G&K announces expense reduction actions to address economic conditions

07 Oct '08

3 min read

G&K Services Inc announced specific actions taken to reduce expenses in light of the continued difficult economic environment and has established reserves for certain matters. The expenses associated with these activities, additional reserves and continued economic softness will result in fiscal 2009 first quarter revenue and earnings per diluted share results which will be below previously provided guidance.

"On-going economic softness continues to pressure our overall performance," said Richard Marcantonio, G&K's chairman and chief executive officer. "Accordingly, we are executing against a set of very specific actions. We believe these steps will enable G&K to better address continued challenging economic conditions, deliver improved profitability moving forward and provide reserves for recent events. Our strong financial condition, combined with driving customer focus and competitive advantage, positions G&K for future revenue and earnings growth."

Expense Reduction Actions and Reserves
Soft economic conditions and reductions in customer employment levels continue to impact the company's revenue and earnings. In addition, earnings are being impacted by higher energy costs and increasing prices for operating items, such as textiles, freight, and hangers. As a result of these continued economic pressures, the company is taking a series of expense reduction activities.

Specifically, the company has taken the following actions:
• closed or planning to close three processing plants and two branch locations;
• reduced selected headcount at U.S. and Canadian corporate locations; and
• outsourced certain plant functions.

As a result of these actions, the company will incur severance, facility closure and operational costs that will total approximately $2.5 million. Once complete, these cost reduction actions will result in annualized pretax savings of approximately $3.5 to $4.5 million. Revenue related to closed plant and branch locations will transfer to other company facilities to increase plant and route efficiencies.

The company has also established additional reserves for certain matters, including:
• increased reserves by approximately $4.5 million for environmental matters; and
• established a reserve of approximately $3.5 million for recent changes in compensation laws.

The expense reduction actions and reserves will impact first quarter operating income by approximately $10.5 million and earnings by approximately $0.42 per diluted share and were not previously included in the company's guidance.

Fiscal 2009 first quarter performance
For the fiscal 2009 first quarter, the company now expects revenue to be in the range of $245.0 to $246.0 million. This level of revenue includes continued economic softness, which continues to pressure the company's organic growth rate.

Earnings for the first quarter willbe impacted by expenses associated with cost reduction activities, additional reserves for environmental and compensation matters and an economic-driven decrease in revenue. First quarter earnings are now estimated to be in the range of $0.07 to $0.09 per diluted share.

G&K Services Inc

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