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(G&K SERVICES LOGO)
    
    UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, 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 October 2, 2010
 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.)
 
 (952) 912-5500
 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
October 2, 2010 and July 3, 2010
    
    
    3Consolidated Condensed Statements of Operations for the three
months ended October 2, 2010 and September 26, 2009
    
    
    4Consolidated Condensed Statements of Cash Flows for the three
months ended October 2, 2010 and September 26, 2009
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    22PART IIItem 1.
    
    Legal Proceedings
    
    
    23Item 1A.
    
    Risk Factors
    
    
    23Item 6.
    
    Exhibits
    
    
    23Signatures
    
    
    24EX-31.1EX-31.2EX-32.1EX-32.2
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PART I
FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED CONDENSED BALANCE SHEETS  G&K Services, Inc. and Subsidiaries
 October 2,2010
    
    
    July 3,(In thousands)
    
    (Unaudited)
    
    
    2010ASSETSCurrent AssetsCash and cash equivalents
    
    $
    10,357
    
    
    $
    8,774Accounts receivable, less allowance for doubtful
accounts of $3,397 and $3,118
    
    
    84,022
    
    
    
    82,754Inventories, net
    
    
    130,397
    
    
    
    126,325Other current assets
    
    
    18,151
    
    
    
    21,279Total current assets
    
    
    242,927
    
    
    
    239,132Property, Plant and Equipment, net
    
    
    193,333
    
    
    
    194,988Goodwill
    
    
    325,613
    
    
    
    323,055Other Assets
    
    
    54,214
    
    
    
    56,693Total assets
    
    $
    816,087
    
    
    $
    813,868LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    27,278
    
    
    $
    25,944Accrued expenses
    
    
    60,491
    
    
    
    71,478Deferred income taxes
    
    
    3,708
    
    
    
    3,557Current maturities of long-term debt
    
    
    990
    
    
    
    1,023Total current liabilities
    
    
    92,467
    
    
    
    102,002Long-Term Debt, net of Current Maturities
    
    
    156,481
    
    
    
    160,398Deferred Income Taxes
    
    
    1,295
    
    
    
    1,242Accrued Income Taxes  Long Term
    
    
    10,325
    
    
    
    10,113Other Noncurrent Liabilities
    
    
    74,911
    
    
    
    73,217Stockholders EquityCommon stock, $0.50 par value
    
    
    9,344
    
    
    
    9,292Additional paid-in capital
    
    
    9,058
    
    
    
    8,009Retained earnings
    
    
    452,190
    
    
    
    444,986Accumulated other comprehensive income
    
    
    10,016
    
    
    
    4,609Total stockholders equity
    
    
    480,608
    
    
    
    466,896Total liabilities and stockholders equity
    
    $
    816,087
    
    
    $
    813,868
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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS  G&K Services, Inc. and Subsidiaries
 For the Three Months EndedOctober 2,
    
    
    September 26,(In thousands, except per share data)
    
    2010
    
    
    2009RevenuesRental operations
    
    $
    186,370
    
    
    $
    195,666Direct sales
    
    
    14,019
    
    
    
    12,465Total revenues
    
    
    200,389
    
    
    
    208,131Operating ExpensesCost of rental operations
    
    
    125,003
    
    
    
    138,430Cost of direct sales
    
    
    10,571
    
    
    
    9,405Selling and administrative
    
    
    46,724
    
    
    
    50,450Total operating expenses
    
    
    182,298
    
    
    
    198,285Income from Operations
    
    
    18,091
    
    
    
    9,846Interest expense
    
    
    2,647
    
    
    
    3,711Income before Income Taxes
    
    
    15,444
    
    
    
    6,135Provision for income taxes
    
    
    6,465
    
    
    
    2,867Net Income
    
    $
    8,979
    
    
    $
    3,268Basic weighted average number
 of shares outstanding
    
    
    18,289
    
    
    
    18,223Basic Earnings per Common Share
    
    $
    0.49
    
    
    $
    0.18Diluted
weighted average number of shares outstanding
    
    
    18,356
    
    
    
    18,269Diluted Earnings per Common Share
    
    $
    0.49
    
    
    $
    0.18Dividends per share
    
    $
    0.095
    
    
    $
    0.075
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  G&K Services, Inc. and Subsidiaries
 For the Three Months EndedOctober 2,
    
    
    September 26,(In thousands)
    
