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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 26, 2009
 Commission file number 0-4063
 G&K SERVICES, INC.
  MINNESOTA
    
    41-0449530(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 
   þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ




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G&K Services, Inc.
Form 10-Q
 Table of Contents
 PAGEPART IItem 1. Financial StatementsConsolidated Condensed Balance Sheets as of
December 26, 2009 and June 27, 2009
    
    
    3Consolidated Condensed Statements of Operations for the three and six
months ended December 26, 2009 and December 27, 2008
    
    
    4Consolidated Condensed Statements of Cash Flows for the six
months ended December 26, 2009 and December 27, 2008
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    25PART IIItem 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 6. Exhibits
    
    
    28Signatures
    
    
    29EX-31.1EX-31.2EX-32.1EX-32.2
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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 G&K Services, Inc. and Subsidiaries
 December 26,2009
    
    
    June 27,(In thousands)
    
    (Unaudited)
    
    
    2009ASSETSCurrent AssetsCash and cash equivalents
    
    $
    12,791
    
    
    $
    13,136Accounts receivable, less allowance for doubtful
accounts of $4,690 and $3,848
    
    
    84,586
    
    
    
    85,209Inventories, net
    
    
    124,435
    
    
    
    135,492Other current assets
    
    
    22,766
    
    
    
    21,241Total current assets
    
    
    244,578
    
    
    
    255,078Property, Plant and Equipment, net
    
    
    205,835
    
    
    
    216,736Goodwill
    
    
    325,211
    
    
    
    319,942Other Assets
    
    
    61,235
    
    
    
    59,412Total assets
    
    $
    836,859
    
    
    $
    851,168LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    29,112
    
    
    $
    29,134Accrued expenses
    
    
    77,559
    
    
    
    79,010Deferred income taxes
    
    
    3,586
    
    
    
    3,414Current maturities of long-term debt
    
    
    7,548
    
    
    
    7,744Total current liabilities
    
    
    117,805
    
    
    
    119,302Long-Term Debt, net of Current Maturities
    
    
    190,348
    
    
    
    224,781Deferred Income Taxes
    
    
    1,077
    
    
    
    1,893Accrued Income Taxes  Long Term
    
    
    12,027
    
    
    
    12,016Other Noncurrent Liabilities
    
    
    56,356
    
    
    
    55,820Stockholders Equity
    
    
    459,246
    
    
    
    437,356Total liabilities and stockholders equity
    
    $
    836,859
    
    
    $
    851,168
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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 G&K Services, Inc. and Subsidiaries
 For the Three Months Ended
    
    
    For the Six Months EndedDecember 26,
    
    
    December 27,
    
    
    December 26,
    
    
    December 27,(In thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008RevenuesRental operations
    
    $
    191,313
    
    
    $
    221,206
    
    
    $
    386,979
    
    
    $
    450,339Direct sales
    
    
    15,047
    
    
    
    20,547
    
    
    
    27,512
    
    
    
    36,650Total revenues
    
    
    206,360
    
    
    
    241,753
    
    
    
    414,491
    
    
    
    486,989Operating ExpensesCost of rental operations
    
    
    134,438
    
    
    
    152,039
    
    
    
    272,868
    
    
    
    313,871Cost of direct sales
    
    
    11,186
    
    
    
    15,217
    
    
    
    20,591
    
    
    
    27,301Selling and administrative
    
    
    46,458
    
    
    
    54,989
    
    
    
    96,908
    
    
    
    116,880Total operating expenses
    
    
    192,082
    
    
    
    222,245
    
    
    
    390,367
    
    
    
    458,052Income from Operations
    
    
    14,278
    
    
    
    19,508
    
    
    
    24,124
    
    
    
    28,937Interest expense
    
    
    3,689
    
    
    
    3,821
    
    
    
    7,400
    
    
    
    7,418Income before Income Taxes
    
    
    10,589
    
    
    
    15,687
    
    
    
    16,724
    
    
    
    21,519Provision for income taxes
    
    
    3,423
    
    
    
    6,149
    
    
    
    6,290
    
    
    
    10,523Net Income
    
    $
    7,166
    
    
    $
    9,538
    
    
    $
    10,434
    
    
    $
    10,996Basic weighted average number
of shares outstanding
    
    
    18,326
    
    
    
    18,490
    
    
    
    18,292
    
    
    
    18,557Basic Earnings per Common Share
    
    $
    0.39
    
    
    $
    0.52
    
    
    $
    0.57
    
    
    $
    0.59Diluted weighted average number
of shares outstanding
    
    
    18,341
    
    
    
    18,490
    
    
    
    18,322
    
    
    
    18,622Diluted Earnings per Common Share
    
    $
    0.39
    
    
    $
    0.52
    
    
    $
    0.57
    
    
    $
    0.59Dividends per share
    
    $
    0.075
    
    
    $
    0.070
    
    
    $
    0.150
    
    
    $
    0.140
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 G&K Services, Inc. and Subsidiaries
  For the Six Months EndedDecember 26,
    
    
    December 27,(In thousands)
    
    2009
    
    
    2008Operating Activities:Net income
    
    $
    10,434
    
    
    $
    10,996Adjustments to reconcile net income to net cash
provided by operating activities -Depreciation and amortization
    
    
    20,356
    
    
    
    22,653Other adjustments
    
    
    (1,398
    )
    
