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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 March 28, 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.)
 
 (952) 912-5500
 þ o
 o o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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
March 28, 2009 and June 28, 2008
    
    
    3Consolidated Condensed Statements of Operations for the three and nine
months ended March 28, 2009 and March 29, 2008
    
    
    4Consolidated Condensed Statements of Cash Flows for the nine
months ended March 28, 2009 and March 29, 2008
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    32PART IIItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 6. Exhibits
    
    
    35Signatures
    
    
    36EX-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
 March 28,2009
    
    
    June 28,(In thousands)
    
    (Unaudited)
    
    
    2008ASSETSCurrent AssetsCash and cash equivalents
    
    $
    15,289
    
    
    $
    12,651Accounts receivable, less allowance for doubtful
accounts of $4,684 and $4,506
    
    
    90,608
    
    
    
    111,307Inventories, net
    
    
    145,723
    
    
    
    142,318Other current assets
    
    
    17,307
    
    
    
    26,181Total current assets
    
    
    268,927
    
    
    
    292,457Property, Plant and Equipment, net
    
    
    218,437
    
    
    
    253,041Goodwill
    
    
    315,975
    
    
    
    434,874Other Assets
    
    
    56,250
    
    
    
    72,802Total assets
    
    $
    859,589
    
    
    $
    1,053,174LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    31,677
    
    
    $
    30,873Accrued expenses
    
    
    83,687
    
    
    
    78,282Deferred income taxes
    
    
    3,589
    
    
    
    6,154Current maturities of long-term debt
    
    
    7,606
    
    
    
    7,891Total current liabilities
    
    
    126,559
    
    
    
    123,200Long-Term Debt, net of Current Maturities
    
    
    249,742
    
    
    
    280,428Deferred Income Taxes
    
    
    2,368
    
    
    
    35,190Accrued Income Taxes  Long Term
    
    
    10,121
    
    
    
    12,343Other Noncurrent Liabilities
    
    
    38,693
    
    
    
    44,537Stockholders Equity
    
    
    432,106
    
    
    
    557,476Total liabilities and stockholders equity
    
    $
    859,589
    
    
    $
    1,053,174
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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 G&K Services, Inc. and Subsidiaries
 For the Three Months Ended
    
    
    For the Nine Months EndedMarch 28,
    
    
    March 29,
    
    
    March 28,
    
    
    March 29,(In thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008RevenuesRental operations
    
    $
    209,872
    
    
    $
    233,001
    
    
    $
    660,211
    
    
    $
    691,277Direct sales
    
    
    21,120
    
    
    
    18,140
    
    
    
    57,770
    
    
    
    58,918Total revenues
    
    
    230,992
    
    
    
    251,141
    
    
    
    717,981
    
    
    
    750,195Operating ExpensesCost of rental operations
    
    
    147,041
    
    
    
    158,368
    
    
    
    460,912
    
    
    
    466,750Cost of direct sales
    
    
    15,521
    
    
    
    13,680
    
    
    
    42,822
    
    
    
    42,745Selling and administrative
    
    
    53,980
    
    
    
    57,538
    
    
    
    170,860
    
    
    
    171,577Goodwill and other impairment charges
    
    
    126,719
    
    
    
    
    
    
    
    126,719
    
    
    
    Total operating expenses
    
    
    343,261
    
    
    
    229,586
    
    
    
    801,313
    
    
    
    681,072(Loss)/Income from Operations
    
    
    (112,269
    )
    
    
    21,555
    
    
    
    (83,332
    )
    
    
    69,123Interest expense
    
    
    3,263
    
    
    
    3,828
    
    
    
    10,681
    
    
    
    11,776(Loss)/Income before Income Taxes
    
    
    (115,532
    )
    
    
    17,727
    
    
    
    (94,013
    )
    
    
    57,347(Benefit)/Provision for income taxes
    
    
    (29,229
    )
    
    
    7,080
    
    
    
    (18,706
    )
    
    
    21,899Net (Loss)/Income
    
    $
    (86,303
    )
    
    $
    10,647
    
    
    $
    (75,307
    )
    
    $
    35,448Basic weighted average number
of shares outstanding
    
    
    18,222
    
    
    
    19,621
    
    
    
    18,450
    
    
    
    20,452Basic Earnings per Common Share
    
    $
    (4.74
    )
    
    $
    0.54
    
    
    $
    (4.08
    )
    