    2010
    
    
    2009Operating Activities:Net income
    
    $
    8,979
    
    
    $
    3,268Adjustments to reconcile net income to net cash
provided by operating activities -Depreciation and amortization
    
    
    9,398
    
    
    
    10,243Other adjustments
    
    
    1,956
    
    
    
    873Changes in current operating items
    
    
    (4,984
    )
    
    
    (4,394
    )Other assets and liabilities
    
    
    (2,372
    )
    
    
    226Net cash provided by operating activities
    
    
    12,977
    
    
    
    10,216Investing Activities:Property, plant and equipment additions, net
    
    
    (5,415
    )
    
    
    (3,520
    )Divestitures of business assets, net
    
    
    
    
    
    
    1,402Net cash used for investing activities
    
    
    (5,415
    )
    
    
    (2,118
    )Financing Activities:Payments of long-term debt
    
    
    (251
    )
    
    
    (7,238
    )Payments on revolving credit facilities, net
    
    
    (3,700
    )
    
    
    (2,967
    )Cash dividends paid
    
    
    (1,775
    )
    
    
    (1,385
    )Net issuance
of common stock, primarily under stock option plans
    
    
    5
    
    
    
    Purchase of common stock
    
    
    (328
    )
    
    
    (363
    )Net cash
used for financing activities
    
    
    (6,049
    )
    
    
    (11,953
    )Increase/(Decrease) in Cash and Cash Equivalents
    
    
    1,513
    
    
    
    (3,855
    )Effect of Exchange Rates on Cash
    
    
    70
    
    
    
    138Cash and Cash Equivalents:Beginning of period
    
    
    8,774
    
    
    
    13,136End of period
    
    $
    10,357
    
    
    $
    9,419
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1.
    
    Basis of Presentation for Interim Financial Statements
 The Consolidated Condensed Financial Statements included herein, except for the July 3, 2010
balance sheet, which was derived from the audited Consolidated Financial Statements for the
fiscal year ended July 3, 2010, 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 October 2, 2010, and the results of our operations and our cash flows for the
three months ended October 2, 2010 and September 26, 2009. 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-month periods ended October 2, 2010 and September
26, 2009 are not necessarily indicative of the results to be expected for the full year. We
have evaluated subsequent events and have found none that require recognition or disclosure.
 The accounting policies we follow are set forth in Note 1 in our Annual Report on Form 10-K
for the fiscal year ended July 3, 2010. Additional significant accounting policies are
identified below.Inventories
 Inventories consist of new goods and rental merchandise in service. New goods are stated at
lower of first-in, first-out (FIFO) cost or market, net of any reserve for obsolete or
excess inventory. Merchandise placed in service to support rental operations is amortized
into cost of rental operations over the estimated useful lives of the underlying inventory
items, primarily on a straight-line basis, which results in a matching of the cost of the
merchandise with the weekly rental revenue generated by the merchandise. Estimated lives of
rental merchandise in service range from six months to three years. In establishing
estimated lives for merchandise in service, management considers historical experience and
the intended use of the merchandise.
 We review the estimated useful lives of our in-service inventory assets on a periodic basis.
During the fourth quarter of 2010, we completed an analysis of certain in-service inventory
assets which resulted in the estimated useful lives for these assets being modified to
better reflect the estimated periods in which the assets will remain in service. The effect
of the change in estimate in fiscal year 2010 and the first quarter of fiscal year 2011 was
not material.
 We estimate our reserves for inventory obsolescence by periodically examining our inventory
to determine if there are indicators that carrying values exceed the net realizable value.
Experience has shown that significant indicators that could require the need for additional
inventory write-downs include the age of the inventory, anticipated demand for our products,
historical inventory usage, revenue trends and current economic conditions. We believe that
adequate reserves for inventory obsolescence have been made in the Consolidated Financial
Statements; however, in the future, product lines and customer requirements may change,
which could result in additional inventory write-downs.Revenue Recognition
 Our rental operations business is largely based on written service agreements whereby
we agree to pick-up soiled merchandise, launder and then deliver clean uniforms and other
related products. The service agreements generally provide for weekly billing upon
completion of the laundering process and delivery to the customer. Accordingly, we
recognize revenue from rental operations in the period in which the services are provided.
Revenue from rental operations also includes billings to customers for lost or damaged
uniforms and replacement fees for non-personalized
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merchandise that is lost or damaged. Direct sale revenue is recognized in the period in
which the product is shipped. Total revenues do not include sales tax as we consider
ourselves a pass-through conduit for collecting and remitting sales taxes.
 We changed our business practices regarding the replacement of certain in-service towel and
linen inventory and accordingly, during the fourth quarter of fiscal year 2010, we modified
our revenue recognition policy related to the associated replacement fees. This revenue,
which has historically been deferred and recognized over the estimated useful life of the
associated in-service inventory, is now recognized upon billing. The effect of this change
was to increase revenue and income from operations by $4.0 million, net income by $2.6
million, basic and diluted earnings per common share by $0.14 in the first quarter of fiscal
year 2011.
 2.
    
