G&K Services, Inc. (NASDAQ:GK) today reported operating
results for the second quarter of its fiscal year 2017, which ended on
December 31, 2016. Second quarter revenue grew 0.4 percent to $244.1
million, compared to $243.1 million in last year's second quarter.
Earnings per diluted share were $0.46, compared to $0.92 in the prior
year period. Second quarter earnings included $0.44 per share of
merger-related costs. Excluding these costs, adjusted non-GAAP earnings
were $0.90 per diluted share (seereconciliation table).
"In the second quarter we delivered solid results, albeit dampened
somewhat by challenges related to the pending transaction," said Douglas
A. Milroy, Chairman and Chief Executive Officer. "As we work toward
closing our merger with Cintas later this year, I want to commend the
entire G&K team for maintaining focus on our Customer Promise and taking
great care of our customers, which is the foundation for our business
results."
Income Statement Review Second
quarter revenue grew 0.4 percent to $244.1 million. The second quarter
organic growth rate, which adjusts for the impact of currency exchange,
acquisitions and divestitures, was also 0.4 percent (see
reconciliation table).
Second quarter operating margin, including the impact of merger-related
costs, was 8.5 percent. Excluding merger-related costs, adjusted
operating margin was 12.6 percent, compared to 13.0 percent in last
year's second quarter. The decreased adjusted operating margin was
primarily driven by higher administrative costs and increased bad debt
expense, partially offset by lower health insurance and workers
compensation costs, and decreased rental merchandise expense.
Interest expense in the quarter increased to $2.1 million, compared to
$1.7 million in the prior year quarter, primarily due to a higher
effective interest rate. The company's effective tax rate increased to
50.6 percent, compared to 38.0 percent in last year's second quarter,
primarily due to the tax impact of non-deductible merger-related costs.
The diluted share count was 19.8 million, slightly lower than the prior
year.
Balance Sheet and Cash Flow The
company ended the quarter with total debt, net of cash, of $186.7
million and a ratio of debt to total capital of 34.8 percent. Fiscal
year to date, the company has reduced net debt by $20.2 million.
Cash provided by operating activities for the six months ended December
31, 2016 was $52.0 million, compared to $55.6 million in the prior year.
The decrease was primarily due to lower net income, lower collections of
accounts receivable due to the timing of the holidays, and higher tax
payments, partially offset by improved utilization of merchandise in
service and increased accounts payable. Capital expenditures for the
first six months of the fiscal year were $15.0 million, compared to
$22.9 million last year. Fiscal year to date, the company has paid
dividends of $15.4 million, or $0.78 per share. In connection with the
proposed merger with Cintas Corporation, the company has suspended
activity under its share repurchase program.
Proposed Merger with Cintas Corporation On
August 16, 2016, G&K Services announced an agreement under which Cintas
Corporation will acquire G&K for $97.50 per share in an all-cash
transaction valued at approximately $2.2 billion, including G&K's
outstanding indebtedness. The merger was approved by G&K Services'
shareholders on November 15, 2016. The transaction is expected to close
not later than the end of the second quarter of calendar year 2017,
subject to required regulatory approvals and other customary closing
conditions.
Outlook and Conference Call Due
to the planned merger with Cintas, G&K has withdrawn all financial
guidance and will not host a conference call this quarter.
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 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 GK and is a component of the Standard & Poor's
SmallCap 600 Index. For more information visit www.gkservices.com.
