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G&K Services Announces Agreement to Be Acquired by Cintas in $2.2 Billion All-Cash Transaction; Reports Record Fiscal 2016 Fourth Quarter Results

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MINNEAPOLIS--(BUSINESS WIRE)--

G&K Services, Inc. (NASDAQ: GK) today announced that its Board of Directors has unanimously approved a definitive agreement pursuant to which Cintas Corporation (NASDAQ: CTAS) will acquire G&K Services in a transaction valued at approximately $2.2 billion, including G&K's outstanding indebtedness. G&K shareholders will receive $97.50 per share in cash for each outstanding share of common stock held. This purchase price represents a nearly 20 percent premium to the stock's all-time closing high and a 69 percent premium to the stock's 52-week closing low.

"This is a compelling transaction that delivers substantial and immediate cash value to our shareholders and expands options for our customers going forward," said Douglas A. Milroy, Chairman and Chief Executive Officer. "We believe the combination has strong strategic logic and creates the right partnership to meet the evolving needs of our customers. In addition, a larger, more diversified company offers employee opportunities as well."

Mr. Milroy continued, "This transaction comes as we announce another set of strong results, with our team delivering record earnings per share and record cash flow in fiscal 2016. These results, the latest in a multi-year trend of strong performance, together with the underlying strength of our business and team, were the driving force in the value created today for our shareholders, with our Board's agreement to be acquired by Cintas."

The boards of directors of both companies have approved the transaction, which is subject to approval by the holders of G&K Services' common stock, the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions. The transaction is expected to close in the next four to six months.

BofA Merrill Lynch acted as exclusive financial advisor and Weil, Gotshal & Manges LLP and Stinson Leonard Street LLP acted as legal advisors to G&K Services.

1 LTM EBITDA on a 52-week basis.

Fiscal 2016 Fourth Quarter and Full-Year Financial Results:

Fourth quarter revenue grew 9.3 percent to $258.5 million, compared to $236.6 million in last year's fourth quarter. The fourth quarter included 14 weeks of operations, compared to 13 weeks in the prior year quarter. The extra week of operations added 7.7 percent to fourth quarter revenue growth, organic growth added 2.0 percent, and acquisitions contributed 0.3 percent. This growth was partially offset by the negative impact of a lower exchange rate for the Canadian dollar, which reduced revenue growth by 0.7 percent.

Earnings per diluted share grew to $1.00, compared to earnings of $0.71 per diluted share in the prior year period. Earnings in last year's fourth quarter included a $0.12 per share charge due to an increase in the company's environmental reserves. Excluding this charge, adjusted earnings in the prior year quarter were $0.83 per diluted share.

Fourth quarter operating margin improved to 12.7 percent, compared to 10.2 percent in last year's fourth quarter. Operating margin in the prior year included the impact of the previously mentioned charge related to environmental reserves. Excluding this charge, adjusted operating margin in last year's fourth quarter was 11.9 percent.

For the full fiscal year revenue grew 4.3 percent to $978 million and earnings increased to a company record $3.61 per diluted share. Full-year operating margin improved to 12.5 percent.

Cash provided by operating activities for the fiscal year grew to a company record $134.2 million, up 42 percent compared to $94.2 million last year. Capital expenditures for the fiscal year were $45.3 million, compared to $55.8 million last year. During the fiscal year, G&K returned $64.9 million of cash to shareholders through dividend payments and share repurchases, a 54 percent increase compared to the prior year.

Cancelling Fiscal Fourth Quarter Conference Call

In light of the announced agreement with Cintas, G&K Services has cancelled its fiscal fourth quarter 2016 conference call with analysts and investors previously scheduled for August 16, 2016 at 10:00 a.m. Central Time. G&K Services has also suspended any prior guidance provided as a result of the transaction announcement.

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 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.

