<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
F O R M 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2000 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)
(952) 912-5500
(Registrant's telephone number, including area 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 November 9, 2000
Common Stock, par value $.50 per share 19,066,372
CLASS B Outstanding November 9, 2000
Common Stock, par value $.50 per share 1,474,996
<PAGE>
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
G&K SERVICES, INC. AND SUBSIDIARIES September 30,
2000 July 1,
ASSETS (In thousands, except share data) (Unaudited) 2000
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,754 $ 6,420
Accounts receivable, less allowance for doubtful
accounts of $3,106 and $3,138 63,982 63,970
Inventories 90,145 89,975
Prepaid expenses 13,801 15,496
Prepaid income taxes - 441
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Total current assets 174,682 176,302
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PROPERTY, PLANT AND EQUIPMENT
Land 25,538 25,845
Buildings and improvements 102,306 101,636
Machinery and equipment 210,859 206,033
Automobiles and trucks 38,884 39,208
Less accumulated depreciation (160,346) (156,288)
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Total property, plant and equipment 217,241 216,434
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OTHER ASSETS
Goodwill, net 143,019 144,229
Restrictive covenants and customer lists, net 39,966 40,911
Other, principally retirement plan assets 17,534 17,076
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Total other assets 200,519 202,216
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$592,442 $594,952
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 15,228 $ 15,892
Accrued expenses
Salaries and employee benefits 20,527 19,678
Other 20,049 18,300
Deferred income taxes 14,348 14,406
Current maturities of long-term debt 43,769 58,355
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Total current liabilities 113,921 126,631
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LONG-TERM DEBT 169,446 167,345
DEFERRED INCOME TAXES 15,074 15,243
OTHER NONCURRENT LIABILITIES 14,560 14,211
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STOCKHOLDERS' EQUITY
Common stock, $.50 par
Class A, 50,000,000 shares authorized, 19,061,299
and 19,061,299 shares issued and outstanding 9,531 9,531
Class B, 10,000,000 shares authorized, 1,474,996
and 1,474,996 shares issued and outstanding 738 738
Additional paid-in capital 26,806 26,679
Retained earnings 256,086 246,629
Deferred compensation (2,458) (2,464)
Accumulated other comprehensive income (11,262) (9,591)
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Total stockholders' equity 279,441 271,522
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$592,442 $594,952
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
G&K SERVICES, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
----------------------------------------------
September 30, September 25,
(In thousands, except per share data) 2000 1999
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<S> <C> <C>
REVENUES
Rental operations $141,898 $130,536
Direct sales 4,043 4,424
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Total revenues 145,941 134,960
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OPERATING EXPENSES
Cost of rental operations 81,163 73,181
Cost of direct sales 3,315 3,713
Selling and administrative 31,832 29,716
Depreciation 7,000 7,004
Amortization of intangibles 2,425 2,140
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Total operating expenses 125,735 115,754
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INCOME FROM OPERATIONS 20,206 19,206
Interest expense 4,399 3,886
Other income, net (581) (573)
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INCOME BEFORE INCOME TAXES 16,388 15,893
Provision for income taxes 6,571 6,310
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NET INCOME $ 9,817 $ 9,583
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Basic weighted average number
of shares outstanding 20,477 20,459
BASIC EARNINGS PER COMMON SHARE $ 0.48 $ 0.47
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Diluted weighted average number
of shares outstanding 20,503 20,535
DILUTED EARNINGS PER COMMON SHARE $ 0.48 $ 0.47
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
G&K SERVICES, INC. AND SUBSIDIARIES
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------------------------
September 30, September 25,
(In thousands) 2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $9,817 $9,583
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 9,425 9,144
Deferred income taxes (159) 121
Changes in current operating items, exclusive
of acquisitions-
Accounts receivable and prepaid expenses 1,469 (2,269)
Inventories (396) 798
Accounts payable and other accrued expenses 2,491 7,922
Other, net 256 178
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Net cash provided by operating activities 22,903 25,477
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INVESTING ACTIVITIES:
Property, plant and equipment additions, net (8,219) (13,031)
Acquisition of business assets (741) (9,462)
Purchase of investments, net (252) (282)
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Net cash used for investing activities (9,212) (22,775)
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FINANCING ACTIVITIES:
Proceeds from debt financing 42,300 10,018
Repayments of debt financing (55,219) (17,944)
Cash dividends paid (359) (359)
Sale of common stock - 207
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Net cash used for financing activities (13,278) (8,078)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 413 (5,376)
EFFECT OF EXCHANGE RATES ON CASH (79) (10)
CASH AND CASH EQUIVALENTS:
Beginning of period 6,420 6,297
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End of period $6,754 $ 911
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for -
Interest $3,800 $3,698
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Income taxes $2,937 $2,020
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</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
G&K SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Three month periods ended September 30, 2000 and September 25, 1999
(Unaudited)
The consolidated financial statements included herein, except
for the July 1, 2000 balance sheet which was extracted from the audited
consolidated financial statements for the fiscal year ended July 1,
2000, have been prepared by G&K Services, Inc. (the Company), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. 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 of the Company as of September 30, 2000,
and the results of its operations and its cash flows for the three
months ended September 30, 2000 and September 25, 1999. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures herein are adequate to make the information presented not
misleading. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report.
