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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended June 30, 2007
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number 0-4063
G&K SERVICES, INC.
(Exact name of registrant as specified in its charter)
| MINNESOTA | 41-0449530 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
5995 OPUS PARKWAY
MINNETONKA, MINNESOTA 55343
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices)
Registrant’s telephone number, including area code (952) 912-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
|
Name of Each Exchange on which Registered | |
Class A Common Stock (par value $0.50 per share)
|
The NASDAQ Stock Market LLC. |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(b) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the voting stock of registrant held by non-affiliates of the
registrant on December 30, 2006 (the last business day of the registrant’s most recently completed
second fiscal quarter), computed by reference to the closing sale price of such shares on such
date, and was approximately $836,237,592.
On August 20, 2007, there were outstanding 21,292,741 shares of the registrant’s Class A Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is
incorporated by reference from the registrant’s definitive proxy statement relating to the annual
meeting of shareholders to be held in November 2007, which definitive proxy statement will be filed
with the Securities and Exchange Commission within 120 days after the end of the fiscal year to
which this report relates.
G&K Services, Inc.
Form 10-K
For the fiscal year ended June 30, 2007
Form 10-K
For the fiscal year ended June 30, 2007
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PART I
ITEM 1. BUSINESS
G&K Services, Inc., founded in 1902 and currently headquartered in Minnetonka, Minnesota, is a
market leader in providing branded identity apparel and facility services programs that enhance
image and safety in the workplace. We serve a wide variety of North American industries including
automotive, warehousing, distribution, transportation, energy, manufacturing, food processing,
pharmaceutical, semi-conductor, retail, restaurants and hospitality, and many others providing them
with rented uniforms and facility services products such as floor mats, dust mops, wiping towels,
restroom supplies and selected linen items. We also sell uniforms and other apparel items to
customers in our direct sale programs. The existing North American rental market is approximately
$7.0 billion, while the existing portion of the direct sale market targeted by us is approximately
$5.0 billion.
Through internal growth and acquisitions, we have steadily expanded our operations into additional
geographic markets. We operate over 160 locations in North America. These locations service
customers in 88 of the top 100 metropolitan markets (MSAs) in the United States and Canada,
including all of the top 30 MSAs.
We target our marketing efforts towards customers and industries in geographic locations that are
expanding and are in need of a corporate image, safety or facility services program. Our marketing
efforts focus on providing innovative segmented solutions that feature proprietary products and
processes to meet stringent customer needs. Further, we are dedicated to providing our high levels
of product quality, consistent customer-centric service through multiple sales channels and best in
class program management abilities. Management believes that both existing and potential customers
large and small are willing to pay a premium price to a service provider that can consistently
support their image and safety needs in a superior manner.
Customers, Products and Services
We serve over 160,000 customers, from Fortune 100 companies to fast-growing small and midsize
firms. No single customer represents more than 1.5% of our total revenues. We serve customers in
virtually all industries including automotive, warehousing, distribution, transportation, energy,
manufacturing, food processing, pharmaceutical, semi-conductor, retail, restaurants, hospitality,
and many others. We believe that over one million people wear our uniforms every work day.
Our full-service business apparel and facility services programs provide rental-lease or purchase
options to meet varied customer needs including heavy-industrial, light-manufacturing, service
businesses, corporate casual and executive apparel markets. In addition, we offer cleanroom
garments and process control services to meet the needs of high-technology customers.
We believe that customers use branded identity apparel programs to meet a variety of critical
business needs that enhance image and safety in the workplace, including:
| • | Company safety and security – uniforms help identify employees working for a particular company or department. | ||
| • | Brand awareness – uniforms promote a company’s brand identity and employees serve as “walking billboards.” | ||
| • | Image – uniforms help companies project a professional image through their employees and frame the perception of credibility, knowledge, trust and a commitment to quality to their customers. Uniformed employees are perceived as trained, competent and dependable. | ||
| • | Employee retention – uniforms enhance worker morale and help build a teamwork attitude in addition to being a tangible employee benefit. | ||
| • | Worker protection – uniforms help protect workers from difficult environments such as heavy soils, heat, flame or chemicals. |
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| • | Product protection – uniforms and facility services help protect products against sources of contamination in the food, pharmaceutical, electronics and health care industries. |
We provide our apparel-rental customers with a full range of services and solutions. A
consultative approach is used to advise and assist our customers in creating specialized solutions
including determining garment application, setting service and distribution requirements and
choosing the appropriate fabrics, styles and colors to meet their branding, identity and safety
needs. We can quickly source and access new and used garments to provide rapid response as
customer needs change due to increases, decreases or turnover in their work force. Professional
cleaning, finishing, repair, embellishment and replacement of uniforms in use is a normal part of
the rental service. Soiled uniforms are picked up at the customer’s location and returned clean
and in good condition on a weekly cycle with all merchandise subject to a rigorous seven point
inspection program.
Uniform rental programs can provide significant customer advantages over ownership. Renting
eliminates investment in uniforms; offers flexibility in styles, colors and quantities as customer
requirements change; assures consistent professional cleaning, finishing, repair and replacement of
items in use; and provides freedom from the operating and maintenance expense, environmental
exposure and management time necessary to administer a uniform program or operate an in house
laundry.
Our facility services programs provide a wide range of dust control, maintenance, hand care and
hygiene products and services. They include several floor mat offerings (traction control, logo,
message, scraper and anti-fatigue), dust and wet mops, wiping towels, fender covers, selected linen
items and several restroom hygiene products. These products support customers’ efforts in
maintaining a clean, safe and attractive environment within their facilities for their employees
and customers.
We also offer direct sale and custom-embroidered logo apparel programs to meet customer branded
identity needs. The direct sale programs can be used for departments and/or customers that require
highly customized and branded apparel or for workers who don’t start at the same location each day
and need uniform apparel they can care for themselves. It can be a more economical approach for
high turnover positions and can be used for employee rewards and recognition, trade shows or events
or customer and vendor appreciation programs.
We also offer comprehensive direct sale uniform programs to large national account customers
through our Lion Uniform Group (Lion). Lion serves many different industries and specializes in
serving the security, transportation, airline and convenience store/retail industries. They handle
all aspects of the uniform program including design, sourcing, inventory management, distribution,
embellishment, information reporting, customer service and program management.
Acquisitions
Our industry is consolidating from many family owned and small local providers to several large
providers. We are participating in this industry consolidation. Our rental acquisition strategy
is focused on acquisitions that expand our geographic presence and/or expand our local market share
and to further leverage our existing plants.
We made several small acquisitions in each of the past three fiscal years. The pro forma effects
of these acquisitions, had they been acquired at the beginning of each fiscal year, were not
material, either individually or in the aggregate. The total purchase consideration, including
related acquisition costs of these transactions, were $46.9 million, $11.5 million and $86.8
million in fiscal 2007, 2006 and 2005, respectively. The fiscal 2005 purchase consideration
includes $11.9 million of debt issued. The total consideration for 2005 was subsequently reduced
by $1.4 million in fiscal 2006. The total purchase price exceeded the estimated fair values of
assets acquired and liabilities assumed by $27.8 million in fiscal 2007, $5.4 million in fiscal
2006 and $50.6 million in fiscal 2005.
Competition
Customers in the corporate identity apparel and facility services industry choose suppliers
primarily based upon the quality, fit, comfort, price and breadth of products offered, the fit with
their unique business environment and brand positioning needs, and the excellence of the service
they receive. While we rank among the nation’s largest garment rental suppliers, we encounter
competition from many companies in the geographic areas we serve. Competitors include publicly
held companies such as Cintas Corporation, UniFirst Corporation and others. We also compete with
numerous regional and local businesses that vary by geographic region. We believe that we compete
effectively in our lines of business because of the quality and breadth of our product line, the
development of innovative segmented marketing solutions for customers’ unique needs, the service
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excellence we provide, and our proven ability as a trusted outsource partner. In addition, our
competitors generally compete with us for acquisition candidates, which can reduce the number of
acquisition candidates available to us.
Manufacturing and Suppliers
We manufactured approximately 40% of the uniform garments that we placed into service in fiscal
2007. These garments are manufactured primarily at a Company owned facility located in the
Dominican Republic and, to a lesser degree, at two Company owned facilities in the United States.
Various outside vendors are used to supplement our additional product needs, including garments,
floor mats, dust mops, wiping towels, linens and related products. We are not aware of any
circumstances that would limit our ability to obtain raw materials to support the manufacturing
process or to obtain garments or other items to meet our customers’ needs.
Environmental Matters
Our operations are subject to various federal, state and/or local laws regulating the discharge of
materials into the environment. This includes discharges into wastewater and air, and the
generation, handling, storage, transportation and disposal of waste and hazardous substances. We
generate modest amounts of waste in connection with our laundry operations, specifically detergent
wastewater, wastewater sludge, waste oil and other residues. Some of these wastes are classified
as hazardous wastes under these laws. We continue to make significant investments in properly
handling and disposing of these wastes.
Although any environmental related liability could result in significant expenditures that, if
aggregated and assumed to occur within a single fiscal year, could be material to our results of
operations or financial position, we believe the likelihood of such occurrence is remote. Based on
information currently available and our best assessment of the ultimate amount and timing of
environmental-related events, we believe that the cost of these environmental-related matters are
not reasonably likely to have a material adverse effect on our results of operations or financial
position.
Employees
Our U.S. operations had a total of 7,720 employees as of June 30, 2007, consisting of 3,965
production employees and 3,755 sales, office, route and management personnel. Unions represent
approximately 13.0% of our U.S. employees. Management believes its domestic employee relations are
satisfactory.
Our Canadian operations had a total of 1,810 employees as of June 30, 2007, consisting of 1,125
production employees and 685 sales, office, route and management personnel. Unions represent
approximately 46.0% of our Canadian employees. Management believes Canadian employee relations are
satisfactory.
Foreign and Domestic Operations
Financial information relating to foreign and domestic operations is set forth in Note 10 of our
consolidated financial statements included in Item 8 of this Form 10-K.
Intellectual Property
We own a portfolio of registered trademarks, trade names and licenses, and certain U.S. and foreign
process and manufacturing patents relating to our business as we currently conduct it. These
proprietary properties, in the aggregate, constitute a valuable asset. Among these are the
trademarks and trade names G&K Services®, G&K TeamWear®, G&K First Step® Facility Services, G&K
ProSura™ food safety solutions, G&K ProTect™ personal safety protection, and G&K Exceed™
performance fabric brands, various logos and marketing themes and collateral. We do not believe,
however, that our business is dependent upon any single proprietary property or any particular
group of proprietary properties.
Seasonality; Working Capital
We do not consider our business to be seasonal to any extent or subject to any unusual working
capital requirements.
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Available Information
We make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form
8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. These reports are available on our website at http://www.gkservices.com. Information included on our website is not deemed to be incorporated into this Annual Report on Form 10-K.
8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. These reports are available on our website at http://www.gkservices.com. Information included on our website is not deemed to be incorporated into this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
The statements in this section, as well as statements described elsewhere in this Annual Report on
Form 10-K, or in other SEC filings, describe risks that could materially and adversely affect our
business, financial condition and results of operations and the trading price of our securities.
These risks are not the only risks that we face. Our business, financial condition and results of
operations could also be materially affected by additional factors that are not presently known to
us or that we currently consider to be immaterial to our operations.
In addition, this section sets forth statements which constitute our cautionary statements under
the Private Securities Litigation Reform Act of 1995.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation
for forward-looking statements. 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
Annual Report on Form 10-K. Factors that might cause such a difference include, but are not
limited to, the possibility of greater than anticipated operating costs, including energy costs,
lower sales volumes, the performance and costs of integration of acquisitions, fluctuations in
costs of materials and labor, costs and possible effects of union organizing activities, loss of
key management, uncertainties regarding any existing access to a work force, or newly-discovered
expenses and liabilities related to environmental compliance and remediation, failure to achieve
and maintain effective internal controls for financial reporting required by the Sarbanes-Oxley Act
of 2002, the initiation or outcome of litigation, higher sourcing or distribution costs of
products, the disruption of operations from catastrophic events, changes in federal, state and
other tax laws and the reactions of competitors in terms of price and service. We undertake no
obligation to update any forward-looking statements to reflect events or circumstances arising
after the date on which they are made.
Also note that we provide the following cautionary discussion of risks uncertainties and
assumptions relevant to our businesses. Actual results may differ from certain assumptions we have
made causing actual events to vary from expected results. These are factors that, individually or
in the aggregate, we think could cause our actual results to differ materially from expected and
historical results. We note these factors for investors as permitted by the Private Securities
Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify
all such factors. Consequently, you should not consider the following to be a complete discussion
of all potential risks or uncertainties.
General economic factors may adversely affect our financial performance.
General economic conditions may adversely affect our financial performance. Higher levels of
unemployment, inflation, tax rates and other changes in tax laws and other economic factors could
adversely affect the demand for our products and services. Increases in labor costs, including
healthcare and insurance costs, higher material costs for items such as linens and textiles, higher
fuel and other energy costs, higher interest rates, inflation, higher tax rates and other changes
in tax laws and other economic factors could increase our costs of rentals, cost of direct sales,
and other services and selling and administrative expenses and could adversely affect our operating
results.
Increased competition could adversely affect our financial performance.
We operate in highly competitive industries and compete with national, regional and local
providers. Product, design, price, quality, service and convenience to the customer are the
primary competitive elements in these industries. If existing or future competitors seek to gain
or retain market share by reducing prices, we may be required to lower prices, which could be
detrimental to our operating results. Our competitors also generally compete with us for
acquisition candidates, which can
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increase the price for acquisitions and reduce the number of
available acquisition candidates. In addition, our customers and prospects may decide to perform
certain services in-house instead of outsourcing such services. These competitive pressures could
adversely affect our sales and operating results.
Risks associated with the suppliers from whom our products are sourced could adversely affect our
operating results.
The products we sell are sourced from a wide variety of domestic and international suppliers.
Global sourcing of many of the products we sell is an important factor in our financial
performance. All of our suppliers must comply with applicable laws, including labor and
environmental laws, and otherwise be certified as meeting our required supplier standards of
conduct. Our ability to find qualified suppliers who meet our standards, and to access products in
a timely and efficient manner is a significant challenge, especially with respect to suppliers
located and goods sourced outside the United States. Political and economic stability in the
countries in which foreign suppliers are located, the financial stability of suppliers, suppliers’
failure to meet our supplier standards, labor problems experienced by our suppliers, the
availability of raw materials to suppliers, currency exchange rates, transport availability and
cost, inflation and other factors relating to the suppliers and the countries in which they are
located are beyond our control. In addition, United States and Canadian foreign trade policies,
tariffs and other impositions on imported goods, trade sanctions imposed on certain countries, the
limitation on the importation of certain types of goods or of goods containing certain materials
from other countries and other factors relating to foreign trade are beyond our control. These and
other factors affecting our suppliers and our access to products could adversely affect our
operating results.
Compliance with environmental laws and regulations could result in significant costs that adversely
affect our operating results.
Our operating locations are subject to stringent environmental laws and regulations relating to the
protection of the environment and health and safety matters, including those governing discharges
of pollutants to the air and water, the management and disposal of hazardous substances and wastes
and the clean-up of contaminated sites. The operation of our businesses entails risks under
environmental laws and regulations. We could incur significant costs, including clean-up costs,
fines and sanctions and claims by third parties for property damage and personal injury, as a
result of violations or liabilities under these laws and regulations. We are currently involved in
a limited number of remedial investigations and actions at various locations. While, based on
information currently known to us, we believe that we maintain adequate reserves with respect to
these matters, our liability could exceed forecasted amounts, and the imposition of additional
clean-up obligations or the discovery of additional contamination at these or other sites could
result in additional costs. In addition, potentially significant expenditures could be required to
comply with environmental laws and regulations, including requirements that may be adopted or
imposed in the future.
Under environmental laws, an owner or operator of real estate may be required to pay the costs of
removing or remediating hazardous materials located on or emanating from property, whether or not
the owner or operator knew of or was responsible for the presence of such hazardous materials.
While we regularly engage in environmental due diligence in connection with acquisitions, we can
give no assurance that locations that have been acquired or leased have been operated in compliance
with environmental laws and regulations during prior periods or that future uses or conditions will
not make us liable under these laws or expose us to third-party actions, including tort suits.
From time to time we are subject to legal proceedings that may adversely affect our financial
condition and operating results.
From time to time we are party to various litigation claims and legal proceedings. Certain of
these lawsuits or potential future lawsuits, if decided adversely to us or settled by us, may
result in liability material to our financial condition and operating results. We discuss these
lawsuits and other litigation to which we are party in greater detail below under the caption “Item
3. Legal Proceedings” and in Note 9 to our consolidated financial statements.
Risks associated with our acquisition policy could adversely affect our operating results.
Historically, a portion of our growth has come from acquisitions. We continue to evaluate
opportunities for acquiring businesses that may supplement our internal growth. However, there can
be no assurance that we will be able to locate and purchase suitable acquisitions. In addition,
the success of any acquisition depends in part on our ability to integrate the acquired company.
The process of integrating acquired businesses may involve unforeseen difficulties and may require
a disproportionate amount of our management’s attention and our financial and other resources.
Although we conduct due diligence investigations prior to each acquisition, there can be no
assurance that we will discover all operational deficiencies or
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material liabilities of an acquired
business for which we may be responsible as a successor owner or operator. The failure to
successfully integrate these acquired businesses or to discover such liabilities could adversely
affect our operating results.
Increases in fuel and energy costs could adversely affect our results of operations and financial
condition.
The price of fuel and energy needed to run our vehicles and equipment is unpredictable and
fluctuates based on events beyond our control, including geopolitical developments, supply and
demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries, regional production patterns, limits on
refining capacities, natural disasters and environmental concerns. Any increase in fuel and energy
costs could adversely affect our results of operations and financial condition.