    $
    1.73Diluted weighted average number
of shares outstanding
    
    
    18,222
    
    
    
    19,742
    
    
    
    18,450
    
    
    
    20,590Diluted Earnings per Common Share
    
    $
    (4.74
    )
    
    $
    0.54
    
    
    $
    (4.08
    )
    
    $
    1.72Dividends per share
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.21
    
    
    $
    0.15
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 G&K Services, Inc. and Subsidiaries
 For the Nine Months EndedMarch 28,
    
    
    March 29,(In thousands)
    
    2009
    
    
    2008Operating Activities:Net (loss)/income
    
    $
    (75,307
    )
    
    $
    35,448Adjustments to reconcile net (loss)/income to net cash
provided by operating activities -Depreciation and amortization
    
    
    33,871
    
    
    
    35,702Goodwill and other impairment charges
    
    
    126,719
    
    
    
    Deferred income taxes
    
    
    (34,298
    )
    
    
    (862
    )Other adjustments
    
    
    5,731
    
    
    
    2,691Changes in current operating items, exclusive of acquisitions
    
    
    13,192
    
    
    
    (5,504
    )Other assets and liabilities
    
    
    3,942
    
    
    
    5,502Net cash provided by operating activities
    
    
    73,850
    
    
    
    72,977Investing Activities:Property, plant and equipment additions, net
    
    
    (18,422
    )
    
    
    (16,576
    )Acquisitions of business assets, net
    
    
    20
    
    
    
    (63,687
    )Purchases of investments, net
    
    
    
    
    
    
    (2,521
    )Net cash used for investing activities
    
    
    (18,402
    )
    
    
    (82,784
    )Financing Activities:Payments of long-term debt
    
    
    (7,540
    )
    
    
    (7,341
    )(Payments of)/Proceeds from revolving credit facilities, net
    
    
    (23,425
    )
    
    
    81,801Cash dividends paid
    
    
    (3,920
    )
    
    
    (3,082
    )Net issuance of common stock, primarily under stock option plans
    
    
    209
    
    
    
    4,220Purchase of common stock
    
    
    (16,775
    )
    
    
    (70,735
    )Net cash (used for)/provided by financing activities
    
    
    (51,451
    )
    
    
    4,863Increase/(Decrease) in Cash and Cash Equivalents
    
    
    3,997
    
    
    
    (4,944
    )Effect of Exchange Rates on Cash
    
    
    (1,359
    )
    
    
    223Cash and Cash Equivalents:Beginning of period
    
    
    12,651
    
    
    
    22,759End of period
    
    $
    15,289
    
    
    $
    18,038
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1.
    
