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G&K generates strong free cash flow

29 Apr '10
4 min read

G&K Services Inc reported third quarter fiscal 2010 revenue of $198.9 million, which compares to revenue of $231.0 million in the prior-year period. The lower level of revenue resulted from continued difficult economic conditions and divestiture activity, partially offset by a stronger Canadian dollar. The company's rental revenue, after adjusting for divestiture activity and foreign currency translation, continued to stabilize for the third consecutive quarter.

The company reported third quarter net earnings of $0.38 per diluted share. This compares to a prior-year period net loss of $4.74 per diluted share. The company's current year third quarter included a net gain from divestiture activity and asset sales, which totaled $0.10 per diluted share. The prior year period included a $5.18 per diluted share loss from goodwill impairment, fixed asset write-downs and other non-cash charges. Current year third quarter earnings benefited from lower merchandise expense, reduced employee benefit costs and gains from specific location profit improvement actions. These benefits were offset by the reduction in fixed cost absorption due to lower revenue and a higher effective tax rate.

"Our business continues to strengthen," said Douglas A. Milroy, G&K's chief executive officer. "We are driving our new game plan, consisting of redoubling our focus on customer satisfaction, improving execution, increasing cost management and addressing underperforming locations. Our efforts continue to show positive progress and are solidifying key elements of our business."

Income Statement Review
Third quarter revenue from rental operations was $185.6 million, down from $209.9 million in the prior-year period. The company's rental organic growth rate was negative 10.5 percent, driven by lower customer employment levels, continued customer financial difficulties and lower pricing. This level of rental organic growth improved from negative 14.0 percent in the company's second quarter. Third quarter revenue from direct sales was $13.3 million, compared to $21.1 million in the prior-year period which included the successful launch of a new uniform program to a major customer.

Third quarter operating margin was 7.0 percent, compared to negative 48.6 percent in the prior-year period. The current year third quarter adjusted operating margin was 5.8 percent when excluding the net gains from divestiture activity and asset sales. The prior year period adjusted operating margin was 6.3 percent when excluding the loss from goodwill and other impairment charges. Current year adjusted operating margin benefited from the efficient utilization of merchandise, lower staffing and employee-related benefit costs and the continued profit improvement in the company's underperforming locations. These benefits were offset by the reduction in fixed cost absorption due to lower revenue.

During the quarter, the company divested a non-core linen business. As a result of this divestiture and other asset sales, the company recorded a net gain of $0.10 per diluted share.

G&K Services Inc

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