<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 29, 1997 Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0449530
- --------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5995 OPUS PARKWAY, SUITE 500
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices and zip code)
(612) 912-5500
(Registrant's telephone number, including zip code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
CLASS A Outstanding April 20, 1997
Common Stock, par value $.50 per share 18,985,592
CLASS B Outstanding April 20, 1997
Common Stock, par value $.50 per share 1,474,996
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G&K SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 29 June 29
1997 1996
------------- -------------
(UNAUDITED) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,279 $ 6,882
Accounts receivable, net 40,413 36,696
Inventories-
New goods 16,489 16,942
Goods in service 41,398 35,135
Prepaid expenses 3,941 3,995
------------- ------------
Total current assets 103,520 99,650
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PROPERTY, PLANT AND EQUIPMENT
Land 19,494 19,326
Buildings and improvements 66,474 61,756
Machinery and equipment 137,374 118,955
Automobiles and trucks 27,553 25,028
Less accumulated depreciation (105,872) (92,167)
------------- ------------
145,023 132,898
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OTHER ASSETS
Goodwill 34,421 34,642
Restrictive covenants, customer lists,
and other assets arising from acquisitions 6,566 6,860
Other, principally executive retirement plan assets 8,047 7,939
------------- ------------
Total other assets 49,034 49,441
------------- ------------
$ 297,577 $ 281,989
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,514 $ 13,068
Accrued expenses -
Salaries and employee benefits 10,591 10,265
Other 10,368 7,151
Reserve for income taxes 8,274 10,280
Current maturities of debt 28,242 9,049
------------- ------------
Total current liabilities 65,989 49,813
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LONG TERM DEBT, NET OF CURRENT MATURITIES 54,164 75,143
DEFERRED INCOME TAXES 9,747 10,093
OTHER NONCURRENT LIABILITIES 7,009 6,293
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STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 18,985,159 and
18,915,725 shares issued and outstanding 9,493 9,458
Class B, 10,000,000 shares authorized, 1,474,996 and
1,521,121 shares issued and outstanding 738 761
Additional paid-in capital 19,881 19,758
Retained earnings 136,898 116,465
Cumulative translation adjustment (6,342) (5,795)
------------- ------------
Total stockholders' equity 160,668 140,647
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$ 297,577 $ 281,989
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
Page 2
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G&K SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -----------------------------
MARCH 29 MARCH 30 MARCH 29 MARCH 30
1997 1996 1997 1996
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Rental operations $85,032 $75,117 $248,628 $216,828
Direct sales 3,433 2,361 10,585 6,692
--------- -------- --------- --------
Total revenues 88,465 77,478 259,213 223,520
--------- -------- --------- --------
EXPENSES
Cost of rental operations 46,221 41,339 135,451 121,464
Cost of direct sales 2,635 1,835 8,217 5,139
Selling and administrative 20,753 17,507 60,178 48,740
Depreciation 5,118 4,679 14,559 13,116
Amortization of intangibles 619 627 1,679 1,902
--------- -------- --------- --------
Total expenses 75,346 65,987 220,084 190,361
--------- -------- --------- --------
INCOME FROM OPERATIONS 13,119 11,491 39,129 33,159
Interest expense 1,560 1,909 4,828 6,246
Other (income) expense, net (491) 310 (994) (17)
--------- -------- --------- --------
INCOME BEFORE INCOME TAXES 12,050 9,272 35,295 26,930
Provision for income taxes 4,681 3,560 13,789 10,456
--------- -------- --------- --------
NET INCOME $7,369 $5,712 $21,506 $16,474
--------- -------- --------- --------
--------- -------- --------- --------
Weighted average number of
shares outstanding 20,449 20,406 20,444 20,406
NET INCOME PER SHARE $0.36 $0.28 $1.05 $0.81
--------- -------- --------- --------
--------- -------- --------- --------
DIVIDENDS PER SHARE $0.0175 $0.0175 $0.0525 $0.0525
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
Page 3
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G&K SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
--------------------------- -------------------------
MAR 29, '97 MAR 30, '96 MAR 29, '97 MAR 30, '96
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,369 $ 5,712 $ 21,506 $ 16,474
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 5,736 5,306 16,237 15,018
Noncurrent deferred income taxes (106) (110) (331) (331)
Change in current operating items-
Inventories (1,178) 404 (5,916) (2,100)
Accounts receivable and prepaid expenses 2,813 127 (3,767) (3,693)
Accounts payable and other current liabilities (5,645) 722 (2,969) (1,295)