    Basis of Presentation for Interim Financial StatementsThe consolidated condensed financial statements included herein, except for the June 28,
2008 balance sheet which was derived from the audited consolidated financial statements for
the fiscal year ended June 28, 2008, 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 March 28, 2009, and the results of our operations for the three and nine
months ended and our cash flows for the nine months ended March 28, 2009 and March 29, 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 nine month periods ended March 28, 2009 and
March 29, 2008 are not necessarily indicative of the results to be expected for the full
year.The significant accounting policies we follow are set forth in Note 1 in our Annual Report
on Form 10-K for the fiscal year ended June 28, 2008. Additional significant accounting
policies are identified below.Environmental CostsWe accrue various environmental related costs, which consist primarily of fines and
penalties, when it is probable that we have incurred a liability and the amount can be
reasonably estimated. When a single amount cannot be reasonably estimated but the cost can
be estimated within a range, we accrue the minimum amount. This accrued amount reflects our
assumptions regarding the nature of the remedy, and the outcome of discussions with
regulatory agencies. Changes in the estimates on which the accruals are based, including
unanticipated government enforcement actions, or changes in environmental regulations could
result in higher or lower costs.Accordingly, as investigation and other actions proceed, it is likely that adjustments in
our accruals will be necessary to reflect new information. The amounts of any such
adjustments could have a material adverse effect on our results of operations or cash flows
in a given period. While we cannot predict the ultimate outcome of these environmental
matters, currently, none of these actions 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.Accruals for environmental liabilities are included in the accrued expenses line item in the
Consolidated Condensed Balance Sheets. Environmental costs are capitalized if they extend
the life of the related property, increase its capacity, and/or mitigate or prevent future
contamination. The cost of operating and maintaining environmental control equipment is
charged to expense.For additional information see Note 2, Contingent Liabilities.Impairments of Long-Lived AssetsLong-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable in accordance with
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144). Recoverability of assets in
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accordance with SFAS No. 144 compares the projected undiscounted future cash flows from use and disposition
of assets to the carrying amounts of those assets. When the sum of projected undiscounted cash
flows is less than the carrying amount, impairment losses are recognized. In determining
such impairment losses, discounted cash flows are utilized to determine the fair value of
the assets being evaluated. During the third quarter of fiscal 2009, we recorded an
impairment loss of $16.2 million related to certain long-lived assets and included that loss
in the goodwill and other impairment charges line item in the Consolidated Condensed
Statements of Operations. We did not record any impairment losses on long-lived assets in
the consolidated condensed financial statements in the first two quarters of fiscal 2009 or
in fiscal 2008.For additional information see Note 11, Goodwill and
Other Impairment Charges.Goodwill and Intangible AssetsThe carrying value of goodwill is reviewed annually in our fourth quarter for
possible impairment in accordance with SFAS No. 142 or more frequently if events or changes
in circumstances indicate that the carrying amount of the goodwill may not be recoverable.
Goodwill has been assigned to reporting units for purposes of impairment testing. Our
reporting units are U.S. Rental operations, Canadian Rental operations and Direct Sales
operations. The goodwill impairment
test involves a two-step process. The first step is a comparison of each reporting units
fair value to its carrying value. We generally estimate fair value based on
discounted cash flows. The reporting units discounted cash flows require
significant management judgment with respect to sales, gross margin and SG&A rates, capital
expenditures and the selection and use of an appropriate discount rate. The projected sales,
gross margin and SG&A expense rate assumptions and capital expenditures are based on our
annual business plan or other forecasted results. Discount rates reflect estimates of
a market-based weighted average cost of capital taking into consideration the
risks associated with the projected cash flows directly resulting from the use of those
assets in operations. The estimated fair value of reporting units are based on the best
information available as of the date of the assessment. The use of different assumptions
would increase or decrease estimated discounted future operating cash flows and could
increase or decrease any impairment charge. If the carrying value of a reporting unit
exceeds its estimated fair value in the first step, a second step is performed, in which the
reporting units goodwill is written down to its implied fair value. The second step
requires us to allocate the fair value of the reporting unit derived in the first step to
the fair value of the reporting units net assets, with any fair value in excess of amounts
allocated to such net assets representing the implied fair value of goodwill for that
reporting unit.For additional information see Note 11, Goodwill and
Other Impairment Charges.ReclassificationsIn the fourth quarter of fiscal year ended June 28, 2008, we reclassified certain amounts in
the Consolidated Statements of Operations. The line items impacted were cost of rental
operations, cost of direct sales, selling and administrative, and depreciation and
amortization. Depreciation expense is included in the cost of rental operations, cost of
direct sales, and selling and administrative line items. Amortization expense is included
in selling and administrative. In addition, certain amounts related to production and
manufacturing previously classified as cost of direct sales and selling and administrative
expenses were reclassified to cost of rental operations.As a result of the reclassifications implemented in the fourth quarter of fiscal year 2008,
the results for the third quarter of fiscal year 2008 were reclassified to conform with the
current year presentation. These reclassifications had no impact on our previously reported
income from operations, net income, cash flows, the basic and diluted earnings per share
amounts or beginning retained earnings.The following table summarizes the changes to originally reported amounts and subtotals in
the Consolidated Condensed Statement of Operations for the three months ended March 29,
2008.
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For the Three Months EndedMarch 29, 2008As Previously Reported
    
    
    Reclassifications
    
    
    As ReclassifiedOperating ExpensesCost of rental operations
    
    $
    148.9
    
    
    $
    9.5
    
    
    $
    158.4Cost of direct sales
    
    
    14.3
    
    
    
    (0.6
    )
    
    
    13.7Selling and administration
    
    
    53.8
    
    
    
    3.7
    
    
    
    57.5Depreciation and
amortization
    
    
    12.6
    
    
    
    (12.6
    )
    
    
    Total operating expenses
    
    $
    229.6
    
    
    $
    
    
    
    $
    229.6
 The following table summarizes the changes to originally reported amounts and subtotals in
the Consolidated Condensed Statement of Operations for the nine months ended March 29, 2008.
 For the Nine Months EndedMarch 29, 2008As Previously Reported
    