    
    2,343Changes in current operating items
    
    
    6,774
    
    
    
    (1,758
    )Other assets and liabilities
    
    
    1,181
    
    
    
    3,281Net cash provided by operating activities
    
    
    37,347
    
    
    
    37,515Investing Activities:Property, plant and equipment additions, net
    
    
    (6,728
    )
    
    
    (13,766
    )Divestitures of business assets, net
    
    
    10,457
    
    
    
    Net cash provided/(used) by investing activities
    
    
    3,729
    
    
    
    (13,766
    )Financing Activities:Payments of long-term debt
    
    
    (7,336
    )
    
    
    (7,345
    )(Payments of)/Proceeds from revolving credit facilities, net
    
    
    (31,067
    )
    
    
    4,700Cash dividends paid
    
    
    (2,808
    )
    
    
    (2,625
    )Net issuance of common stock, primarily under stock option plans
    
    

    
    
    
    
    209Purchase of common stock
    
    
    (373
    )
    
    
    (16,769
    )Net cash used by financing activities
    
    
    (41,584
    )
    
    
    (21,830
    )(Decrease)/Increase in Cash and Cash Equivalents
    
    
    (508
    )
    
    
    1,919Effect of Exchange Rates on Cash
    
    
    163
    
    
    
    (1,215
    )Cash and Cash Equivalents:Beginning of period
    
    
    13,136
    
    
    
    12,651End of period
    
    $
    12,791
    
    
    $
    13,355
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1.
    
    Basis of Presentation for Interim Financial Statements
 The consolidated condensed financial statements included herein, except for the June 27,
2009 balance sheet which was derived from the audited consolidated financial statements for
the fiscal year ended June 27, 2009, have been prepared by us, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In our opinion, the
accompanying unaudited consolidated condensed financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly our financial
position as of December 26, 2009, and the results of our operations for the three and six
months ended and our cash flows for the six months ended December 26, 2009 and December 27,
2008. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations, although we believe that
the disclosures herein are adequate to make the information presented not misleading. It is
suggested that these consolidated condensed financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in our latest report on
Form 10-K.The results of operations for the three and six month periods ended December 26, 2009 and
December 27, 2008 are not necessarily indicative of the results to be expected for the full
year. We have evaluated subsequent events through January 28, 2010 and have found none that
warrant discussion.The accounting policies we follow are set forth in Note 1 in our Annual Report on Form 10-K
for the fiscal year ended June 27, 2009. Additional significant accounting policies are
identified below. 2.
    
    Contingent Liabilities
 Environmental MattersWe are currently involved in several environmental-related proceedings by certain
governmental agencies which relate primarily to whether we operated certain facilities in
compliance with required permits. In addition to these proceedings, in the normal course of
our business, we are subject to, among other things, periodic inspections by regulatory
agencies. We continue to dedicate substantial operational and financial resources to
environmental compliance, and we remain fully committed to operating in compliance with all
environmental laws and regulations. As of December 26, 2009 and June 27, 2009, we had
reserves of approximately $4.4 million and $4.6 million, respectively, related to various
pending environmental-related matters. During the six months ended December 27, 2008, a
$4.1 million charge was recorded related to environmental matters, which is included in the
selling and administrative line of the consolidated condensed statements of operations.
Total expense for these matters was $3.9 million and $0.2 million in the first quarter and
second quarter of fiscal 2009, respectively.While we cannot predict the ultimate outcome of any of these matters, currently none of them
are expected to have a material adverse effect on our results of operations or financial
position. While we believe the possibility is remote, there is the potential that we may
incur additional losses in excess of established reserves, and these losses could be
material. 3.
    
    Adoption of New Accounting Pronouncements
 In December 2007, the Financial Accounting Standards Board (FASB) issued revised guidance
regarding accounting for business combinations. The guidance retains the requirement that
the acquisition method of accounting (previously called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business combination.
This guidance also establishes principles and requirements for how the acquirer: (a)
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and
measures the goodwill acquired in the business combination or a gain from 6




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a bargain purchase; and (c) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. We adopted this
revised guidance effective at the beginning of fiscal year 2010. Our adoption did not impact
our consolidated financial position or results of operations.In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 168, the FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principlesa replacement of FASB Statement No. 162. SFAS No. 168
was codified as Accounting Standards Codification Topic 105-10 and replaces SFAS No. 162,
the Hierarchy of Generally Accepted Accounting Principles, to establish the FASB
Accounting Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in preparation of
financial statements in conformity with generally accepted accounting principles
in the United States. We adopted Accounting Standards Codification Topic 105-10 effective as
of September 26, 2009. The adoption did not impact our financial position or
results of operations.
 4.
    