Our Canadian results and Dominican Republic operations are influenced by currency fluctuations and
other risks that could have an adverse effect on our results of operations and financial condition.
Certain of our foreign revenues and operating expenses are transacted in local currencies. As a
result, our results of operations and certain receivables and payables are subject to foreign
exchange rate fluctuations.
If we are unable to preserve positive labor relationships or become the target of labor
unionization campaigns, the resulting labor unrest could disrupt our business by impairing our
ability to produce and deliver our products.
Significant portions of our Canadian labor force are unionized, and a lesser portion of United
States employees are unionized. Competitors within our industry have been the target of
unionization campaigns by multiple labor unions. While we believe that our Canadian and domestic
employee relations are satisfactory, we could experience pressure from labor unions or become the
target of campaigns similar to those faced by our competitors. If we do encounter pressure from
labor unions, any resulting labor unrest could disrupt our business by impairing our ability to
produce and deliver our products and services. In addition, significant union representation would
require us to negotiate with many of our employees collectively and could adversely affect our
results by restricting our ability to maximize the efficiency of our operations.
If we are unable to attract and retain employees our results of operations could be adversely
impacted.
Our ability to attract and retain employees is important to our operations. Our ability to expand
our operations is in part impacted by our ability to increase our labor force. In the event of a
labor shortage, or in the event of a change in prevailing labor and/or immigration laws, we could
experience difficulty in delivering our services in a high-quality or timely manner and we could be
forced to increase wages in order to attract and retain employees, which would result in higher
operating costs.
Loss of our key management or other personnel could adversely impact our business.
Our success is largely dependent on the skills, experience and efforts of our senior management and
certain other key personnel. If, for any reason, one or more senior executives or key personnel
were not to remain active in our company, our results of operations could be adversely affected.
Unexpected events could disrupt our operations and adversely affect our operating results.
Unexpected events, including fires at facilities, natural disasters such as hurricanes and
tornados, war or terrorist activities, unplanned outages, supply disruptions, failure of equipment
or systems or changes in laws and/or regulations impacting our business, could adversely affect our
operating results. These events could result in disruption of customer service, physical damage to
one or more key operating facilities, the temporary closure of one or more key operating facilities
or the temporary disruption of information systems.
Failure to achieve and maintain effective internal controls could adversely affect our business and
stock price.
Effective internal controls are necessary for us to provide reliable financial reports. All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. While we continue to evaluate our internal
controls, we cannot be certain that these measures will ensure that we implement and maintain
adequate controls over our financial processes and reporting in the future. If we fail to maintain
the adequacy of our internal controls or if we or our independent registered public accounting firm
were to discover material weaknesses in our internal controls, as such standards are modified,
supplemented or amended, we may not be able to ensure that we can conclude on an ongoing basis that
we have effective internal control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002. Failure
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to achieve and maintain an effective internal control
environment could cause us to be unable to produce reliable financial reports or prevent fraud.
This may cause investors to lose confidence in our reported financial information, which could have
a material adverse effect on our stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We occupy 174 facilities located in the United States, Canada and the Dominican Republic. These
facilities include our processing, branch, garment manufacturing, distribution and administrative
support locations. We clean and supply rental items principally from 67 industrial garment,
cleanroom garment, dust control and linen supply plants located in 51 cities in the United States
and 11 cities in Canada. We own approximately 75% of our processing facilities, each of which
average over 43,000 square feet in size.
ITEM 3. LEGAL PROCEEDINGS
We are involved in a variety of legal actions relating to personal injury, employment,
environmental and other legal matters that arise in the normal course of business. These legal
actions include but are not limited to those items set forth in Item 1. Business – Environmental
Matters and lawsuits that challenge the practice of charging for certain environmental services on
invoices and contract disputes. None of these legal actions are expected to have a material adverse
effect on our results of operations, financial position or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during the fourth quarter of
fiscal 2007.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our Class A Common Stock is quoted on the Global Select Market of The NASDAQ Stock Market LLC under
the symbol “GKSR.” The following table sets forth the high and low reported sales prices for the
Class A Common Stock as quoted on The Global Select Market of the NASDAQ Stock Market LLC, for the
periods indicated.
| High | Low | |||||||
Fiscal 2007 |
||||||||
1st Quarter |
$ | 37.12 | $ | 31.12 | ||||
2nd Quarter |
40.06 | 35.67 | ||||||
3rd Quarter |
39.99 | 35.49 | ||||||
4th Quarter |
39.95 | 34.81 | ||||||
Fiscal 2006 |
||||||||
1st Quarter |
$ | 43.10 | $ | 36.65 | ||||
2nd Quarter |
40.38 | 35.26 | ||||||
3rd Quarter |
42.95 | 38.24 | ||||||
4th Quarter |
42.47 | 34.17 | ||||||
As of August 20, 2007, we had 557 registered holders of record of our common stock.
We paid dividends of $3.4 million in fiscal 2007 and $1.5 million in both fiscal 2006 and 2005.
The increase in dividend payments is the result of increasing the dividend per share by $0.09 from
$0.07 per share in fiscal year 2006 and 2005 to $0.16 per share in fiscal year 2007. We anticipate
dividends in fiscal year 2008 to increase from $0.16 to $0.20 per share, which will result in an
estimated total dividend of $4.3 million in fiscal year 2008. Our debt agreements contain various
restrictive covenants, which, among other things, limit the payment of cash dividends we declare
during any fiscal year.
The following table sets forth certain information as of June 30, 2007 with respect to equity
compensation plans under which securities are authorized for issuance:
| Number of Securities to | Weighted-Average | Number of Securities Remaining | ||||||||||
| be Issued Upon Exercise | Exercise Price of | Available for Future Issuance | ||||||||||
| of Outstanding Options, | Outstanding Options, | Under Equity Compensation Plans | ||||||||||
| Warrants and Rights | Warrants and Rights | (Excluding Securities Reflected in | ||||||||||
| Plan category (1) | (A) | (B) | Column (A)) | |||||||||
Equity compensation plans
approved by security holders: |
||||||||||||
2006 Equity Incentive Plan (2) |
35,400 | $ | 38.42 | 1,951,900 | ||||||||
Employee Plans (3) |
1,382,222 | 35.70 | — | |||||||||
1996 Directors’ Stock Option Plan |
56,000 | 36.01 | — | |||||||||
Total: |
1,473,622 | $ | 35.78 | 1,951,900 | ||||||||
Equity compensation plans not
approved by stockholders: |
||||||||||||
None |
— | — | — | |||||||||
Total |
1,473,622 | $ | 35.78 | 1,951,900 | ||||||||
| (1) | See Note 6 to our audited financial statements included in the accompany financial statements. | |
| (2) | Approved at the November 16, 2006 shareholder meeting. | |
| (3) | Includes our 1989 Stock Option and Compensation Plan and 1998 Stock Option and Compensation Plan. |
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ISSUER PURCHASE OF EQUITY SECURITIES:
The table below sets forth information regarding repurchases we made of our common stock during the periods indicated.
| Maximum Dollar | ||||||||||||||||
| Total | Total Number of | value of shares that | ||||||||||||||
| Number of | Average | Shares Purchased as | May Yet Be | |||||||||||||
| Shares | Price Paid | Part of Publicly | Purchased Under | |||||||||||||
| Period | Purchased(1) | Per Share | Announced Plan(2) | the Plan | ||||||||||||
June 1-June 30, 2007 |
232,000 | $ | 38.39 | 232,000 | $ | 91,086,000 | ||||||||||
| (1) | 164,500 shares were purchased on the open market with the remaining 67,500 purchased from our pension plan. | |
| (2) | On May 30, 2007 we announced a $100 million share repurchase program whereby we plan to repurchase shares from time to time in open market, privately negotiated or other transactions in accordance with applicable securities laws. The timing and the amount of the repurchases will be determined by us based on our evaluation of market conditions, share price and other factors. |
In May 2007, we announced an authorization to repurchase up to $100.0 million shares of G&K
Services outstanding common stock. As of June 30, 2007, we purchased 232,000 shares at an average
price of $38.39 totaling $8.9 million. Cash spent during the period on the purchase of shares
totaled $7.9 million. The amount of cash expended excludes $1.0 million for shares purchased on
June 29, 2007, but due to timing, the $1.0 million cash payment was made July 2, 2007. We have
$91.1 million remaining under this authorization.
STOCKHOLDER RETURN PERFORMANCE GRAPH
The following graph compares, for the five fiscal years, the cumulative total return on $100
invested in the Company’s Common Stock, the Standard and Poor’s (“S&P”) 500 Stock Index, and a
nationally recognized group of companies in the uniform services industry (the “Peer Index”). The
companies included in the New Peer Index are Angelica Corporation, Cintas Corporation, and Unifirst
Corporation.
The graph illustrates the cumulative values at the end of each succeeding fiscal year resulting
from the change in the stock price, assuming a dividend reinvestment.
Copyright © 2002, Standard & Poor’s a division of The McGraw-Hill Companies, Inc.
Chart Provided by Zack’s Investment Research, Inc.
Chart Provided by Zack’s Investment Research, Inc.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data. All amounts are in thousands,
except per share data.
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
Revenues |
$ | 929,542 | $ | 880,843 | $ | 788,775 | $ | 733,447 | $ | 705,588 | ||||||||||
Net Income |
43,190 | 41,851 | 38,179 | 33,638 | 31,846 | |||||||||||||||
Per Share Data: |
||||||||||||||||||||
Basic earnings per share |
2.03 | 1.98 | 1.82 | 1.62 | 1.55 | |||||||||||||||
Diluted earnings per share |
2.02 | 1.97 | 1.78 | 1.61 | 1.54 | |||||||||||||||
Dividends per share |
0.16 | 0.07 | 0.07 | 0.07 | 0.07 | |||||||||||||||
Total Assets |
991,814 | 951,092 | 903,169 | 802,747 | 778,806 | |||||||||||||||
Long-Term Debt |
149,005 | 195,355 | 210,462 | 184,305 | 236,731 | |||||||||||||||
Stockholders’ Equity |
591,988 | 547,388 | 479,750 | 429,462 | 383,720 | |||||||||||||||
Fiscal Year: We utilize a 52-53 week fiscal year ending on the Saturday nearest June 30. Fiscal
2004 was a 53-week year.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial
statements and related notes thereto which are included herein. We utilize a 52-53 week fiscal
year ending on the Saturday nearest June 30.
Overview
G&K Services, Inc., founded in 1902 and currently headquartered in Minnetonka, Minnesota, is a
market leader in providing branded identity apparel and facility services programs that enhance
image and safety in the workplace. We serve a wide variety of North American industrial, service
and high-technology companies providing them with rented uniforms and facility services products
such as floor mats, dust mops, wiping towels, restroom supplies and selected linen items. We also
sell uniforms and other apparel items to customers in our direct sale programs. The North American
rental market is approximately $7.0 billion, while the portion of the direct sale market targeted
by us is approximately $5.0 billion.
Our industry continues to consolidate from many family owned and small local providers to several
large providers. We are participating in this industry consolidation. Our rental acquisition
strategy is focused on acquisitions in the rental and direct purchase businesses that expand our
geographic presence and/or expand our local market share and further leverage our existing plants.
In June 2007, we entered into a strategic agreement with Dockers ® San Francisco, a market leader
in men’s and women’s apparel to exclusively represent Dockers® apparel in North America as part of
our direct sale and rental apparel offering for the uniform industry.
In fiscal 2007, revenue grew to $929.5 million, up 5.5% over the prior year as a result of new
account growth, improved customer retention, continued improvement in direct sales and
acquisitions. Our fiscal 2007 net income grew by 3.2% to $43.2 million which reflects higher
operating income from revenue growth and productivity improvements, partially offset by a higher
effective tax rate, higher energy costs, and higher interest expense. In addition, we continued to
make strategic investments in sales, marketing and technology initiatives.
In January 2007, we acquired the outstanding stock and certain real estate from Grand Rapids Coats
and Apron Service, Inc, a uniform rental and facility services company serving Western Michigan.
Also, in February 2007, we acquired the outstanding stock and certain real estate assets from
Alltex Uniform Rental Services, Inc., a leading uniform and facility services company serving the
New England states. These two acquisitions enhance our geographic coverage in North America and
further strengthen our ability to meet the needs of large national account customers. These two
acquisitions add approximately $20.0 million in annual revenue.
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Critical Accounting Policies
The discussion of the financial condition and results of operations are based upon the consolidated
financial statements, which have been prepared in conformity with United States generally accepted
accounting principles. As such, management is required to make certain estimates, judgments and
assumptions that are believed to be reasonable based on the information available. These estimates
and assumptions affect the reported amount of assets and liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities at the date of the financial statements. Actual
results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and
uncertainties, the most important and pervasive accounting policies used and areas most sensitive
to material changes from external factors. See Note 1 to the consolidated financial statements for
additional discussion of the application of these and other accounting policies.
Revenue Recognition and Allowance for Doubtful Accounts
Our rental operations business is largely
based on written service agreements whereby we agree to
collect, launder and deliver uniforms and other related products. The service agreements provide
for weekly billing upon completion of the laundering process and delivery to the customer.
Accordingly, we recognize revenue from rental operations in the period in which the services are
provided. Revenue from rental operations also includes billings to customers for lost or damaged
merchandise. Direct sale revenue is recognized in the period in which the product is shipped.
Estimates are used in determining the collectibility of billed accounts receivable. Management
analyzes specific accounts receivable and historical bad debt experience, customer credit
worthiness, current economic trends and the age of outstanding balances when evaluating the
adequacy of the allowance for doubtful accounts. Significant management judgments and estimates
are used in connection with establishing the allowance in any accounting period. While we have
been consistent in applying our methodologies, and in making our estimates over the past three fiscal years, material differences may result in the
amount and timing of bad debt expense recognition for any given period if management makes
different judgments or utilizes different estimates.
Inventories
Inventories consist of new goods and rental
merchandise in service. We estimate our reserves for
inventory obsolescence by periodically examining our inventory to determine if there are indicators
that carrying values exceed the net realizable value. Experience has shown that significant
indicators that could require the need for additional inventory write-downs are the age of the
inventory, anticipated demand for our products, historical inventory usage, revenue trends and
current economic conditions. While we believe that adequate reserves for inventory obsolescence
have been made in the consolidated financial statements, product lines and customer requirements
may change and we could experience additional inventory write-downs in the future. New goods are
stated at lower of first-in, first-out (FIFO) cost or market, net of any reserve for obsolete or
excess inventory. Merchandise placed in service to support rental operations is amortized into
cost of rental operations over the estimated useful lives of the underlying inventory items,
primarily on a straight-line basis, which results in a matching of the cost of the merchandise with
the weekly rental revenue generated by merchandise. Estimated lives of rental merchandise in
service range from nine months to three years. In establishing estimated lives for merchandise in
service, management considers historical experience and the intended use of the merchandise.
Goodwill, Intangibles and Other Long-Lived Assets
As required under Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other
Intangible Assets,” goodwill is separately disclosed from other intangible assets on the balance
sheet and no longer amortized. SFAS 142 also requires that companies test goodwill for impairment
on an annual basis and when events occur or circumstances change that would more likely than not
reduce the fair value of the reporting unit to which goodwill is assigned below its carrying
amount. Our evaluation follows the two step impairment test prescribed by SFAS 142. First we
assess whether the fair value of the reporting unit exceeds the carrying amount of the unit
including goodwill. Our evaluation considers changes in the operating environment, competitive
position, market trends, operating performance, quoted market prices for our equity securities and
fair value models and research prepared by independent analysts. If the carrying amount of a
reporting unit exceeded its fair value, we would perform a second test to measure the amount of
impairment loss, if any. Management completes its annual impairment tests in the fourth quarter of
each fiscal year. There have been no impairments of goodwill in fiscal 2007, 2006 or 2005. Future
events could cause management to conclude that impairment indicators exist and that goodwill and
other intangibles associated with acquired businesses are impaired. Any resulting impairment loss
could have a material impact on our financial condition and results of operations.
Property, plant and equipment and definite-lived intangible assets are depreciated or amortized
over their useful lives. Useful lives are based on management estimates of the period that the
assets will add value. Long-lived assets and definite-lived
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intangible assets are evaluated for
impairment whenever events and circumstances indicate an asset may be impaired. There have been no
material write-downs of any long-lived assets or definite-lived intangible assets in fiscal 2007,
2006 or 2005.
Insurance
We self-insure for certain obligations related to health, workers’ compensation and auto and
general liability programs. We purchase stop-loss insurance policies to protect us from
catastrophic losses. Estimates are used in determining the potential liability associated with
reported claims and for losses that have occurred, but have not been reported. Management estimates
generally consider historical claims experience, escalating medical cost trends, expected timing of
claim payments and actuarial analyses provided by third parties. Changes in the cost of medical
care, our ability to settle claims and the present value estimates and judgments used by management
could have a material impact on the amount and timing of expense for any period.
Income Taxes
In the normal course of business, we are subject to audits from federal, state, Canadian provincial
and other tax authorities regarding various tax liabilities. These audits may alter the timing or
amount of taxable income or deductions, or the allocation of income among tax jurisdictions. The
amount ultimately paid upon resolution of issues raised may differ from the amount accrued. We
believe that taxes accrued on our consolidated balance sheets fairly represent the amount of future
tax liability due.
We utilize income tax planning to reduce our overall income tax expense. Upon audit, it is
possible that certain strategies might be disallowed resulting in an increased liability for income
taxes. We believe that the provision for liabilities resulting from the implementation of income tax planning is appropriate. Our past examinations by governmental
revenue authorities leads management to believe that our past provisions for exposures related to
income tax planning are appropriate.
