G&K SERVICES INC - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - January 26, 2016

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Exhibit 99.1
G&K SERVICES REPORTS FISCAL 2016 SECOND QUARTER RESULTS
Earnings Grow 11 Percent to a Record $0.92 Per Diluted Share
Organic Revenue Grows 4.7 Percent
Operating Margin Improves to 13.0 Percent
Return on Invested Capital Increases to 12.7 Percent

MINNEAPOLIS, MN, January 26, 2016 - G&K Services, Inc. (NASDAQ: GK) today reported operating results for the second quarter of its fiscal year 2016, which ended on December 26, 2015. Second quarter revenue grew 2.4 percent to $243.1 million, up from $237.3 million in last year’s second quarter, as solid organic growth was partially offset by the negative impact of foreign currency translation. Earnings per diluted share were $0.92, compared to $0.83 in the prior year period. The negative impact of foreign currency translation reduced second quarter earnings by $0.04 per diluted share compared to the prior year period.

“I couldn’t be more proud of our team’s performance, delivering record financial results in what remains a difficult operating environment,” said Douglas A. Milroy, Chairman and Chief Executive Officer. “As we move into the second half of the fiscal year, I’m confident our team and Game Plan will continue to drive strong progress toward our 15/5 Goals.”

Income Statement Review
The second quarter organic growth rate, which adjusts for the impact of currency exchange, acquisitions and divestitures, was 4.7 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 2.5 percent. Acquisitions added 0.2 percent to second quarter revenue growth.

Operating margin improved to 13.0 percent, up 90 basis points compared to last year’s second quarter. The higher operating margin was primarily driven by operating leverage from revenue growth, decreased selling and administrative costs, and lower energy costs. These gains were partially offset by higher rental merchandise expense and increased health insurance costs.

Interest expense in the quarter decreased to $1.7 million, compared to $1.9 million in the prior-year quarter, primarily due to a lower total debt level. The effective tax rate was 38.0 percent, compared to 36.5 percent in the second quarter last year. The current period tax rate was higher than last year’s second quarter due to the favorable resolution of a tax matter in the prior year. The diluted share count was 19.9 million, down slightly from last year’s second quarter.

Balance Sheet and Cash Flow
The company ended the second quarter with total debt, net of cash, of $228.3 million and a ratio of debt to total capital of 39.6 percent. On a three month annualized basis, return on invested capital (ROIC) was 12.7 percent, up 100 basis points compared to the prior year (see table below for calculation).

Cash provided by operating activities for the six months ended December 26, 2015 was $55.7 million, up 16 percent compared to $48.0 million in the prior year. The increased operating cash flow was primarily due to reduced investment in inventory and lower tax payments. Capital expenditures for the first six months of the fiscal year were $22.9 million, compared to $25.6 million in the prior year. Fiscal year to date G&K has returned $29.8 million of cash to shareholders through dividend payments and share repurchases, a 53 percent increase compared to the prior year.

Outlook
Due to the continuing decline in the value of the Canadian dollar, the company has narrowed its full year guidance. The company now expects fiscal 2016 revenue in the range of $975 million to $990 million and full year diluted earnings per share between $3.50 and $3.60. This compares to the previously announced guidance of revenue between $975 million to $1 billion and earnings of $3.50 to $3.70 per diluted share. The negative impact from foreign currency exchange is now expected to reduce full year revenue by approximately 2.5 percent compared to fiscal 2015 and reduce full year earnings by approximately $0.16 per diluted share.

In addition, the guidance for fiscal 2016 includes one extra week of operations compared to fiscal 2015 due to the timing of the fiscal calendar. This extra week of operations is expected to add approximately 2 percent to both revenue and earnings for the year. In fiscal 2017 the company will return to a normal 52 week 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 February 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 is the largest such provider in 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.
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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 net 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 December 26, 2015 and December 27, 2014.
(unaudited)
For the Three Months Ended
 
December 26,
 
December 27,
(U.S. Dollars, in thousands)
2015
 
2014
Numerator:
 
 
 
Income from operations
31,484

 
28,624

Income taxes at 37.5 percent
11,807

 
10,734

       Income from operations after tax
19,677

 
17,890

Annualized income from operations after tax
78,708

 
71,560

 
 
 
 
Denominator:
 
 
 
Current maturities of long-term debt
—

 
560

Long-term debt
254,777

 
240,083

Total stockholders' equity
389,317

 
385,217

Less: cash and cash equivalents
(26,449
)
 
(13,034
)
Total capital
617,645

 
612,826

 
 
 
 
Return on invested capital
12.7
%
 
11.7
%




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
G&K Services, Inc. and Subsidiaries
(unaudited)
 
For the Three Months Ended
 
For the Six Months Ended
(U.S. Dollars, in thousands, except per share data)
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
 
 
 
 
 
 
 
 
Rental and direct sale revenue
$
243,060

 
$
237,309

 
$
480,231

 
$
467,551

 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
Cost of rental and direct sale revenue
160,030