    Fair Value Measurements
 Generally accepted accounting principles (GAAP) defines fair value, establishes a framework
for measuring fair value and establishes disclosure requirements about fair value
measurements. Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the
measurement date. We considered non-performance risk when determining fair value of our
derivative financial instruments. The fair value hierarchy prescribed under GAAP contains
three levels as follows:Level 1 Unadjusted quoted prices that are available in active markets for the identical
assets or liabilities at the measurement date.Level 2 Other observable inputs available at the measurement date, other than quoted
prices included in Level 1, either directly or indirectly, including:-Quoted prices for similar assets or liabilities in active markets;-Quoted prices for identical or similar assets in non-active markets;-Inputs other than quoted prices that are observable for the asset or liability; and-Inputs that are derived principally from or corroborated by other observable market data.Level 3 Unobservable inputs that cannot be corroborated by observable market data and
reflect the use of significant management judgment. These values are generally determined
using pricing models for which the assumptions utilize managements estimates of market
participant assumptions.The following table summarizes the balances of assets and liabilities measured at fair value
on a recurring basis: As of December 26, 2009Fair Value Measurements Using Inputs Considered asLevel 1

    


    Level 2
    

    
    TotalOther current assets:Derivative financial instruments
    
    $
    
    
    
    $
    0.2
    
    
    $
    0.2Other assets:Non-qualified, non-contributory retirement
plan assets
    
    
    
    
    
    
    9.5
    
    
    
    9.5Non-qualified deferred compensation plan assets
    
    
    17.3
    
    
    
    
    
    
    
    17.3Total assets
    
    $
    17.3
    
    
    $
    9.7
    
    
    $
    27.0Accrued expenses:Derivative financial instruments
    
    $
    
    
    
    $
    9.1
    
    
    $
    9.1Total liabilities
    
    $
    
    
    
    $
    9.1
    
    
    $
    9.1
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5.
    
    Derivative Financial Instruments
 All derivative financial instruments are recognized at fair value and are recorded in the
other current assets or accrued expenses line items in the consolidated condensed balance
sheets. The accounting for changes in the fair value of a derivative financial instrument
depends on whether it has been designated and qualifies as a hedging relationship and on the
type of the hedging relationship. For those derivative financial instruments that are
designated and qualify as hedging instruments, we designate the hedging instrument (based on
the exposure being hedged) as cash flow hedges. We do not have any derivative financial
instruments that have been designated as either a fair value hedge or a hedge of a net
investment in a foreign operation. Cash flows associated with derivative financial
instruments are classified in the same category as the cash flows hedged in the consolidated
condensed statements of cash flows.In the ordinary course of business, we are exposed to market risks. We utilize derivative
financial instruments to manage interest rate risk and commodity price risk and periodically
foreign exchange risk. Interest rate swap contracts are entered into to manage interest
rate risk associated with our fixed and variable rate debt. Futures contracts on energy
commodities are entered into to manage the price risk associated with forecasted purchases
of gasoline and diesel fuel used in our rental operations. Forward exchange contracts on
foreign currencies are periodically entered into to manage the foreign currency exchange
risk associated with firm commitments denominated in foreign currencies. We designate
interest rate swap contracts as cash flow hedges of the interest expense related to variable
rate debt and futures contracts on energy commodities as cash flow hedges of forecasted
purchases of gasoline and diesel fuel. We have not designated our forward exchange contracts
on foreign currencies as hedging instruments.For derivative financial instruments that are designated and qualify as cash flow hedges,
the effective portion of the gain or loss on the derivative financial instrument is reported
as a component of accumulated other comprehensive income and reclassified into the
consolidated condensed statements of operations in the same line item associated with the
forecasted transaction and in the same period as the expenses from the cash flows of the
hedged items are recognized. We perform an assessment at the inception of the hedge and on
a quarterly basis thereafter, to determine whether our derivatives are highly effective in
offsetting changes in the value of the hedged items. Any changes in the fair value resulting
from hedge ineffectiveness, is immediately recognized as income or expense.We use interest rate swap contracts to limit exposure to changes in interest rates and to
balance the total debt that is subject to variable and fixed interest rates. The interest
rate swap contracts we utilize effectively modify our exposure to interest rate risk by
converting variable rate debt to a fixed rate without an exchange of the underlying
principal amount. Approximately 87% of our outstanding variable rate debt had its interest
payments modified using interest rate swap contracts as of December 26, 2009.In addition, we purchase fuel commodity futures contracts to limit exposure to energy prices
and effectively hedge a portion of our anticipated gasoline and diesel fuel purchases. The
objective of these hedges is to reduce the variability of cash flows associated with the
forecasted purchases of those commodities without an exchange of the underlying commodity.
Approximately 35% of our anticipated gasoline and diesel fuel purchases for the next twelve
months are hedged using futures contracts as of December 26, 2009.We do not engage in speculative transactions or fair value hedging nor do we hold or issue
financial instruments for trading purposes.
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The following tables summarize the classification and fair value of the interest rate swap
contracts and fuel commodity futures contracts which have been designated as cash flow
hedging instruments:
 Asset Derivatives Fair ValueRelationship:
    
    Balance Sheet Classification:
    
    
    December 26, 2009
    
    June 27, 2009Fuel commodity futures contracts
    
    Other current assets
    
    $
    0.2
    
    
    $
    0.3Total derivatives designated as cash flow hedging instruments
    
    
    
    $
    0.2
    
    
    $
    0.3Liability Derivatives Fair ValueRelationship:
    
    Balance Sheet Classification:
    
    
    December 26, 2009
    
    
    June 27, 2009Interest rate swap contracts
    
    Accrued expenses
    
    $
    8.7
    
    
    $
    9.3Fuel commodity futures contracts
    
    Accrued expenses
    
    
    0.1
    
    
    
    0.2Total derivatives designated as cash flow hedging  instruments
    
    
    