Deferred income taxes are determined in accordance with SFAS No. 109, “Accounting for Income
Taxes.” Deferred tax assets and liabilities are recorded for temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial statements, using
statutory rates in effect for the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results
of operations in the period that the changes are enacted. We record valuation allowances to reduce
deferred tax assets when it is more likely than not that some portion of the asset may not be
realized. We evaluate our deferred tax assets and liabilities on a periodic basis. We believe
that we have adequately provided for our future tax obligations based upon current facts,
circumstances and tax law.
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Results of Operations
The percentage relationships to revenues of certain income and expense items for the three fiscal
years ended June 30, 2007, July 1, 2006 and July 2, 2005, and the percentage changes in these
income and expense items between years are presented in the following table:
| Percentage of Revenues | Percentage Change | |||||||||||||||||||
| Years Ended | Between Years | |||||||||||||||||||
| FY 2007 vs. | FY 2006 vs. | |||||||||||||||||||
| Fiscal 2007 | Fiscal 2006 | Fiscal 2005 | FY 2006 | FY 2005 | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Rental operations |
91.2 | % | 91.0 | % | 93.9 | % | 5.8 | % | 8.2 | % | ||||||||||
Direct sales |
8.8 | 9.0 | 6.1 | 3.2 | 65.6 | |||||||||||||||
Total revenues |
100.0 | 100.0 | 100.0 | 5.5 | 11.7 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Cost of rental operations |
63.9 | 64.7 | 63.5 | 4.4 | 10.3 | |||||||||||||||
Cost of direct sales |
72.5 | 72.3 | 74.5 | 3.6 | 60.5 | |||||||||||||||
Total cost of sales |
64.7 | 65.4 | 64.1 | 4.3 | 13.9 | |||||||||||||||
Selling and administrative |
21.9 | 21.2 | 21.4 | 9.1 | 10.7 | |||||||||||||||
Depreciation |
3.7 | 3.7 | 4.1 | 7.1 | 1.6 | |||||||||||||||
Amortization of intangibles |
1.2 | 1.2 | 1.2 | 0.2 | 12.8 | |||||||||||||||
Income from operations |
8.5 | 8.5 | 9.2 | 5.5 | 3.0 | |||||||||||||||
Interest expense |
1.5 | 1.5 | 1.4 | 5.1 | 16.7 | |||||||||||||||
Income before income taxes |
7.0 | 7.0 | 7.8 | 6.2 | 0.5 | |||||||||||||||
Provision for income taxes |
2.4 | 2.2 | 3.0 | 12.6 | (14.5 | ) | ||||||||||||||
Net income |
4.6 | % | 4.8 | % | 4.8 | % | 3.2 | % | 9.6 | % | ||||||||||
Fiscal 2007 Compared to Fiscal 2006
Fiscal Years. We operate on a fiscal year ending on the Saturday closest to June 30. As a result,
we will periodically have a fiscal year with 53 weeks of results. Fiscal years 2007 and 2006 both
had 52 weeks.
Revenues. Total revenues in fiscal 2007 rose 5.5% to $929.5 million from $880.8 million in fiscal
2006. Rental revenue was up $46.2 million in fiscal 2007, a 5.8% increase over fiscal 2006. The
organic industrial rental growth rate was approximately 4.0%, an improvement from 3.5% in fiscal
2006. The increase is primarily due to growth of new account sales, improved customer retention
and improved pricing controls.
Direct sale revenue was $82.1 million in fiscal 2007, a 3.2% increase over $79.6 million in fiscal
2006, largely due to the impact of the Lion Uniform Group. The organic direct sale growth rate was
approximately 2.0% in fiscal year 2007 compared to 34.5% in fiscal year 2006. The decrease in
organic growth was due almost entirely to the installation of a new uniform program with a major
customer in our Lion Uniform Group in fiscal year 2006 that did not reoccur in fiscal year 2007.
Organic growth rates are calculated using industrial rental and direct sale revenue, respectively,
adjusted to remove the impact of foreign currency exchange rate changes and revenue from newly
acquired business compared to prior-period results. We believe that the organic growth rates
better reflect the growth of our existing industrial rental and direct sale business and are
therefore useful in analyzing our financial condition and results of operations.
Cost of Rental and Direct Sale. Cost of rental operations which includes merchandise, production
and delivery expenses increased 4.4% to $541.4 million in fiscal 2007 from $518.5 million in fiscal
2006. Gross margin from rental sales increased
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to 36.1% in fiscal 2007 from 35.3% in the prior
year. The increase in gross margins resulted from leveraging our revenue growth as well an
improvement in our merchandise costs in fiscal year 2007.
Cost of direct sales increased to $59.6 million in fiscal 2007 from $57.5 million in fiscal 2006.
Gross margin from direct sales decreased slightly in fiscal 2007 to 27.5% from 27.7% in fiscal
2006. The slight decrease in gross margin is due to a combination of increased compensation costs
and increased customer fulfillment and shipping costs at our Lion Uniform Group. These costs
increased primarily due to the expiration of a cost sharing arrangement between Lion Uniform Group
and a third party at the end of fiscal 2006.
Selling and Administrative. Selling and administrative expenses increased 9.1% to $203.6 million
in fiscal 2007 from $186.7 million in fiscal 2006. As a percentage of total revenues, selling and
administrative expenses increased to 21.9% in fiscal 2007 from 21.2% in fiscal 2006. The increase
in expense is due to the expansion of our sales force and the continued rollout of our information
technology initiatives. These increases were partially offset by lower administrative expenses due
to office productivity savings driven by our handheld initiative, leverage due to improved revenue
growth and lower retirement plan and workers’ compensation expenses.
Depreciation. Depreciation expense increased 7.1% to $34.8 million in fiscal 2007 from $32.5
million in fiscal 2006. As a percentage of total revenues, depreciation expense remained at 3.7%
in both fiscal 2007 and fiscal 2006. The increase in depreciation expense during fiscal 2007 was
primarily related to expansion and upgrading of several facilities and acquisitions. Capital
expenditures for fiscal 2007, excluding acquisition of businesses, were $31.5 million compared to
$32.0 million in fiscal 2006.
Amortization. Amortization expense remained at $10.8 million in both fiscal 2007 and fiscal 2006.
As a percentage of total revenues, amortization expense remained at 1.2% in both fiscal 2007 and
fiscal 2006.
Interest Expense. Interest expense was $13.9 million in fiscal 2007 as compared to $13.2 million
in fiscal 2006. The increase was due primarily to higher interest rates and slightly higher debt
levels during fiscal year 2007. The increase in debt was driven by our acquisitions, offset by
continued strong cash flow.
Provision for Income Taxes. Our effective tax rate for fiscal 2007 increased to 34.0% from 32.1%
in fiscal 2006. This increase is the result of higher pretax income that is taxed at our statutory
rate and larger reversals in the prior year of tax reserves that were no longer required due to the
expiration of certain statutes.
Fiscal 2006 Compared to Fiscal 2005
Fiscal Years. We operate on a fiscal year ending on the Saturday closest to June 30. As a result,
periodically we will have a fiscal year with 53 weeks of results. Fiscal years 2006 and 2005 both
had 52 weeks.
Revenues. Total revenues in fiscal 2006 rose 11.7% to $880.8 million from $788.8 million in fiscal
2005. Rental revenue was up $60.5 million in fiscal 2006, an 8.2% increase over fiscal 2005. The
organic industrial rental growth rate was approximately 3.5%, an improvement from 0.5% in fiscal
2005. The increase is due to accelerated new account growth and improved customer retention. The
balance of the revenue growth was due to acquisitions and changes in foreign currency exchange
rates.
Direct sale revenue was $79.6 million in fiscal 2006, a 65.6% increase over $48.1 million in fiscal
2005, largely due to the impact of the Lion Uniform Group. The organic direct sale growth rate was
approximately 34.5%. The increase in the organic direct sale growth rate was largely due to
garment sales to a major airline and a large telecommunications organization as well as sales to
many smaller organizations.
Organic growth rates are calculated using industrial rental and direct sale revenue, respectively,
adjusted to remove the impact of foreign currency exchange rate changes and revenue from newly
acquired business compared to prior-period results. We believe that the organic growth rates
better reflect the growth of our existing industrial rental and direct sale business and are
therefore useful in analyzing our financial condition and results of operations.
Cost of Rental and Direct Sale. Cost of rental operations increased 10.3% to $518.5 million in
fiscal 2006 from $470.1 million in fiscal 2005. Gross margin from rental sales decreased to 35.3%
in fiscal 2006 from 36.5% in the prior year. The decrease in gross margins resulted from costs
associated with new customer growth, higher energy costs, the impact of hurricanes, plant capacity
initiatives, offset by margin improvement due to pricing initiatives, higher sales to existing
customers and productivity improvements.
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Cost of direct sales increased to $57.5 million in fiscal 2006 from $35.8 million in fiscal 2005.
Gross margin from direct sales increased in fiscal 2006 to 27.7% from 25.5% in fiscal 2005. The
increase in gross margin was primarily due to improved efficiencies from greater sales volume.
Selling and Administrative. Selling and administrative expenses increased 10.7% to $186.7 million
in fiscal 2006 from $168.6 million in fiscal 2005. As a percentage of total revenues, selling and
administrative expenses decreased to 21.2% in fiscal 2006 from 21.4% in fiscal 2005. The
improvement was primarily from leveraging our sales and administrative costs over a larger revenue
base offset by continued investment in growth initiatives.
Depreciation. Depreciation expense increased 1.6% to $32.5 million in fiscal 2006 from $32.0
million in fiscal 2005. As a percentage of total revenues, depreciation expense decreased to 3.7%
in fiscal 2006 from 4.1% in fiscal 2005. Capital expenditures for fiscal 2006, excluding
acquisition of businesses, were $32.0 million compared to $19.4 million in fiscal 2005.
Amortization. Amortization expense increased to $10.8 million in fiscal 2006 from $9.6 million in
fiscal 2005. As a percentage of total revenues, amortization expense was 1.2% in both fiscal 2006
and fiscal 2005.
Interest Expense. Interest expense was $13.2 million in fiscal 2006 as compared to $11.3 million
in fiscal 2005. The increase was due primarily to higher interest rates.
Provision for Income Taxes. Our effective tax rate for fiscal 2006 decreased to 32.1% from 37.7%
in fiscal 2005 largely due to the resolution of certain statutory tax matters.
Liquidity, Capital Resources and Financial Condition
Financial Condition. We believe our financial condition is strong. In assessing our financial
condition, we consider factors such as working capital, cash flows provided by operations, capital
expenditures, and debt service obligations. We continue to fund our growth through a combination
of cash flow from operations and debt financing. We have approximately $252.4 million of available
capacity under our revolving credit facility. We believe we have sufficient access to capital
markets to fund our currently anticipated growth and potential acquisitions.
Our primary sources of cash are net cash flows from operations and borrowings under our debt
arrangements. Primary uses of cash are interest payments on indebtedness, capital expenditures,
acquisitions and general corporate purposes.
Working capital at June 30, 2007 was $113.5 million, a $28.7 million decrease from $142.2 million
at July 1, 2006. This decrease is due to our $58.0 million revolving loan maturing October 23,
2007 which was reclassified as a current liability, which we expect to renew or refinance before
the due date.
Operating Activities. Net cash provided by operating activities was $80.4 million in fiscal 2007,
$69.5 million in fiscal 2006 and $63.5 million in fiscal 2005. Fiscal year 2007 cash provided by
operations increased as a result of higher net income and our focus on controlling inventory
expenditures partially offset by increased payments on payables. In fiscal 2006, cash provided by
operations was positively impacted by a higher net income, and timing of payments on our accounts
payable and accruals which were partially offset by increased expenditures on inventory. Fiscal
2005 cash provided by operations was negatively impacted by the timing of payments of taxes as well
as growth in new inventories in connection with the expansion of our manufacturing operation.
These uses of cash were partially offset by continued emphasis to control in-service inventory
expenditures.
Investing Activities. Net cash used for investing activities was $81.2 million in fiscal 2007,
$45.4 million in fiscal 2006 and $95.9 million in fiscal 2005. In fiscal 2007, 2006 and 2005 cash
was largely used for acquisition of business assets and property, plant and equipment additions.
Financing Activities. Financing activities provided cash of $3.7 million in fiscal 2007, used cash
of $20.6 million in fiscal 2006 and provided cash of $19.2 million in fiscal 2005. Cash provided
in fiscal 2007, was primarily the result of borrowings under our credit facilities partially offset
by our repurchase of shares of our common stock and repayments on our long term debt. Cash used in
fiscal 2006, was primarily for the repayments of debt. Cash provided in fiscal 2005, was from debt
proceeds used primarily for acquisitions of businesses. We paid dividends of $3.4 million in
fiscal 2007 and $1.5 million in both fiscal 2006 and 2005. The increase in dividend payments is
the result of increasing the dividend per share by $0.09 from $0.07 per share in fiscal year 2006
and 2005 to $0.16 per share in fiscal year 2007. We anticipate dividends in fiscal year
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2008 to
increase from $0.16 to $0.20 per share, which will result in an estimated total dividend of $4.3
million in fiscal year 2008.
Capital Structure. Total debt was $214.8 million at June 30, 2007, a slight increase from the
prior year of $213.6 million. This increase was primarily due to our share repurchase program and
acquisition activity partially offset by cash provided by operations. The ratio of debt to
capitalization (total debt divided by the sum of the stockholder’s equity plus total debt) was
26.6% at fiscal year end 2007 and 28.1% at fiscal year end 2006. We view our debt to
capitalization as an important indicator of our credit worthiness.
While cash flows could be negatively affected by a decrease in revenues, we do not believe that our
revenues are highly susceptible, in the short term to rapid changes within our industry.
Consequently, we believe that we will fund all of the cash requirements which are reasonably
foreseeable for fiscal 2008, including scheduled debt repayments, new investments in the business,
share repurchases, dividend payments, and possible business acquisitions, from operating cash flow
and our revolving credit facility.
We maintain a revolving credit facility of $325.0 million expiring August 31, 2010. As of June 30,
2007, borrowings outstanding under the revolving credit facility were $51.5 million at rates
ranging from 0.55% to 1.50% over the London Interbank Offered Rate (“LIBOR”). Borrowings under
this facility are unsecured. The unused portion of the revolver may be used for general corporate
purposes, acquisitions, working capital needs and to provide up to $50.0 million in letters of
credit. As of June 30, 2007, letters of credit outstanding against the revolving credit facility
were $21.1 million which primarily relate to our property and casualty insurance programs. No
amounts have been drawn upon these letters of credit.
Borrowings under the revolving credit facility bear interest at 0.55% to 1.50% over the LIBOR, or
the Canadian prime rate for Canadian borrowings, based on a leverage ratio calculated on a
quarterly basis. Advances outstanding as of June 30, 2007 bear interest at a rate of 5.40% LIBOR
plus 0.75%. We also pay a fee on the unused daily balance of the revolving credit facility based
on a leverage ratio calculated on a quarterly basis.
We have $50.0 million, 8.4% unsecured private placement notes with certain institutional investors.
The 10-year notes have a seven-year average life with a final maturity on July 20, 2010.
Beginning on July 20, 2004, and annually thereafter to maturity, we will repay $7.1 million of the
principal amount at par. As of June 30, 2007, there was $28.6 million outstanding under the notes.
We maintain a loan agreement expiring on October 23, 2007. Under the loan agreement, the lender
will make loans to us on a revolving basis up to $60.0 million. The facility was amended on June
2, 2006 increasing the facility size from $50.0 million to $60.0 million. We will be required to
pay interest on outstanding loan balances at a rate per annum of one month LIBOR plus a margin or,
if the lender is funding the loan through the issuance of commercial paper to third parties, at a
rate per annum equal to a margin plus the average annual interest rate for such commercial paper.
In connection with the loan agreement, we granted a first priority security interest in certain of
our U.S. based accounts receivable. The amount of funds available under the loan agreement will be
based on the amount of eligible accounts receivable less various reserve requirements. At June 30,
2007, there was $58.0 million outstanding under the agreement at a current rate of 5.35%.
We have $75.0 million of variable rate unsecured private placement notes. The notes bear interest
at 0.60% over LIBOR. The $75.0 million variable rate notes are scheduled to mature on June 30,
2015. The notes do not require principal payments until maturity. Interest payments are reset and
paid on a quarterly basis. As of June 30, 2007, the outstanding balance of the notes was $75.0
million at a current rate of 5.95%.
The credit facilities, loan agreements, fixed rate notes and variable rate notes contain various
restrictive covenants that among other matters require us to maintain a minimum stockholders’
equity and a maximum leverage ratio, all as defined. These debt arrangements also contain
customary representations, warranties, covenants and indemnifications. At June 30, 2007, we were
in compliance with all debt covenants and only a material adverse change in our financial
performance and condition could result in a potential event of default. In the unlikely event that
an event of default would be imminent, we believe that we would be able to successfully negotiate
amended covenants or obtain waivers; however, certain financial concessions might be required. Our
results of operations and financial condition could be adversely affected if amended covenants or
waivers in acceptable terms could not be successfully negotiated.
Cash Obligations. Under various agreements, we are obligated to make future cash payments in fixed
amounts. These include payments under the variable rate term loan and revolving credit facility,
the fixed rate term loan, capital lease obligations and rent payments required under non-cancelable
operating leases with initial or remaining terms in excess of one year.