    
    Reclassifications
    
    
    As ReclassifiedOperating ExpensesCost of rental operations
    
    $
    439.9
    
    
    $
    26.9
    
    
    $
    466.8Cost of direct sales
    
    
    43.6
    
    
    
    (0.9
    )
    
    
    42.7Selling and administration
    
    
    160.6
    
    
    
    11.0
    
    
    
    171.6Depreciation and
amortization
    
    
    37.0
    
    
    
    (37.0
    )
    
    
    Total operating expenses
    
    $
    681.1
    
    
    $
    
    
    
    $
    681.1
 The following table summarizes the changes to originally reported amounts and subtotals in
the Consolidated Condensed Statement of Cash Flows for the nine months ended March 29, 2008.
 For
the Nine Months EndedMarch 29, 2008As Previously Reported
    
    
    Reclassifications
    
    
    As ReclassifiedOperating Activities:Depreciation and amortization
    
    $
    37.0
    
    
    $
    (1.3
    )
    
    $
    35.7Other assets and liabilities
    
    
    4.2
    
    
    
    1.3
    
    
    
    5.5Net cash provided by operating activities
    
    $
    73.0
    
    
    $
    
    
    
    $
    73.0
 2.
    
    Contingent LiabilitiesEnvironmental MattersWe are currently involved in several environmental-related proceedings by certain
governmental agencies which relate primarily to operating certain facilities in
noncompliance with required permits. We resolved two of these proceedings in the fall of
2008 and have paid the negotiated penalties in these two actions. 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. During
the first quarter of fiscal year 2009, we decided to enhance our oversight by engaging a
recognized international environmental consulting firm to conduct reviews of all of our
production facilities. By hiring experts in this complex area, we have gained additional
assurance with respect to our environmental compliance. We have substantially completed
these inspections and, where required, are undertaking appropriate corrective actions. As
of March 28, 2009, we had reserves of approximately $4.1 million related to these matters.
Total expense for these matters was $0 and $4.1 million for the three and nine months ended
March 28, 2009, respectively, and is recorded in the selling and administrative line of the
Consolidated Condensed Statements of Operations.
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Compensation MattersAs a result of changes to prevailing compensation laws, we previously determined that it is
probable that we will be required to pay additional compensation to certain affected
employees for services previously rendered. While rulemaking regarding this law remains
ongoing, in an effort to estimate the amount, we have conducted extensive financial analysis
and have inspected available historical records. We established a reserve of approximately
$3.3 million for this liability, which we believe is sufficient to resolve this matter.
This amount was recorded in the cost of rental line of the Consolidated Condensed Statements
of Operations in the first quarter of fiscal year 2009. We do not expect this change in
compensation law to materially impact our ongoing operations as we are in the process of
implementing operational changes to correct the issue.While we cannot predict the ultimate outcome of these environmental and compensation
matters, currently, none of these actions 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.3.
    
    Adoption of New Accounting PronouncementsIn September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). This
statement provides a definition of fair value, provides guidance for measuring fair value in
U.S. GAAP and expands disclosures about fair value measurement. We adopted SFAS No. 157
effective at the beginning of fiscal year 2009, subject to the deferral provisions of FSP No. 157-2. Our adoption did not impact our
consolidated financial position or results of operations. See Note 4 of the consolidated
condensed financial statements for additional disclosures.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159). This statement permits companies to choose to
measure many financial instruments and certain other items at fair value. The objective is
to improve financial reporting by providing companies with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. We adopted SFAS
No. 159 effective at the beginning of fiscal year 2009, and did not elect the fair value
option for eligible items that existed at the date of adoption.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS No. 161). This statement establishes enhanced disclosures about
derivative and hedging activities. We adopted SFAS No. 161 at the beginning of the quarter
ended March 28, 2009. Our adoption did not impact our consolidated financial position or
results of operations. See Note 5 of the consolidated condensed financial statements for
additional disclosures.Accounting Pronouncements Not Yet AdoptedIn December 2007, the FASB issued SFAS No. 141(r), Business Combinations (SFAS No. 141
(r)). This statement replaces SFAS No. 141, Business Combinations. This statement retains
the fundamental requirements in SFAS No. 141 that the acquisition method of accounting
(which SFAS No. 141 called the purchase method) be used for all business combinations and
for an acquirer to be identified for each business combination. This statement 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 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. SFAS No. 141(r) will apply prospectively
to business combinations that are consummated after June 27, 2009.We do not believe that SFAS 141(r) will have a material impact on our consolidated financial
statements.4.
    