    Contingent Liabilities
 Environmental MattersWe are currently involved in several environmental-related proceedings by certain
governmental agencies, which relate primarily to allegedly operating certain facilities in
noncompliance 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 October 2, 2010 and July 3, 2010, we had reserves
of approximately $2.6 million and $3.2 million, respectively, related to various pending
environmental-related matters. There was no expense for these matters for the three months
ended October 2, 2010 and September 26, 2009.
 While we cannot predict the outcome of these matters with certainty, we currently do not
expect any of these matters to have a material adverse effect on our results of operations
or financial position. However, 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.
    
    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.We have not transferred any amounts between fair value levels during fiscal year 2011. In
addition, we valued our level 2 assets and liabilities by reference to information provided
by independent third parties for similar assets and liabilities in active markets.
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The following tables summarize the balances of assets and liabilities measured at fair value
on a recurring basis as of October 2, 2010 and July 3, 2010:
 As of October 2, 2010Fair Value Measurements Using Inputs Considered asLevel 1
    
    Level 2
    
    TotalOther assets:Non-qualified, non-contributory retirement
plan assets
    
    $
    
    
    
    $
    10.0
    
    
    $
    10.0Non-qualified deferred compensation plan assets
    
    
    17.4
    
    
    
    
    
    
    
    17.4Total assets
    
    $
    17.4
    
    
    $
    10.0
    
    
    $
    27.4Accrued expenses:Derivative financial instruments
    
    $
    
    
    
    $
    4.9
    
    
    $
    4.9Total liabilities
    
    $
    
    
    
    $
    4.9
    
    
    $
    4.9
 As of July 3, 2010Fair Value Measurements Using Inputs Considered asLevel 1
    
    Level 2
    
    TotalOther assets:Non-qualified, non-contributory retirement
plan assets
    
    $
    
    
    
    $
    9.6
    
    
    $
    9.6Non-qualified deferred compensation plan assets
    
    
    16.9
    
    
    
    
    
    
    
    16.9Total assets
    
    $
    16.9
    
    
    $
    9.6
    
    
    $
    26.5Accrued expenses:Derivative financial instruments
    
    $
    
    
    
    $
    5.2
    
    
    $
    5.2Total liabilities
    
    $
    
    
    
    $
    5.2
    
    
    $
    5.2
 We do not have any level 3 assets or liabilities, and the fair value of cash, trade
receivables and borrowings under the various credit agreements approximates the amounts
recorded.
 4.
    
    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 periodically commodity price risk and
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 periodically entered into to manage the price risk associated with
forecasted purchases of gasoline and diesel fuel used in our rental operations. 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.
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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 change 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
manage 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 74% of our outstanding variable rate debt had its interest
payments modified using interest rate swap contracts as of October 2, 2010.
 In addition, we occasionally 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 any hedge is to reduce the variability of cash flows associated
with the forecasted purchases of those commodities without an exchange of the underlying
commodity. Approximately 3% of our anticipated gasoline and diesel fuel purchases for the
next twelve months are hedged using futures contracts as of October 2, 2010.
 We do not engage in speculative transactions or fair value hedging nor do we hold or issue
financial instruments for trading purposes.
 We do not have any material assets related to derivatives as of October 2, 2010 and July 3,
2010.
 We do have liabilities associated with derivatives, and the following table summarizes the
classification and fair value of the interest rate swap agreements and fuel commodity
futures contracts, which have been designated as cash flow hedging instruments:
 Liability Derivatives Fair ValueOctober 2,
    
    
    July 3,Relationship:
    
    Balance Sheet Classification:
    
