G&K Services, Inc. (NASDAQ: GK) today reported operating results for the first quarter of its fiscal year 2017, which ended on October 1, 2016. First quarter revenue grew 1.6 percent to $241.0 million, compared to $237.2 million in last year’s first quarter. Earnings per diluted share were $0.50, compared to $0.80 in the prior year period. First quarter earnings included $0.24 per share of merger-related costs, a previously disclosed $0.19 per share pension settlement charge, and a $0.04 per share benefit due to the adoption of a new accounting standard for employee share-based payments. Excluding these items, adjusted non-GAAP earnings grew 11 percent to $0.89 per diluted share (see reconciliation table).
“Our first quarter results demonstrate the underlying strength of our business, as our team continued to deliver solid profitability improvements and adjusted earnings growth,” said Douglas A. Milroy, Chairman and Chief Executive Officer. “We remain confident that our pending merger with Cintas will be completed and look forward to closing the transaction later this fiscal year.”
Income Statement Review
The
first quarter organic growth rate, which adjusts for the impact of
currency exchange, acquisitions and divestitures, was 1.6 percent.
First quarter operating margin, including the impact of merger-related costs and the pension settlement charge, was 7.7 percent. Excluding these items, adjusted operating margin improved to 12.7 percent, compared to 11.8 percent in last year’s first quarter (see reconciliation table). The improvement in adjusted operating margin was primarily driven by lower rental merchandise expense, decreased selling costs, and operating leverage from revenue growth.
Interest expense in the quarter increased to $2.0 million, compared to $1.6 million in the prior year quarter, primarily due to a higher effective interest rate from an interest rate swap contract that became effective during the quarter. This swap contract limits the company’s interest rate risk by effectively converting variable rate debt to a fixed rate.
As previously disclosed, in an effort to reduce the risk in its pension plan the company offered former employees who were vested in the plan the opportunity to receive a lump-sum payment of their entire pension benefit. For those plan participants who elected the lump-sum distribution, payments were made during the first quarter, which resulted in an after-tax settlement loss of $3.8 million, or $0.19 per share, that was recognized in the quarter. All payments were made from pension plan trust assets.
Also during the quarter, the company adopted Accounting Standards Update 2016-09 (ASU 2016-09), Improvements to Employee Share-Based Payment Accounting. The adoption of this guidance is expected to increase the volatility of the company’s effective tax rate, as the excess tax benefit related to stock options exercised and vested restricted stock are recorded as income tax expense and no longer in equity. During the first quarter, the adoption had a favorable impact on the company’s effective tax rate, which increased earnings by $0.04 per share. This favorable impact on the tax rate was offset by the tax impact of non-deductible merger-related costs. The result of these two adjustments increased the first quarter effective tax rate to 39.6 percent, compared to 38.0 percent in the prior year.
Balance Sheet and Cash Flow
The
company ended the quarter with total debt, net of cash, of $193.4
million and a ratio of debt to total capital of 35.7 percent. Net debt
was reduced by $13.5 million during the quarter.
Cash provided by operating activities increased 61 percent to $31.2 million, compared to $19.4 million in the prior year quarter. The increase was primarily driven by improved utilization of merchandise in service, improved collections of accounts receivable and an increase in accounts payable. Capital expenditures were $8.9 million, compared to $13.8 million in the first quarter last year. During the quarter the company paid dividends of $7.7 million, or $0.39 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 transaction is expected to close not later
than the second quarter of calendar year 2017, subject to approval by
the holders of G&K Services’ common stock, required regulatory
approvals, and other customary closing conditions.
Outlook
Due to the planned
merger with Cintas, G&K has withdrawn all financial guidance.
Due to the planned merger with Cintas, the company 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.
Important Information About the Transaction and
Where to Find It
This communication may be deemed to be
solicitation material in respect of the Merger. On September 29, 2016,
the Company filed a definitive proxy statement on Schedule 14A (the
“Proxy Statement”) with the Securities and Exchange Commission (the
“SEC”) in connection with the solicitation of proxies for the annual
meeting of the Company’s shareholders to be held on November 15, 2016
(the “meeting”), where, among other business, shareholders will consider
the Merger. The Proxy Statement and a proxy card have been mailed 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 Proxy Statement and in Company’s Annual Report on Form 10-K for the
fiscal year ended July 2, 2016 and in any subsequent Statements of
Change in Ownership on Form 4 filed by such individuals with the SEC,
and may be included other documents to be filed with the SEC in
connection with the proposed transaction.