Important Information About the Transaction and Where to Find It

In connection with the proposed transaction, the Company plans to file a proxy statement (the "Proxy Statement") with the Securities and Exchange Commission ("SEC"), in connection with the solicitation of proxies for a meeting of G&K Services' shareholders to be called at a future date (the "meeting"). Promptly after filing its Proxy Statement in definitive form with the SEC, the Company will mail the Proxy Statement to each shareholder entitled to vote at the meeting. Shareholders are urged to read the Proxy Statement (including any amendments or supplements thereto) and any other relevant documents that the Company will file with the SEC when they become available because they will contain important information about the proposed transaction and related matters. Shareholders may obtain, free of charge, copies of the Proxy Statement and any other documents filed by the Company with the SEC in connection with the transaction at the SEC's website (http://www.sec.gov) or by contacting the investor relations department of the Company at:

jeff.huebschen@gkservices.com
+1.952.912.5773
Investor Relations
5995 Opus Parkway
Minnetonka, MN, 55343

Participants in the Solicitation

The Company, its directors and certain executive officers are or may be deemed to be participants in the solicitation of proxies from the Company's shareholders in connection with the proposed transaction. Information regarding such participants, including their direct or indirect interests, by security holdings or otherwise, can be found in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 2015 and in any subsequent Statements of Change in Ownership on Form 4 filed by such individuals with the SEC, and will be included in the Proxy Statement and other relevant documents to be filed with the SEC in connection with the proposed transaction when the Proxy Statement becomes available.

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 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 shareholder and 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) potential litigation relating to the proposed transaction that 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. These risks, as well as other risks associated with the proposed transaction, will be more fully discussed in the Proxy Statement that will be filed with the SEC in connection with the proposed transaction. While the list of factors presented here is, and the list of factors to be presented in the Proxy Statement are, 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 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
July 2, 2016 June 27, 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 $ 258,503 $ 32,917 $ 19,828 $ 1.00 $ 236,577 $ 24,139 $ 14,120 $ 0.71
Add: Environmental Reserves (2)   -     -     -     -   -     3,904     2,446     0.12
As Adjusted $ 258,503   $ 32,917   $ 19,828   $ 1.00 $ 236,577   $ 28,043   $ 16,566   $ 0.83
 
Twelve Months Ended Twelve Months Ended
July 2, 2016 June 27, 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 $ 978,041 $ 122,640 $ 72,439 $ 3.61 $ 937,642 $ 101,214 $ 59,870 $ 2.95
Add: Impact of pension withdrawal and associated expenses (1) - - - - - 6,500 4,069 0.21
Add: Environmental Reserves (2)   -     -     -     -   -     3,904     2,446     0.12
As Adjusted $ 978,041   $ 122,640   $ 72,439   $ 3.61 $ 937,642   $ 111,618   $ 66,385   $ 3.28
 
(1) In the third quarter of fiscal 2015, we increased our estimated liability associated with the withdrawal from certain MEPPs, by $6,500.
(2) In the fourth quarter of fiscal 2015, we increased our estimated reserves for environmental related items by $3,904.
 

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.

EBITDA and Adjusted EBITDA Non-GAAP Financial Measures

The following table reconciles net income, the most directly comparable GAAP measure, to EBITDA and adjusted EBITDA, non-GAAP financial measures:

(unaudited)  
(U.S. Dollars, in thousands) Twelve months ended
July 2, 2016
Net income $ 72,439
Add: Interest expense 6,835
Add: Provision for income taxes 43,366
Add: Depreciation and amortization     36,504  
EBITDA (non-GAAP) 159,144
Less: Adjustment for 53rd week of operations     (4,443 )
Adjusted EBITDA (non-GAAP)   $ 154,701  
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
G&K Services, Inc. and Subsidiaries
(unaudited)
           
For the Three Months Ended     For the Twelve Months Ended
July 2, 2016 June 27, 2015 July 2, 2016 June 27, 2015
(U.S. Dollars, in thousands, except per share data)   (14 weeks)   (13 weeks)     (53 weeks)   (52 weeks)
 
Rental and direct sale revenue 258,503 236,577 978,041 937,642
Cost of rental and direct sale revenue     169,363       158,117       643,067       621,135  
Gross Margin 89,140 78,460 334,974 316,507
Pension withdrawal and associated expenses - - - 6,500
Selling and administrative     56,223       54,321       212,334       208,793  
Income from Operations 32,917 24,139 122,640 101,214
Interest expense     1,803       1,675       6,835       7,138  
Income before Income Taxes 31,114 22,464 115,805 94,076
Provision for income taxes     11,286       8,344       43,366       34,206  
Net Income   $ 19,828     $ 14,120     $ 72,439     $ 59,870  
 