Cautionary Statements Regarding Forward Looking
Statements This communication contains "forward-looking
statements" within the meaning of the federal securities laws, including
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor from
civil litigation for forward-looking statements. Forward-looking
statements by their nature address matters that are, to different
degrees, uncertain, such as statements about the potential timing or
consummation of the proposed transaction with Cintas or the anticipated
benefits thereof, including, without limitation, future financial and
operating results. Forward-looking statements may be identified by words
such as "estimates," "anticipates," "projects," "plans," "expects,"
"intends," "believes," "seeks," "could," "should," "may" and "will" or
the negative versions thereof and similar expressions and by the context
in which they are used. Such statements are based upon our current
expectations and speak only as of the date made. These statements are
subject to various risks, uncertainties and other factors that could
cause actual results to differ from those set forth in or implied by
this press release. Factors that may cause such a difference include,
but are not limited to, risks and uncertainties related to (i) the
ability to obtain regulatory approvals, or the possibility that they may
delay the transaction or that such regulatory approval may result in the
imposition of conditions that could cause the parties to abandon the
transaction, (ii) the risk that a condition to closing of the merger may
not be satisfied, (iii) the ability of the Company and Cintas to
integrate their businesses successfully and to achieve anticipated cost
savings and other synergies, (iv) the possibility that other anticipated
benefits of the proposed transaction will not be realized, including
without limitation, anticipated revenues, expenses, earnings and other
financial results, and growth and expansion of the new combined
company's operations, and the anticipated tax treatment, (v) litigation
relating to the proposed transaction that has been or could be
instituted against the Company or Cintas or their respective directors,
(vi) possible disruptions from the proposed transaction that could harm
the Company's or Cintas' business, including current plans and
operations, (vii) the ability of the Company or Cintas to retain,
attract and hire key personnel, (viii) potential adverse reactions or
changes to relationships with clients, employees, suppliers or other
parties resulting from the announcement or completion of the merger,
(ix) potential business uncertainty, including changes to existing
business relationships, during the pendency of the merger that could
affect the Company's and/or Cintas' financial performance, (x) certain
restrictions during the pendency of the merger that may impact the
Company's and/or Cintas' ability to pursue certain business
opportunities or strategic transactions, (xi) continued availability of
capital and financing and rating agency actions, (xii) legislative,
regulatory and economic developments and (xiii) unpredictability and
severity of catastrophic events, including, but not limited to, acts of
terrorism or outbreak of war or hostilities, as well as management's
response to any of the aforementioned factors. While the list of factors
presented here is considered representative, no such list should be
considered to be a complete statement of all potential risks and
uncertainties. Unlisted factors may present significant additional
obstacles to the realization of forward-looking statements. Consequences
of material differences in results as compared with those anticipated in
the forward-looking statements could include, among other things,
business disruption, operational problems, financial loss, legal
liability to third parties and similar risks, any of which could have a
material adverse effect on the Company's or Cintas' consolidated
financial condition, results of operations, credit rating or liquidity.
Neither the Company nor Cintas undertake any obligation to update any
forward-looking statements to reflect events or circumstances arising
after the date on which they are made, except as required by law.
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, which exclude pension
settlement costs, merger-related costs, and equity compensation
adjustments, 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:
(Unaudited)
Three Months Ended
Three Months Ended
December 31, 2016
December 26, 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
$
244,145
$
20,813
$
9,262
$
0.46
$
243,060
$
31,484
$
18,493
$
0.92
Add: Merger-related Costs
-
10,067
8,754
0.44
-
-
-
-
As Adjusted
$
244,145
$
30,880
$
18,016
$
0.90
$
243,060
$
31,484
$
18,493
$
0.92
Six Months Ended
Six Months Ended
December 31, 2016
December 26, 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
$
485,165
$
39,414
$
19,312
$
0.96
$
480,231
$
59,362
$
34,756
$
1.72
Add: Pension Settlement Charge
-
6,010
3,766
0.19
-
-
-
-
Add: Merger-related Costs
-
16,123
13,491
0.68
-
-
-
-
Less: Equity Compensation Adoption (ASU 2016-09)
-
-
(823
)
(0.04
)
-
-
-
-
As Adjusted
$
485,165
$
61,547
$
35,746
$
1.79
$
480,231
$
59,362
$
34,756
$
1.72
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, measures prepared in accordance with GAAP.