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 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) 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. These risks, as well as
other risks associated with the proposed transaction, are more fully
discussed in the Proxy Statement. While the list of factors presented
here is, and the list of factors 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, 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 | ||||||||||||||||||||||||||
October 1, 2016 | September 26, 2015 | ||||||||||||||||||||||||||
Operating | Earnings Per | Operating | Earnings Per | ||||||||||||||||||||||||
(U.S. Dollars, in thousands, except per share data) | Revenue | Income | Net Income | Share | Revenue | Income | Net Income | Share | |||||||||||||||||||
As Reported | $ | 241,020 | $ | 18,601 | $ | 10,050 | $ | 0.50 | $ | 237,171 | $ | 27,878 | $ | 16,263 | $ | 0.80 | |||||||||||
Add: Pension Settlement Charge | - | 6,010 | 3,766 | 0.19 | - | - | - | - | |||||||||||||||||||
Add: Merger related Costs | - | 6,056 | 4,737 | 0.24 | - | - | - | - | |||||||||||||||||||
Less: Equity Compensation Charge | - | - | (823 | ) | (0.04 | ) | - | - | - | - | |||||||||||||||||
As Adjusted | $ | 241,020 | $ | 30,667 | $ | 17,730 | $ | 0.89 | $ | 237,171 | $ | 27,878 | $ | 16,263 | $ | 0.80 | |||||||||||
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 revenue growth rate to the total revenue growth rate is
presented in the table below:
Three Months Ended | ||||
October 1, 2016 | September 26, 2015 | |||
Organic growth rate | 1.6% | 5.5% | ||
Impact of foreign currency exchange rate changes | 0.0% | -2.2% | ||
Acquisitions and other changes | 0.0% | -0.3% | ||
Total revenue growth | 1.6% | 3.0% | ||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
G&K Services, Inc. and Subsidiaries | ||||||||
(Unaudited) | ||||||||
For the Three Months Ended | ||||||||
(U.S. Dollars, in thousands, except per share data) | October 1, 2016 | September 26, 2015 | ||||||
Rental and direct sale revenue | 241,020 | 237,171 | ||||||
Cost of rental and direct sale revenue | 157,363 | 156,088 | ||||||
Gross Margin | 83,657 | 81,083 | ||||||
Pension settlement charge | 6,010 | - | ||||||
Merger-related expenses | 6,056 | - | ||||||
Selling and administrative | 52,990 | 53,205 | ||||||
Income from Operations | 18,601 | 27,878 | ||||||
Interest expense | 1,961 | 1,627 | ||||||
Income before Income Taxes | 16,640 | 26,251 | ||||||
Provision for income taxes | 6,590 | 9,988 | ||||||
Net Income | $ | 10,050 | $ | 16,263 | ||||
Basic Earnings per Common Share | $ | 0.51 | $ | 0.81 | ||||
Diluted Earnings per Common Share | $ | 0.50 | $ | 0.80 | ||||
Earnings available to common stockholders: | ||||||||
Net income | $ | 10,050 | $ | 16,263 | ||||
Less: Income allocable to participating securities | (138 | ) | (227 | ) | ||||
Net income available to common stockholders | $ | 9,912 | $ | 16,036 | ||||
Weighted average shares outstanding, basic | 19,453 | 19,727 | ||||||
Weighted average shares outstanding, diluted | 19,795 | 20,001 | ||||||
Dividends Declared per Share | $ | 0.39 | $ | 0.37 | ||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||
G&K Services, Inc. and Subsidiaries | ||||||
October 1, 2016 | July 2, 2016 | |||||
(U.S. Dollars, in thousands) | (Unaudited) | |||||
ASSETS | ||||||
Current Assets | ||||||
Cash and cash equivalents | $ | 27,132 | $ | 24,279 | ||
Accounts receivable, net | 103,030 | 102,657 | ||||
Inventory | 34,554 | 34,077 | ||||