    
    2010
    
    
    2010Interest rate swap contracts
    
    Accrued expenses
    
    $
    4.9
    
    
    $
    5.0Fuel commodity futures contracts
    
    Accrued expenses
    
    
    
    
    
    
    0.2Total derivatives designated as cash flow hedging instruments
    
    $
    4.9
    
    
    $
    5.2
 As of October 2, 2010 and July 3, 2010, 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 $3.5
million net loss deferred in accumulated other comprehensive income as of October 2, 2010, a
$2.2 million loss is expected to be reclassified to interest expense in the next twelve
months.
 As of October 2, 2010, we had interest rate swap contracts to pay fixed rates of interest
and to receive variable rates of interest based on the three-month London Interbank Offered
Rate (LIBOR) on $95.0 million notional amount, none of which are forward starting interest
rate swap contracts. Of the $95.0 million notional amount, $45.0 million matures in the next
12 months, $25.0 million matures in 13-24 months and $25.0 million matures in 25-36 months.
The average rate on the $95.0 million of interest rate swap contracts was 4.0% as of October
2, 2010. These interest rate swap contracts are highly effective cash flow hedges and
accordingly, gains or losses on any ineffectiveness were 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
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income or loss is reclassified to the Cost of rental operations line item in the
Consolidated Condensed Statements of Operations. The amount deferred in accumulated other
comprehensive income as of October 2, 2010 is $0.
 As of October 2, 2010, 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 0.1 million gallons, all of which will occur in the next twelve
months. The weighted average fixed price on the 0.1 million gallons of fuel commodity
futures contracts was $2.96 per gallon as of October 2, 2010. 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.
 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 months ended October 2, 2010 and September
26, 2009 related to derivative financial instruments used in cash flow hedging
relationships:
 Amount of Gain or (Loss) Recognized inAccumulated Other Comprehensive Income (Loss)Three Months EndedRelationship:
    
    October 2, 2010
    
    
    September 26, 2009Interest rate swap contracts
    
    $
    (0.5
    )
    
    $
    (0.8
    )Fuel commodity futures contracts
    
    
    
    
    
    
    (0.3
    )Total derivatives designated as
cash flow hedging instruments
    
    $
    (0.5
    )
    
    $
    (1.1
    )
 Amount of Gain or (Loss) Reclassified FromAccumulated Other Comprehensive Income (Loss)to Consolidated Statements of OperationsStatement of Operations
    
    
    Three Months EndedRelationship:
    
    Classification:
    
    
    October 2, 2010
    
    
    September 26, 2009Interest rate swap contracts
    
    Interest expense
    
    $
    (0.7
    )
    
    $
    (0.9
    )Fuel commodity futures
contracts
    
    Cost of rental operations
    
    
    (0.1
    )
    
    
    Total derivatives designated as cash flow hedging instruments
    
    $
    (0.8
    )
    
    $
    (0.9
    )
 5.
    
    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 the most efficient manner. These actions may consist of
facility closures, divestitures, expansions and increases or decreases in staffing levels.
 During the first quarter of fiscal year 2010, we aligned our workforce and cost structure to
better match our revenue levels. As a result, we reduced selected administrative, regional
and corporate headcount, divested an unprofitable operation and recorded approximately $1.4
million in associated severance costs in the Selling and administrative line item. Of the
$1.4 million in severance, substantially all was paid by October 2, 2010 and was primarily
recorded in our United States operating segment.
 There were no comparable actions taken in the first quarter of fiscal year 2011.
 6.
    
    Income Taxes
 Our effective tax rate decreased to 41.9% in the first quarter of fiscal 2011 from 46.7% in
the same period of fiscal 2010. The tax rates for both years were higher than our statutory
rate primarily due to the write-off of deferred tax assets associated with equity
compensation. In addition, the current period tax rate was lower than
the prior period tax rate primarily due to a decrease in the amount
of deferred tax asset write-offs related to equity compensation and
the leverage associated with these write-offs spread over a higher
pre-tax income base.
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7.
    
    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 using the treasury
stock method and non-vested restricted stock.
 Three Months EndedOctober 2, 2010
    
    
    September 26, 2009Weighted average number of common
shares outstanding used in computation
of basic earnings per share
    
    
    18.3
    
    
    
    18.2Weighted average effect of non-vested
restricted stock grants and assumed
exercise of options
    
    
    0.1
    
    
    
    0.1Shares used in computation of diluted
earnings per share
    
    
    18.4
    
    
    
    18.3
 We excluded potential common shares related to our outstanding equity compensation
grants of 1.6 million and 2.0 million for the three months ended October 2, 2010 and
September 26, 2009, respectively, from the computation of diluted earnings per share.
Inclusion of these shares would have been anti-dilutive.
 8.
    