    Fair Value MeasurementsAs discussed in Note 3, we adopted SFAS No. 157 at the beginning of fiscal year 2009, subject to the deferral provisions of FSP No. 157-2, on June 29, 2008.
This standard defines fair value, establishes a
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framework for measuring fair value and expands disclosure requirements about fair value
measurements. SFAS No. 157 defines fair value 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 by SFAS No. 157
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 March 28, 2009Fair Value Measurements Using Inputs Considered asLevel 1
    
    Level 2
    
    TotalOther assets:Non-qualified, non-contributory retirement
plan assets
    
    $
    0.2
    
    
    $
    8.6
    
    
    $
    8.8Non-qualified deferred compensation plan assets
    
    
    13.0
    
    
    
    
    
    
    
    13.0Total assets
    
    $
    13.2
    
    
    $
    8.6
    
    
    $
    21.8Accrued expenses:Derivative financial instruments
    
    $
    
    
    
    $
    12.6
    
    
    $
    12.6Total liabilities
    
    $
    
    
    
    $
    12.6
    
    
    $
    12.6
 5.
    
    Derivative Financial InstrumentsWe account for derivative financial instruments in accordance with Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133) and related authoritative guidance. 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 part of a hedging relationship and further, 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
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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. In accordance with SFAS No.133, 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
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. These contracts involve the receipt of
variable rate amounts in exchange for fixed rate interest payments over the life of the
contract without an exchange of the underlying principal amount. Approximately 80% of our
outstanding variable rate debt had its interest payments designated as the hedged forecasted
transactions to interest rate swap contracts at March 28, 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. These contracts involve the receipt of variable
commodity amounts in exchange for fixed commodity payments over the life of the contract
without an exchange of the underlying commodity. Approximately 50% of our anticipated
gasoline and diesel fuel purchases for the next twelve months were designated as the hedged
forecasted transactions to fuel commodity futures contracts at March 28, 2009.We do not engage in speculative transactions or fair value hedging nor do we hold or issue
financial instruments for trading purposes.The following tables summarize 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 under FAS 133:
 Asset Derivatives Fair ValueDerivative Financial Instruments in Cash Flow Hedging
    
    Balance Sheet
    
    
    March 28,
    
    
    June 28,Relationship:
    
    Classification:
    
    
    2009
    
    
    2008Interest Rate Swap Contracts
    
    Other Current Assets
    
    $
    
    
    
    $
    2.0Fuel Commodity Futures Contracts
    
    Other Current Assets
    
    
    
    
    
    
    1.8Total Derivatives Designed as Cash Flow Hedging
Instruments
    
    
    
    
    
    $
    
    
    
    $
    3.8
 Liability Derivatives Fair ValueDerivative Financial Instruments in Cash Flow Hedging
    
    Balance Sheet
    
    
    March 28,
    
    
    June 28,Relationship:
    
    Classification:
    
    
    2009
    
    
    2008Interest Rate Swap Contracts
    
    Other Accrued Expenses
    
    $
    11.3
    
    
    $
    3.3Fuel Commodity Futures Contracts
    
    Other Accrued Expenses
    
    
    1.3
    
    
    
    Total Derivatives Designed as Cash Flow Hedging
Instruments
    
    
    
    
    
    $
    12.6
    
    
    $
    3.3
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##### Table of Contents



There were no derivative financial instruments not designated as hedging instruments under
SFAS 133 as of June 28, 2008 and March 28, 2009.As our interest rate swap contracts 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 $6.2 million
loss deferred in other comprehensive income as of March 28, 2009, a $3.1 million loss is
expected to be reclassified to interest expense in the next twelve months.As of March 28, 2009, we had interest rate swap contracts to pay fixed rates of interest and
to receive variable rates of interest based on three-month LIBOR on $195.0 million notional
amount of indebtedness, of which $30.0 million will mature in the next twelve months. As of
March 28, 2009, we also have forward starting interest rate swaps of $30.0 million that pay
fixed rates of interest and receive variable rates of interest. The average rate on the
$195.0 million of interest rate swap contracts was 4.1% as of March 28, 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 cost of rental operations line item in the Consolidated Condensed Statements
of Operations. Of the $0.7 million loss deferred in other comprehensive income as of March
28, 2009, a $0.6 million loss is expected to be reclassified to cost of rental operations in
the next twelve months.As of March 28, 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 2.8 million gallons, of which 2.3 million gallons will occur in the
next twelve months. The weighted average fixed price on the 2.8 million gallons of fuel
commodity futures contracts was $2.84 per gallon as of March 28, 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 March 28, 2009 and June 28, 2008.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 nine months ended March 28, 2009 and
March 29, 2008:


