G&K Services Reports Fiscal 2016 Third Quarter Results

Adjusted Earnings Grow 10 Percent to $0.89 Per Diluted Share

Adjusted Operating Margin Improves 70 Basis Points to 12.7 Percent

Return on Invested Capital Increases to 12.4 Percent

Year to Date Cash Flow from Operations Grows 18 Percent to $96 Million

MINNEAPOLIS--()--G&K Services, Inc. (NASDAQ:GK) today reported operating results for the third quarter of its fiscal year 2016, which ended on March 26, 2016. Third quarter revenue grew 2.5 percent to $239.3 million, up from $233.5 million in last year’s third quarter. Earnings per diluted share grew 10 percent to $0.89, compared to adjusted earnings of $0.81 per diluted share in the prior year period. Adjusted earnings in the prior year excluded a $0.20 per share charge related to the company’s withdrawal from multi-employer pension plans. Including this charge, prior year earnings were $0.61 per diluted share.

“Our team delivered another strong quarter with double-digit earnings growth, significant margin and ROIC expansion, and increased cash flow,” said Douglas A. Milroy, Chairman and Chief Executive Officer. “While the operating environment remains challenging, we’re staying focused on our Game Plan, which is driving steady progress toward our long-term goals.”

Income Statement Review
The third quarter organic growth rate, which adjusts for the impact of currency exchange, acquisitions and divestitures, was 3.9 percent. Organic growth was partially offset by the negative impact of a lower exchange rate for the Canadian dollar, which reduced total revenue growth by 1.6 percent. Acquisitions added 0.2 percent to third quarter revenue growth.

Operating margin improved to 12.7 percent, up 70 basis points compared to an adjusted operating margin of 12.0 percent in last year’s third quarter. The higher operating margin was primarily driven by lower energy costs, decreased workers compensation expenses, and operating leverage from revenue growth.

Interest expense in the quarter was $1.7 million, unchanged from the prior year. The effective tax rate was 37.6 percent, compared to 37.4 percent in the third quarter last year. The diluted share count was 19.7 million, as stock repurchases lowered the share count from 20.1 million in the prior year quarter.

Balance Sheet and Cash Flow
The company ended the third quarter with total debt, net of cash, of $218.4 million and a ratio of debt to total capital of 37.9 percent. On a three month annualized basis, return on invested capital (ROIC) was 12.4 percent, up 70 basis points compared to the prior year (see table below for calculation).

Cash provided by operating activities for the nine months ended March 26, 2016 was $95.5 million, up 18 percent compared to $80.9 million in the prior year. The increased operating cash flow was primarily due to lower tax payments, reduced investment in inventory, and higher net income. Capital expenditures for the first nine months of the fiscal year were $36.6 million, compared to $40.0 million in the prior year. Fiscal year to date, G&K has returned $47.5 million of cash to shareholders through dividend payments and share repurchases, a 60 percent increase compared to the prior year.

Outlook
With only one quarter remaining in its fiscal year, the company has narrowed its full year guidance. The company now expects fiscal 2016 revenue in the range of $975 million to $980 million and full year diluted earnings per share between $3.52 and $3.58. This compares to the previously announced guidance of revenue between $975 million to $990 million and earnings of $3.50 to $3.60 per diluted share.

The guidance for fiscal 2016 includes one extra week of operations compared to fiscal 2015 due to the timing of the fiscal calendar. The extra week will occur in the company’s fourth quarter. This extra week of operations is expected to add approximately 2 percent to both full year revenue and earnings. The extra week of operations will not recur in fiscal 2017, when the company will return to a normal 52 week fiscal year.

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 website at investors.gkservices.com. A replay of the call will be available on the company’s website through May 26, 2016.

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 27, 2015 and any subsequent filings with the U.S. Securities and Exchange Commission.

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 Canada. Headquartered in Minneapolis, Minnesota, G&K Services has 8,000 employees serving approximately 170,000 customer locations from 165 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 visit www.gkservices.com.