    Comprehensive Income
 For the three months ended October 2, 2010 and September 26, 2009, the components of
comprehensive income were as follows:
 Three Months EndedOctober 2, 2010
    
    September 26, 2009Net income
    
    $
    9.0
    
    
    $
    3.3Other comprehensive income:Foreign currency translation adjustments, net of tax
    
    
    5.1
    
    
    
    6.8Derivative financial instruments (loss) recognized, net of tax
    
    
    (0.5
    )
    
    
    (1.1
    )Derivative financial instruments gain reclassified, net of tax
    
    
    0.8
    
    
    
    0.9Total comprehensive income
    
    $
    14.4
    
    
    $
    9.9
 9.
    
    Inventories
 The components of inventory as of October 2, 2010 and July 3, 2010 are as follows:
 October 2,
    
    
    July 3,2010
    
    
    2010Raw Materials
    
    $
    8.4
    
    
    $
    7.5Work in Process
    
    
    0.9
    
    
    
    0.5Finished Goods
    
    
    46.9
    
    
    
    49.0New Goods
    
    $
    56.2
    
    
    $
    57.0Merchandise In Service
    
    $
    74.2
    
    
    $
    69.3Total Inventories
    
    $
    130.4
    
    
    $
    126.3
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10.
    
    Goodwill and Intangible Assets
 Goodwill by segment is as follows:
 United States
    
    
    Canada
    
    
    TotalBalance as of July 3, 2010
    
    $
    259.7
    
    
    $
    63.4
    
    
    $
    323.1Foreign currency translation and other
    
    
    
    
    
    
    2.5
    
    
    
    2.5Balance as of October 2, 2010
    
    $
    259.7
    
    
    $
    65.9
    
    
    $
    325.6
 Our other intangible assets, which are included in Other assets on the Consolidated
Condensed Balance Sheet, are as follows:
 October 2,
    
    
    July 3,2010
    
    
    2010Other Intangible Assets:Customer contracts
    
    $
    114.7
    
    
    $
    114.0Accumulated amortization
    
    
    (93.7
    )
    
    
    (91.7
    )Net
    
    $
    21.0
    
    
    $
    22.3Non-competition agreements
    
    $
    11.1
    
    
    $
    11.1Accumulated amortization
    
    
    (10.9
    )
    
    
    (10.8
    )Net
    
    $
    0.2
    
    
    $
    0.3
 The customer contracts include the combined value of the written service agreements and
the related customer relationship. Other intangible assets are amortized over a weighted
average life of approximately 11 years.
 Amortization expense was $1.5 million and $1.6 million for the three months ended October 2,
2010 and September 26, 2009, respectively. Estimated amortization expense for each of the
next five fiscal years based on the intangible assets as of October 2, 2010 is as follows:
 2011 remaining
    
    $
    4.32012
    
    
    5.22013
    
    
    4.12014
    
    
    2.92015
    
    
    2.02016
    
    
    1.4
 11.
    
    Long-Term Debt
 We have a $300.0 million, unsecured revolving credit facility with a syndicate of banks,
which expires on July 1, 2012. Borrowings in U.S. dollars under this 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 0.50% and (iii)
the adjusted LIBOR for a one month interest period plus 1.00%, plus, in each case, a margin
determined with reference to our consolidated leverage ratio. Base rate 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 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 1.00%.
 As of October 2, 2010, borrowings outstanding under the revolving credit facility were $60.8
million. The unused portion of the revolver may be used for general corporate purposes,
acquisitions, share repurchases, working capital needs and to provide up to $50.0 million in
letters of credit. As of October 2, 2010, letters of credit outstanding against the
revolver totaled $23.6 million and primarily relate to our property and casualty insurance
programs. No amounts have been drawn upon these letters of credit. Availability of credit
under this new facility requires that we maintain compliance with certain covenants. In
addition, there are certain restricted payment limitations on dividends or other
distributions, including share repurchases. The covenants under this agreement are the most
restrictive when
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##### Table of Contents



compared to our other credit facilities. The following table illustrates compliance with
regard to the material covenants required by the terms of this facility as of October 2,
2010:
 Required
    
