G&K Services, Inc. reported operating results for the second quarter of its fiscal year 2014, which ended on December 28, 2013. Revenue from continuing operations grew by 3.5 percent to $225.9 million, up from $218.3 million in last year’s second quarter.
Second quarter adjusted earnings from continuing operations grew 14 percent to a company record $0.75 per diluted share, up from $0.66 per diluted share in the prior year period. Adjusted earnings in the quarter excluded a $0.06 per share benefit from the previously announced change in estimated merchandise amortization lives.
Including this benefit, the company recorded earnings from continuing operations of $0.81 per diluted share. As previously disclosed, the company divested two non-core business units which have been reclassified as discontinued operations in its current and historical financial results.
“This was another strong quarter for G&K, with solid revenue growth, significantly improved margins and record-high earnings per share,” said Douglas A. Milroy, Chief Executive Officer. “The second quarter also marked the full achievement of our 10/10 goals. With adjusted operating margin of 11.5 percent and return on invested capital reaching 10.2 percent, we are already well on the way to delivering our 12+ Plan. This is a tremendous accomplishment for the entire G&K team.”
Income Statement Review
Second quarter revenue grew 3.5 percent to $225.9 million, compared to $218.3 million in the prior-year quarter. This excludes revenue from the divested businesses, which are now classified as discontinued operations. The rental organic growth rate, which adjusts for the impact of currency exchange rate differences, acquisitions and divestitures, was 4.2 percent. The impact of a lower exchange rate for the Canadian dollar decreased revenue growth by 1.0 percent.
Second quarter adjusted operating income from continuing operations grew 16 percent to $25.9 million, compared to $22.3 million in the prior year quarter. This was the highest quarterly operating income in the company’s history. Adjusted operating margin from continuing operations expanded to 11.5 percent, a 130 basis point increase from 10.2 percent in last year’s second quarter.
The improvement in adjusted operating margin was primarily driven by increased operating leverage from revenue growth, productivity improvements in rental operations, and improved gross margins from the recently restructured direct sale catalog business.
These margin gains were partially offset by higher selling costs. Second quarter adjusted operating income and operating margin from continuing operations excluded the previously mentioned benefit from a change in estimated merchandise amortization lives. Including this benefit, operating income from continuing operations was $27.7 million and operating margin was 12.3 percent.
Interest expense in the quarter was $1.6 million, up from $1.1 million in the prior-year quarter, primarily due to a higher effective interest rate, partially offset by lower total debt. The effective tax rate for continuing operations in the quarter was 37.5 percent, compared to 39.2 percent in the second quarter last year, primarily due to lower tax expense on foreign earnings.
Second quarter diluted share count increased to 19.9 million, up from 19.1 million last year, primarily due to gains in the company’s stock price, which led to more stock option exercises and increased the dilutive effect of outstanding stock options.