The results of operations for the three month periods ended
September 30, 2000, and September 25, 1999, are not necessarily
indicative of the results to be expected for the full year.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies followed by the Company are set forth in
Note 1 to the Company's Annual Consolidated Financial Statements.
NATURE OF BUSINESS
G&K Services, Inc. is a full-service uniform rental provider,
including the rental of cleanroom garments. The Company also provides
rental of nonuniform items such as floormats, dustmops and cloths,
wiping towels and selected linen items. In addition, the Company
manufactures uniforms for customers as well as uniforms for direct
sale.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly
owned. Significant intercompany balances and transactions have been
eliminated in consolidation.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in
the management of its interest rate exposure. Amounts to be paid or
received under interest rate swap agreements are accrued as interest
rates change and are recognized over the life of the swap agreements as
an adjustment to interest expense. The related amounts payable to, or
receivable from, the counterparties are included in other accrued
expenses.
PER SHARE DATA
Basic earnings per common share was computed by dividing net
income by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per common share was
computed similar to the computation of basic earnings per share, except
that the denominator is increased for the assumed exercise of dilutive
options and other dilutive securities (including nonvested restricted
stock) using the treasury stock method.
5
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
September 30, September 25,
2000 1999
---------------- ----------------
<S> <C> <C>
Weighted average number of common
shares outstanding 20,477 20,459
----------------------------------
Shares used in computation of
basic earnings per share 20,477 20,459
Weighted average effect of non-vested
restricted stock grants - 8
Weighted average common shares
issuable upon the exercise of
stock options 26 68
----------------------------------
Shares used in computation of
diluted earnings per share 20,503 20,535
----------------------------------
----------------------------------
</TABLE>
2. COMPREHENSIVE INCOME
For the three month periods ended September 30, 2000 and
September 25, 1999, the components of comprehensive income were as
follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
September 30, September 25,
2000 1999
----------------------------------
<S> <C> <C>
Net income $9,817 $9,583
Other comprehensive income
Foreign currency translation
adjustments, net of tax (1,238) (450)
Unrealized loss on investments held
for sale, net of tax - (213)
Net unrealized derivative loss (433) -
----------------------------------
Comprehensive income $8,146 $8,920
----------------------------------
----------------------------------
</TABLE>
3. LONG-TERM DEBT
During the first quarter, the Company completed a
$50,000, 8.40% private placement debt transaction with certain
institutional investors. The 10-year notes have a seven-year
average life. According to the note purchase agreement, an
initial take-down of $20,000 was completed on July 20, 2000 and
a second take-down of $15,000 was completed on September 15,
2000. A final take-down of $15,000 will be made on or about
December 15, 2000. Each take-down bears the same coupon of
8.40%. The Company has used the net proceeds from the sale of
the notes to repay existing indebtedness under its term loan and
revolving credit facility and for general corporate expenses.