    
    ActualMaximum Leverage Ratio (Debt/EBITDA)
    
    
    3.50
    
    
    
    1.62Minimum Interest Coverage Ratio (EBITDA/Interest Expense)
    
    
    3.00
    
    
    
    8.74Minimum Net Worth
    
    $
    315.1
    
    
    $
    480.6
 Our maximum leverage ratio and minimum interest coverage ratio covenants are calculated
by adding back non-cash charges, as defined in our debt agreement.
 Advances outstanding as of October 2, 2010 bear interest at a weighted average all-in rate
of 2.80% (LIBOR plus 2.50%) for the Eurocurrency rate loans and an all-in rate of 3.25%
(Lender Prime Rate) for overnight base rate loans. 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. At October 2, 2010 this fee was 0.30% of the unused daily balance.
 We have $75.0 million of variable rate unsecured private placement notes. The notes bear
interest at 0.60% over LIBOR and are scheduled to mature on June 30, 2015. The notes do not
require principal payments until maturity. Interest payments are reset and paid on a
quarterly basis. As of October 2, 2010, the outstanding balance of the notes was $75.0
million at an all-in rate of 0.89% (LIBOR plus 0.60%).
 We maintain an accounts receivable securitization facility whereby the lender will make
loans to us on a revolving basis. On September 29, 2010, we completed the Second Amended and
Restated Loan Agreement. The primary purpose of entering into the Loan Agreement and
replacing the prior loan agreement was to (i) make conforming changes in connection with the
previously disclosed reduction of the facility limit to $40.0 million effective July 1,
2010; (ii) make available an amount not exceeding $15.0 million under the facility for the
issuance of letters of credit (subject to the aggregate $40.0 million facility limit); and
(iii) add three of our subsidiaries as parties to the related intercompany receivables sale
agreement to increase the borrowing base. Under the above stated amendment, we will now pay
interest at a rate per annum equal to a margin of 0.85%, plus the average annual interest
rate for such commercial paper. In addition, this facility is subject to customary fees for
the issuance of letters of credit and any unused portion of the facility. Under this
facility and customary with transactions of this nature, our eligible accounts receivable
are sold to a subsidiary.
 As of October 2, 2010, there was $20.0 million outstanding under this loan agreement at an
all-in interest rate of 1.15%. Additionally, no letters of credit were outstanding under
this facility on this date. The facility expires on September 26, 2012.
 See Note 4 to the Consolidated Condensed Financial Statements for details of our interest
rate swap and hedging activities related to our outstanding debt.
 12.
    
    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 $1.4 million for each of the three months ended
October 2, 2010 and September 26, 2009. The number of options exercised and restricted
stock vested since July 3, 2010, was 0.1 million shares.
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13.
    
    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 months ended October 2, 2010 and
September 26, 2009 was $0.9 million and $0.6 million, respectively.The components of net periodic pension cost for these plans for the three months ended
October 2, 2010 and September 26, 2009 are as follows:
 Pension Plan
    
    
    Supplemental Executive Retirement PlanThree Months Ended
    
    
    Three Months EndedOctober 2, 2010
    
    
    September 26, 2009
    
    
    October 2, 2010
    
    
    September 26, 2009Interest cost
    
    $
    1.0
    
    
    $
    0.9
    
    
    $
    0.2
    
    
    $
    0.2Expected return on assets
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    
    
    
    
    Loss
    
    
    0.5
    
    
    
    0.3
    
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    0.7
    
    
    $
    0.4
    
    
    $
    0.2
    
    
    $
    0.2
 14.
    
    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 work apparel and facility services industry. During the three months ended
October 2, 2010 and for the same period of the prior fiscal year, no single customers
transactions accounted for more than 2.0% of our total revenues. Substantially all of
our customers are in the United States or 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 $2.2 million and $2.4 million for the
three months ended October 2, 2010 and September 26, 2009, respectively.We evaluate performance based on income from operations. Financial information by
segment for the three-month periods ended October 2, 2010 and September 26, 2009 is as
follows:
 UnitedStates
    
    
    Canada
    
    
    Elimination
    
    
    TotalFirst Quarter Fiscal Year 2011:Revenues
    
    $
    167.1
    
    
    $
    33.3
    
    
    $
    
    
    