    $
    8.8
    
    
    $
    9.5
 The fair value of interest rate swap contracts not designated as hedging instruments totaled
a $0.3 million liability as of December 26, 2009. As of June 27, 2009, all derivative
financial instruments were designated as hedging instruments.For our interest rate swap contracts that qualify for cash flow hedge designation, the
related gains or losses on the contracts are deferred as a component of accumulated other
comprehensive income or loss (net of related income taxes) until the interest expense on the
related debt is recognized. As the interest expense on the hedged debt is recognized, the
other comprehensive income or loss is reclassified to interest expense. Of the $4.5 million
loss deferred in accumulated other comprehensive income as of December 26, 2009, a $3.1
million loss is expected to be reclassified to interest expense in the next twelve months.As of December 26, 2009, we had interest rate swap contracts to pay fixed rates of interest
and to receive variable rates of interest based on three-month London Interbank Offered Rate
(LIBOR) on $185.0 million notional amount, of which, $20.0 million are forward starting
interest rate swap contracts. Of the $185.0 million notional amount, $70.0 million matures
in 12 months, $45.0 million matures in 13-24 months, $45.0 million matures in 25-36 months
and $25.0 million matures later than 36 months. The average rate on the $185.0 million of
interest rate swap contracts was 4.1% as of December 26, 2009. These interest rate swap
contracts have been designated as highly effective cash flow hedges and accordingly, gains
or losses on any ineffectiveness was not material to any period.As our fuel commodity futures contracts qualify for cash flow hedge designation, the related
gains or losses on these contracts are deferred as a component of other comprehensive income
or loss (net of related income taxes) until the expense is recognized on the hedged
commodity. Upon purchase of the hedged commodity the other comprehensive income or loss is
reclassified to the cost of rental operations line item in the consolidated condensed
statements of operations. All of the $0.1 million gain deferred in accumulated other
comprehensive income as of December 26, 2009 is expected to be reclassified to cost of
rental operations in the next twelve months.As of December 26, 2009, we had fuel commodity futures contracts to pay fixed prices of
unleaded gasoline and diesel fuel and receive variable prices based on the Department of
Energy (DOE) index on 1.6 million gallons, all of which will occur in the next twelve
months. The weighted average fixed price on the 1.6 million gallons of fuel commodity
futures contracts was $2.87 per gallon as of December 26, 2009. These commodity contracts
have been designated as highly effective cash flow hedges and accordingly, gains or losses
on any ineffectiveness was not material to any period.We may also enter into foreign currency exchange contracts to hedge firm commitments with
our foreign subsidiary. These agreements are recorded at fair value and the gains and
losses are included in earnings. There were no outstanding foreign currency exchange
contracts as of December 26, 2009 and June 27, 2009.
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The following tables summarize the amount of gain or loss recognized in accumulated other
comprehensive income or loss and the classification and amount of gains or losses
reclassified from accumulated other comprehensive income or loss into the consolidated
condensed statements of operations for the three and six months ended December 26, 2009 and
December 27, 2008 related to derivative financial instruments used in cash flow hedging:
 Amount of Gain or (Loss) Recognized in Accumulated OtherComprehensive Income (Loss)Three Months Ended
    
    
    Six Months EndedDecember 26,
    
    
    December 27,
    
    
    December 26,
    
    
    December 27,Relationship:
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interest rate swap contracts
    
    $
    (0.4
    )
    
    $
    (6.0
    )
    
    $
    (1.2
    )
    
    $
    (6.5
    )Fuel commodity futures contracts
    
    
    0.2
    
    
    
    (1.5
    )
    
    
    (0.1
    )
    
    
    (2.1
    )Total
derivatives designated as cash flowhedging instruments
    
    $
    (0.2
    )
    
    $
    (7.5
    )
    
    $
    (1.3
    )
    
    $
    (8.6
    )
 Amount of Gain or (Loss) Reclassified From AccumulatedOther Comprehensive Income (Loss) to ConsolidatedStatements of OperationsThree Months Ended
    
    
    Six Months EndedStatement of Operations
    
    
    December 26,
    
    
    December 27,
    
    
    December 26,
    
    
    December 27,Relationship:
    
    Classification:
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interest rate swap contracts
    
    Interest Expense
    
    $
    (1.0
    )
    
    $
    (0.1
    )
    
    $
    (1.8
    )
    
    $
    (0.4
    )Fuel
commodity futures contracts
    
    Cost of Rental Operations
    
    
    
    
    
    
    (0.3
    )
    
    
    
    
    
    
    Total derivatives
designated ascash flow hedging
instruments
    
    
    
    
    
    $
    (1.0
    )
    
    $
    (0.4
    )
    
    $
    (1.8
    )
    
    $
    (0.4
    )
 6.
    