 
156,993

 
316,118

 
308,445

Selling and administrative
51,546

 
51,692

 
104,751

 
103,632

Total operating expenses
211,576

 
208,685

 
420,869

 
412,077

 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS
31,484

 
28,624

 
59,362

 
55,474

Interest expense
1,656

 
1,923

 
3,283

 
3,718

INCOME BEFORE INCOME TAXES
29,828

 
26,701

 
56,079

 
51,756

Provision for income taxes
11,335

 
9,748

 
21,323

 
18,435

NET INCOME
$
18,493

 
$
16,953

 
$
34,756

 
$
33,321

 
 
 
 
 
 
 
 
        BASIC EARNINGS PER COMMON SHARE
$
0.93

 
$
0.85

 
$
1.74

 
$
1.67

        DILUTED EARNINGS PER COMMON SHARE
$
0.92

 
$
0.83

 
$
1.72

 
$
1.64

 
 
 
 
 
 
 
 
Earnings available to common stockholders:
 
 
 
 
 
 
 
Net income
$
18,493

 
$
16,953

 
$
34,756

 
$
33,321

Less: Income allocable to participating securities
(271
)
 
(303
)
 
(498
)
 
(536
)
Net income available to common stockholders
$
18,222

 
$
16,650

 
$
34,258

 
$
32,785

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding, basic
19,665

 
19,654

 
19,696

 
19,641

Weighted average number of shares outstanding, diluted
19,870

 
20,039

 
19,936

 
20,019

 
 
 
 
 
 
 
 
Dividends Declared per Share
$
0.37

 
$
0.31

 
$
0.74

 
$
0.62

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




CONDENSED CONSOLIDATED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
 
December 26, 2015
 
June 27, 2015
(U.S. Dollars, in thousands)
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
26,449

 
$
16,235

Accounts receivable, net
102,228

 
100,402

Inventory
39,181

 
36,258

Merchandise in service, net
133,843

 
133,942

Other current assets
18,431

 
30,383

Total current assets
320,132

 
317,220

 
 
 
 
Property, plant and equipment, net
224,694

 
222,056

Goodwill
320,992

 
325,183

Other noncurrent assets
58,028

 
64,406

Total assets
$
923,846

 
$
928,865

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
48,255

 
$
51,616

Accrued expenses and other current liabilities
69,865

 
71,739

Deferred income taxes
32,436

 
31,097

Current maturities of long-term debt
—

 
169

Total current liabilities
150,556

 
154,621

 
 
 
 
Long-term debt, net of current maturities
254,777

 
243,600

Deferred income taxes
29,634

 
28,851

Other noncurrent liabilities
99,562

 
107,443

Stockholders' Equity
389,317

 
394,350

Total liabilities and stockholders' equity
$
923,846

 
$
928,865





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
(unaudited)
 
For the Six Months Ended
 
December 26,
 
December 27,
(U.S. Dollars, in thousands)
2015
 
2014
Operating Activities:
 
 
 
Net income
$
34,756

 
$
33,321

Adjustments to reconcile net income to net cash provided by operating activities -
 
 
 
Depreciation and amortization
17,242

 
15,837

Deferred income taxes
6,183

 
4,788

Share-based compensation
3,399

 
3,314

Changes in operating items, exclusive of acquisitions and divestitures-
 
 
 
Accounts receivable
(3,758
)
 
(3,049
)
Inventory and merchandise in service
(4,168
)
 
(10,902
)
Accounts payable
(2,254
)
 
10,490

Other current assets and liabilities
10,357

 
1,592

      Other
(6,109
)
 
(7,376
)
Net cash provided by operating activities
55,648

 
48,015

Investing Activities:
 
 
 
Capital expenditures
(22,933
)
 
(25,562
)
Acquisition of business
(2,146
)
 
—

Net cash used for investing activities
(25,079
)
 
(25,562
)
Financing Activities:
 
 
 
Repayments of long-term debt
(75,168
)
 
(508
)
Proceeds from (repayments of) revolving credit facilities, net
86,177

 
(25,857
)
Cash dividends paid
(14,797
)
 
(12,357
)
Proceeds from issuance of common stock under stock option plans
731

 
2,080

Repurchase of common stock
(15,020
)
 
(7,094
)
Shares withheld for taxes under equity compensation plans
(2,992
)
 
(1,575
)
Excess tax benefit of shared-based compensation
1,911

 
1,703

Net cash used for financing activities
(19,158
)
 
(43,608
)
Effect of Exchange Rates on Cash
(1,197
)
 
(2,929
)
Increase in Cash and Cash Equivalents
10,214

 
(24,084
)
 
 
 
 
Cash and Cash Equivalents:
 
 
 
Beginning of period
16,235

 
37,118

End of period
$
26,449

 
$
13,034

 
 
 
 
Supplemental Cash Flow Information
 
 
 
Cash paid for-
$
(3,274
)
 
$
(3,464
)
   Interest
$
(1,842
)
 
$
(7,353
)
   Income taxes
 
 
 
Supplemental Non-cash Investing Information
 
 
 
Capital expenditures included in accounts payable
$
3,031

 
$
1,026

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



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