6
<PAGE>
4. SEGMENT INFORMATION
The Company has two operating segments under the guidelines of
SFAS No. 131: United States and Canada. Each operating segment derives
revenues from the uniform rental business which includes garment rental
and nonuniform items such as floormats, dust mops and cloths, wiping
towels and selected linen items. No one customer's transactions account
for 10% or more of the Company's revenues.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies (see Note
1). Financial information by geographic location for the three month
periods ended September 30, 2000 and September 25, 1999 is as follows:
<TABLE>
<CAPTION>
United
States Canada Total
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<S> <C> <C> <C>
Fiscal Year 2001:
Revenues $127,060 $18,881 $145,941
Income from operations 15,050 5,156 20,206
Capital expenditures 7,676 543 8,219
Depreciation and amortization
expense 8,263 1,162 9,425
Fiscal Year 2000:
Revenues $118,341 $16,619 $134,960
Income from operations 14,375 4,831 19,206
Capital expenditures 12,171 860 13,031
Depreciation and amortization
expense 8,084 1,060 9,144
----------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Unaudited)
The percentage relationships to net sales of certain income and expense
items for the three month periods ended September 30, 2000 and September 25,
1999, and the percentage changes in these income and expense items between
periods are presented in the following table:
<TABLE>
<CAPTION>
PERCENTAGE
THREE MONTHS ENDED CHANGE
------------------------------------------------- ------------------
FY Q1 2001 vs. FY
September 30, 2000 September 25, 1999 Q1 2000
------------------------------------------------- ------------------
<S> <C> <C> <C>
Revenues:
Rental 97.2% 96.7% 8.7%
Direct 2.8 3.3 (8.6)
------------------------------------------------
Total revenues 100.0 100.0 8.1
Expenses:
Cost of rental sales 57.2 56.1 10.9
Cost of direct sales 82.0 83.9 (10.7)
------------------------------------------------
Total cost of sales 57.9 57.0 9.9
Selling and administrative 21.8 22.0 7.1
Depreciation 4.8 5.2 (0.1)
Amortization of intangibles 1.7 1.6 13.3
------------------------------------------------
Income from operations 13.8 14.2 5.2
Interest expense 3.0 2.8 13.2
Other income, net (0.4) (0.4) 1.4
------------------------------------------------
Income before income taxes 11.2 11.8 3.1
Provision for income taxes 4.5 4.7 4.1
------------------------------------------------
Net income 6.7% 7.1% 2.4%
------------------------------------------------
</TABLE>
Total revenues for the first quarter of fiscal 2001 increased 8.1% to
$145.9 million from $130.5 million in the first quarter of fiscal 2000. Rental
revenue growth for the first quarter accounted for $11.4 million, or an 8.7%
increase. The improvement in rental revenue growth rates were influenced by
several factors including the Company's focus on internal revenue growth through
an expanded sales force, improved sales productivity, new product introductions,
service marketing and acquisitions. Additionally, the Company has continued to
aggressively build its presence in the national account market through both new
sales and further penetration of existing national accounts.
Total direct sales to outside customers decreased 8.6% to $4.0 million
for the first quarter of fiscal 2001 compared to $4.4 million in the same period
of fiscal 2000. Direct sale revenue is down as the Company continues to focus on
improving efficiency and productivity of its direct sale operation. Cost of
direct sales, as a percentage of direct sales, decreased to 82.0% from 83.9% in
the same period of fiscal 2000.
Cost of rental operations increased 10.9% to $81.2 million for the
first quarter of fiscal 2001 from $73.2 million in the same period of fiscal
2000. As a percentage of rental revenues, these costs increased to 57.2% for the
first quarter of fiscal 2001 from 56.1% in the same period of fiscal 2000. The
increase reflects higher fuel costs and increased workers' compensation and
health insurance expenses.
Selling and administrative expenses increased 7.1% to $31.8 million in
the first quarter of fiscal 2001 from $29.7 million in the same period of fiscal
2000. As a percentage of revenues, selling and administrative expenses
8
<PAGE>
decreased to 21.8% in the first quarter of fiscal 2001 from 22.0% in the same
period of fiscal 2000. The decrease as a percent of revenue is largely due to
cost reductions in the direct sale operation.
Depreciation expense decreased 0.1% to $7.0 million in the first
quarter of fiscal 2001 from $7.0 million in the same period of fiscal 2000. As a
percentage of revenues, depreciation expense decreased to 4.8% in the first
quarter of fiscal 2001 from 5.2% in the same period of fiscal 2000. Fixed asset
additions supporting revenue growth were largely offset by the equipment
purchased in fiscal 1998 from the National Linen Service transaction that is now
fully depreciated. Capital expenditures, excluding acquisition of businesses,
were $8.2 million in the first quarter of fiscal 2001 compared to $13.0 million
in the prior year's quarter.