 
Basic Earnings per Common Share   $ 1.01     $ 0.72     $ 3.65     $ 3.01  
Diluted Earnings per Common Share   $ 1.00     $ 0.71     $ 3.61     $ 2.95  
 
Earnings available to common stockholders:
Net income $ 19,828 $ 14,120 $ 72,439 $ 59,870
Less: Income allocable to participating securities     (257 )     59       (1,025 )     (713 )
Net income available to common stockholders   $ 19,571     $ 14,179     $ 71,414     $ 59,157  
 
Weighted average number of shares outstanding, basic 19,422 19,746 19,586 19,676
Weighted average number of shares outstanding, diluted 19,633 20,077 19,808 20,047
 
Dividends Declared per Share $ 0.37 $ 0.31 $ 1.48 $ 1.24
 
CONDENSED CONSOLIDATED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
     
(U.S. Dollars, in thousands) July 2, 2016 June 27, 2015
    (unaudited)      
ASSETS
Current Assets
Cash and cash equivalents $ 24,279 $ 16,235
Accounts receivable, net 102,657 100,402
Inventory 34,077 36,258
Merchandise in service, net 131,801 133,942
Other current assets     20,539       30,383
Total current assets     313,353       317,220
 
Property, plant and equipment, net 228,642 222,056
Goodwill 324,520 325,183
Other noncurrent assets     55,022       63,738
Total assets   $ 921,537     $ 928,197
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 44,792 $ 51,616
Accrued expenses and other current liabilities 72,736 71,739
Current maturities of long-term debt     0       169
Total current liabilities     117,528       123,524
 
Long-term debt, net of current maturities 231,148 243,600
Deferred income taxes 68,895 59,280
Other noncurrent liabilities 114,426 107,443
Stockholders' Equity     389,540       394,350
Total liabilities and stockholders' equity   $ 921,537     $ 928,197
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
(unaudited)
  For the Twelve Months Ended
July 2,   June 27,
2016 2015
(U.S. Dollars, in thousands)   (53 weeks)   (52 weeks)
Operating Activities:
Net income $ 72,439 $ 59,870

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

Depreciation and amortization 36,504 32,298
Pension withdrawal and associated expenses - 6,500
Deferred income taxes 19,606 18,638
Share-based compensation 6,749 6,219
Changes in operating items, exclusive of acquisitions and divestitures-
Accounts receivable (3,048 ) (2,908 )
Inventory and merchandise in service 4,590 (9,429 )
Accounts payable (3,662 ) 7,201
Other current assets and liabilities 18,789 (3,352 )
Multi-employer pension plan settlement payment (7,903 ) (24,799 )
Other     (9,888 )     3,997  
Net cash provided by operating activities     134,176       94,235  
Investing Activities:
Capital expenditures (45,349 ) (55,838 )
Acquisition of business     (2,982 )     -  
Net cash used for investing activities     (48,331 )     (55,838 )
Financing Activities:
Repayments of long-term debt (75,168 ) (843 )
Proceeds from (repayments of) revolving credit facilities, net 62,548 (22,362 )
Cash dividends paid (30,418 ) (24,544 )
Proceeds from issuance of common stock under stock option plans 2,160 6,283
Repurchase of common stock (34,524 ) (17,597 )
Shares withheld for taxes under equity compensation plans (4,750 ) (2,076 )
Excess tax benefit from shared-based compensation     2,528       5,205  
Net cash used for financing activities     (77,624 )     (55,934 )
Effect of Exchange Rates on Cash (177 ) (3,346 )
Increase (Decrease) in Cash and Cash Equivalents 8,044 (20,883 )
 
Cash and Cash Equivalents:
Beginning of year     16,235       37,118  
End of year   $ 24,279     $ 16,235  
 
Supplemental Cash Flow Information:
Cash paid for-
Interest $ 6,658 $ 6,647
Income taxes $ 11,290 $ 11,539
Supplemental Non-cash Investing Information:
Capital expenditures not yet paid and included in accounts payable $ 1,792 $ 3,662

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

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