    Exit, Disposal and Related Activities
 We continuously monitor our operations and related cost structure to ensure that our
resource levels are appropriate, and from time to time take various actions to ensure that
these resources are utilized in an efficient manner. These actions may consist of facility
closures, divestitures, expansions and increases or decreases in staffing levels. During
the six months ended December 27, 2008 and December 26, 2009 we took a number of actions to
adjust our business operations as a result of the changes in the economic environment. The
most significant of these actions are discussed below.In the first quarter of fiscal year 2009, we closed three processing plants, two branch
locations, reduced selected headcount and outsourced our fleet maintenance function. As a
result of these actions, we recorded approximately $2.6 million of expense in the
consolidated condensed statements of operations during fiscal year 2009. These charges
principally impacted our United States operating segment. Of these amounts, approximately
$1.0 million was recorded in the cost of rental operations line item and the remaining $1.6
million was recorded in the selling and administrative line item. All severance associated
with this action was paid by September 26, 2009.During the first quarter of fiscal year 2010, we continued to align our operations and
workforce to better match our cost structure with our revenue levels. As a result, we
reduced selected headcount related to certain administrative, regional and corporate
personnel and divested an unprofitable operation. As a result of these actions, we recorded
approximately $1.4 million in associated severance costs in the selling and administrative
line in the first quarter of fiscal year 2010. Of the $1.4 million in severance, $0.6
million was paid by September 26, 2009, with the remaining $0.8 million to be paid over the
next twelve months. These actions primarily impacted our United States operating segment. 10




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In the second quarter of fiscal year 2010, we sold all of the customer lists and certain
assets related to our U.S. Cleanroom operations. In addition, we disposed of a non core
linen operation at one of our production facilities. As a result of these transactions,
including the associated asset impairment charges, we recognized a net gain of $1.2 million
in the selling and administrative line in the consolidated condensed statements of operations.
 7.
    
    Income Taxes
 Our fiscal 2010 year to date effective tax rate decreased to 37.6% for the first six months
of fiscal year 2010 from 48.9% in the same period of fiscal year 2009. The current year tax
rate is lower due to the adjustment of deferred tax liabilities related to Canada and the
enactment of a provincial tax rate reduction, offset by the reduction of a deferred tax
asset associated with equity based compensation. The prior year tax rate was significantly
higher than our statutory rate primarily due to the non-deductibility of certain
environmental related charges and the write-off of deferred tax assets associated with
certain expiring stock options.
 8.
    
    Per Share Data
 Basic earnings per common share was computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings per common
share was computed similarly to the computation of basic earnings per share, except that the
denominator is increased for the assumed exercise of dilutive options and other dilutive
securities, including non-vested restricted stock, using the treasury stock method.
 Three Months Ended
    
    
    Six Months EndedDecember
    
    
    December
    
    
    December
    
    
    December26,
    
    
    27,
    
    
    26,
    
    
    27,2009
    
    
    2008
    
    
    2009
    
    
    2008Weighted average number of common shares outstanding used in computation of basic earnings per share
    
    
    18.3
    
    
    
    18.5
    
    
    
    18.3
    
    
    
    18.6Weighted average effect of non-vested restricted stock grants and assumed exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares used in computation of diluted earnings per share
    
    
    18.3
    
    
    
    18.5
    
    
    
    18.3
    
    
    
    18.6
 We excluded potential common shares related to our outstanding equity compensation
grants of 1.9 million and 2.1 million for the three months ended December 26, 2009 and
December 27, 2008, respectively, and 2.0 million and 1.6 million for the six months ended
December 26, 2009 and December 27, 2008, respectively, from the computation of diluted
earnings per share. Inclusion of these shares would have been anti-dilutive.
 9.
    
    Comprehensive Income
 For the three and six month periods ended December 26, 2009 and December 27, 2008, the
components of comprehensive income were as follows:
 Three Months Ended
    
    
    Six Months EndedDecember 26,
    
    
    December 27,
    
    
    December 26,
    
    
    December 27,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    7.2
    
    
    $
    9.5
    
    
    $
    10.4
    
    
    $
    11.0Other comprehensive income/(loss):Foreign currency translation
adjustments, net of tax
    
    
    4.9
    
    
    
    (22.3
    )
    
    
    11.8
    
    
    
    (25.6
    )Derivative financial
instruments (loss)
recognized, net of tax
    
    
    (0.2
    )
    
    
    (7.5
    )
    
    
    (1.3
    )
    
    
    (8.6
    )Derivative financial
instruments gain
reclassified,
net of tax
    
    
    1.0
    
    
    
    0.4
    
    
    
    1.8
    
    
    
    0.4Total comprehensive income/(loss)
    
    $
    12.9
    
    
    $
    (19.9
    )
    
    $
    22.7
    
    
    $
    (22.8
    )
 11




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##### Table of Contents



10.
    
    Inventories
 The components of inventory as of December 26, 2009 and June 27, 2009 are as follows:
 December 26,
    
    
    June 27,2009
    
    
    2009Raw Materials
    
    $
    7.1
    
    
    $
    9.2Work in Process
    
    
    1.9
    
    
    
    3.6Finished Goods
    
    
    52.5
    
    
    
    55.1New Goods
    
    $
    61.5
    
    
    $
    67.9Merchandise in Service
    
    $
    62.9
    
    
    $
    67.6Total Inventories
    
    $
    124.4
    
    
    $
    135.5
 11.
    
    Goodwill and Intangible Assets
 Goodwill by segment includes the following:
 United States
    
    
    Canada
    
    
    TotalBalance as of June 27, 2009
    
    $
    260.2
    
    
    $
    59.7
    
    
    $
    319.9Acquisitions, net of purchase
accounting adjustments
    
    
    0.2
    
    
    
    
    
    
    
    0.2Divestitures
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.5
    )Foreign currency translation and other
    
    
    0.1
    
    
    
    5.5
    
    
    
    5.6Balance as of December 26, 2009
    
    $
    260.0
    
    
    $
    65.2
    
    
    $
    325.2
  December 26,
    
    
    June 27,2009
    
    
    2009Other Intangible Assets:Customer Contracts
    
    $
    114.5
    
    
    $
    113.8Accumulated Amortization
    
    
    (89.0
    )
    
    
    (85.0
    )Net
    
    $
    25.5
    
    
    $
    28.8Non-Competition Agreements
    
    $
    11.1
    
    
    $
    11.0Accumulated Amortization
    
    
    (10.6
    )
    
    
    (10.3
    )Net
    
    $
    0.5
    
    
    $
    0.7
   2010 remaining
    
    $
    2.62011
    
    
    5.12012
    
    
    4.02013
    
    
    2.82014
    
    
    1.92015
    
    
    1.3
 12




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##### Table of Contents



12.
    