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The following table summarizes our fixed cash obligations as of June 30, 2007 for the next five
fiscal years and thereafter (in thousands):
| Less than | One to | Three to | After five | |||||||||||||||||
| One year | three years | five years | years | Total | ||||||||||||||||
Variable rate revolving credit
facility |
$ | — | $ | 51,500 | $ | — | $ | — | $ | 51,500 | ||||||||||
Variable rate notes |
— | — | — | 75,000 | 75,000 | |||||||||||||||
Variable rate loan |
58,000 | — | — | — | 58,000 | |||||||||||||||
Fixed rate notes |
7,143 | 14,286 | 7,142 | — | 28,571 | |||||||||||||||
Other debt arrangements, including
capital leases |
695 | 865 | 212 | — | 1,772 | |||||||||||||||
Operating leases |
20,450 | 26,563 | 12,390 | 3,297 | 62,700 | |||||||||||||||
Total contractual cash obligations |
$ | 86,288 | $ | 93,214 | $ | 19,744 | $ | 78,297 | $ | 277,543 | ||||||||||
At June 30, 2007, we had available cash on hand of $22.8 million and approximately $252.4 million
of available capacity under our revolving credit facility. We anticipate that we will generate
sufficient cash flows from operations to satisfy our cash commitments and capital requirements for
fiscal 2008 and to reduce the amounts outstanding under the revolving credit facility; however, we
may utilize borrowings under the revolving credit facility to supplement our cash requirements from
time to time. We estimate that capital expenditures in fiscal 2008 will be approximately $30-$33
million.
The amount of cash flow generated from operations could be affected by a number of risks and
uncertainties. In fiscal 2008, we may actively seek and consider acquisitions of business assets.
The consummation of any acquisition could affect our liquidity profile and level of outstanding
debt. We believe that our earnings and cash flow from operations, existing credit facilities and
our ability to obtain additional debt or equity capital, if necessary, will be adequate to finance
acquisition opportunities.
Off Balance Sheet Arrangements
At June 30, 2007, we had stand-by letters of credit totaling $21.1 million issued and outstanding,
primarily in connection with our property and casualty insurance programs. No amounts have been
drawn upon these letters of credit. In addition, we have outstanding operating leases with
contractual obligations totaling $62.7 million related to facility and equipment leases. We do not
utilize special purpose entities to facilitate off-balance sheet financing arrangements.
Pension Obligations
We account for our defined benefit pension plan using SFAS No. 87 “Employer’s Accounting for
Pensions” (“SFAS 87”) and SFAS No. 158 “Employer’s Accounting for Defined Benefit Pension and Other
Postretirement Plans.” Under SFAS 87, pension expense is recognized on an accrual basis over
employees’ approximate service periods. Pension expense calculated under SFAS 87 is generally
independent of funding decisions or requirements. We recognized expense for our defined benefit
pension plan of $1.8 million, $7.0 million and $4.9 million in fiscal 2007, 2006 and 2005,
respectively. At June 30, 2007, the fair value of our pension plan assets totaled $41.5 million.
We anticipate making cash contributions of approximately $7.1 million in fiscal 2008.
Effective January 1, 2007 we have frozen our defined benefit pension plan and related supplemental
executive retirement plan. We incurred $0.2 million in costs associated with this action in fiscal
year 2006. All benefits earned by defined benefit plan participants through the end of calendar
year 2006 will be available upon retirement under plan provisions. Future growth in benefits will
no longer occur beyond December 31, 2006.
The calculation of pension expense and the corresponding liability requires the use of a number of
critical assumptions, including the expected long-term rate of return on plan assets and the
assumed discount rate. Changes in these assumptions can result in different expense and liability
amounts, and future actual experience can differ from these assumptions. Pension expense increases
as the expected rate of return on pension plan assets decreases. At June 30, 2007, we estimate that
the pension plan assets will generate a long-term rate of return of 8.0%. This rate is consistent
with the assumed rate used at both July 1, 2006 and July 2, 2005 and was developed by evaluating
input from our outside actuary as well as long-term inflation
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assumptions. The expected long-term
rate of return on plan assets at June 30, 2007 is based on an allocation of equity and fixed income
securities. Decreasing the expected long-term rate of return by 0.5% (from 8.0% to 7.5%) would
increase our estimated 2008 pension expense by approximately $0.2 million. Pension liability and
future pension expense increase as the discount rate is reduced. We discounted future pension
obligations using a rate of 6.40% at June 30, 2007, 6.45% at July 1, 2006 and 5.50% at July 2,
2005. Our outside actuary determines the discount rate by creating a yield curve based on high
quality bonds. Decreasing the discount rate by 0.5% (from 6.40% to 5.90%) would increase our
accumulated benefit obligation at June 30, 2007 by approximately $4.9 million and would have an
immaterial impact on our fiscal 2008 pension expense.
Future changes in plan asset returns, assumed discount rates and various other factors related to
the participants in our pension plan will impact our future pension expense and liabilities. We
cannot predict with certainty what these factors will be in the future.
Share-based Payments
We grant share-based awards, including restricted stock and options to purchase common stock of the
Company. Stock option grants are for a fixed number of shares to employees and directors with an
exercise price equal to the fair value of the shares at the date of grant. Share-based
compensation for awards is recognized in the consolidated statements of operations on a
straight-line basis over the requisite service period. The amortization of share-based
compensation reflects estimated forfeitures adjusted for actual forfeiture experiences and we
review our estimate on an annual basis. As share-based compensation expense is recognized, a
deferred tax asset is recorded that represents an estimate of the future tax deduction from the
exercise of stock options or release of restrictions on the restricted stock. At the time
share-based awards are exercised, cancelled, expire or restrictions lapse, we recognize adjustments
to income tax expense.
Impact of Inflation
In general, we believe that our results of operations are not dependent on moderate changes in the
inflation rate. Historically, we have been able to manage the impacts of more significant changes
in inflation rates through our customer relationships, customer agreements that generally provide
for price increases consistent with the rate of inflation or 5.0%, whichever is greater, and
continued focus on of operational productivity improvements.
Significant increases in energy costs, specifically natural gas and gasoline, can materially affect
our results of operations and financial condition. Currently, energy costs represent approximately
4.4% of our total revenue.
Litigation
We are involved in a variety of legal actions relating to personal injury, employment,
environmental and other legal matters that arise in the normal course of business. These legal
actions include lawsuits that challenge the practice of charging for certain environmental services
on invoices which were settled in the last fiscal year and are presently being administered. None
of these legal actions are expected to have a material adverse effect on our results of operations
or financial position.
Adoption of New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158). SFAS
158 requires an employer to recognize the funded status of a benefit plan as an asset or liability
in its statement of financial position, measured as the difference between plan assets at fair
value and the benefit obligation, and to recognize as a component of accumulated other changes in
equity from nonowner sources, net of tax, actuarial gains or losses and prior service costs or
credits that arise during the period but which are not recognized as components of net periodic
benefit cost pursuant to FASB Statement No. 87, Employers’ Accounting for Pensions (SFAS 87), or
FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (SFAS
106). The provisions of SFAS 87 and SFAS 106 continue to apply in measuring plan assets and benefit
obligations, as of the date of the fiscal year-end statement of financial position, and in
determining the amount of net periodic benefit cost. The provisions of SFAS 158 were effective for
fiscal years ending after December 15, 2006 and are not to be applied retrospectively. See Note 8
to our consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
On July 13, 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 (FIN
48), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,”
which fundamentally changes the way that we
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will be required to treat our uncertain tax positions
for financial accounting purposes and will be effective for our fiscal year starting July 1, 2007.
FIN 48 prescribes rules regarding how we should recognize, measure and disclose in our financial
statements the tax positions that we have taken or will take on our tax return that are reflected
in measuring current or deferred income tax assets and liabilities for interim or annual periods.
Differences between tax positions taken in a tax return and amounts recognized in the financial
statements will generally result in an increase in a liability for income taxes payable, or a
reduction in a deferred tax asset or an increase in a deferred tax liability. We believe the
impact of adopting FIN 48 will be immaterial.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value
Measurement” (SFAS 157). SFAS 157 provides a definition of fair value, provides guidance for
measuring fair value in U.S. GAAP and expands disclosures about fair value measurement. SFAS 157
will be effective at the beginning of fiscal 2009.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits entities
to choose to measure many financial instruments and certain other items at fair value. SFAS 159
will be effective at the beginning of fiscal 2009.
We are currently evaluating the impact of SFAS 157 and SFAS 159 on our consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risks. Market risk is the potential loss arising from adverse changes in
interest rates, energy prices and foreign currency exchange rates. We do not enter into derivative
or other financial instruments for speculative purposes.
Interest Rate Risk
We are subject to market risk exposure related to changes in interest rates. We use financial
instruments such as interest rate swap agreements to manage the interest rate on our fixed and
variable rate debt. Under these arrangements, we agree to exchange, at specified intervals, the
difference between fixed and floating interest amounts calculated by reference to an agreed-upon
notional principal amount. Interest rate swap agreements are entered into for periods consistent
with related underlying exposures and do not constitute positions independent of those exposures.
A sensitivity analysis was performed to measure our interest rate risk over a one-year period for
forecasted debt levels and interest rate swaps. The base rates used for the sensitivity analysis
for variable debt and interest rate swaps is the three month LIBOR market interest rates at June
29, 2007. The credit spread is included onto the base rates used in the analysis. The two
scenarios include measuring the sensitivity to interest expense with an immediate 100 basis point
increase and decrease on market interest rates and the impact of a gradual increase and decrease of
25 basis point at the beginning of each quarter on market interest rates. Our forecasted average
debt level over the succeeding 12 months is $257.0 million with outstanding interest rate swaps of
$90.0 million. Based on the forecasted average debt level, outstanding interest rate swaps and
current market interest rates, the forecasted interest expense is $16.2 million. The scenario with
an immediate increase or decrease of 100 basis points on market interest rates would increase or
decrease forecasted interest of $16.2 million by 8.9%. The scenario with a gradual 25 basis point
increase or decrease at the start of each quarter would increase or decrease forecasted interest
expense of $16.2 million by 1.3%.
For additional information regarding our debt see Note 4 to our consolidated financial statements
as well as the Liquidity, Capital Resources and Financial Condition section of Management’s
Discussion and Analysis.
Energy Cost Risk
We are subject to market risk exposure related to changes in energy costs. To manage this risk, we
have established target levels of forecasted purchases in which the price will not be subject to
market price changes. We use derivative financial instruments to manage the risk that changes in
gasoline costs will have on our future financial results. We purchase futures contracts to
effectively hedge a portion of anticipated actual energy purchases. Under these arrangements, we
agree to exchange, at specified intervals, the difference between fixed and floating commodity
prices calculated by reference to an agreed-upon notional principal amount.
A sensitivity analysis was performed to measure our energy cost risk over a one-year period for
forecasted levels of unleaded and diesel fuel purchases. The sensitivity analysis that was
performed assumed no change in the current number of hedged gallons of 2.3 million (including
unleaded and diesel), gasoline prices at June 30, 2007, or forecasted gasoline and diesel
21
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purchases which were consistent with the prior year. For each one percentage point increase or
decrease in gasoline and diesel prices under these forecasted levels and prices, our forecasted
energy cost would change by approximately $0.05 million.
Production costs at our plants are also subject to fluctuations in natural gas costs. To reduce
our exposure to changes in natural gas prices, we utilize natural gas supply contracts in the
normal course of business. These contracts meet the definition of “normal purchases or normal
sales” under FAS 133 and therefore, are not considered derivative instruments for accounting
purposes.
Foreign Currency Exchange Risk
We have material foreign subsidiaries located in Canada. The assets and liabilities of these
subsidiaries are denominated in the Canadian dollar and as such are translated into U.S. dollars at
the exchange rate in effect at the balance sheet date. Results of operations are translated using
the average exchange rates throughout the period. The effect of exchange rate fluctuations on
translation of assets and liabilities are recorded as a component of stockholders’ equity. Gains
and losses from foreign currency transactions are included in results of operations.
We may periodically hedge firm commitments with our foreign subsidiary, generally with foreign
currency contracts. These agreements are recorded at current market values and the gains and
losses are included in earnings. There were no outstanding foreign currency contracts at June 30,
2007 or July 1, 2006. Notional amounts outstanding under foreign currency contracts at July 2,
2005 were $0.4 million, all of which matured during fiscal 2006.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Following is a summary of the results of operations for each of the quarters within fiscal years ended June 30, 2007 and July 1, 2006. All amounts are in thousands, except per share data.
QUARTERLY FINANCIAL DATA
G&K Services, Inc. and Subsidiaries
G&K Services, Inc. and Subsidiaries
| (Unaudited) | First | Second | Third | Fourth | ||||||||||||
2007 |
||||||||||||||||
Revenues |
$ | 223,128 | $ | 230,764 | $ | 235,242 | $ | 240,408 | ||||||||
Gross Profit |
79,437 | 80,314 | 81,368 | 87,452 | ||||||||||||
Income from Operations |
18,340 | 19,040 | 19,932 | 22,050 | ||||||||||||
Net Income |
9,192 | 9,644 | 12,149 | 12,205 | ||||||||||||
Basic Earnings per Share |
0.43 | 0.46 | 0.57 | 0.57 | ||||||||||||
Diluted Earnings per Share |
0.43 | 0.45 | 0.57 | 0.57 | ||||||||||||
Dividends per Share |
0.0400 | 0.0400 | 0.0400 | 0.0400 | ||||||||||||
2006 |
||||||||||||||||
Revenues |
$ | 207,948 | $ | 219,348 | $ | 226,141 | $ | 227,406 | ||||||||
Gross Profit |
73,241 | 77,521 | 77,095 | 76,921 | ||||||||||||
Income from Operations |
18,897 | 19,022 | 16,593 | 20,351 | ||||||||||||
Net Income |
10,371 | 10,234 | 10,358 | 10,888 | ||||||||||||
Basic Earnings per Share |
0.49 | 0.49 | 0.49 | 0.51 | ||||||||||||
Diluted Earnings per Share |
0.49 | 0.48 | 0.49 | 0.51 | ||||||||||||
Dividends per Share |
0.0175 | 0.0175 | 0.0175 | 0.0175 | ||||||||||||
We utilize a 52-53 week fiscal year ending on the Saturday nearest June 30. Fiscal 2007 and fiscal
2006 were both 52 week years.
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Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for G&K Services, Inc. (“the Company”) as defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934. Our internal control over financial reporting was designed
under the supervision of the Company’s principal executive officer, principal financial
officer, principal accounting officer and other members of management, and effected by the
Company’s Board of Directors, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation and presentation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Our management completed an assessment of the Company’s internal control over financial
reporting. This assessment was based on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.
Based on this assessment, management has concluded that our internal control over financial
reporting was effective as of June 30, 2007.
Ernst & Young LLP, the Company’s independent registered public accounting
firm that audited the consolidated financial statements and the effectiveness of the Company’s internal control over
financial reporting, has issued an unqualified attestation report on the Company’s effectiveness of internal control
over financial reporting, as stated in their report which is included herein.
Any internal control system over financial reporting, no matter how well conceived and operated,
has inherent limitations.
As a result, even those systems determined to be effective can provide only reasonable, not
absolute, assurance that the control objectives over the reliability of financial reporting and
preparation and presentation of financial statements for external purposes in accordance with
generally accepted accounting principles are met.
/s/ Richard L. Marcantonio |
||
| Chairman of the Board and Chief Executive Officer | ||
(Principal Executive Officer) |
||
/s/ Jeffrey L. Wright |
||
| Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer) |
||
/s/ Thomas J. Dietz
|
||
Vice President and Controller |
||
(Principal Accounting Officer) |
||
August 27, 2007 |
||
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
G&K Services, Inc.
G&K Services, Inc.
We have audited the accompanying consolidated balance sheets of G&K Services, Inc. as of June
30, 2007, and July 1, 2006, and the related consolidated statements of operations,
stockholders’ equity and comprehensive income, and cash flows for each of the three years in
the period ended June 30, 2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of G&K Services, Inc. as of June 30,
2007, and July 1, 2006, and the results of its operations and its cash flows for each of the
three fiscal years in the period ended June 30, 2007, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of G&K Services, Inc.’s internal control
over financial reporting as of June 30, 2007, based on criteria established in Internal Control
– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated August 27, 2007, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP |
||
Minneapolis, Minnesota
August 27, 2007
August 27, 2007
24
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of G&K Services, Inc.