Merchandise in service, net | 130,529 | 131,801 | ||||
Other current assets | 17,333 | 20,539 | ||||
Total current assets | 312,578 | 313,353 | ||||
Property, plant and equipment, net | 228,015 | 228,642 | ||||
Goodwill | 323,607 | 324,520 | ||||
Other noncurrent assets | 55,343 | 55,022 | ||||
Total assets | $ | 919,543 | $ | 921,537 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
Current Liabilities | ||||||
Accounts payable | $ | 50,681 | $ | 44,792 | ||
Accrued expenses and other current liabilities | 65,253 | 72,736 | ||||
Current maturities of long-term debt | 22,000 | - | ||||
Total current liabilities | 137,934 | 117,528 | ||||
Long-term debt, net of current maturities | 198,548 | 231,148 | ||||
Deferred income taxes | 74,134 | 68,895 | ||||
Other noncurrent liabilities | 110,950 | 114,426 | ||||
Stockholders' Equity | 397,977 | 389,540 | ||||
Total liabilities and stockholders' equity | $ | 919,543 | $ | 921,537 | ||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
G&K Services, Inc. and Subsidiaries | ||||||||
(Unaudited) | ||||||||
For the Three Months Ended | ||||||||
October 1, | September 26, | |||||||
(U.S. Dollars, in thousands) | 2016 | 2015 | ||||||
Operating Activities: | ||||||||
Net income | $ | 10,050 | $ | 16,263 | ||||
Adjustments to reconcile net income to net cash provided by operating activities - | ||||||||
Depreciation and amortization | 9,056 | 8,455 | ||||||
Non-cash pension settlement charge | 6,010 | - | ||||||
Deferred income taxes | 710 | 4,155 | ||||||
Share-based compensation | 1,855 | 1,941 | ||||||
Changes in operating items, exclusive of acquisitions and divestitures- | ||||||||
Accounts receivable | (527 | ) | (3,969 | ) | ||||
Inventory and merchandise in service | 869 | (5,269 | ) | |||||
Accounts payable | 6,310 | 1,734 | ||||||
Other current assets and liabilities | (3,605 | ) | (4,072 | ) | ||||
Other | 500 | 206 | ||||||
Net cash provided by operating activities | 31,228 | 19,444 | ||||||
Investing Activities: | ||||||||
Capital expenditures | (8,873 | ) | (13,785 | ) | ||||
Acquisition of business | - | (1,944 | ) | |||||
Net cash used for investing activities | (8,873 | ) | (15,729 | ) | ||||
Financing Activities: | ||||||||
Repayments of long-term debt | - | (108 | ) | |||||
(Repayments of) proceeds from revolving credit facilities, net | (10,600 | ) | 13,400 | |||||
Cash dividends paid | (7,690 | ) | (7,427 | ) | ||||
Proceeds from issuance of common stock under stock option plans | 797 | 456 | ||||||
Repurchase of common stock | - | (5,882 | ) | |||||
Shares withheld for taxes under equity compensation plans | (1,848 | ) | (2,983 | ) | ||||
Excess tax benefit from shared-based compensation | - | 1,802 | ||||||
Net cash used for financing activities | (19,341 | ) | (742 | ) | ||||
Effect of Exchange Rates on Cash | (161 | ) | (707 | ) | ||||
Increase in Cash and Cash Equivalents | 2,853 | 2,266 | ||||||
Cash and Cash Equivalents: | ||||||||
Beginning of period | 24,279 | 16,235 | ||||||
End of period | $ | 27,132 | $ | 18,501 | ||||
Supplemental Cash Flow Information: | ||||||||
Cash (paid) received for- | ||||||||
Interest | $ | (926 | ) | $ | (750 | ) | ||
Income taxes | $ | (1,464 | ) | $ | 434 | |||
Supplemental Non-cash Investing Information: | ||||||||
Capital expenditures not yet paid and included in accounts payable | $ | 1,404 | $ | 2,730 |
View source version on businesswire.com: http://www.businesswire.com/news/home/20161101005281/en/
Contacts:
Jeff Huebschen, 952-912-5773
Director,
Investor Relations
jeff.huebschen@gkservices.com