Amount of Gain or (Loss) Recognized in Accumulated OtherComprehensive Income (Loss)Three Months Ended
    
    
    Nine Months EndedDerivative Financial Instruments in Cash Flow
    
    March 28,
    
    
    March 29,
    
    
    March 28,
    
    
    March 29,Hedging Relationship:
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interest Rate Swap Contracts
    
    $
    (0.3
    )
    
    $
    (2.2
    )
    
    $
    (6.7
    )
    
    $
    (4.5
    )Fuel Commodity Futures Contracts
    
    
    (0.2
    )
    
    
    0.2
    
    
    
    (2.3
    )
    
    
    0.8Total Derivatives Designed as Cash Flow
Hedging Instruments
    
    $
    (0.5
    )
    
    $
    (2.0
    )
    
    $
    (9.0
    )
    
    $
    (3.7
    )


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##### Table of Contents



Amount of Gain or (Loss) Reclassified From AccumulatedOther Comprehensive Income (Loss) to ConsolidatedStatements of OperationsThree Months Ended
    
    
    Nine Months EndedDerivative Financial Instruments in
    
    Statement of Operations
    
    
    March 28,
    
    
    March 29,
    
    
    March 28,
    
    
    March 29,Cash Flow Hedging Relationship:
    
    Classification:
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interest Rate Swap Contracts
    
    Interest Expense
    
    $
    (0.8
    )
    
    $
    0.1
    
    
    $
    (1.3
    )
    
    $
    0.3Fuel Commodity Futures Contracts
    
    Cost of Rental Operations
    
    
    (0.5
    )
    
    
    0.1
    
    
    
    (0.5
    )
    
    
    0.2Total Derivatives
Designed as
Cash Flow Hedging Instruments
    
    
    
    
    
    $
    (1.3
    )
    
    $
    0.2
    
    
    $
    (1.8)
    
    
    $
    0.5
 6.
    
    Exit, Disposal and Related ActivitiesIn the first quarter of fiscal year 2009, we closed three processing plants, two branch
locations, reduced selected headcount and outsourced our fleet maintenance function. We
expect all payments associated with these actions to be completed by September 30, 2009.During the first quarter of fiscal year 2009, we recorded approximately $2.6 million of
expense in the Consolidated Condensed Statements of Operations. 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.In the third quarter of fiscal year 2009, we realigned our workforce to better match our
cost structure with our revenue volume. As a result of this realignment, we eliminated 340
personnel and recorded approximately $0.9 million in severance costs in the Consolidated
Condensed Statements of Operations. These charges impacted both our United States and
Canadian operating segments and did not significantly impact any one line item on our
Consolidated Condensed Statements of Operations for the three and nine months ended March
28, 2009. Substantially all severance costs related to these actions were paid by March 28,
2009.7.
    
    Income TaxesOur fiscal 2009 year to date effective tax rate decreased to 19.9% for the first nine months
of fiscal year 2009 from 38.2% in the same period of fiscal year 2008. The current year tax
rate is significantly lower than our statutory rate primarily due to the impact of
nondeductible goodwill impairment charges, nondeductible environmental charges, the decrease
in tax reserves for uncertain tax positions due to the expiration of certain tax statutes,
and the write-off of deferred tax assets associated with certain expiring stock options.
The prior year rate was higher than our statutory rate due to an increase in reserves for
uncertain tax positions, offset by the utilization of a net operating loss previously deemed
unrealizable. Both periods included adjustments resulting from the final calculation and
filing of our annual income tax returns.8.
    
    Per Share DataBasic 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 dilutive effects of options and other dilutive securities,
including non-vested restricted stock, using the treasury stock method.
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##### Table of Contents



Three Months Ended
    
    Nine Months EndedMarch 28,
    
    March 29,
    
    March 28,
    
    March 29,2009
    
    2008
    
    2009
    
    2008Weighted average number of common
shares outstanding used in computation
of basic earnings per share
    
    

    
    18.2
    
    

    
    19.6
    
    

    
    18.5
    
    

    
    20.5Weighted 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
    
    

    
    18.2
    
    

    
    19.7
    
    

    
    18.5
    
    

    
    20.6
  9.
    