    $
    200.4Income from operations
    
    
    14.6
    
    
    
    3.5
    
    
    
    
    
    
    
    18.1Total assets
    
    
    756.4
    
    
    
    140.4
    
    
    
    (80.7
    )
    
    
    816.1Depreciation and amortization
expense
    
    
    8.2
    
    
    
    1.2
    
    
    
    
    
    
    
    9.4First Quarter Fiscal Year 2010:Revenues
    
    $
    173.3
    
    
    $
    34.8
    
    
    $
    
    
    
    $
    208.1Income from operations
    
    
    8.2
    
    
    
    1.6
    
    
    
    
    
    
    
    9.8Total assets
    
    
    798.5
    
    
    
    141.0
    
    
    
    (87.5
    )
    
    
    852.0Depreciation and amortization
expense
    
    
    8.8
    
    
    
    1.4
    
    
    
    
    
    
    
    10.2
 15.
    
    Stock Repurchase
 As of October 2, 2010, we have a $175.0 million share repurchase program which was
originally authorized by our Board of Directors in May 2007. We did not repurchase any
shares under this program in fiscal year 2010 or fiscal year 2011. We have approximately
$57.9 million remaining under this authorization.
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16.
    
    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.
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
    Critical Accounting Policies
   Inventories
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Revenue Recognition
   Results of Operations
  Three Months
    
    PercentageEnded
    
    ChangeThree MonthsOctober 2,
    
    September 26,
    
    Fiscal Year 20112010
    
    2009
    
    vs. Fiscal Year 2010Revenues:Rental operations
    
    
    93.0
    %
    
    
    94.0
    %
    
    
    (4.8
    )%Direct sales
    
    
    7.0
    
    
    
    6.0
    
    
    
    12.5Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    (3.7
    )Expenses:Cost of rental operations
    
    
    67.1
    
    
    
    70.7
    
    
    
    (9.7
    )Cost of direct sales
    
    
    75.4
    
    
    
    75.5
    
    
    
    12.4Total cost of sales
    
    
    67.7
    
    
    
    71.0
    
    
    
    (8.3
    )Selling and administrative
    
    
    23.3
    
    
    
    24.2
    
    
    
    (7.4
    )Income from operations
    
    
    9.0
    
    
    
    4.7
    
    
    
    83.7Interest expense
    
    
    1.3
    
    
    
    1.8
    
    
    
    (28.7
    )Income before income taxes
    
    
    7.7
    
    
    
    2.9
    
    
    
    151.7Provision for income taxes
    
    
    3.2
    
    
    
    1.4
    
    
    
    125.5Net income
    
    
    4.5
    %
    
    
    1.6
    %
    
    
    174.8
    %
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Three months ended October 2, 2010 compared to three months ended September 26, 2009
 Revenues
   Cost of Rental
 Cost of Direct Sales
 Selling and Administrative
 Interest Expense
 Provision for Income Taxes
 Liquidity, Capital Resources and Financial Condition
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Operating Activities.
 Investing Activities.
 Financing Activities.
   Required
    
    
    ActualMaximum Leverage Ratio (Debt/EBITDA)
    
    
    3.50
    
    
    
    1.62Minimum Interest Coverage Ratio (EBITDA/Interest Expense)
    
    
    3.00
    
    
    
    8.74Minimum Net Worth
    
    $
    315.1
    
    
    $
    480.6
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Cash Obligations.
  Off Balance Sheet Arrangements
  Pension Obligations
     19




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Union Pension Plans
    Exit, Disposal and Related Activities
    Litigation
  Environmental Matters
   20




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Share-Based Compensation
  Cautionary Statements Regarding Forward-Looking Statements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest Rate Risk
   21




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Energy Cost Risk
    Foreign Currency Exchange Risk
  
 ITEM 4. CONTROLS AND PROCEDURES
   22




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PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
      
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
 a.
    
    Exhibits10.1 Second Amended and Restated Loan Agreement, dated September 29, 2010 among G&K
Services, Inc., G&K Receivables Corp., Three Pillars Funding LLC, SunTrust Robinson
Humphrey, Inc. and SunTrust Bank (incorporated herein by reference to the Registrants
exhibit 10.1 Form 8-K filed October 4, 2010).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.
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G&K SERVICES, INC.
(Registrant)Date:      November 5, 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) 24