Organic Growth A reconciliation
of the organic growth rate to the total revenue growth rate is presented
in the table below:
Three Months Ended
December 31, 2016
December 26, 2015
Organic growth rate
0.4
%
4.7
%
Impact of foreign currency exchange rate changes
-
-2.5
%
Acquisitions and other changes
-
0.2
%
Total revenue growth rate
0.4
%
2.4
%
Six Months Ended
December 31, 2016
December 26, 2015
Organic growth rate
1.0
%
5.1
%
Impact of foreign currency exchange rate changes
-
-2.6
%
Acquisitions and other changes
-
0.2
%
Total revenue growth rate
1.0
%
2.7
%
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 31, 2016
December 26, 2015
December 31, 2016
December 26, 2015
Rental and direct sale revenue
$
244,145
$
243,060
$
485,165
$
480,231
Cost of rental and direct sale revenue
159,236
160,030
316,599
316,118
Gross Margin
84,909
83,030
168,566
164,113
Pension settlement charge
-
-
6,010
-
Merger-related expenses
10,067
-
16,123
-
Selling and administrative
54,029
51,546
107,019
104,751
Income from Operations
20,813
31,484
39,414
59,362
Interest expense
2,065
1,656
4,026
3,283
Income before Income Taxes
18,748
29,828
35,388
56,079
Provision for income taxes
9,486
11,335
16,076
21,323
Net Income
$
9,262
$
18,493
$
19,312
$
34,756
Basic Earnings per Common Share
$
0.47
$
0.93
$
0.98
$
1.74
Diluted Earnings per Common Share
$
0.46
$
0.92
$
0.96
$
1.72
Earnings available to common stockholders:
Net income
$
9,262
$
18,493
$
19,312
$
34,756
Less: Income allocable to participating securities
(127
)
(271
)
(265
)
(498
)
Net income available to common stockholders
$
9,135
$
18,222
$
19,047
$
34,258
Weighted average shares outstanding, basic
19,465
19,665
19,459
19,696
Weighted average shares outstanding, diluted
19,826
19,870
19,810
19,936
Dividends Declared per Share
$
0.39
$
0.37
$
0.78
$
0.74
CONDENSED CONSOLIDATED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
December 31, 2016
July 2, 2016
(U.S. Dollars, in thousands)
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents
$
29,864
$
24,279
Accounts receivable, net
108,700
102,657
Inventory
36,525
34,077
Merchandise in service, net
130,915
131,801
Other current assets
15,757
20,539
Total current assets
321,761
313,353
Property, plant and equipment, net
223,777
228,642
Goodwill
322,371
324,520
Other noncurrent assets
56,539
55,022
Total assets
$
924,448
$
921,537
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable
$
53,149
$
44,792
Accrued expenses and other current liabilities
65,849
72,736
Current maturities of long-term debt
22,000
-
Total current liabilities
140,998
117,528
Long-term debt, net of current maturities
194,548
231,148
Deferred income taxes
79,209
68,895
Other noncurrent liabilities
104,384
114,426
Stockholders' Equity
405,309
389,540
Total liabilities and stockholders' equity
$
924,448
$
921,537
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
(Unaudited)
For the Six Months Ended
December 31,
December 26,
(U.S. Dollars, in thousands)
2016
2015
Operating Activities:
Net income
$
19,312
$
34,756
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization
18,241
17,242
Non-cash pension settlement charge
6,010
-
Deferred income taxes
3,740
6,183
Share-based compensation
3,604
3,399
Changes in operating items, exclusive of acquisitions and
divestitures
Accounts receivable
(6,607
)
(3,758
)
Inventory and merchandise in service
(1,699
)
(4,168
)
Accounts payable
9,530
(2,254
)
Other current assets and liabilities
(1,451
)
10,357
Other
1,367
(6,109
)
Net cash provided by operating activities
52,047
55,648
Investing Activities:
Capital expenditures
(14,980
)
(22,933
)
Acquisition of business
-
(2,146
)
Net cash used for investing activities
(14,980
)
(25,079
)
Financing Activities:
Repayments of long-term debt
-
(75,168
)
(Repayments of) proceeds from revolving credit facilities, net
(14,600
)
86,177
Cash dividends paid
(15,385
)
(14,797
)
Proceeds from issuance of common stock under stock option plans
1,028
731
Repurchase of common stock
-
(15,020
)
Shares withheld for taxes under equity compensation plans
(1,860
)
(2,992
)
Excess tax benefit from shared-based compensation
-
1,911
Net cash used for financing activities
(30,817
)
(19,158
)
Effect of Foreign Exchange Rate Changes on Cash
(665
)
(1,197
)
Increase in Cash and Cash Equivalents
5,585
10,214
Cash and Cash Equivalents:
Beginning of period
24,279
16,235
End of period
$
29,864
$
26,449
Supplemental Cash Flow Information:
Cash paid for-
Interest
$
3,734
$
3,274
Income taxes
$
7,371
$
1,842
Supplemental Non-cash Investing Information:
Capital expenditures not yet paid and included in accounts payable