We have audited G&K Services, Inc.’s internal control over financial reporting as of June 30, 2007, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). G&K Services, Inc.’s management is
responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, G&K Services, Inc. maintained, in all material respects, effective internal control
over financial reporting as of June 30, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of G&K Services, Inc. as of June 30, 2007
and July 1, 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash
flows for each of the three years in the period ended June 30, 2007 of G&K Services, Inc. and our
report dated August 27, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP |
||
Minneapolis, Minnesota
August 27, 2007
August 27, 2007
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CONSOLIDATED STATEMENTS OF OPERATIONS
G&K Services, Inc. and Subsidiaries
G&K Services, Inc. and Subsidiaries
| For the Fiscal Years Ended | ||||||||||||
| June 30, | July 1, | July 2, | ||||||||||
| (In thousands, except per share data) | 2007 | 2006 | 2005 | |||||||||
Revenues |
||||||||||||
Rental operations |
$ | 847,401 | $ | 801,240 | $ | 740,708 | ||||||
Direct sales |
82,141 | 79,603 | 48,067 | |||||||||
Total revenues |
929,542 | 880,843 | 788,775 | |||||||||
Operating Expenses |
||||||||||||
Cost of rental operations* |
541,392 | 518,543 | 470,116 | |||||||||
Cost of direct sales* |
59,579 | 57,522 | 35,830 | |||||||||
Selling and administrative |
203,614 | 186,652 | 168,620 | |||||||||
Depreciation |
34,789 | 32,479 | 31,981 | |||||||||
Amortization of intangibles |
10,806 | 10,784 | 9,562 | |||||||||
Total operating expenses |
850,180 | 805,980 | 716,109 | |||||||||
Income from Operations |
79,362 | 74,863 | 72,666 | |||||||||
Interest expense |
13,901 | 13,226 | 11,338 | |||||||||
Income before Income Taxes |
65,461 | 61,637 | 61,328 | |||||||||
Provision for income taxes |
22,271 | 19,786 | 23,149 | |||||||||
Net Income |
$ | 43,190 | $ | 41,851 | $ | 38,179 | ||||||
Basic weighted average number of shares outstanding |
21,245 | 21,093 | 20,942 | |||||||||
Basic Earnings per Common Share |
$ | 2.03 | $ | 1.98 | $ | 1.82 | ||||||
Diluted weighted average number of shares outstanding |
21,424 | 21,253 | 21,400 | |||||||||
Diluted Earnings per Common Share |
$ | 2.02 | $ | 1.97 | $ | 1.78 | ||||||
Dividends per Share |
$ | 0.16 | $ | 0.07 | $ | 0.07 | ||||||
| * | Excludes depreciation and amortization |
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
G&K Services, Inc. and Subsidiaries
G&K Services, Inc. and Subsidiaries
| June 30, | July 1, | |||||||
| (In thousands, except share data) | 2007 | 2006 | ||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 22,759 | $ | 19,690 | ||||
Accounts receivable, less allowance for doubtful
accounts of $3,405 and $3,011 |
98,276 | 94,964 | ||||||
Inventories |
140,780 | 141,031 | ||||||
Prepaid expenses |
14,167 | 15,552 | ||||||
Current income taxes receivable |
745 | — | ||||||
Total current assets |
276,727 | 271,237 | ||||||
Property, Plant and Equipment |
||||||||
Land |
33,957 | 32,986 | ||||||
Buildings and improvements |
164,923 | 151,641 | ||||||
Machinery and equipment |
304,578 | 286,533 | ||||||
Automobiles and trucks |
36,683 | 38,158 | ||||||
Less accumulated depreciation |
(284,145 | ) | (260,317 | ) | ||||
Total property, plant and equipment |
255,996 | 249,001 | ||||||
Other Assets |
||||||||
Goodwill, net |
380,070 | 349,469 | ||||||
Customer contracts and non-competition agreements, net |
44,928 | 50,712 | ||||||
Other, principally retirement plan assets |
34,093 | 30,673 | ||||||
Total other assets |
459,091 | 430,854 | ||||||
| $ | 991,814 | $ | 951,092 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 21,911 | $ | 27,404 | ||||
Accrued expenses |
||||||||
Salaries and employee benefits |
29,522 | 32,607 | ||||||
Other |
39,405 | 36,820 | ||||||
Current income taxes payable |
— | 3,572 | ||||||
Deferred income taxes |
6,568 | 10,419 | ||||||
Current maturities of long-term debt |
65,838 | 18,199 | ||||||
Total current liabilities |
163,244 | 129,021 | ||||||
Long-Term Debt, net of Current Maturities |
149,005 | 195,355 | ||||||
Deferred Income Taxes |
34,298 | 34,343 | ||||||
Other Noncurrent Liabilities |
53,279 | 44,985 | ||||||
Commitments and Contingencies (Notes 8 and 9) |
||||||||
Stockholders’ Equity |
||||||||
Common stock, $0.50 par value, non-convertible
Class A, 400,000,000 shares authorized, 21,290,932
and 21,283,196 shares issued and outstanding |
10,645 | 10,642 | ||||||
Additional paid-in capital |
66,863 | 68,268 | ||||||
Retained earnings |
485,954 | 446,199 | ||||||
Accumulated other comprehensive income |
28,526 | 22,279 | ||||||
Total stockholders’ equity |
591,988 | 547,388 | ||||||
| $ | 991,814 | $ | 951,092 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
G&K Services, Inc. and Subsidiaries
G&K Services, Inc. and Subsidiaries
| Accumulated Other | ||||||||||||||||||||||||||||||||
| Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||
| Net Unrealized | Minimum | |||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Gain/(Loss) on | Pension | Cumulative | |||||||||||||||||||||||||||
| Common | Common | Paid-In | Retained | Financial | Liability and | Translation | Stockholders’ | |||||||||||||||||||||||||
| (In thousands, except per share data) | Stock | Stock | Capital | Earnings | Instruments | Other | Adjustments | Equity | ||||||||||||||||||||||||
Balance July 3, 2004 |
$ | 9,716 | $ | 738 | $ | 51,963 | $ | 369,129 | $ | (110 | ) | $ | (1,363 | ) | $ | (611 | ) | $ | 429,462 | |||||||||||||
Net income |
— | — | — | 38,179 | — | — | — | 38,179 | ||||||||||||||||||||||||
Foreign currency
translation |
— | — | — | — | — | — | 8,197 | 8,197 | ||||||||||||||||||||||||
Unrealized holding gains,
net of income tax |
— | — | — | — | 544 | — | — | 544 | ||||||||||||||||||||||||
Minimum pension liability,
net of income tax |
— | — | — | — | — | (4,765 | ) | — | (4,765 | ) | ||||||||||||||||||||||
Comprehensive income |
42,155 | |||||||||||||||||||||||||||||||
Issuance of common stock
under stock plans, net
(207 shares) |
103 | — | 5,850 | — | — | — | — | 5,953 | ||||||||||||||||||||||||
Stock option-based
compensation |
— | — | 2,806 | — | — | — | — | 2,806 | ||||||||||||||||||||||||
Amortization of restricted
stock |
— | — | 841 | — | — | — | — | 841 | ||||||||||||||||||||||||
Cash dividends
($0.07 per share) |
— | — | — | (1,467 | ) | — | — | — | (1,467 | ) | ||||||||||||||||||||||
Balance July 2, 2005 |
9,819 | 738 | 61,460 | 405,841 | 434 | (6,128 | ) | 7,586 | 479,750 | |||||||||||||||||||||||
Net income |
— | — | — | 41,851 | — | — | — | 41,851 | ||||||||||||||||||||||||
Foreign currency
translation |
— | — | — | — | — | — | 13,205 | 13,205 | ||||||||||||||||||||||||
Unrealized holding gains,
net of income tax |
— | — | — | — | 1,327 | — | — | 1,327 | ||||||||||||||||||||||||
Minimum pension liability,
net of income tax |
— | — | — | — | — | 5,855 | — | 5,855 | ||||||||||||||||||||||||
Comprehensive income |
62,238 | |||||||||||||||||||||||||||||||
Conversion of Class B shares |
738 | (738 | ) | — | — | — | — | — | — | |||||||||||||||||||||||
Issuance of common stock
under stock plans, net
(170 shares) |
85 | — | 2,873 | — | — | — | — | 2,958 | ||||||||||||||||||||||||
Stock option-based
compensation |
— | — | 2,781 | — | — | — | — | 2,781 | ||||||||||||||||||||||||
Amortization of restricted
stock |
— | — | 1,154 | — | — | — | — | 1,154 | ||||||||||||||||||||||||
Cash dividends
($0.07 per share) |
— | — | — | (1,493 | ) | — | — | — | (1,493 | ) | ||||||||||||||||||||||
Balance July 1, 2006 |
10,642 | — | 68,268 | 446,199 | 1,761 | (273 | ) | 20,791 | 547,388 | |||||||||||||||||||||||
Net income |
— | — | — | 43,190 | — | — | — | 43,190 | ||||||||||||||||||||||||
Foreign currency
translation |
— | — | — | — | — | — | 6,540 | 6,540 | ||||||||||||||||||||||||
Unrealized holding gains,
net of income tax |
— | — | — | — | (769 | ) | — | — | (769 | ) | ||||||||||||||||||||||
Pension benefit liabilities,
net of tax |
— | — | — | — | — | 12 | — | 12 | ||||||||||||||||||||||||
Comprehensive income |
48,973 | |||||||||||||||||||||||||||||||
Adjustment for adoption of SFAS No.
158, net of tax |
— | — | — | — | — | 464 | — | 464 | ||||||||||||||||||||||||
Issuance of common stock
under stock plans, net
(239 shares) |
119 | — | 3,184 | — | — | — | — | 3,303 | ||||||||||||||||||||||||
Stock option-based compensation |
— | — | 2,435 | — | — | — | — | 2,435 | ||||||||||||||||||||||||
Share Repurchase Program (232 shares) |
(116 | ) | — | (8,797 | ) | — | — | — | — | (8,913 | ) | |||||||||||||||||||||
Amortization of restricted
stock |
— | — | 1,773 | — | — | — | — | 1,773 | ||||||||||||||||||||||||
Cash dividends
($0.16 per share) |
— | — | — | (3,435 | ) | — | — | — | (3,435 | ) | ||||||||||||||||||||||
Balance June 30, 2007 |
$ | 10,645 | — | $ | 66,863 | $ | 485,954 | $ | 992 | $ | 203 | $ | 27,331 | $ | 591,988 | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
G&K Services, Inc. and Subsidiaries
G&K Services, Inc. and Subsidiaries
| For the Fiscal Years Ended | ||||||||||||
| June 30, | July 1, | July 2, | ||||||||||
| (In thousands) | 2007 | 2006 | 2005 | |||||||||
Operating Activities: |
||||||||||||
Net income |
$ | 43,190 | $ | 41,851 | $ | 38,179 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities - |
||||||||||||
Depreciation and amortization |
45,595 | 43,263 | 41,543 | |||||||||
Deferred income taxes |
(1,037 | ) | (102 | ) | 854 | |||||||
Share-based compensation |
4,208 | 3,935 | 3,658 | |||||||||
Changes in current operating items,
exclusive of acquisitions - |
||||||||||||
Accounts receivable and prepaid expenses |
(362 | ) | (4,794 | ) | (5,116 | ) | ||||||
Inventories |
(141 | ) | (20,683 | ) | (11,164 | ) | ||||||
Accounts payable and other accrued expenses |
(14,480 | ) | 3,951 | (6,596 | ) | |||||||
Other assets and liabilities |
3,416 | 2,100 | 2,176 | |||||||||
Net cash provided by operating activities |
80,389 | 69,521 | 63,534 | |||||||||
Investing Activities: |
||||||||||||
Property, plant and equipment additions, net |
(31,515 | ) | (31,968 | ) | (19,408 | ) | ||||||
Acquisition of business assets, net of cash |
(46,966 | ) | (11,455 | ) | (74,871 | ) | ||||||
Purchases of investments, net |
(2,688 | ) | (1,967 | ) | (1,595 | ) | ||||||
Net cash used for investing activities |
(81,169 | ) | (45,390 | ) | (95,874 | ) | ||||||
Financing Activities: |
||||||||||||
Repayments of long-term debt |
(7,710 | ) | (7,835 | ) | (25,730 | ) | ||||||
Proceeds from (repayments of) short-term borrowings, net |
19,442 | (14,228 | ) | 40,400 | ||||||||
Cash dividends paid |
(3,435 | ) | (1,493 | ) | (1,467 | ) | ||||||
Sale of common stock |
3,303 | 2,958 | 5,953 | |||||||||
Repurchase of common stock shares |
(7,883 | ) | — | — | ||||||||
Net cash provided by (used for) financing activities |
3,717 | (20,598 | ) | 19,156 | ||||||||
Increase (Decrease) in Cash and Cash Equivalents |
2,937 | 3,533 | (13,184 | ) | ||||||||
Effect of Exchange Rates on Cash |
132 | 812 | 1,598 | |||||||||
Cash and Cash Equivalents: |
||||||||||||
Beginning of year |
19,690 | 15,345 | 26,931 | |||||||||
End of year |
$ | 22,759 | $ | 19,690 | $ | 15,345 | ||||||
Supplemental Cash Flow Information: |
||||||||||||
Cash paid for - |
||||||||||||
Interest |
$ | 12,851 | $ | 12,689 | $ | 10,800 | ||||||
Income taxes |
$ | 30,414 | $ | 24,962 | $ | 28,975 | ||||||
Non-Cash Transactions: |
||||||||||||
Notes payable issued to sellers in business acquisitions |
$ | — | $ | (1,419 | ) | $ | 11,890 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
(Amounts in thousands, except share and per share data)
1. Summary of Significant Accounting Policies
Nature of Business
G&K Services, Inc. is a market leader in providing branded identity apparel and facility services
programs that enhance image and safety in the workplace. We serve a wide variety of North American
industries including automotive, warehousing, distribution, transportation, energy, manufacturing,
food processing, pharmaceutical, semi-conductor, retail, restaurants and hospitality, and many
others providing them with rented uniforms and facility services products such as floor mats, dust
mops, wiping towels, restroom supplies and selected linen items. We also manufacture certain
uniform garments that are used to support our garment rental and direct purchase programs. We have
two operating segments, United States and Canada, which have been identified as components of our
organization that are reviewed by our Chief Executive Officer to determine resource allocation and
evaluate performance.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of our organization and our
subsidiaries, all of which are wholly owned. Material intercompany balances and transactions have
been eliminated in consolidation.
Fiscal Year
Our fiscal year is the 52 week or 53 week period ending on the Saturday nearest June 30. All
references herein to “2007”, “2006” and “2005”, mean the fiscal years ended June 30, 2007, July 1,
2006 and July 2, 2005, respectively. All three fiscal years were comprised of 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
All short-term, highly liquid investments with a maturity of three months or less, at the date of
acquisition are classified as cash and cash equivalents.
Accounts Receivable
Accounts receivable is recorded net of an allowance for expected losses and the fair value
approximates the book value. The allowance, recognized as an amount equal to the anticipated
future write-offs, is based on age of outstanding balances, analysis of specific accounts and
historical bad debt expense and current economic trends.
Inventories
Inventories consist of new goods and rental merchandise in service. New goods are stated at lower
of first-in, first-out (FIFO) cost or market, net of any reserve for obsolete or excess inventory.
Merchandise placed in service to support rental operations is amortized into cost of rental
operations over the estimated useful lives of the underlying inventory items, primarily on a
straight-line basis, which results in a matching of the cost of the merchandise with the weekly
rental revenue generated by merchandise. Estimated lives of rental merchandise in service range
from nine months to three years. In establishing estimated lives for merchandise in service,
management considers historical experience and the intended use of the merchandise.
We estimate our reserves for inventory obsolescence by periodically examining our inventory to
determine if there are indicators that carrying values exceed the net realizable value. Experience
has shown that significant indicators that could require the need for additional inventory
write-downs are the age of the inventory, anticipated demand for our products, historical inventory
usage, revenue trends and current economic conditions. While we believe that adequate reserves for
inventory obsolescence have been made in the consolidated financial statements, product lines and
customer requirements may
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change and we could experience additional inventory write-downs in the future. The components of
inventories as of June 30, 2007 and July 1, 2006 are as follows:
| June 30, | July 1, | |||||||
| 2007 | 2006 | |||||||
Raw Materials |
$ | 5,474 | $ | 5,742 | ||||
Work in Process |
4,370 | 4,587 | ||||||
Finished Goods |
52,970 | 52,457 | ||||||
New Goods |
$ | 62,814 | $ | 62,786 | ||||
Merchandise In Service |
$ | 77,966 | $ | 78,245 | ||||
Total Inventories |
$ | 140,780 | $ | 141,031 | ||||
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation (including those under capital
leases) is generally computed using the straight-line method over the following estimated useful
lives:
| Life | ||||
| (Years) | ||||
Automobiles and trucks |
3 to 8 | |||
Machinery and equipment |
3 to 10 | |||
Buildings |
20 to 33 | |||
Building improvements |
10 | |||
Costs of significant additions, renewals and betterments, including external and certain internal
computer software development costs, are capitalized. When an asset is sold or otherwise disposed
of, the related cost and accumulated depreciation are removed from the respective accounts and the
gain or loss on disposition is reflected in earnings. Repairs and maintenance costs are charged to
operating expense when incurred.
Goodwill, Intangible and Long-Lived Assets
The cost of acquisitions in excess of the fair value of the underlying net assets is recorded as
goodwill. Non-competition agreements that limit the seller from competing with us for a fixed
period of time and acquired customer contracts are stated at cost less accumulated amortization and
are amortized over the terms of the respective agreements or estimated average life of an account,
primarily five to eleven years.
The carrying value of goodwill is evaluated on an annual basis and also when events occur or
circumstances change that would more likely than not reduce the fair value of the reporting unit to
which goodwill is assigned below its carrying amount. When evaluating whether goodwill is
impaired, the fair value of the reporting unit to which goodwill is assigned is compared to its
carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair
value, then the amount of the impairment loss must be measured. The impairment loss would be
calculated by comparing the implied fair value of the goodwill with its carrying amount. In
calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated
to all of the other assets and liabilities of that unit based on their fair values. The excess of
the fair value of a reporting unit over the amount assigned to its other assets and liabilities is
the implied fair value of goodwill. Management completes its annual goodwill impairment test in
the fourth quarter of each fiscal year and there have been no impairments of goodwill in fiscal
2007, 2006 or 2005.
We review all other long-lived assets, including definite-lived intangible assets, for impairment
in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for
the Impairment and Disposal of Long-Lived Assets.” Under SFAS 144, impairment losses are recorded
on long-lived assets used in operations when events and circumstances indicate the assets might be
impaired and the undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. We also perform a periodic assessment of the useful lives
assigned to intangible assets. All of our intangibles are subject to amortization.
Retirement Plan Assets
Retirement plan assets consist primarily of mutual funds and cash equivalents, which are stated at
their fair value as determined by quoted market prices and the cash surrender values of life
insurance policies.
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Foreign Currency
Foreign currency denominated assets and liabilities are translated into U.S. dollars using the
exchange rates in effect at the balance sheet date. Results of operations are translated using the
average exchange rates throughout the period. The effect of exchange rate fluctuations on
translation of assets and liabilities are recorded in accumulated other comprehensive income, as a
component of stockholders’ equity. Gains and losses from foreign currency transactions are
included in results of operations and were not material in fiscal 2007, 2006 or 2005.