Other, net (1,344) 552 (121) 1,530
---------- ---------- ----------- -----------
Net cash provided by operating activities 7,645 12,713 24,639 25,603
---------- ---------- ----------- -----------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Property, plant and equipment additions, net (7,623) (7,639) (25,587) (27,008)
Acquisitions of operating assets 0 0 (1,948) 0
---------- ---------- ----------- -----------
Net cash used for investment activities (7,623) (7,639) (27,535) (27,008)
---------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 8 11 12 11
Proceeds from issuance of long-term debt 565 0 13,335 17,605
Repayments of long-term debt (1,187) (9,835) (14,980) (17,174)
Cash dividends paid (359) (358) (1,074) (1,072)
---------- ---------- ----------- -----------
Net cash provided by (used for) financing activities (973) (10,182) (2,707) (630)
---------- ---------- ----------- -----------
INCREASE (DECREASE) IN CASH (951) (5,108) (5,603) (2,035)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Cash:
Beginning of the period 2,230 6,118 6,882 3,045
---------- ---------- ----------- -----------
End of the period $ 1,279 $ 1,010 $ 1,279 $ 1,010
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
Page 4
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G&K SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and nine month periods ended March 29, 1997 and March 30, 1996
(Unaudited)
1. The consolidated financial statements included herein, except for the June
29, 1996, balance sheet which was extracted from the audited financial
statements of June 29, 1996, have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's latest
annual report.
2. In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of March 29, 1997, and June 29, 1996, and the results of operations for the
three and nine months ended March 29, 1997 and March 30, 1996, and the
changes in financial position for the three and nine month periods then
ended.
The accounting policies followed by the Company are set forth in Note 1 to
the Company's Annual Consolidated Financial Statements.
The results of operations for the three and nine month periods ended March
29, 1997, are not necessarily indicative of the results to be expected for
the full year.
3. Net income per share is based on the weighted average number of shares of
common stock outstanding during the applicable period.
4. In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," (SFAS
128), which changes the way companies calculate their earnings per share
(EPS). SFAS 128 replaces primary EPS with basic EPS. Basic EPS is
computed by dividing reported earnings by weighted average shares
outstanding, excluding potentially dilutive securities. Fully diluted
EPS, termed diluted EPS under SFAS 128, is also to be disclosed. The
Company is required to adopt SFAS 128 in the second quarter of fiscal
1998 at which time all prior period EPS are to be restated in accordance
with SFAS 128.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
REVENUES
Rental revenues from rentals and services totaled $85,032,000 and
$75,117,000 for the third quarter of fiscal 1997 and 1996 respectively, and
$248,628,000 and $216,828,000 for the first nine months of fiscal 1997 and 1996
respectively. Revenues for G&K's U.S. rental operations grew at 13.3% rate for
the third quarter and 15% for the first nine months of fiscal 1997 when compared
with the same periods last year. Increased new account sales, expansion of
existing accounts, selective price increases, new market entries, and good
customer retention rates helped achieve this result. Revenues for Canadian
rental operations increased at a 12.7% rate for the third quarter and 13.0% rate
for the first nine months of fiscal 1997 compared to the same periods last year.
Revenues in Canadian dollars increased 11.9% for the third quarter and 12.8% for
the first nine months when compared to the same periods last year. There were no
significant changes in product mix or selling prices during the first nine
months fiscal 1997.
Revenues from direct sales totaled $3,433,000 and $2,361,000 for the third
quarter fiscal 1997 and 1996 respectively. Revenues from direct sales totaled
$10,585,000 and $6,692,000 for the first nine months of fiscal 1997 and 1996
respectively. Increase in direct sales is due to higher U.S. manufacturing
division external revenues which utilize our manufacturing capacities above
internal needs.
.
EXPENSES
Cost of rental operations totaled $46,221,000 and $41,339,000 representing
54.4% and 55.0% of revenues from rental operations for the third quarter fiscal
1997 and 1996 respectively, and $135,451,000 and $121,464,000 representing 54.5%
and 56.0% of revenues for rental operations for the first nine months of fiscal
1997 and 1996 respectively. These improvements are a result of decreased
production and merchandise costs that come from efficiencies gained in the
rental operations and manufacturing of rental garments.