    Long-Term Debt
 On July 1, 2009, we completed a new $300.0 million, three-year unsecured revolving credit
facility with a syndicate of banks, which expires on July 1, 2012. This facility replaces
our $325.0 million unsecured revolving credit facility, which was scheduled to mature in
August 2010. Borrowings in U.S. dollars under the new credit facility will, at our
election, bear interest at (a) the adjusted London Interbank Offered Rate (LIBOR) for
specified interest periods plus a margin, which can range from 2.25% to 3.25%, determined
with reference to our consolidated leverage ratio or (b) a floating rate equal to the
greatest of (i) JPMorgans prime rate, (ii) the federal funds rate plus 0.5% and (iii) the
adjusted LIBOR for a one month interest period plus 1%, plus, in each case, a margin
determined with reference to our consolidated leverage ratio. Swingline loans will, at our
election, bear interest at (i) the rate described in clause (b) above or (ii) a rate to be
agreed upon by us and JPMorgan. Borrowings in Canadian dollars under the credit facility
will bear interest at the greater of (a) the Canadian Prime Rate and (b) the Adjusted LIBOR
for a one month Interest Period on such day (or if such day is not a Business Day, the
immediately preceding Business Day) plus 1%. Effective July 1, 2009, the interest rate
spread on this new facility is 1.875% higher than the previous facility. We also pay a fee
on the unused daily balance of the revolving credit facility based on a leverage ratio
calculated on a quarterly basis.
  Required
    
    
    ActualMaximum Leverage Ratio (Debt/Adjusted EBITDA)
    
    
    3.50
    
    
    
    2.33Minimum Interest Coverage Ratio (Adjusted
EBITDA/Interest Expense)
    
    
    3.00
    
    
    
    6.72Minimum Net Worth
    
    $
    314.5
    
    
    $
    459.2
     13




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##### Table of Contents



plus a margin. In connection with the loan agreement, we granted a first priority security interest in certain of our U.S. based
receivables. As of December 26, 2009, there was $10.0 million outstanding under this loan
agreement at an all-in interest rate of 1.56% (commercial paper plus 1.10%). We are also
required to pay a fee on the unused balance of the facility.We have $50.0 million, 8.4% unsecured fixed rate private placement notes with certain
institutional investors. The 10-year notes have a nine-year average life with a final
maturity on July 20, 2010. Beginning on July 20, 2004, and
annually thereafter, we repaid $7.1 million of the principal amount at par. As of December
26, 2009, there was $7.1 million outstanding under the notes. Subsequent to the end of our
second fiscal quarter, on January 20, 2010, we repaid these notes prior to their original
maturity date and incurred additional costs associated with the prepayment of approximately
$0.3 million.See Note 5 to the consolidated condensed financial statements for details of our interest
rate swap and hedging activities related to our outstanding debt.
 13.
    
    Share-Based Compensation
 We grant share-based awards, including restricted stock and options to purchase our common
stock. Stock option grants are for a fixed number of shares to employees and directors with
an exercise price equal to the fair value of the shares at the date of grant. Share-based
compensation is recognized in the consolidated condensed statements of operations on a
straight-line basis over the requisite service period. The amortization of share-based
compensation reflects estimated forfeitures adjusted for actual forfeiture experiences. We
review our estimated forfeiture rates on an annual basis. As share-based compensation
expense is recognized, a deferred tax asset is recorded that represents an estimate of the
future tax deduction from the exercise of stock options or release of restrictions on the
restricted stock. At the time share-based awards are exercised, cancelled, expire or
restrictions lapse, we recognize adjustments to income tax expense. Total compensation
expense related to share-based awards was $0.9 million and $1.7 million for the three months
ended December 26, 2009 and December 27, 2008, respectively and $2.3 million and $3.3
million for the six months ended December 26, 2009 and December 27, 2008, respectively. The
number of options exercised and restricted stock vested since June 27, 2009, was 0.1 million shares.
 14.
    
    Employee Benefit Plans
 On December 31, 2006, we froze our pension and supplemental executive retirement plans. The
net periodic pension cost for these plans for the three and six months ended December 26,
2009 was $0.6 million and $1.2 million, respectively. The net periodic pension cost for
these plans for the three and six months ended December 27, 2008 was $0.1 million and $0.3
million, respectively. In addition, the components of net periodic pension cost for these
plans are immaterial for the three and six months ended December 26, 2009 and December 27,
2008.
 15.
    
