the Canadian dollar exchange rate. The earnings guidance reflects the company's ongoing efforts to improve operational efficiency offset by investments geared to drive increased revenue growth and continued record energy costs. First quarter earnings guidance also incorporates the anticipated impact associated with expensing stock options of $0.02 per diluted share. "During fiscal 2005, we achieved record revenues and earnings even while continuing the investments we're making to stimulate top-line growth and despite significantly higher energy costs," Marcantonio said. "In fiscal 2006, we will continue to balance the need to generate increased earnings with on-going investments in our sales team, marketing programs and operational initiatives. We will also continue to pursue strategic acquisitions that enhance our market position and further leverage our existing infrastructure. In the end, we expect to improve our financial performance, enhance our customer relationships and continue to differentiate our services through innovation." Conference Call Information The company will conduct a conference call today beginning at 10:00 a.m. Central Time. The call will be web cast and can be accessed through the web site 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 September 16, 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 For the Three For the Twelve Months Ended Months Ended ------------------------------------------- July 2, July 3, July 2, July 3, 2005 2004 2005 2004 (U.S. dollars, in (13 weeks) (14 weeks) (52 weeks) (53 weeks) thousands, except per share data) ---------------------------------------------------------------------- Revenues Rental operations $193,243 $187,277 $740,708 $708,708 Direct sales 14,155 6,003 48,067 24,739 ---------------------------------------------------------------------- Total revenues 207,398 193,280 788,775 733,447 ---------------------------------------------------------------------- Operating Expenses Cost of rental operations 123,553 116,842 470,116 448,131 Cost of direct sales 10,482 4,754 35,830 18,899 Selling and administrative 43,451 43,357 165,814 158,034 Depreciation and amortization 10,817 10,018 41,543 39,346 ---------------------------------------------------------------------- Total operating expenses 188,303 174,971 713,303 664,410 ---------------------------------------------------------------------- Income from Operations 19,095 18,309 75,472 69,037 Interest expense 3,258 3,052 11,338 11,966 ---------------------------------------------------------------------- Income before Income Taxes 15,837 15,257 64,134 57,071 Provision for income taxes 6,033 5,798 24,207 21,687 ---------------------------------------------------------------------- Net Income $9,804 $9,459 $39,927 $35,384 ---------------------------------------------------------------------- Basic weighted average number of shares outstanding 21,037 20,793 20,942 20,710 Basic Earnings Per Common Share $0.47 $0.45 $1.91 $1.71 ---------------------------------------------------------------------- Diluted weighted average number of shares outstanding 21,240 21,042 21,199 20,900 Diluted Earnings Per Common Share $0.46 $0.45 $1.88 $1.69 ---------------------------------------------------------------------- Dividends per share $0.0175 $0.0175 $0.0700 $0.0700 CONSOLIDATED CONDENSED BALANCE SHEETS G&K Services, Inc. and Subsidiaries July 2, July 3, (U.S. dollars, in thousands) 2005 2004 ---------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $15,345 $26,931 Accounts receivable, net 83,459 71,058 Inventories 121,120 94,476 Prepaid expenses 16,587 14,902 ---------------------------------------------------------------------- Total current assets 236,511 207,367 ---------------------------------------------------------------------- Property, Plant and Equipment, net 243,307 240,609 Other Assets 423,351 354,771 ---------------------------------------------------------------------- $903,169 $802,747 ---------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $25,695 $20,511 Accrued expenses 81,523 76,470 Deferred income taxes 8,971 7,395 Current maturities of long-term debt 26,537 24,018 ---------------------------------------------------------------------- Total current liabilities 142,726 128,394 ---------------------------------------------------------------------- Long-Term Debt, net of current maturities 210,462 184,305 Deferred Income Taxes 36,900 38,256 Other Noncurrent Liabilities 37,651 26,369 Stockholders' Equity 475,430 425,423 ---------------------------------------------------------------------- $903,169 $802,747 ---------------------------------------------------------------------- CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS G&K Services, Inc. and Subsidiaries For the Twelve Months Ended --------------------- July 2, July 3, 2005 2004 (U.S. dollars, in thousands) (52 weeks) (53 weeks) ---------------------------------------------------------------------- Operating Activities: Net income $39,927 $35,384 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 41,543 39,346 Deferred income taxes 76 1,300 Tax benefit of employee stock options 767 492 Amortization of deferred compensation - restricted stock 852 937 Changes in current operating items, exclusive of acquisitions (21,817) 14,243 Other assets and liabilities 1,637 4,565 ---------------------------------------------------------------------- Net cash provided by operating activities 62,985 96,267 ---------------------------------------------------------------------- Investing Activities: Property, plant and equipment additions, net (19,408) (17,349) Acquisition of business assets and other (75,917) (26,527) ---------------------------------------------------------------------- Net cash used for investing activities (95,325) (43,876) ---------------------------------------------------------------------- Financing Activities: Proceeds from issuance of long-term debt - 1,345 Repayments of long-term debt (25,729) (12,874) Proceeds from (repayments of) short-term borrowings, net 40,400 (29,500) Cash dividends paid (1,468) (1,459) Sale of common stock 5,953 5,218 ---------------------------------------------------------------------- Net cash provided by (used for) financing activities 19,156 (37,270) ---------------------------------------------------------------------- (Decrease) / Increase in Cash and Cash Equivalents (13,184) 15,121 Effect of Exchange Rates on Cash 1,598 306 Cash and Cash Equivalents: Beginning of period 26,931 11,504 ---------------------------------------------------------------------- End of period $15,345 $26,931 ---------------------------------------------------------------------- Supplemental Cash Flow Information: Non-Cash Transactions - Debt issued in connection with business acquisitions $11,890 $ - ---------------------------------------------------------------------- *T