GKSR G&K Services - Class A (MM)

G&K Services, Inc. (NASDAQ: GKSR) today reported operating results for the fourth quarter of its fiscal year 2012, which ended on June 30, 2012. Fourth quarter revenue grew by 4.8 percent to $224.3 million, up from $214.0 million in the prior-year period.

The company reported fourth quarter net earnings of $0.59 per diluted share, a 20 percent increase from adjusted earnings of $0.49 per diluted share in the prior-year period. Adjusted earnings in the prior year excluded a charge of $0.08 per share related to plant consolidation and restructuring activities (see reconciliation table).

“The fourth quarter was a strong finish to a strong year for G&K,” said Douglas A. Milroy, Chief Executive Officer. “Over the past three years we have made lasting improvements in our business, which are clearly reflected in our financial results. Fourth quarter revenue, operating margin, earnings per share, and return on invested capital all reached new high points since the initiation of our game plan. Moving into fiscal 2013, we will build on these successes to drive continued performance gains.”

Income Statement ReviewFourth quarter revenue from rental operations grew solidly to $204.1 million, up from $194.0 million in the prior-year quarter. The rental organic growth rate was 5.8 percent. The organic growth rate is calculated using revenue adjusted for foreign currency exchange rate differences, acquisitions and divestitures. Rental organic growth was primarily driven by continued strong new account sales, increased revenue from existing rental customers, and improved pricing. Fourth quarter direct sales grew by 1.0 percent to $20.2 million, up from $20.0 million in the prior-year.

Fourth quarter operating margin expanded to 8.7 percent, a 100 basis point improvement from an adjusted operating margin of 7.7 percent in the prior-year. The prior-year adjusted operating margin excluded the impact of the previously mentioned charge related to plant consolidation and restructuring activities. The operating margin increase was driven by revenue growth leveraging fixed costs, lower selling and administrative expenses, and lower rental production and delivery costs as a percentage of revenue. These improvements were partially offset by an expected increase in rental merchandise expense and lower direct sale gross margins.

Net earnings also benefited from lower interest expense. Interest expense in the current quarter was $1.3 million, down from $2.2 million in the prior-year period, primarily due to a lower effective interest rate, partially offset by increased debt levels.

Balance Sheet and Cash FlowThe company ended the fiscal year with total debt, net of cash, of $198.6 million and a debt to total capital ratio of 35.1 percent. Total debt, net of cash, increased by $85.7 million compared to the prior year, due to increased borrowings used to fund the $6.00 per share special dividend payment made during the quarter. Total stockholders’ equity at the end of the fourth quarter was $403.1 million.

The company delivered another year of strong cash flow. Cash provided by operating activities during the fiscal year improved to $73.0 million, an increase of $6.0 million compared to $67.0 million in the prior year. Capital expenditures for the year were $34.0 million, up from $20.7 million in the prior year period, due to increased investments to enhance productivity and support profitable revenue growth.

OutlookThe company expects to drive continued performance gains in fiscal year 2013, despite slow employment growth and persistent weakness in the economy. The company expects fiscal 2013 revenue to be in the range of $890 million to $910 million, with earnings per diluted share between $2.20 and $2.40.

Conference Call InformationThe 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 September 16, 2012.

Safe Harbor for Forward-Looking StatementsStatements 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 July 2, 2011.

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 GKSR 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.

Comparison of GAAP to Non-GAAP Financial MeasuresThe company reports its consolidated financial results in accordance with generally accepted accounting principles (GAAP). To supplement these consolidated financial results, management believes that certain non-GAAP operating results provide a more meaningful measure on which to compare the company’s results of operations between periods. The company believes these non-GAAP results provide useful information to both management and investors by excluding certain amounts that impact comparability of the results. A reconciliation of operating income, net income and earnings per diluted share on a GAAP basis to adjusted earnings per diluted share on a non-GAAP basis is presented in the table below:

        Three Months Ended Three Months Ended June 30, 2012 July 2, 2011 (U.S. Dollars, in thousands, except per share data) Revenue    

OperatingIncome

   

NetIncome

   

EarningsPer Share

Revenue    

OperatingIncome

   

NetIncome

   

EarningsPer Share

As Reported $ 224,341     $ 19,424     $ 11,188     $ 0.59 $ 214,037     $ 14,723     $ 7,551     $ 0.41 Add: Plant consolidation and restructuring activities (3)   -       -       -         -     -         1,663         1,486         0.08   As Adjusted $ 224,341     $ 19,424     $ 11,188       $ 0.59   $ 214,037       $ 16,386       $ 9,037       $ 0.49       Twelve Months Ended Twelve Months Ended June 30, 2012 July 2, 2011 (U.S. Dollars, in thousands, except per share data) Revenue

OperatingIncome

NetIncome

EarningsPer Share

Revenue

OperatingIncome

NetIncome

EarningsPer Share

As Reported $ 869,937 $ 42,271 $ 24,147 $ 1.29 $ 828,861 $ 65,375 $ 33,160 $ 1.79 Add: Impact of pension withdrawal and associated expenses (1) - 24,004 14,626 0.78 - - - - Add: Impact of equitable adjustment to equity based compensation (2) - 1,881 1,241 0.07 - - - - Add: Plant consolidation and restructuring activities (3) - - - - - 1,663 1,486 0.08 Less: Impact of discrete tax event (4) - - (1,390 ) (0.07 ) - - - - Less: Impact of change in accounting (5)   -       -       -         -     (5,929 )       (5,929 )       (3,698 )       (0.20 ) As Adjusted $ 869,937     $ 68,156     $ 38,624       $ 2.06   $ 822,932       $ 61,109       $ 30,948       $ 1.67     * The EPS calculation for the adjustments does not foot due to rounding.  

