G&K Services, Inc. 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 (see reconciliation 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 |
Net Income |
Earnings Per |
Revenue |
Operating |
Net Income |
Earnings Per |
||||||||||||||||||||||||||
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 |
Net Income |
Earnings Per |
Revenue |
Operating |
Net Income |
Earnings Per |
||||||||||||||||||||||||||
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 | $ | 763 | $ | 3,031 | ||||||
View source version on businesswire.com: http://www.businesswire.com/news/home/20170131005145/en/
G&K Services, Inc.
Jeff Huebschen, 952-912-5773
Director,
Investor Relations
jeff.huebschen@gkservices.com
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