Costs of direct sales were $8,217,000 and $5,139,000 representing 77.6%
and 76.8% of direct sales for the first nine months of fiscal 1997 and 1996
respectively. The increase in cost of direct sales as a percent of revenues is
due to reduced gross margins on outside sales.
Selling and administrative expenses were $20,753,000 and $17,507,000
representing 23.5% and 22.6% of revenues for the third quarter of fiscal 1997
and 1996 respectively, and $60,178,000 and $48,740,000 representing 23.2% and
21.8% of revenues for nine months ended fiscal 1997 and 1996 respectively. The
increase is primarily from the addition of new locations along with sales,
marketing and training costs from continued development and maintenance of
projects that maximize our continued internal sales growth rates.
Depreciation expense equaled $5,118,000 and $4,679,000, for the third
quarter of fiscal 1997 and 1996 respectively. Depreciation totaled $14,559,000
and $13,116,000 for nine months ended fiscal 1997 and 1996 respectively. The
increase in depreciation of 9.4% and 11.0% respectively, is the result of
investment of capital into new and existing locations.
6
<PAGE>
Interest expense of $4,828,000 decreased 22.7% in the first nine months of
fiscal 1997 when compared with the same period last year. The decrease is a
result of lower average interest rates.
Effective income tax rates were 39.3% and 38.9% in the first nine months of
fiscal 1997 and 1996.
NET INCOME
Net income for the third quarter of fiscal 1997 totaled $7,369,000
representing a 29.0% increase compared with the same period in 1996. Net income
for nine months of fiscal 1997 totaled $21,506,000 representing a 30.5% increase
compared with the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were $24,639,000 in the first nine
months of fiscal 1997 compared with $25,603,000 in the same period last year.
The slight decrease is primarily the result of higher net income before
depreciation and amortization, off-set by growth in inventory and accounts
payable and other current liabilities.
Net cash used for financing activities of $2,707,000 in the first nine
months of fiscal 1997 included the repayment of senior notes payable of
$9,000,000 offset by additional borrowing on the long term line of credit. Net
cash used in the first nine months of fiscal 1996 of $630,000 included a
payment on senior notes payable of $6,197,000 and additional borrowing on the
long term line of credit.
Management believes that funds generated from operations and existing lines
of credit should provide adequate funding for current business operations and
debt service requirements.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-Q and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are forward-looking, such as statements relating to
plans for future expansion and other business development activities, as well as
other capital spending, financial sources and the effects of regulation and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect future results and, accordingly,
such results may differ from those expressed in any forward-looking statement
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to development and business activities,
dependence on existing management, domestic or global economic conditions,
changes in federal or state laws or the administration of such laws, as well as
all other risks and uncertainties described in the Company's filings.
7
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
Exhibit 27 - Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K.
Not Applicable.
8
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
G&K SERVICES, INC.
(Registrant)
Date: May 13, 1997 /s/ Richard Fink
------------------ ---------------------------
Richard Fink
Chairman of the Board
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
G&K SERVICES, INC.
(Registrant)
Date: May 13, 1997
------------------ ---------------------------
Richard Fink
Chairman of the Board
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> MAR-29-1997
<CASH> 1,279
<SECURITIES> 0
<RECEIVABLES> 42,475
<ALLOWANCES> (2,062)
<INVENTORY> 57,887
<CURRENT-ASSETS> 103,520
<PP&E> 250,895
<DEPRECIATION> (105,872)
<TOTAL-ASSETS> 297,577
<CURRENT-LIABILITIES> 65,989
<BONDS> 0
0
0
<COMMON> 10,231
<OTHER-SE> 150,432
<TOTAL-LIABILITY-AND-EQUITY> 297,577
<SALES> 10,585
<TOTAL-REVENUES> 259,213
<CGS> 8,217
<TOTAL-COSTS> 220,084
<OTHER-EXPENSES> (994)
<LOSS-PROVISION> 1,810
<INTEREST-EXPENSE> 4,828
<INCOME-PRETAX> 35,295
<INCOME-TAX> 13,789
<INCOME-CONTINUING> 21,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,506
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
</TABLE>