    Segment Information
 We have two operating segments, United States (includes the Dominican Republic and
Ireland Operations) and Canada, which have been identified as components of our
organization that are reviewed by our Chief Executive Officer to determine resource
allocation and evaluate performance. Each operating segment derives revenues from the
branded identity apparel and facility services industry. During the three and six
months ended December 26, 2009, and for the same periods of the prior fiscal year, no
single customer accounted for more than 1.5% of our total revenues. Our customers are
primarily located in the United States and Canada.Income from operations includes the impact of an intercompany management fee charged to
Canada which is self-eliminated in the total income from operations below. This
intercompany management fee was approximately $2.5 million and $2.1 million for the
three months ended December 26, 2009 and December 27, 2008, respectively and $4.9
million and $4.4 million for the six months ended December 26, 2009 and December 27,
2008, respectively.
 14




---



##### Table of Contents



We evaluate performance based on income from operations. Financial information by
segment for the three and six month periods ended December 26, 2009 and December 27,
2008 is as follows:
 UnitedFor the Three Months Ended
    
    States
    
    
    Canada
    
    
    Elimination
    
    
    Total| | | |Second Quarter Fiscal Year 2010:Revenues
    
    $
    169.2
    
    
    $
    37.2
    
    
    $
    
    
    
    $
    206.4Income from operations
    
    
    10.2
    
    
    
    4.1
    
    
    
    
    
    
    
    14.3Total assets
    
    
    779.9
    
    
    
    146.9
    
    
    
    (89.9
    )
    
    
    836.9Depreciation and amortization
expense
    
    
    8.6
    
    
    
    1.5
    
    
    
    
    
    
    
    10.1Second Quarter Fiscal Year 2009:Revenues
    
    $
    205.4
    
    
    $
    36.4
    
    
    $
    
    
    
    $
    241.8Income from operations
    
    
    15.4
    
    
    
    4.1
    
    
    
    
    
    
    
    19.5Total assets
    
    
    970.2
    
    
    
    139.8
    
    
    
    (99.2
    )
    
    
    1,010.8Depreciation and amortization
expense
    
    
    9.9
    
    
    
    1.4
    
    
    
    
    
    
    
    11.3
 UnitedFor the Six Months Ended
    
    States
    
    
    Canada
    
    
    Elimination
    
    
    Total| | | |Fiscal Year 2010:Revenues
    
    $
    342.5
    
    
    $
    72.0
    
    
    $
    
    
    
    $
    414.5Income from operations
    
    
    18.4
    
    
    
    5.7
    
    
    
    
    
    
    
    24.1Total assets
    
    
    779.9
    
    
    
    146.9
    
    
    
    (89.9
    )
    
    
    836.9Depreciation and amortization
expense
    
    
    17.4
    
    
    
    3.0
    
    
    
    
    
    
    
    20.4Fiscal Year 2009:Revenues
    
    $
    408.8
    
    
    $
    78.2
    
    
    $
    
    
    
    $
    487.0Income from operations
    
    
    21.0
    
    
    
    7.9
    
    
    
    
    
    
    
    28.9Total assets
    
    
    970.2
    
    
    
    139.8
    
    
    
    (99.2
    )
    
    
    1,010.8Depreciation and amortization
expense
    
    
    19.7
    
    
    
    3.0
    
    
    
    
    
    
    
    22.7
 16.
    
    Stock Repurchase
 In May 2008, we announced the authorization to expand our share repurchase program from
$100.0 million to $175.0 million, which increased the share repurchase program previously
approved by our Board of Directors in May 2007. For the three and six months ended December
26, 2009, there were no share repurchases. For the three months ended December 27, 2008, we
repurchased 454,168 shares totaling $10.0 million for which we expended the same amount of
cash. For the six months ended December 27, 2008, we repurchased 650,387 shares totaling
$16.1 million for which we expended the same amount of cash. As of December 26, 2009, we
had approximately $57.8 million remaining under this authorization.
 17.
    
    Restricted Stock Unit Withholdings
 We issue restricted stock units as part of our equity incentive plans. Upon vesting, the
participant may elect to have shares withheld to pay the minimum statutory tax withholding
requirements. Although shares withheld are not issued, they are treated as common stock
repurchases in our financial statements as they reduce the number of shares that would have
been issued upon vesting.
 15




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##### Table of Contents



ITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
    Critical Accounting Policies
   16




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##### Table of Contents



Results of Operations
  Three Months
    
    
    Six Months
    
    
    PercentageEnded
    
    
    Ended
    
    
    ChangeThree Months
    
    
    Six MonthsDecember 26,
    
    
    December 27,
    
    
    December 26,
    
    
    December 27,
    
    
    FY 2010
    
    
    FY 20102009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    vs. FY 2009
    
    
    vs. FY 2009Revenues:Rental operations
    
    
    92.7
    %
    
    
    91.5
    %
    
    
    93.4
    %
    
    
    92.5
    %
    
    
    (13.5
    )%
    
    
    (14.1
    )%Direct sales
    
    
    7.3
    
    
    
    8.5
    
    
    
    6.6
    
    
    
    7.5
    
    
    
    (26.8
    )
    
    
    (24.9
    )Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    (14.6
    )
    
    
    (14.9
    )Expenses:Cost of rental operations
    
    
    70.3
    
    
    
    68.7
    
    
    
    70.5
    
    
    
    69.7
    
    
    
    (11.6
    )
    
    
    (13.1
    )Cost of direct sales
    
    
    74.3
    
    
    
    74.1
    
    
    
    74.8
    
    
    
    74.5
    
    
    
    (26.5
    )
    