Revenue Recognition
Our rental operations business is largely based on written service agreements whereby we agree to
collect, launder and deliver uniforms and other related products. The service agreements provide
for weekly billing upon completion of the laundering process and delivery to the customer.
Accordingly, we recognize revenue from rental operations in the period in which the services are
provided. Revenue from rental operations also includes billings to customers for lost or damaged
merchandise. Direct sale revenue is recognized in the period in which the product is shipped. Total revenues do not include
sales tax as we consider ourselves a pass-through conduit for collecting and remitting sales taxes.
Insurance
We self-insure for certain obligations related to health, workers’ compensation and auto and
general liability programs. We purchase excess of loss insurance policies to protect us from
catastrophic losses. We periodically evaluate our significant liabilities under such programs
based on a third party actuarial analysis. Management’s estimates including present value
estimates, consider historical claims experience, escalating medical cost trends and the expected
timing of claim payments.
Income Taxes
Deferred income taxes are determined in accordance with SFAS No. 109, “Accounting for Income
Taxes.” Deferred tax assets and liabilities are recorded for temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial statements, using
statutory rates in effect for the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results
of operations in the period the changes are enacted. We record valuation allowances to reduce
deferred tax assets when it is more likely than not that some portion of the asset may not be
realized.
Per Share Data
Basic earnings per common share was computed by dividing net income by the weighted average number
of shares of common stock outstanding during the year. Diluted earnings per common share was
computed similarly to the computation of basic earnings per share, except that the denominator is
increased for the assumed exercise of dilutive options and other dilutive securities, including
non-vested restricted stock, using the treasury stock method.
| For the Fiscal Years Ended | June 30, | July 1, | July 2, | |||||||||
| (In thousands) | 2007 | 2006 | 2005 | |||||||||
Weighted average number of common
shares outstanding used in
computation of basic
earnings per share |
21,245 | 21,093 | 20,942 | |||||||||
Weighted average effect of non-vested
restricted stock grants and assumed
exercise of options |
179 | 160 | 458 | |||||||||
Shares used in computation of diluted
earnings per share |
21,424 | 21,253 | 21,400 | |||||||||
Potential common shares of 564,000, 553,000 and 193,000 related to our outstanding stock options
and restricted stock grants were excluded from the computation of diluted earnings per share for
fiscal 2007, 2006 and 2005, respectively. Inclusion of these shares would have been anti-dilutive
as the exercise price of these shares exceeded market value.
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Derivative Financial Instruments
In the ordinary course of business, we enter into derivative transactions to manage our interest
rate and energy price risk and account for the derivatives in accordance with Statement of
Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”) and related authoritative guidance. All derivative instruments are
recorded as other assets or other liabilities at fair value and subsequent changes in a
derivative’s fair value are recognized in income, unless specific hedge accounting criteria are
met.
Derivative instruments that qualify for hedge accounting are classified as a hedge of the
variability of cash flows to be paid related to a recognized liability or a forecasted transaction.
We currently hedge approximately 2.3 million gallons of both unleaded gasoline and diesel fuel
over approximately 18 months. Changes in the fair value of a derivative that is highly effective
and designated as a cash flow hedge are recognized in accumulated other comprehensive income until
expense from the cash flows of the hedged items are recognized. We perform an assessment, at both
the inception and on a quarterly basis thereafter, to determine whether our derivatives are highly
effective in offsetting changes in the value of the hedged items. Any changes in the fair value
resulting from hedge ineffectiveness, is immediately recognized in other income.
We do not engage in speculative transactions or fair value hedging nor do we hold or issue
financial instruments for trading purposes.
Share-based Payments
We grant share-based awards, including restricted stock and options to purchase common stock of the
Company. Stock option grants are for a fixed number of shares to employees and directors with an
exercise price equal to the fair value of the shares at the date of grant. Share-based
compensation for awards is recognized in the consolidated statements of operations on a
straight-line basis over the requisite service period. The amortization of share-based
compensation reflects estimated forfeitures adjusted for actual forfeiture experiences and we
review our estimate on an annual basis. As share-based compensation expense is recognized, a
deferred tax asset is recorded that represents an estimate of the future tax deduction from the
exercise of stock options or release of restrictions on the restricted stock. At the time
share-based awards are exercised, cancelled, expire or restrictions lapse, we recognize adjustments
to income tax expense.
Adoption of New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158). SFAS
158 requires an employer to recognize the funded status of a benefit plan as an asset or liability
in its statement of financial position, measured as the difference between plan assets at fair
value and the benefit obligation, and to recognize as a component of accumulated other changes in
equity from nonowner sources, net of tax, actuarial gains or losses and prior service costs or
credits that arise during the period but which are not recognized as components of net periodic
benefit cost pursuant to FASB Statement No. 87, Employers’ Accounting for Pensions (SFAS 87), or
FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (SFAS
106). The provisions of SFAS 87 and SFAS 106 continue to apply in measuring plan assets and benefit
obligations, as of the date of the fiscal year-end statement of financial position, and in
determining the amount of net periodic benefit cost. The provisions of SFAS 158 were effective for
fiscal years ending after December 15, 2006 and are not to be applied retrospectively. See Note 8
to our consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
On July 13, 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 (FIN
48), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,”
which fundamentally changes the way that we will be required to treat our uncertain tax positions
for financial accounting purposes and will be effective for our fiscal year starting July 1, 2007.
FIN 48 prescribes rules regarding how we should recognize, measure and disclose in our financial
statements the tax positions that we have taken or will take on our tax return that are reflected
in measuring current or deferred income tax assets and liabilities for interim or annual periods.
Differences between tax positions taken in a tax return and amounts recognized in the financial
statements will generally result in an increase in a liability for income taxes payable, or a
reduction in a deferred tax asset or an increase in a deferred tax liability. We believe the
impact of adopting FIN 48 will be immaterial.
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In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value
Measurement” (SFAS 157). SFAS 157 provides a definition of fair value, provides guidance for
measuring fair value in U.S. GAAP and expands disclosures about fair value measurement. SFAS 157
will be effective at the beginning of fiscal 2009.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits entities
to choose to measure many financial instruments and certain other items at fair value. SFAS 159
will be effective at the beginning of fiscal 2009.
We are currently evaluating the impact of SFAS 157 and SFAS 159 on our consolidated financial
statements.
2. Acquisitions
During each of fiscal 2007, 2006 and 2005, we made several small acquisitions. The total purchase
consideration, including related acquisition costs, and purchase price adjustments from prior year
acquisitions as well as the amounts exceeding the estimated fair values of assets acquired and
liabilities assumed were as follows:
| Fiscal Years | 2007 | 2006 | 2005 | |||||||||
Total purchase price and related
acquisition costs |
$ | 46,966 | $ | 11,455 | $ | 86,761 | ||||||
Goodwill |
27,768 | 5,442 | 50,641 | |||||||||
In January 2007, we acquired the outstanding stock and certain real estate from Grand
Rapids Coats and Apron Service, Inc., a uniform rental and facility services company serving Western Michigan. Also, in February 2007,
we acquired the outstanding stock and certain real estate assets from Alltex Uniform Rental Services, Inc., a leading uniform
and facility services company serving the New England States. These two acquisitions enhance our geographic coverage in
North America and further strengthen our ability to meet the needs of large national account customers. These two
acquisitions add approximately $20,000 in annual revenue.
Total purchase consideration for fiscal 2005 includes $11,890 of debt issued which was subsequently
reduced by $1,419 in fiscal year 2006 as a purchase price adjustment. The pro forma effects of
these acquisitions, had they been acquired at the beginning of the fiscal year, were not material,
either individually or in the aggregate.
3. Goodwill and Intangible Assets
Goodwill includes the following:
| United States | Canada | Total | ||||||||||
Balance as of July 2, 2005 |
$ | 286,313 | $ | 52,388 | $ | 338,701 | ||||||
Acquisitions, net of purchase
accounting adjustments |
(143 | ) | 5,585 | 5,442 | ||||||||
Currency exchange and other |
— | 5,326 | 5,326 | |||||||||
Balance as of July 1, 2006 |
286,170 | 63,299 | 349,469 | |||||||||
Acquisitions, net of purchase
accounting adjustments |
29,586 | (1,818 | ) | 27,768 | ||||||||
Foreign currency translation and other |
— | 2,833 | 2,833 | |||||||||
Balance as of June 30, 2007 |
$ | 315,756 | $ | 64,314 | $ | 380,070 | ||||||
Information regarding our other intangible assets, which are included in other assets on the
consolidated balance sheet, are as follows:
| June 30, 2007 | July 1, 2006 | |||||||
Other Intangible Assets: |
||||||||
Customer Contracts |
$ | 111,740 | $ | 106,408 | ||||
Accumulated Amortization |
(68,484 | ) | (58,158 | ) | ||||
Net |
$ | 43,256 | $ | 48,250 | ||||
Non-Competition Agreements |
$ | 11,094 | $ | 10,908 | ||||
Accumulated Amortization |
(9,422 | ) | (8,446 | ) | ||||
Net |
$ | 1,672 | $ | 2,462 | ||||
The customer contracts include the combined value of the written service agreements and the
related customer relationship. It has been determined that there are no customer relationships
with a significant separate value.
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Amortization expense was $10,806, $10,784 and $9,562 for the twelve months ended June 30, 2007,
July 1, 2006, and July 5, 2005 respectively. Estimated amortization expense for each of the next
five fiscal years based on the intangible assets as of June 30, 2007 is as follows:
2008 |
10,512 | |||
2009 |
6,791 | |||
2010 |
6,620 | |||
2011 |
5,944 | |||
2012 |
5,177 | |||
4. Long-Term Debt
Debt as of June 30, 2007 and July 1, 2006 includes the following:
| 2007 | 2006 | |||||||
Borrowings under unsecured revolving credit facility |
$ | 51,500 | $ | 40,800 | ||||
Borrowings under unsecured variable rate notes |
75,000 | 75,000 | ||||||
Borrowings under secured variable rate loans |
58,000 | 50,000 | ||||||
Borrowings under unsecured fixed rate notes |
28,571 | 35,714 | ||||||
Other debt arrangements including capital leases |
1,772 | 12,040 | ||||||
| 214,843 | 213,554 | |||||||
Less current maturities |
(65,838 | ) | (18,199 | ) | ||||
Total long-term debt |
$ | 149,005 | $ | 195,355 | ||||
We maintain a $325,000 unsecured revolving credit facility. As of June 30, 2007, borrowings
outstanding under the revolving credit facility were $51,500. The unused portion of the revolver
may be used for general corporate purposes, acquisitions, working capital needs and to provide up
to $50,000 in letters of credit. As of June 30, 2007, letters of credit outstanding against the
revolver were $21,060.
Borrowings under the revolving credit facility bear interest at 0.55% to 1.50% over the London
Interbank Offered Rate (“LIBOR”), or the Canadian prime rate for Canadian borrowings, based on a
leverage ratio calculated on a quarterly basis. Advances outstanding as of June 30, 2007 bear
interest at a rate of 5.40% (LIBOR plus 0.75%). We also pay a fee on the unused daily balance of
the revolving credit facility based on a leverage ratio calculated on a quarterly basis.
We have issued $50,000 of 8.4% unsecured fixed rate private placement notes with certain
institutional investors. The 10-year notes have a seven-year average life with a final maturity on
July 20, 2010. Beginning on July 20, 2004, and annually thereafter to maturity, we will repay
$7,143 of the principal amount at par. As of June 30, 2007, the outstanding balance was $28,571.
We maintain a loan agreement expiring on October 23, 2007. Under the loan agreement, the lender
will make loans to us on a revolving basis up to $60,000. The facility was amended on June 2, 2006
increasing the facility size from $50,000 to $60,000. We are required to pay interest on
outstanding loan balances at a rate per annum of one month LIBOR plus a margin or, if the lender is
funding the loan through the issuance of commercial paper to third parties, at a rate per annum
equal to a margin plus the average annual interest rate for such commercial paper. In connection
with the loan agreement, we granted a first priority security interest in certain of our U.S. based
receivables. The amount of funds available under the loan agreement will be based on the amount of
eligible receivables less various reserve requirements. We used the net proceeds of this loan to
reduce indebtedness under our unsecured credit facilities. At June 30, 2007, there was $58,000
outstanding under the agreement at a current interest rate of 5.35%.
We have $75,000 of unsecured variable rate private placement notes. The notes bear interest at
0.60% over LIBOR and are scheduled to mature on June 30, 2015. The notes do not require principal
payments until maturity. The interest rate is reset and interest payments are paid on a quarterly
basis. As of June 30, 2007, the outstanding balance of the notes was $75,000 at a current rate of
5.95%.
The credit facilities, loan agreements, fixed rate notes and variable rate notes contain various
restrictive covenants that among other matters require us to maintain a minimum stockholders’
equity and a maximum leverage ratio, all as defined in the
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respective agreement. These debt
arrangements also contain customary representations, warranties, covenants and indemnifications.
As of June 30, 2007, we were in compliance with all debt covenants.
The fair value of our long-term debt is determined using quoted market prices for the same or
similar issues or on the current rates offered to us for debt of the same remaining maturities.
The fair value of the long-term debt under the unsecured revolving credit facility, unsecured
variable rate notes and secured variable rate loans approximates their carrying value as of June
30, 2007 and July 1, 2006. The fair value of the unsecured fixed rate notes is $29,714 as of June
30, 2007.
In January 2007, we repaid a promissory note for $10,471 which bore interest of 2.35% that had
previously been issued in connection with the acquisition of the Lion Uniform Group.
The following table summarizes payments due on long-term debt, including capital leases, as of June
30, 2007 for the next five fiscal years and thereafter:
2008 |
$ | 65,838 | ||
2009 |
7,788 | |||
2010 |
58,862 | |||
2011 |
7,338 | |||
2012 |
17 | |||
2013 and thereafter |
75,000 | |||
5. Derivative Financial Instruments
We use derivative financial instruments to limit exposure to changes in interest rates and energy
prices. Interest rate swap contracts are used to balance the total debt that is subject to
variable and fixed interest rates. The interest rate swap contracts are reflected at fair value in
the consolidated balance sheet. As these derivatives qualify for cash flow hedge designation, the
related gains or losses on these contracts are deferred in stockholders’ equity (as a component of
other comprehensive income) until the interest expense on the related debt is recognized. Amounts
to be paid or received under the contracts are accrued as interest rates change and are recognized
over the life of the contracts as an adjustment to interest expense. The net effect of this
accounting is that interest expense on the portion of variable rate debt being hedged is generally
recorded based on fixed interest rates.
At June 30, 2007, we had interest rate swap contracts to pay fixed rates of interest (average rate
of 4.18%) and receive variable rates of interest based on three-month LIBOR on $130,000 notional
amount of indebtedness. The $130,000 notional amount of contracts outstanding at June 30, 2007,
includes existing interest rate swaps of $60,000 and forward starting interest rate swaps of
$70,000, none of which will mature in fiscal year 2008. These swap contracts have been designated
as highly effective cash flow hedges and accordingly, gains or losses on any ineffectiveness was
not material to any period. If these swap agreements were to be terminated, we would have incurred
an after-tax gain on the contracts of $904 as of June 30, 2007 and an after-tax gain of $1,831 as
of July 1, 2006.
In addition, we purchase futures contracts to effectively
hedge a portion of our anticipated fuel
commodity purchases. The futures contracts are reflected at fair value in the consolidated
condensed balance sheet and as these derivatives qualify for cash flow hedge designation the
related gains or losses on these contracts are deferred in stockholders’ equity (as a component of
other comprehensive income) until the expense is recognized on the hedged commodity.
Upon settlement of each contract, the actual gain or loss is reflected in cost of rental
operations. If these contracts were to be terminated, we would have incurred an after-tax loss on
the contracts of $24 as of June 30, 2007. These contracts have been designated as highly effective
cash flow hedges and accordingly, gains or losses on any ineffectiveness of these instruments were
not material to any one period as of June 30, 2007 and July 1, 2006.
We may also enter into foreign currency exchange contracts to hedge firm commitments with its
foreign subsidiary. These agreements are recorded at current market values and the gains and
losses are included in earnings. There were no outstanding foreign contracts at June 30, 2007 and
at July 1, 2006.
6. Stockholders’ Equity
We formerly issued both Class A and Class B shares of our stock. Upon the retirement of a former
officer of the Company, effective December 31, 2005, all Class B shares outstanding were converted
on a share-for-share basis to Class A shares. As
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of June 30, 2007 and July 1, 2006 the only shares
outstanding were Class A shares. Each share of Class A common stock is entitled to one vote and is
freely transferable.
In the fourth quarter of fiscal year 2007, our Board of Directors authorized a $100,000 share
repurchase program. We intend to repurchase shares from time to time in the open market, privately
negotiated or other transactions in accordance with applicable federal securities laws. The timing
and the amount of the repurchases will be determined by us based on our evaluation of market
conditions, share price and other factors. As of June 30, 2007, we had purchased and retired
approximately 232,000 shares for $8,913 leaving $91,087 still available under this program. Of the
$8,913 of shares repurchased, $7,883 was paid by June 30, 2007 with the remaining $1,030 paid on
July 2, 2007.
Share-Based Payment Plans
On November 16, 2006 our shareholders approved the 2006 Equity Incentive Plan (the “plan”). Under
the 2006 Equity Incentive Plan, a maximum of 2,000,000 equity awards can be granted. Only 667,000
of the awards granted under the plan can be stock appreciation rights, restricted stock, restricted
stock units, deferred stock units or stock. As of June 30, 2007, 1,942,300 equity awards were
available for grant. The only plan available to grant equity compensation as of June 30, 2007, is
the 2006 Equity Incentive Plan. Shares that were available but not granted under all previous
plans have been deauthorized and therefore no additional shares remain available for grant.