Reconciliation of GAAP to Non-GAAP Financial Measures
The 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 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:

 
All results reported in the tables below are only from our continuing operations
                               
Three Months Ended Three Months Ended
March 26, 2016 March 28, 2015
(U.S. Dollars, in thousands, except per share data) Revenue    

Operating
Income

    Net Income    

Earnings
Per Share

Revenue    

Operating
Income

    Net Income    

Earnings
Per Share

As Reported $ 239,307 $ 30,360 $ 17,854 $ 0.89 $ 233,514 $ 21,601 $ 12,429 $ 0.61
Add: Impact of pension withdrawal and associated expenses (1)   -       -       -       -   -       6,500       4,069       0.20
As Adjusted $ 239,307     $ 30,360     $ 17,854     $ 0.89 $ 233,514     $ 28,101     $ 16,498     $ 0.81
 
Nine Months Ended Nine Months Ended
March 26, 2016 March 28, 2015
(U.S. Dollars, in thousands, except per share data) Revenue    

Operating
Income

    Net Income    

Earnings
Per Share

Revenue    

Operating
Income

    Net Income    

Earnings
Per Share

As Reported $ 719,538 $ 89,723 $ 52,611 $ 2.61 $ 701,065 $ 77,075 $ 45,750 $ 2.24
Add: Impact of pension withdrawal and associated expenses (1)   -       -       -       -   -       6,500       4,069       0.21
As Adjusted $ 719,538     $ 89,723     $ 52,611     $ 2.61 $ 701,065     $ 83,575     $ 49,819     $ 2.45
 
(1) In the third quarter of fiscal 2015, we increased our estimated liability associated with the withdrawal from certain MEPPs, by $6,500.
 

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.

Return on Invested Capital
Return on invested capital (ROIC) is a non-GAAP financial measure and may not be defined and calculated by other companies in the same manner. The company uses ROIC as a measure of the effectiveness of its use of capital.

The company defines ROIC as annualized adjusted income from operations after tax, divided by the sum of total debt less cash, plus stockholders’ equity. The company assumes an average effective income tax rate of 37.5 percent. The company previously assumed an average effective income tax rate of 38.5 percent in its ROIC calculation. Beginning in the first quarter of fiscal year 2016, the assumed tax rate was changed to better reflect the company’s expectations about its tax rate in future periods.

The following table provides a calculation of ROIC on a 3-month annualized basis, for the periods ending March 26, 2016 and March 28, 2015.

   
(unaudited) For the Three Months Ended
March 26,    

March 28,

(U.S. Dollars, in thousands)     2016     2015
Numerator:
Income from operations 30,360 21,601
Add: Impact of pension withdrawal and associated expenses     0       6,500  
Adjusted income from operations 30,360 28,101
Income taxes at 37.5 percent     11,385       10,538  
Adjusted income from operations after tax     18,975       17,563  
Annualized adjusted income from operations after tax     75,900       70,252  
 
Denominator:
Current maturities of long-term debt - 337
Long-term debt 240,448 229,000
Total stockholders' equity 394,056 386,612
Less: cash and cash equivalents     (22,011 )     (13,328 )
Total capital     612,493       602,621  
             
Return on invested capital     12.4 %     11.7 %
 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
G&K Services, Inc. and Subsidiaries
(Unaudited)
               
For the Three Months Ended     For the Nine Months Ended
 
(U.S. Dollars, in thousands, except per share data)     March 26, 2016     March 28, 2015     March 26, 2016     March 28, 2015
 
Rental and direct sale revenue 239,307 233,514 719,538 701,065
Cost of rental and direct sale revenue       157,586         154,573         473,704         463,018  
Gross margin 81,721 78,941 245,834 238,047
Pension withdrawal and associated expenses - 6,500 - 6,500
Selling and administrative       51,361         50,840         156,111         154,472  
Income from Operations 30,360 21,601 89,723 77,075
Interest expense       1,749         1,745         5,032         5,463  
Income before Income Taxes 28,611 19,856 84,691 71,612
Provision for income taxes       10,757         7,427         32,080         25,862  
Net Income     $ 17,854       $ 12,429       $ 52,611       $ 45,750  
 
 
Basic Earnings per Common Share     $ 0.90       $ 0.62       $ 2.64       $ 2.29  
Diluted Earnings per Common Share     $ 0.89       $ 0.61       $ 2.61       $ 2.24  
 