    
    (24.6
    )Total cost of sales
    
    
    70.6
    
    
    
    69.2
    
    
    
    70.8
    
    
    
    70.1
    
    
    
    (12.9
    )
    
    
    (14.0
    )Selling and administrative
    
    
    22.5
    
    
    
    22.7
    
    
    
    23.4
    
    
    
    24.0
    
    
    
    (15.5
    )
    
    
    (17.1
    )Income from operations
    
    
    6.9
    
    
    
    8.1
    
    
    
    5.8
    
    
    
    5.9
    
    
    
    (26.8
    )
    
    
    (16.6
    )Interest expense
    
    
    1.8
    
    
    
    1.6
    
    
    
    1.8
    
    
    
    1.5
    
    
    
    (3.5
    )
    
    
    (0.2
    )Income before income taxes
    
    
    5.1
    
    
    
    6.5
    
    
    
    4.0
    
    
    
    4.4
    
    
    
    (32.5
    )
    
    
    (22.3
    )Provision for income taxes
    
    
    1.7
    
    
    
    2.5
    
    
    
    1.5
    
    
    
    2.2
    
    
    
    (44.3
    )
    
    
    (40.2
    )Net income
    
    
    3.5
    %
    
    
    3.9
    %
    
    
    2.5
    %
    
    
    2.3
    %
    
    
    (24.9
    )%
    
    
    (5.1
    )%
 Three months ended December 26, 2009 compared to three months ended December 27, 2008
 Revenues
 17




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##### Table of Contents



Cost of Rental
 Cost of Direct Sales
 Selling and Administrative
 Interest Expense
 Provision for Income Taxes
 Six months ended December 26, 2009 compared to six months ended December 27, 2008
 Revenues
  18




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##### Table of Contents



Cost of Rental.
 Cost of Direct Sales.
 Selling and Administrative
 Interest Expense
 Provision for Income Taxes
 Liquidity, Capital Resources and Financial Condition
   Operating Activities.
 Investing Activities.
 Financing Activities.
 19




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##### Table of Contents



Required
    
    ActualMaximum Leverage Ratio (Debt/Adjusted EBITDA)
    
    
    3.50
    
    
    
    2.33Minimum Interest Coverage Ratio (Adjusted
EBITDA/Interest Expense)
    
    
    3.00
    
    
    
    6.72Minimum Net Worth
    
    $
    314.5
    
    
    $
    459.2
     20




---



##### Table of Contents



Cash Obligations.
    Off Balance Sheet Arrangements
  Pension Obligations
    21




---



##### Table of Contents



Union Pension Plans
   Exit, Disposal and Related Activities
     Litigation
  22




---



##### Table of Contents



Environmental Matters
   Share-Based Compensation
  Adoption of New Accounting Pronouncements
   Cautionary Statements Regarding Forward-Looking Statements
  23




---



##### Table of Contents



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest Rate Risk
   Energy Cost Risk
    24




---



##### Table of Contents



Foreign Currency Exchange Risk
  
 ITEM 4.  CONTROLS AND PROCEDURES
   25




---



##### Table of Contents



PART II
 OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
     26




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##### Table of Contents



ITEM 1A.
    
    RISK FACTORS
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 a.
    
    The Company held its Annual Meeting of Shareholders on November 12, 2009.b.
    
    The following four persons were elected as directors: Paul Baszucki, Douglas
A. Milroy, Alice M. Richter and Jeffrey L. Wright. The following six persons comprise
the other directors whose terms of office continued after the Annual Meeting of
Shareholders: John S. Bronson, Lynn Crump-Caine, J. Patrick Doyle, Wayne M. Fortun,
Ernest J. Mrozek and M. Lenny Pippin.c.
    
    1. Each director nominee received the following votes:
 SharesIn Favor
    
    Withhold Authority
    
    Broker Non-VotesMr. Baszucki
    
    
    16,883,690
    
    
    
    574,459
    
    
    
    0Mr. Milroy
    
    
    16,898,517
    
    
    
    559,632
    
    
    
    0Ms. Richter
    
    
    17,202,882
    
    
    
    255,267
    
    
    
    0Mr. Wright
    
    
    16,641,711
    
    
    
    816,438
    
    
    
    0
 2.
    
    Shareholders ratified the appointment of Ernst & Young LLP, Independent
Registered Public Accounting Firm, as the Companys independent auditors for fiscal
2010: 17,325,100 shares in favor, 124,000 shares voting against and 9,049 shares
abstaining. There were no broker non-votes.
 27




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##### Table of Contents



ITEM 6.
    
    EXHIBITS
 a.
    
    Exhibits
 10.1
    
    First Amendment, dated September 30, 2009, to the Amended and Restated Loan
Agreement dated as of October 1, 2008 among G&K Receivables Corp., G&K Services, Inc.,
Three Pillars Funding LLC and Suntrust Robinson Humphrey, Inc. (incorporated herein by reference to Registrants exhibit 10.1
Form 8-K filed October 1, 2009).31.1
    
    Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 28




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##### Table of Contents



G&K SERVICES, INC.
(Registrant)Date: January 29, 2010
    By:
    /s/ Jeffrey L. WrightJeffrey L. WrightExecutive Vice President, Chief Financial
Officer and Director
(Principal Financial Officer)By:
    /s/ Thomas J. DietzThomas J. DietzVice President and Controller
(Principal Accounting Officer) 29