The 2006 Equity Incentive Plan provides for certain stock awards, including stock options at fair
market value and non-vested restricted shares, to our key employees and non-employee directors. On
the date individuals become a non-employee director, they receive a grant of 3,000 nonqualified
stock options (initial grant) that vest over three years. In addition, on the first business day
of each calendar year that a non-employee director is serving, the non-employee director receives
2,400 nonqualified stock options that vest on the first anniversary of the grant and an
unrestricted stock grant of 1,200 shares. Exercise periods for the stock options are limited to a
maximum of 10 years and a minimum of one year. Stock options issued to employees generally vest
over three years while restricted stock grants to employees generally vest over five years.
We adopted the provisions of the Statement of Financial Accounting Standards No. 123 (revised 2004)
“Share-Based Payment” (“SFAS 123(r)”) in the first quarter of fiscal 2006 under the modified
retrospective transition method. SFAS 123(r) eliminates accounting for share-based compensation
transactions using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for
Stock Issued to Employees,” and requires instead that the fair value of all share-based
transactions, including grants of employee stock options, be recognized in the income statement.
Under the modified retrospective transition method, all prior period financial statements were
restated to recognize compensation cost in the amounts previously reported in the Notes to
Consolidated Financial Statements.
As a result of adopting SFAS 123(r) on July 3, 2005, income before income taxes and net income have
been decreased and restated by $2,806 and $1,748, respectively, for fiscal year 2005. Basic and
diluted earnings per share have been decreased and restated by $0.09 and $0.10 per share,
respectively, for fiscal year 2005. The beginning balances of long-term deferred taxes and paid in
capital have been increased and restated by $4,320 and $14,571 respectively and retained earnings
has been decreased and restated by $18,891 to recognize compensation cost for fiscal years 1996
through 2005 in the amounts previously reported in the Notes to Consolidated Financial Statements
under provisions of SFAS No.123, “Accounting for Stock-Based Compensation.”
Compensation cost for share-based compensation plans is recognized on a straight-line basis over
the requisite service period of the award (or to an employee’s eligible retirement date, if
earlier). The amount of compensation cost that has been recognized in the consolidated statements
of operations was $4,208, $3,935, and $3,658 for fiscal years 2007, 2006 and 2005, respectively.
The total income tax benefit recognized in the income statement for share-based compensation
arrangements was $1,578, $1,476 and $1,390 for fiscal years 2007, 2006, and 2005. In addition, no
amount of share-based compensation expense was capitalized during the periods presented.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes
option pricing model using the assumptions noted in the following table. Expected volatilities are
based on the historic volatility of our stock. We use historical data to estimate option exercise
and employee termination within the valuation model. The expected term of the options granted is
derived from historical data and represents the period of time that options granted are expected to
be outstanding. The risk free interest rate for each option is the interpolated market yield on a
U.S. Treasury bill with a term comparable to the expected option term of the granted stock option.
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| For the Fiscal Years Ended | ||||||||||||
| June 30, 2007 | July 1, 2006 | July 2, 2005 | ||||||||||
Expected share price volatility |
23.2% - 27.4 | % | 24.4% - 25.0 | % | 25.9% - 26.5 | % | ||||||
Weighted average volatility |
24.6 | % | 24.4 | % | 26.0 | % | ||||||
Expected annual dividend per
share |
$ | 0.16 | $ | 0.07 | $ | 0.07 | ||||||
Expected term (in years) |
5-6 | 4-5 | 5 | |||||||||
Risk free rate |
4.5% - 4.8 | % | 3.8% - 4.9 | % | 3.3% - 3.9 | % | ||||||
A summary of stock option activity under our plans as of June 30, 2007, and changes during the year
then ended is presented below:
| Weighted Average | ||||||||||||||||
| Weighted Average | Remaining | Aggregate | ||||||||||||||
| Options | Shares | Exercise Prices | Contractual Term | Intrinsic Value | ||||||||||||
Outstanding at July 1, 2006 |
1,364,016 | $ | 35.84 | |||||||||||||
Granted |
297,310 | 33.95 | ||||||||||||||
Exercised |
(119,074 | ) | 31.49 | |||||||||||||
Forfeited or expired |
(68,630 | ) | 38.22 | |||||||||||||
Outstanding at June 30, 2007 |
1,473,622 | $ | 35.78 | 6.21 | $ | 6,967,178 | ||||||||||
Exercisable at June 30, 2007 |
976,636 | $ | 35.20 | 4.97 | $ | 5,216,596 | ||||||||||
The weighted-average fair value of stock options on the date of grant during the fiscal years ended
2007, 2006, and 2005 was $10.09, $10.90, and $10.85, respectively. The total intrinsic value of
stock options exercised during the fiscal years ended 2007, 2006, and 2005, was $836, $815, and
$2,429, respectively. As of June 30, 2007, there was $2,872 of total unrecognized compensation
expense related to non-vested share-based compensation arrangements granted under our stock option
plan.
We received total cash as a result of the exercise of stock options in fiscal years 2007, 2006 and
2005 of $3,184, $2,842 and $5,967, respectively.
A summary of the status of our non-vested shares of restricted stock as of June 30, 2007 and
changes during the year ended June 30, 2007, is presented below:
| Weighted-Average | ||||||||
| Non-vested Shares | Shares | Grant-Date Fair Value | ||||||
Non-vested at July 1, 2006 |
112,280 | $ | 39.35 | |||||
Granted |
140,425 | 33.64 | ||||||
Vested |
(34,286 | ) | 36.12 | |||||
Forfeited |
(16,083 | ) | 36.05 | |||||
Non-vested at June 30, 2007 |
202,336 | $ | 35.92 | |||||
As of June 30, 2007, there was $5,045 of total unrecognized compensation expense related to
non-vested share-based compensation arrangements granted under our restricted stock plan. That
expense is expected to be recognized over a weighted-average period of 3.6 years. The total fair
value of shares vested during the fiscal years ended 2007, 2006 and 2005 was $1,238, $924 and
$1,208 respectively.
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7. Income Taxes
The components of the provision for income taxes are as follows:
| Fiscal Years | 2007 | 2006 | 2005 | |||||||||
Current: |
||||||||||||
Federal |
$ | 10,687 | $ | 8,595 | $ | 14,820 | ||||||
State and local |
2,131 | 2,189 | 1,637 | |||||||||
Foreign |
13,554 | 10,217 | 5,116 | |||||||||
| 26,372 | 21,001 | 21,573 | ||||||||||
Deferred |
(4,101 | ) | (1,215 | ) | 1,576 | |||||||
| $ | 22,271 | $ | 19,786 | $ | 23,149 | |||||||
The reconciliation between income taxes using the statutory federal income tax rate and the
recorded income tax provision is as follows:
| Fiscal Years | 2007 | 2006 | 2005 | |||||||||
Federal taxes at the statutory
rate |
$ | 22,911 | $ | 21,573 | $ | 21,464 | ||||||
State taxes, net of federal
tax benefit |
1,196 | 1,435 | 1,429 | |||||||||
Foreign earnings taxed at different
rates |
(141 | ) | 1,263 | (210 | ) | |||||||
Change in tax contingency reserve |
(1,725 | ) | (2,894 | ) | 124 | |||||||
Permanent differences
and other, net |
30 | (1,591 | ) | 342 | ||||||||
Total provision |
$ | 22,271 | $ | 19,786 | $ | 23,149 | ||||||
Effective rate |
34.0 | % | 32.1 | % | 37.7 | % | ||||||
The change in the tax contingency reserve in 2007 and 2006 was the result of the expiration of
certain statutes and the favorable resolution of other tax matters.
Significant components of our deferred tax assets and deferred tax liabilities as of June 30, 2007
and July 1, 2006 are as follows:
| 2007 | 2006 | |||||||
Deferred tax liabilities: |
||||||||
Inventory |
$ | (20,112 | ) | $ | (22,306 | ) | ||
Depreciation |
(18,805 | ) | (22,367 | ) | ||||
Intangibles |
(32,948 | ) | (28,620 | ) | ||||
Total deferred tax liabilities |
(71,865 | ) | (73,293 | ) | ||||
Deferred tax assets: |
||||||||
Accruals, reserves and other |
25,136 | 22,876 | ||||||
Other |
5,863 | 5,655 | ||||||
Total deferred tax assets |
30,999 | 28,531 | ||||||
Net deferred tax liabilities |
$ | (40,866 | ) | $ | (44,762 | ) | ||
We have foreign tax credit carry-forwards of $1,045, which expire in fiscal year 2017. We have
determined that no valuation allowance is necessary as of June 30, 2007 and July 1, 2006.
We have not provided U.S. income taxes and foreign withholding taxes on undistributed earnings from
our foreign subsidiaries of approximately $42,400 as of June 30, 2007 and July 1, 2006
respectively. These earnings are considered to be indefinitely reinvested in the operations of
such subsidiaries.
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8. Employee Benefit Plans
Pension Plan and Supplemental Executive Retirement Plan
We have a noncontributory defined benefit pension plan (the “Plan”) covering substantially all
employees, except certain employees who are covered by union-administered plans. Benefits are
based on the number of years of service and each employee’s compensation near retirement. We make
annual contributions to the Plan consistent with federal funding requirements.
Annual benefits under the Supplemental Executive Retirement Plan (“SERP”) are based on years of
service and individual compensation near retirement. In years prior to fiscal year 2007, we
purchased life insurance contracts that could have been used to fund the retirement benefits
under this plan. In fiscal year 2007, to better leverage our resources we redeemed the cash
surrender value of a number of life insurance policies for $6,295 and invested the proceeds in
high quality debt and equity instruments. These investments in conjunction with the remaining
life insurance policies may be used to fund the retirement benefits. The value of the
investment instrument and the net cash surrender value of the contracts as of June 30, 2007 and
July 1, 2006 were $14,969 and $14,670, respectively, and are included in other assets in the
accompanying consolidated balance sheets.
We froze the Plan and SERP effective January 1, 2007. All benefits earned by the defined benefit
plans participants through the end of calendar year 2006 will be available upon retirement under
the plan provisions. Future growth in benefits will no longer occur beyond December 31, 2006. We
incurred $160 and $100 of costs in fiscal year 2006 associated with the curtailment of the pension
plan and SERP respectively.
Effective June 30, 2007, we adopted the recognition provisions of SFAS No. 158, which requires that
the consolidated balance sheet reflect the funded status of the pension and postretirement plans.
The funded status of the plan is measured as the difference between the plan assets at fair value
and the projected benefit obligation. We have recognized the aggregate of all under-funded plans
within other noncurrent liabilities. The portion of the amount by which the actuarial present
value of benefits included in the projected benefit obligation exceeds the fair value of plan
assets, payable in the next 12 months, is reflected in accrued liabilities. The measurement date
of the plan assets coincides with our fiscal year end.
At June 30, 2007, previously unrecognized differences between actual amounts and estimates based on
actuarial assumptions are included in accumulated other comprehensive income in our consolidated
balance sheet as required by SFAS No. 158. In future reporting periods, the difference between
actual amounts and estimates based on actuarial assumptions will be recognized in other
comprehensive income in the period in which they occur.
The incremental effect of adopting the recognition provisions of SFAS No. 158 on individual line
items in the consolidated balance sheet at June 30, 2007 is shown below:
| Before adoption of | After adoption of | |||||||||||
| SFAS No. 158 | Adjustments | SFAS No. 158 | ||||||||||
Other, principally retirement plan assets |
$ | 34,197 | $ | (104 | ) | $ | 34,093 | |||||
Total other assets |
459,195 | (104 | ) | 459,091 | ||||||||
Total Assets |
$ | 991,918 | $ | (104 | ) | $ | 991,814 | |||||
Deferred income taxes |
$ | 34,019 | $ | 279 | $ | 34,298 | ||||||
Other Noncurrent Liabilities |
54,126 | (847 | ) | 53,279 | ||||||||
Accumulated other comprehensive income |
28,062 | 464 | 28,526 | |||||||||
Total stockholders’ equity |
591,524 | 464 | 591,988 | |||||||||
Total stockholders’ equity and liabilities |
$ | 991,918 | $ | (104 | ) | $ | 991,814 | |||||
The estimated amortization from accumulated other comprehensive income into net periodic
benefit cost during fiscal year 2008 is not material.
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Table of Contents
Obligations and Funded Status at June 30, 2007 and July 1, 2006
| Supplemental Executive | ||||||||||||||||
| Pension Plan | Retirement Plan | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Change in benefit obligation: |
||||||||||||||||
Projected benefit obligation, beginning of year |
$ | 48,545 | $ | 59,296 | $ | 11,045 | $ | 13,961 | ||||||||
Service cost |
1,432 | 4,761 | 316 | 936 | ||||||||||||
Interest cost |
3,095 | 3,236 | 691 | 754 | ||||||||||||
Actuarial (gain) loss** |
(134 | ) | (9,017 | ) | 259 | (1,466 | ) | |||||||||
Curtailment (gain) |
— | (8,366 | ) | — | (2,709 | ) | ||||||||||
Benefits paid |
(1,311 | ) | (1,365 | ) | (472 | ) | (431 | ) | ||||||||
Projected benefit obligation, end of year |
$ | 51,627 | $ | 48,545 | $ | 11,839 | $ | 11,045 | ||||||||
Change in plan assets: |
||||||||||||||||
Fair value of plan assets, beginning of year |
$ | 32,809 | $ | 29,057 | $ | — | $ | — | ||||||||
Actual return on plan assets |
4,775 | 1,984 | — | — | ||||||||||||
Employer contributions |
5,256 | 3,133 | 472 | 431 | ||||||||||||
Benefits paid |
(1,311 | ) | (1,365 | ) | (472 | ) | (431 | ) | ||||||||
Fair value of plan assets, end of year |
$ | 41,529 | $ | 32,809 | $ | — | $ | — | ||||||||
Funded status |
$ | (10,098 | ) | $ | (15,736 | ) | $ | (11,839 | ) | $ | (11,045 | ) | ||||
Unrecognized prior service cost |
* | 9 | * | 8 | ||||||||||||
Unrecognized actuarial loss |
* | 1,248 | * | — | ||||||||||||
Net amount recognized |
$ | (10,098 | ) | $ | (14,479 | ) | $ | (11,839 | ) | $ | (11,037 | ) | ||||
| * | Not applicable due to the adoption of SFAS No. 158. | |
| ** | The actuarial gain in fiscal 2006 of $9,017 was a result of an increase in discount rates in the current year. |
Amounts recognized in the consolidated balance sheets consist of:
| Supplemental Executive | ||||||||||||||||
| Pension Plan | Retirement Plan | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Accrued benefit liability |
$ | (10,098 | ) | $ | (14,727 | ) | $ | (11,839 | ) | $ | (11,037 | ) | ||||
Intangible assets |
* | 8 | * | — | ||||||||||||
Accumulated other comprehensive income |
* | 240 | * | — | ||||||||||||
Net amount recognized |
$ | (10,098 | ) | $ | (14,479 | ) | $ | (11,839 | ) | $ | (11,037 | ) | ||||
| * | Not applicable due to the adoption of SFAS No. 158 |
The projected benefit obligation, accumulated benefit obligation and fair value of plan
assets for the pension plans with an accumulated benefit obligation in excess of plan assets
were $51,627, $51,627 and $41,529, respectively, as of June 30, 2007 and $48,545, $47,537 and
$32,809, respectively as of July 1, 2006. No pension plans had plan assets in excess of
accumulated benefit obligations at June 30, 2007 or July 1, 2006.
Components of Net Periodic Benefit Cost
| Supplemental Executive | ||||||||||||||||||||||||
| Pension Plan | Retirement Plan | |||||||||||||||||||||||
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||
Service cost |
$ | 1,432 | $ | 4,761 | $ | 3,793 | $ | 316 | $ | 936 | $ | 792 | ||||||||||||
Interest cost |
3,095 | 3,236 | 2,720 | 691 | 754 | 685 | ||||||||||||||||||
Expected return on assets |
(2,813 | ) | (2,466 | ) | (2,175 | ) | — | — | — | |||||||||||||||
Prior service cost |
8 | 52 | 55 | 9 | 43 | 43 | ||||||||||||||||||
Loss |
— | 1,361 | 514 | — | 303 | 187 | ||||||||||||||||||
Net periodic benefit cost |
$ | 1,722 | $ | 6,944 | $ | 4,907 | $ | 1,016 | $ | 2,036 | $ | 1,707 | ||||||||||||
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Assumptions
The following weighted average assumptions were used to determine benefit obligations for the
plans at June 30, 2007 and July 1, 2006:
| Supplemental Executive | ||||||||||||||||
| Pension Plan | Retirement Plan | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Discount rate |
6.40 | % | 6.45 | % | 6.30 | % | 6.40 | % | ||||||||
Rate of compensation increase |
N/A | 4.25 | N/A | 5.00 | ||||||||||||
The following weighted average assumptions were used to determine net periodic benefit cost for
the plans for the years ended June 30, 2007 and July 1, 2006:
| Supplemental Executive | ||||||||||||||||
| Pension Plan | Retirement Plan | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Discount rate |
6.45 | % | 5.50 | % | 6.40 | % | 5.50 | % | ||||||||
Expected return on plan assets |
8.00 | 8.00 | N/A | N/A | ||||||||||||
Rate of compensation increase |
4.25 | 4.25 | 5.00 | 5.00 | ||||||||||||
To develop the expected long-term rate of return on asset assumptions, we consider the
historical returns and the future expectations for returns for each asset class, as well as the
target asset allocation of the pension portfolio. This resulted in the selection of the 8.00%
long-term rate of return on assets assumption.