Earnings available to common stockholders:
Net income $ 17,854 $ 12,429 $ 52,611 $ 45,750
Less: Income allocable to participating securities       (270 )       (235 )       (768 )       (771 )
Net income available to common stockholders     $ 17,584       $ 12,194       $ 51,843       $ 44,979  
 
Weighted average shares outstanding, basic 19,529 19,679 19,640 19,653
Weighted average shares outstanding, diluted 19,728 20,074 19,867 20,037
 
Dividends Declared per Share $ 0.37 $ 0.31 $ 1.11 $ 0.93
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
       
(U.S. Dollars, in thousands) March 26, 2016 June 27, 2015
      (Unaudited)      
ASSETS
Current Assets
Cash and cash equivalents $ 22,011 $ 16,235
Accounts receivable, net 99,763 100,402
Inventory 41,012 36,258
Merchandise in service, net 130,611 133,942
Other current assets       15,859       30,383
Total current assets       309,256       317,220
 
Property, plant and equipment, net 229,072 222,056
Goodwill 323,018 325,183
Other noncurrent assets       57,108       64,406
Total assets     $ 918,454     $ 928,865
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 47,580 $ 51,616
Accrued expenses and other current liabilities 67,205 71,739
Deferred income taxes 31,648 31,097
Current maturities of long-term debt       0       169
Total current liabilities       146,433       154,621
 
Long-term debt, net of current maturities 240,448 243,600
Deferred income taxes 36,911 28,851
Other noncurrent liabilities 100,606 107,443
Stockholders' Equity       394,056       394,350
Total liabilities and stockholders' equity     $ 918,454     $ 928,865
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
(Unaudited)
    For the Nine Months Ended
March 26,     March 28,
(U.S. Dollars, in thousands)     2016     2015
Operating Activities:
Net income $ 52,611 $ 45,750

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

Depreciation and amortization 26,435 23,873
Pension withdrawal and associated expenses - 6,500
Deferred income taxes 12,020 3,624
Share-based compensation 5,236 5,320
Changes in operating items, exclusive of acquisitions and divestitures-
Accounts receivable (540 ) 268
Inventory and merchandise in service (1,772 ) (9,518 )
Accounts payable (1,689 ) 6,224
Other current assets and liabilities 15,476 5,969
Multi-employer pension plan settlement payment (5,425 ) -
Other       (6,813 )       (7,144 )
Net cash provided by operating activities       95,539         80,866  
Investing Activities:
Capital expenditures (36,603 ) (40,022 )
Acquisition of business       (2,206 )       -  
Net cash used for investing activities       (38,809 )       (40,022 )
Financing Activities:
Repayments of long-term debt (75,168 ) (675 )
Proceeds from (repayments of) revolving credit facilities, net 71,848 (36,962 )
Cash dividends paid (22,118 ) (18,542 )
Proceeds from issuance of common stock under stock option plans 1,324 4,107
Repurchase of common stock (25,388 ) (11,158 )
Shares withheld for taxes under equity compensation plans (3,002 ) (1,600 )
Excess tax benefit from shared-based compensation       2,040         3,676  
Net cash used for financing activities       (50,464 )       (61,154 )
Effect of Exchange Rates on Cash (490 ) (3,480 )
Increase (Decrease) in Cash and Cash Equivalents 5,776 (23,790 )
 
Cash and Cash Equivalents:
Beginning of period       16,235         37,118  
End of period     $ 22,011       $ 13,328  
 
Supplemental Cash Flow Information:
Cash paid for-
Interest $ (3,969 ) $ (4,123 )
Income taxes $ (3,191 ) $ (13,187 )
Supplemental Non-cash Investing Information:
Capital expenditures included in accounts payable $ 1,647 $ 2,862
 

Contacts

G&K Services, Inc.
Jeff Huebschen, 952-912-5773
Director, Investor Relations
jeff.huebschen@gkservices.com

Release Summary

G&K SERVICES REPORTS FISCAL 2016 THIRD QUARTER RESULTS

$Cashtags

Contacts

G&K Services, Inc.
Jeff Huebschen, 952-912-5773
Director, Investor Relations
jeff.huebschen@gkservices.com