(Source: Business Wire)G&K Services, Inc. (NASDAQ: GKSR), today reported first quarter fiscal 2010 revenue of $208.1 million, which compares to revenue of $245.2 million in the prior-year period. The company reported first quarter net earnings of $0.18 per diluted share, compared to $0.08 per diluted share in the prior year. Current year earnings included severance and other costs associated with staff reductions in the company's corporate headquarters, divestiture activity and eliminating the company's former regional office structure, which totaled approximately $0.04 per diluted share. Prior-year first quarter earnings included cost reduction actions and the establishment of, or increase to, reserves for certain environmental and compensation matters, which totaled approximately $0.42 per diluted share.

"We're moving aggressively to improve results by executing our new game plan," said Douglas A. Milroy, G&K's chief executive officer. "The team has embraced our new direction and we're running the company differently. Foremost, we're redoubling our focus on customer service. At the same time, we're increasing our cost management focus. During the first quarter we significantly reduced corporate staffing, streamlined our U.S. rental operations and closed several regional administrative offices. These actions are consistent with reshaping G&K to move activities and resources closer to our customers and run lean. Additionally, as part of our new game plan, we also continue to address underperforming locations. Recently, we divested two small non-core businesses and restructured other locations to improve our overall level of profitability. We're encouraged by the progress we're making against our plan."

Income Statement Review

First quarter revenue from rental operations decreased to $195.7 million, down from $229.1 million in the prior-year period. The company's rental organic growth rate was negative 14.0 percent in the quarter, and reflects continued deterioration in customer employment levels, increased customer financial difficulties, lower pricing and decreased new account sales. For the quarter, direct sale revenue was also lower than the prior-year period, due to continued weak economic conditions and the non-renewal of one large customer.

First quarter adjusted earnings of $0.22 per diluted share compare to adjusted earnings of $0.50 per diluted share in the prior-year period. Current year adjusted earnings were driven by a reduction in production, selling and administrative expenses as a result of lower staffing levels, efficient utilization of merchandise and lower energy costs. These earnings improvements were offset by a reduction in fixed cost absorption due to lower rental and direct sale revenue. Current year earnings also benefited slightly from a lower effective tax rate and a small reduction in share count, which were partially offset by a slight increase in interest expense.

Financial Strength

The company's balance sheet remains strong. As of September 26, 2009, the company had total borrowings of $226.1 million and a debt to capitalization ratio of 33.6 percent. As previously disclosed during the quarter the company completed a new three-year $300.0 million credit facility with a syndicate of strong banking institutions. This new credit facility maintains the company's solid liquidity position and increases its financial flexibility.

The company continued to generate strong cash flow from operations and has reduced its debt, net of cash, by $61.9 million during the past year. Cash provided by operating activities for the quarter was $10.2 million, driven by solid working capital management. For the quarter, free cash flow, defined as cash flow from operations less capital expenditures, was $6.7 million.

Outlook

The company expects second quarter revenue to be consistent with first quarter revenue. Second quarter operating income margin and earnings per diluted share are expected to improve slightly from first quarter results primarily due to recent staffing reductions at the company's corporate and regional offices and location specific profitability actions.

As previously disclosed, the company does not provide a specific quarterly range for anticipated revenue or earnings due primarily to prolonged difficult economic and employment conditions and numerous operating changes currently being executed as part of the company's new game plan.

Conference Call Information

The company will host a conference call today at 10:00 a.m. (CDT) to discuss its financial results and outlook. The call will be webcast and is available on the Investor Relations section of the company's website at www.gkservices.com (click on webcast icon and follow the instructions). A replay of the call will be available on the company's website through November 27, 2009.

Safe Harbor for Forward-Looking Statements

Statements made in this press release concerning the company's intentions, expectations or predictions about future results or events are "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. These statements reflect the company's current expectations or beliefs, and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations, which could be material and adverse.