(1)

In the third quarter of fiscal 2012 we recorded a charge associated with the estimated withdrawal from the Central States Southeast and Southwest Areas Pension Fund.

 

(2)

In the third quarter of fiscal 2012, as a result of our $6.00 per share special dividend, the Board of Directors approved an equitable adjustment to all outstanding stock options to preserve the intrinsic value of the options, which resulted in a pre-tax non-cash charge to earnings.

 

(3)

In the fourth quarter of fiscal 2011, we implemented certain plant consolidation and restructuring activities that included the closure or divestiture of three facilities.

 

(4)

In the third quarter of fiscal 2012, we recorded a tax benefit related to the final disposition of a subsidiary.

 

(5)

During the fourth quarter of fiscal 2010, we changed our business practices regarding the replacement of certain lost or damaged in-service towel and linen inventory. As a result of this change, we had a dual, non-recurring revenue stream which occurred in fiscal 2011. There were no comparable amounts recognized in fiscal 2012.

 

These non-GAAP measures are not in accordance with, or an alternative for measures prepared in accordance with, GAAP and may be different from non-GAAP measures used by other companies. Investors should consider non-GAAP measures in addition to, and not as a substitute for, or superior to, financial performance measures prepared in accordance with GAAP.

                  CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS G&K Services, Inc. and Subsidiaries (Subject to Reclassification)   For the Three Months Ended For the Twelve Months Ended (U.S. Dollars, in thousands, except per share data)    

June 30,2012

   

July 2,2011

June 30,2012

   

July 2,2011

                      REVENUES Rental operations $ 204,128 $ 194,017 $ 795,199 $ 760,304 Direct sales       20,213       20,020   74,738       68,557 Total revenues       224,341       214,037   869,937       828,861   OPERATING EXPENSES Cost of rental operations 140,382 133,315 549,622 516,631 Cost of direct sales 14,975 14,187 57,936 50,779 Pension withdrawal and associated expenses - - 24,004 - Selling and administrative       49,560       51,812   196,104       196,076 Total operating expenses       204,917       199,314   827,666       763,486                       INCOME FROM OPERATIONS 19,424 14,723 42,271 65,375 Interest expense       1,298       2,229   6,082       10,240 INCOME BEFORE INCOME TAXES 18,126 12,494 36,189 55,135 Provision for income taxes       6,938       4,943   12,042       21,975 NET INCOME     $ 11,188     $ 7,551 $ 24,147     $ 33,160   Basic weighted average number of shares outstanding 18,552 18,393 18,494 18,355 BASIC EARNINGS PER COMMON SHARE     $ 0.60     $ 0.41 $ 1.31     $ 1.81 Diluted weighted average number of shares outstanding 18,931 18,606 18,731 18,497 DILUTED EARNINGS PER COMMON SHARE     $ 0.59     $ 0.41 $ 1.29     $ 1.79   Dividends per share $ 6.195 $ 0.095 $ 6.585 $ 0.380           CONSOLIDATED CONDENSED BALANCE SHEETS G&K Services, Inc. and Subsidiaries (Subject to Reclassification)   (U.S. Dollars, in thousands)    

June 30,2012

   

July 2,2011

ASSETS Current Assets Cash and cash equivalents $ 19,604 $ 22,974 Accounts receivable, net 93,064 90,522 Inventories, net 178,226 163,050 Other current assets       12,239       21,614 Total current assets       303,133       298,160   Property, Plant, Equipment, net 187,840 185,521 Goodwill 325,336 328,219 Other Assets       57,422       54,020 Total assets     $ 873,731     $ 865,920   LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 41,358 $ 38,067 Accrued expenses 69,902 72,395 Deferred income taxes 8,439 7,626 Current maturities of long-term debt       206       40,710 Total current liabilities       119,905       158,798   Long-Term Debt, net of Current Maturities 218,018 95,188 Deferred Income Taxes 5,473 9,189 Accrued Income Taxes 11,339 13,199 Pension Withdrawal Liability 23,562 - Other Noncurrent Liabilities 92,375 74,640 Stockholders' Equity       403,059       514,906 Total Liabilities and stockholders' equity     $ 873,731     $ 865,920     CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS G&K Services, Inc. and Subsidiaries (Subject to Reclassification)         For the Twelve Months Ended June 30, July 2, (U.S. Dollars, in thousands)     2012     2011 Operating Activities: Net income $ 24,147 $ 33,160

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

Depreciation and amortization 33,983 37,600 Deferred income taxes 2,775 982 Other adjustments 6,037 4,175 Changes in current operating items (7,743 ) (7,422 ) Other assets and liabilities (9,929 ) (1,491 ) Pension withdrawal liability       23,703         -   Net cash provided by operating activities       72,973         67,004   Investing Activities: Property, plant and equipment additions, net (34,026 ) (20,670 ) Acquisition of business assets, net of cash       (1,087 )       -   Net cash used for investing activities       (35,113 )       (20,670 ) Financing Activities: Payments of long-term debt (729 ) (1,025 ) Proceeds from (payments on) revolving credit facilities, net 81,944 (24,500 ) Cash dividends paid (123,921 ) (7,105 ) Net Issuance of common stock, under stock option plans 2,858 695 Purchase of common stock       (817 )       (352 ) Net cash used for financing activities       (40,665 )       (32,287 ) (Decrease)/Increase in Cash and Cash Equivalents (2,805 ) 14,047 Effect of Exchange Rates on Cash (565 ) 153   Cash and Cash Equivalents: Beginning of period       22,974         8,774   End of period     $ 19,604       $ 22,974