(Source: Business Wire)
G&K Services, Inc. (NASDAQ: GKSR), today reported third quarter fiscal 2009 revenue of $231.0 million, which was within previous company guidance and compares to revenue of $251.1 million in the prior-year period. The continued significant deterioration in customer employment levels and an $8.4 million impact from the reduction in the value of the Canadian dollar affected overall revenue. These economic forces, which lowered total company revenue, were partially offset by strong third quarter direct sale revenue growth, which increased 16.4 percent compared to the prior-year period.
The company reported a net loss of $4.74 per diluted share, which included a $94.4 million after-tax, or $5.18 per diluted share negative impact from goodwill impairment, fixed asset write-downs and other non-cash charges. This compares with net earnings of $0.54 per diluted share for the third quarter of fiscal 2008. When excluding the non-cash charges, third quarter fiscal 2009 adjusted earnings per diluted share were $0.44 and within the company's earnings guidance. The non-cash charges were a result of the write-down of goodwill and other assets required by Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", and company cost reduction activities. The primary cause for the goodwill impairment was the continued deterioration in prevailing economic conditions and the related decline in the equity markets, resulting in a reduction in the company's share price and market capitalization as compared to book value.
These non-cash charges are expected to have no adverse impact on the company's business, available borrowings under its bank credit facilities, or cash flows from operating activities, nor are they expected to impact future operations. During the third quarter the company continued to generate strong cash flow from operations and further reduced its overall level of debt financing.
Third quarter adjusted earnings benefited from the reduction in production and administrative costs as a result of cost reduction activities, improved contribution from solid direct sale performance and lower energy and incentive compensation costs. These earnings improvements were offset by a reduction in fixed cost absorption from lower revenue, the impact of severance costs associated with workforce reductions, higher health care costs and the effect of the weak Canadian dollar.
"Our third quarter revenue and adjusted earnings per diluted share were in line with our guidance despite the accelerated pace of deterioration in customer employment levels," said Richard Marcantonio, chairman and chief executive officer. "During this difficult employment and economic environment, we continue to focus on improving revenue growth, reducing expenses and maximizing cash flow. As a result, during the quarter, we achieved solid growth in our National Accounts business, strong organic growth in direct sales, lower administrative expenses and record quarterly cash flow from operations. G&K is well-positioned to capture future growth opportunities and drive improved long-term financial performance by leveraging a more streamlined overall cost structure."
Income Statement Review Third quarter revenue from rental operations was $209.9 million, compared to $233.0 million in the prior-year period. For the quarter, the company's organic rental growth rate was approximately negative 7.25 percent. Organic rental growth reflects significant reductions in customer employment levels, lost business as a result of customer financial difficulty and lower new account and route sales due to the difficult economy. Direct sale revenue was $21.1 million, up approximately 17.75 percent on an organic revenue basis. Strong direct sale organic revenue growth was driven by the successful launch of the Delta Air Lines' uniform program to selected Northwest Airlines employees, and early results from the rollout of the company's Dockers® San Francisco apparel offering to its U.S. field locations. Organic growth is calculated using revenue, adjusted for foreign currency exchange rate differences and newly acquired revenue.
Gross margin from rental operations for the third quarter was 29.9 percent, compared to 32.0 percent in the prior-year period. The change in rental gross margin was a result of the reduction in fixed cost absorption from lower rental revenue, higher health care expenses and the impact of severance costs, partially offset by the benefit of location consolidation actions, workforce reductions, and lower energy costs. Direct sale gross margin increased to 26.5 percent, up from 24.6 percent in the prior-year period, as a result of the fixed cost leverage achieved from higher direct sale volume.
Selling and administrative expenses in the quarter were 23.4 percent of consolidated revenue, up from 22.9 percent in the prior-year period. On an absolute dollar basis, selling and administrative expenses decreased $3.6 million compared to the prior-year period due to the company's proactive focus on reducing its non-revenue producing workforce and aggressive cost controls, offset by higher health care costs and regulatory compliance expenses.
Financial Strength The company's balance sheet remains strong. As of March 28, 2009, the company had total borrowings of $257.3 million and a debt to capitalization ratio of 37.3 percent. Total shareholders' equity at the end of the third quarter was $432.1 million.
Cash provided by operating activities for the nine months ended March 28, 2009 was $73.9 million, compared to $73.0 million in the prior-year period. For the third quarter, free cash flow, defined as cash flow from operations less capital expenditures, was a record $31.7 million. During the quarter, the company utilized its free cash flow to reduce debt, net of cash, by $30.3 million.
Outlook The company expects fiscal 2009 fourth quarter revenue to range from $212.0 million to $222.0 million and earnings per diluted share from $0.25 to $0.35. The revenue guidance includes continued focus on controllable growth factors, offset by the impact from deteriorating customer employment levels and difficult economic conditions. Due to the weaker Canadian dollar, fourth quarter revenue is projected to be reduced by approximately $9.0 million when compared to the prior-year period.
The earnings guidance reflects anticipated severance and facility shutdown costs and the impact of the weaker Canadian dollar exchange rate, which in total are anticipated to impact earnings by $0.09 to $0.11 per diluted share when compared to the prior-year period.
