MINNEAPOLIS--(BUSINESS WIRE)--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.
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 | |||||||||||||||||||
December 26, | December 27, | December 26, | December 27, | |||||||||||||||||
(U.S. Dollars, in thousands, except per share data) | 2015 | 2014 | 2015 | 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 | ||||||||
(U.S. Dollars, in thousands) | (Unaudited) | June 27, 2015 | ||||||
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 | 0 | 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 from 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- | ||||||||||
Interest | $ | (3,274 | ) | $ | (3,464 | ) | ||||
Income taxes | $ | (1,842 | ) | $ | (7,353 | ) | ||||
Supplemental Non-cash Investing Information | ||||||||||
Capital expenditures included in accounts payable | $ | 3,031 | $ | 1,026 | ||||||