Amortization expense increased 13.3% to $2.4 million in the first
quarter of fiscal 2001 from $2.1 million in the first quarter of fiscal 2000.
The increase in amortization expense is due to the goodwill associated with
acquisitions made during fiscal 2000.
Income from operations increased 5.2% to $20.2 million in the first
quarter of fiscal 2001 from $19.2 million in the same period of fiscal 2000.
Operating margins decreased to 13.8% in fiscal 2001 from 14.2% in fiscal 2000.
Interest expense was $4.4 million for the first quarter of fiscal 2001,
up from $3.9 million in the same period of fiscal 2000. The increase in interest
expense is due primarily to an increase of approximately 140 basis points in the
Company's overall effective interest rate since last year. The Company's
effective tax rate increased to 40.1% in the first quarter of fiscal 2001 from
39.7% in the same period of fiscal 2000.
Net income rose 2.4% to $9.8 million in the first quarter of fiscal
2001 from $9.6 million in the same period of fiscal 2000. Basic and diluted
earnings per share for the first quarter of fiscal 2001 were $.48 per share,
compared to $.47 per share for the prior year quarter. Net income margins
decreased to 6.7% for the first quarter of fiscal 2001 compared with 7.1% in the
first quarter of fiscal 2000.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities was $22.9 million in the first
quarter of fiscal 2001 and $25.5 million in the same period of fiscal 2000. The
greater cash flow in fiscal 2000 was partially due to increases in accounts
payable and other accrued expenses in connection with the acquisition of 3-D
Services, Inc. Working capital at September 30, 2000 was $60.8 million, up 22.3%
from $49.7 million at July 1, 2000. The increase in working capital is largely
due to the issuance of $35 million of senior long-term debt replacing amounts
outstanding under other credit facilities that were classified as current
maturities of long-term debt at year end.
Cash used in investing activities was $9.2 million in the first quarter
of fiscal 2001 and $22.8 million in the first quarter of fiscal 2000. The
decrease is primarily due to the acquisition of business assets in the first
quarter of fiscal 2000.
Cash used for financing activities was $13.3 million in the first
quarter of fiscal 2001 and $8.1 million in the same period of fiscal 2000. The
long-term debt, including current maturities, decreased to $213.2 million at
September 30, 2000 from $225.7 million at July 1, 2000. The Company paid
dividends of $0.4 million during the quarter. The Company's ratio of debt to
total capitalization decreased to 43.3% at the end of the first quarter of
fiscal 2001 from 45.4% at July 1, 2000.
Stockholders' equity grew 2.9% to $279.4 million at September 30, 2000,
compared with $271.5 million at the end of fiscal 2000. G&K's return on average
equity decreased to 3.6% for the first quarter of fiscal 2001 compared with 4.0%
for the first quarter of fiscal 2000.
Management believes that cash flows generated from operations and its
credit facilities should provide adequate funding for its current businesses and
planned expansion of operations or any future acquisitions.
9
<PAGE>
MARKET RISK SENSITIVITY
The Company uses financial instruments, including fixed and variable
rate debt, as well as interest rate swaps, to finance operations and to hedge
interest rate exposures. The swap contracts are entered into for periods
consistent with related underlying exposures and do not constitute positions
independent of those exposures. The Company does not enter into contracts for
speculative purposes, nor is it a party to any leveraged instrument. There has
been no material change in the Company's market risks associated with debt and
interest rate swap obligations during the quarter ended September 30, 2000.
Statements in this document regarding ongoing trends and expectations
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve known and
unknown risks, which may cause the Company's actual results in the future to
differ materially from expected results. These risks and uncertainties include,
but are not limited to, unforeseen operating risks; the availability of capital
to finance planned growth; competition within the uniform leasing industry; and
the effects of economic conditions.
10
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
27 Financial Data Schedule (for SEC use only)
b. Reports on Form 8-K
None
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
G&K SERVICES, INC.
(Registrant)
Date: November 14, 2000 /s/ Jeffrey L. Wright
----------------------- ------------------------
Jeffrey L. Wright
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer)
/s/ Michael F. Woodard
-------------------------
Michael F. Woodard
Controller
(Principal Accounting Officer)
12