Additional Information
The weighted average asset allocations in the pension plan at June 30, 2007 and July 1, 2006
are as follows:
| 2007 | 2006 | |||||||
International equity |
15 | % | 15 | % | ||||
Large cap equity |
35 | — | ||||||
Value equity |
— | 25 | ||||||
Small cap equity |
10 | 10 | ||||||
Fund of hedge funds |
15 | — | ||||||
Core growth equity |
— | 20 | ||||||
Fixed income |
25 | 30 | ||||||
Total |
100 | % | 100 | % | ||||
The asset allocation strategy for 2007 targets 25.0%-35.0% in high-quality fixed income
instruments with the balance of the portfolio to be invested in a diversified and complimentary
portfolio of equity vehicles. The objective is to achieve a long-term rate of return of
7.0%-9.5%. In determining investment options, all classes or categories of investments allowed
by the Employee Retirement Income Security Act of 1974 (“ERISA”) are acceptable investment
choices. As directed by ERISA, no single investment will comprise more than 10.0% of assets,
except for certain government backed securities.
Pension assets consist primarily of listed common stocks and U.S. government and corporate
obligations. The plan held approximately 67,500 shares of our Class A common stock at July 1,
2006, with a market value of $2,316. The plan received $11 in dividends on our Class A common
stock during fiscal 2007 and $5 in dividends during fiscal 2006. During Fiscal 2007, the
pension plan participated in our share repurchase program and sold all of the 67,500 shares of
our class A common stock for total proceeds of $2,585.
We expect to contribute $7,144 to our pension plan and $484 to the SERP in fiscal year 2008.
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Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are
expected to be paid:
| Supplemental | ||||||||
| Executive Retirement | ||||||||
| Pension Plan | Plan | |||||||
2008 |
$ | 1,163 | $ | 484 | ||||
2009 |
1,281 | 507 | ||||||
2010 |
1,415 | 544 | ||||||
2011 |
1,556 | 624 | ||||||
2012 |
1,686 | 658 | ||||||
2013 and thereafter |
11,048 | 4,408 | ||||||
Union Pension Plans
Certain employees of ours are covered by union-sponsored, collectively bargained, multiemployer
pension plans (“Union Plans”). We contributed and charged to expense $1,888 in fiscal 2007,
$1,761 in fiscal 2006 and $1,555 in fiscal 2005 for such plans. These contributions are
determined in accordance with the provisions of negotiated labor contracts and generally are
based on the number of hours worked. We may be liable for our share of unfunded vested
benefits related to the Union Plans. Information from the Union Plans’ administrators is not
available to permit us to determine our share of unfunded vested benefits.
401(k) Plan
All full-time nonunion employees are eligible to participate in a 401(k) plan. We match a
portion of the employee’s salary reduction contributions and provide investment choices for the
employee. The matching contributions under the 401(k) plan, made prior to January 1, 2007 vest
over a five-year employment period while matching contributions made after that date vest
immediately. We made matching contributions of $5,074 in fiscal 2007, $2,047 in fiscal 2006
and $1,814 in fiscal 2005. The increase from fiscal 2006 to fiscal 2007 is the result of
increased participation in the 401(k) plan due to the action taken in fiscal year 2007 to
freeze the pension plans as discussed earlier.
Executive Deferred Compensation Plan
Under the Executive Deferred Compensation Plan (DEFCO plan), we match a portion of the
designated employees’ contributions. Our matching contributions under the DEFCO plan were $871
in fiscal 2007, $506 in fiscal 2006 and $464 in fiscal 2005. The accumulated benefit
obligation of $16,740 as of June 30, 2007 and $13,021 as of July 1, 2006 is included in other
noncurrent liabilities in the accompanying consolidated balance sheets. We have purchased
investments, including stable income and stock index managed funds, based on investment
elections made by the employees, which may be used to fund the retirement benefits. The
investments are recorded at estimated fair value based on quoted market prices and are included
in other assets in the accompanying consolidated balance sheets. Unrealized gains and losses
are included in income on a current basis. At June 30, 2007 and July 1, 2006, the estimated
fair value of the investments was $16,740 and $13,021, and the cost of the investments was
$14,322 and $11,874, respectively.
9. Commitments and Contingencies
Litigation
We are involved in a variety of legal actions relating to personal injury, employment,
environmental and other legal matters that arise in the normal course of business. These legal
actions include lawsuits that challenge the practice of charging for certain environmental
services on invoices. None of these legal actions are expected to have a material adverse
effect on our results of operations or financial position.
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Leases
We lease certain facilities and equipment for varying periods. Most facility leases contain
renewal options from one to five years. Management expects that in the normal course of
business, leases will be renewed or replaced by other leases.
The following is a schedule of future minimum lease payments for operating leases that had
initial or remaining non-cancelable lease terms in excess of one year as of June 30, 2007:
| Operating Leases | ||||
2008 |
$ | 20,450 | ||
2009 |
15,756 | |||
2010 |
10,807 | |||
2011 |
7,299 | |||
2012 |
5,091 | |||
2013 and thereafter |
3,297 | |||
Total minimum lease payments |
$ | 62,700 | ||
Total rent expense for operating leases, including those with terms of less than one year, was
$31,441 in fiscal 2007, $24,319 in fiscal 2006 and $20,684 in fiscal 2005.
10. Segment Information
We have two operating segments, United States and Canada, which have been identified as
components of our organization that are reviewed by our Chief Executive Officer to determine
resource allocation and evaluate performance. Each operating segment derives revenues from the
branded identity apparel and facility services industry, which includes garment rental and
non-apparel items such as floor mats, dust mops, wiping towels, selected linen items and
several restroom products. No single customer’s transactions accounted for more than 1.5% of
our revenues. All of our customers are in the United States or Canada.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies (see Note 1). Corporate expenses are allocated to the segments
based on segment revenue. We evaluate performance based on income from operations. Financial
information by geographic location is as follows:
| United | ||||||||||||||||||||
| States | Canada | Elimination | Total | |||||||||||||||||
| 2007 | ||||||||||||||||||||
Revenues |
$ | 768,990 | $ | 160,552 | $ | — | $ | 929,542 | ||||||||||||
Income from operations |
53,499 | 25,863 | — | 79,362 | ||||||||||||||||
Interest expense |
13,778 | 123 | — | 13,901 | ||||||||||||||||
Total assets |
931,568 | 172,343 | (112,097 | ) | 991,814 | |||||||||||||||
Capital expenditures |
29,215 | 2,300 | — | 31,515 | ||||||||||||||||
Depreciation and amortization expense |
39,146 | 6,449 | — | 45,595 | ||||||||||||||||
Income tax expense |
12,543 | 9,728 | — | 22,271 | ||||||||||||||||
| 2006 | ||||||||||||||||||||
Revenues |
$ | 728,434 | $ | 152,409 | $ | — | $ | 880,843 | ||||||||||||
Income from operations |
48,925 | 25,938 | — | 74,863 | ||||||||||||||||
Interest expense |
13,186 | 40 | — | 13,226 | ||||||||||||||||
Total assets |
894,663 | 172,629 | (116,200 | ) | 951,092 | |||||||||||||||
Capital expenditures |
29,260 | 2,708 | — | 31,968 | ||||||||||||||||
Depreciation and amortization
expense |
37,196 | 6,067 | — | 43,263 | ||||||||||||||||
Income tax expense |
10,147 | 9,639 | — | 19,786 | ||||||||||||||||
| 2005 | ||||||||||||||||||||
Revenues |
$ | 663,000 | $ | 125,775 | $ | — | $ | 788,775 | ||||||||||||
Income from operations |
48,363 | 24,303 | — | 72,666 | ||||||||||||||||
Interest expense |
11,328 | 10 | — | 11,338 | ||||||||||||||||
Total assets |
859,349 | 147,586 | (103,766 | ) | 903,169 | |||||||||||||||
Capital expenditures |
15,698 | 3,710 | — | 19,408 | ||||||||||||||||
Depreciation and amortization
expense |
36,064 | 5,479 | — | 41,543 | ||||||||||||||||
Income tax expense |
17,671 | 5,478 | — | 23,149 | ||||||||||||||||
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are
our controls and other procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and communicated to our
management, including our chief executive officer and chief financial officer, as appropriate to
allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
We have evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2007. Based on that evaluation, the chief executive officer and the
chief financial officer concluded that our disclosure controls and procedures are effective in
recording, processing, summarizing and timely reporting information required to be disclosed in the
reports that we file or submit under the Exchange Act.
Management’s Annual Report on Internal Control over Financial Reporting
The report of management required under this Item 9A is contained in Item 8 of this Annual Report
on Form 10-K under the caption “Management’s Report on Internal Control over Financial Reporting.”
Attestation Report of Registered Public Accounting Firm
The attestation report required under this Item 9A is contained in Item 8 of this Annual Report on
Form 10-K under the caption “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Controls
There were no changes in our internal controls over financial reporting during the fourth quarter
of fiscal 2007 that have materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Reference is made to information with respect to our Proxy Statement for the fiscal year 2007
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after the end
of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to information with respect to our Proxy Statement for the fiscal year 2007
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after the end
of the fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Reference is made to information with respect to our Proxy Statement for the fiscal year 2007
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after the end
of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Reference is made to information with respect to our Proxy Statement for the fiscal year 2007
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after the end
of the fiscal year covered by this Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Reference is made to information with respect to our Proxy Statement for the fiscal year 2007
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days after the end
of the fiscal year covered by this Form 10-K.
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PART IV, ITEM 15
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | The following documents are filed as a part of this report: |
| (1) | Financial Statements | ||
| The consolidated financial statements of the Registrant are set forth in Item 8 of Part II of this report. | |||
| (2) | Financial Statement Schedules | ||
| All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted as not required or not applicable, or the information has been included elsewhere by reference in the financial statements and related notes, except for Schedule II, which is included as Exhibit 99.1 to this Form 10-K, as filed with the SEC. | |||
| (3) | Exhibits | ||
| The following exhibits, as required by Item 601 of Regulation S-K are filed as a part of this report: | |||
| 3(a) Articles of Amendment and Restatement of the Registrant, as filed with the Secretary of State of Minnesota (incorporated herein by reference to Exhibit 3(i) to the Registrant’s Form 10-Q filed November 13, 2001). | |||
| 3(b) Amended and Restated Bylaws of the Registrant (incorporated herein by reference to the Registrant’s Form 10-Q filed February 2, 2007).** | |||
| 3(c) Form of share-based compensation agreement. | |||
| 4(a) Rights Agreement, dated as of September 17, 2001, by and between G&K Services, Inc. and Wells Fargo Bank Minnesota, National Association (incorporated by reference to the Registrant’s Form 8-K filing dated September 19, 2001). | |||
| 10(a) 1989 Stock Option and Compensation Plan, as amended on October 30, 1997 (incorporated by reference to the Registrant’s definitive proxy statement on Schedule 14A, exhibit A, filed on October 8, 1997). ** | |||
| 10(b) Amended and Restated 1996 Director Stock Option Plan, as amended March 10, 2004 (incorporated by reference to the Registrant’s definitive proxy statement on Schedule 14A filed on October 12, 2005). | |||
| 10(c) 1998 Stock Option and Compensation Plan, as amended November 7, 2002 (incorporated by reference to the Registrant’s definitive proxy statement on Schedule 14A, exhibit A, filed on September 26, 2002). ** | |||
| 10(d) Form of Change of Control Agreement between Registrant and each of Robert G. Wood and Jeffrey L. Wright, dated February 24, 1999 (incorporated herein by reference to the Registrant’s Form 10-Q filed May 11, 1999). ** | |||
| 10(e) Note Purchase Agreement dated July 20, 2000 among G&K Services, Inc. and various institutional investors (incorporated herein by reference to the Registrant’s Form 10-K filed September 28, 2000). | |||
| 10(f) Form of Executive Employment Agreement between Registrant and each of Robert G. Wood and Jeffrey L. Wright, dated January 1, 2001 (incorporated herein by reference to the Registrant’s Form 10-K filed September 27, 2001). ** | |||
| 10(g) Credit Agreement, dated June 25, 2002, by and among the Registrant, G&K Services Canada, Inc., Bank One N.A., Wachovia Bank, National Association, Wachovia Securities, Inc (f/k/a First Union Securities, Inc.), Banc One Capital Markets, Inc. and various lenders (incorporated herein by reference to Exhibit 10(m) to the Registrant’s Form 10-K filed September 26, 2002). | |||
| 10(h) Executive Employment Agreement between Registrant and Richard L. Marcantonio, dated June 25, 2002 (incorporated herein by reference to Exhibit 10(n) to the Registrant’s Form 10-K filed September 26, 2002). ** | |||
| 10(i) Promissory Note of Richard L. Marcantonio dated July 26, 2002 and payable to the Registrant (incorporated herein by reference to Registrant’s Form 10-Q filed November 12, 2002). ** |
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| 10(j) Stock Pledge Agreement dated as of July 26, 2002, by and between the Registrant and Richard L. Marcantonio (incorporated herein by reference to Registrant’s Form 10-Q filed November 12, 2002). ** | |||
| 10(k) Change of Control Agreement between Registrant and Richard L. Marcantonio dated November 12, 2002 (incorporated herein by reference to Registrant’s Form 10-Q filed May 13, 2003). ** | |||
| 10(l) First Amendment, dated December 17, 2003 to Credit Agreement dated June 25, 2002, among the Registrant, G&K Services Canada, Inc., Bank One, N.A., Wachovia Bank, National Association, Wachovia Securities, Inc, Banc One Capital Markets, Inc. and various lenders (incorporated herein by reference to Registrant’s Form 10-Q filed February 5, 2004). | |||
| 10(m) Executive Employment Agreement between Registrant and David F. Fisher, dated May 10, 2004 (incorporated herein by reference to Registrant’s Form 10-K filed September 16, 2004). ** | |||
| 10(n) Loan Agreement dated November 17, 2004 among G&K Services, Inc., and its subsidiaries, Three Pillars Funding LLC and Sun Trust Capital Markets, Inc. (incorporated herein by reference to Registrant’s Form 10-Q filed February 8, 2005). | |||
| 10(o) Loan Agreement dated June 30, 2005 among G&K Services, Inc. and various institutional investors (incorporated by reference to Registrant’s Form 10-K filed September 15, 2005). | |||
| 10(p) Form of Executive Employment Agreement between Registrant and David Miller, dated December 19, 2005 (incorporated herein by reference to the Registrant’s Form 10-Q filed February 3, 2006). ** | |||
| 10(q) Third Amendment, dated June 2, 2006 to Loan Agreement dated November 17, 2004, among the Registrant, Three Pillars Funding LLC and Sun Trust Capital Markets, Inc. | |||
| 10(r) Form of Executive Employment Agreement between Registrant and Richard L. Marcantonio, dated December 22, 2006 (incorporated herein by reference to the Registrant’s Form 10-Q filed February 2, 2007).** | |||
| 10(s) Form of Executive Employment Agreement between Registrant and each of David F. Fisher, David Miller, Douglas Milroy, and Robert Wood, dated March 1, 2007 (incorporated herein by reference to the Registrant’s Form 8-K filed March 19, 2007).** | |||
| 10(t) 2006 Equity incentive plan (incorporated herein by reference to the Registrant’s Form 10-Q filed February 2, 2007).** | |||
| 10(u) Fourth Amendment, dated November 15, 2006 to Loan Agreement dated November 17, 2004, among the Registrant, Three Pillars Funding LLC and Sun Trust Capital Markets, Inc.* | |||
| 10(v) First Amendment, dated May 30, 2007 to Loan Agreement dated August 31, 2005, among the Registrant, JP Morgan Chase Bank, N.A.* |
| 21 | Subsidiaries of G&K Services, Inc. * | ||
| 23 | Consent of Independent Registered Public Accounting Firm.* | ||
| 24 | Power of Attorney dated as of August 23, 2007.* | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-15(e)/15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | ||
| 31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-15(e)/15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | ||
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | ||
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | ||
| 99.1 | Report of Ernst & Young LLP, Independent Registered Public Accounting Firm and Schedule II.* |
| Footnotes: | ||
| * | Filed herewith | |
| ** | Compensatory plan or arrangement | |
| (b) | Exhibits |
| See exhibits listed under Item 15(a)(3). | |||
| (c) | Financial Statement Schedules |
| See the financial statement schedules listed under Item 15(a)(2). | |||
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
| Date: August 29, 2007 | G&K SERVICES, INC. (Registrant) |
|||
| By: | /s/ Richard L. Marcantonio | |||
| Richard L. Marcantonio, Chairman of the Board and Chief Executive Officer | ||||
| (Principal Executive Officer) | ||||
| By: | /s/ Jeffrey L. Wright | |||
| Jeffrey L. Wright, Senior Vice President and Chief Financial Officer | ||||
| (Principal Financial Officer) | ||||
| By: | /s/ Thomas J. Dietz | |||
| Thomas J. Dietz, Vice President and Controller | ||||
| (Principal Accounting Officer) | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has
been signed below on the 29th day of August, 2007, by the following persons in the
capacity indicated:
/s/ Richard L. Marcantonio
|
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) and Director | |||
*
|
Director | |||
*
|
Director | |||
Paul Baszucki |
||||
*
|
Director | |||
John S. Bronson |
||||
*
|
Director | |||
J. Patrick Doyle |
||||
*
|
Director | |||
Wayne M. Fortun |
||||
*
|
Director | |||
Ernest J. Mrozek |
||||
*
|
Director | |||
M. Lenny Pippin |
||||
*
|
Director | |||
Alice M. Richter |
*By:
|
/s/ Richard L. Marcantonio | |||
| Richard L. Marcantonio | ||||
| Attorney-in-fact |
50