    Comprehensive IncomeFor the three and nine months ended March 28, 2009 and March 29, 2008, the components of
comprehensive income were as follows:
 Three Months Ended
    
    
    Nine Months EndedMarch 28,
    
    
    March 29,
    
    
    March 28,
    
    
    March 29,2009
    
    
    2008
    
    
    2009
    
    
    2008Net (loss)/income
    
    $
    (86.3
    )
    
    $
    10.6
    
    
    $
    (75.3
    )
    
    $
    35.4Other comprehensive (loss)/income:Foreign currency translation
adjustments, net of tax
    
    
    (1.8
    )
    
    
    (6.2
    )
    
    
    (27.6
    )
    
    
    6.5Derivative financial instruments
(loss) recognized, net of tax
    
    
    (0.5
    )
    
    
    (2.0
    )
    
    
    (9.0
    )
    
    
    (3.7
    )Derivative financial instruments gain or
(loss) reclassified, net of tax
    
    
    1.3
    
    
    
    (0.2
    )
    
    
    1.8
    
    
    
    (0.5
    )Comprehensive (loss)/income
    
    $
    (87.3
    )
    
    $
    2.2
    
    
    $
    (110.1
    )
    
    $
    37.7
 10.
    
    InventoriesThe components of inventory as of March 28, 2009 and June 28, 2008 are as follows:
 March 28,
    
    
    June 28,2009
    
    
    2008Raw Materials
    
    $
    8.3
    
    
    $
    5.3Work in Process
    
    
    6.7
    
    
    
    4.7Finished Goods
    
    
    61.9
    
    
    
    50.9New Goods
    
    $
    76.9
    
    
    $
    60.9Merchandise in Service
    
    $
    68.8
    
    
    $
    81.4Total Inventories
    
    $
    145.7
    
    
    $
    142.3
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##### Table of Contents



11.
    
    Goodwill and Other Impairment ChargesThe following table identifies the major components of the goodwill and other impairment
charges that are reflected in the Consolidated Condensed Statements of Operations for the
three and nine months ended March 28, 2009.
 Goodwill
    
    $
    107.0Computer software
    
    
    7.6Property, plant and equipment
    
    
    7.2Customer contracts
    
    
    3.5Assets held for sale
    
    
    1.4Goodwill and other impairment charges
    
    $
    126.7
 GoodwillDuring the three months ended March 28, 2009, we recorded a non-cash impairment charge of
$107.0 million related to our goodwill, of this amount $100.0 million was associated with
U.S. Rental operations and $7.0 million was related to Direct Sales operations. The
goodwill impairment charges described above are recorded on the goodwill and other
impairment charges line of the Consolidated Condensed Statements of Operations.The carrying value of goodwill is reviewed annually in our fourth quarter for possible
impairment in accordance with SFAS No. 142 or more frequently if events or changes in
circumstances indicate that the carrying amount of the goodwill may be impaired. In the
third quarter of fiscal year 2009, the accelerated deterioration in the economic
environment continued to negatively impact our operations. The resultant increased
disparity between our carrying value and market capitalization as of our measurement date
of January 31, 2009 prompted us to perform an interim goodwill impairment test. Goodwill
has been assigned to reporting units for purposes of impairment testing and consists of
U.S. Rental operations, Canadian Rental operations and Direct Sales operations. The
goodwill impairment test involves a two-step process. The first step is a comparison of
each reporting units fair value to its carrying value. In previous years, we used a market
valuation approach to determine fair value for each reporting unit. As of June 28, 2008,
our market capitalization substantially exceeded our carrying value. During the third
quarter of fiscal year 2009, we engaged a third party independent valuation consulting firm
to assist in determining the fair value of each reporting unit. Based on consultation with
our valuation specialist, we used both a market valuation and income valuation approach,
weighted evenly, to determine the fair values of our reporting units. The income valuation
was derived by discounting future forecasted cash flows using a market based weighted
average cost of capital. The market valuation was derived by referencing a measure of
invested capital compared to earnings and cash flows of a peer group of companies and
applying the resultant multiples to our reporting units. The combination of these
valuations produced an estimated fair value that was less than the carrying amount for the
U.S. Rental and Direct Sales reporting units. The fair value of our Canadian Rental
reporting unit exceeded its carrying amount by more than 20%. If the carrying value of a
reporting unit exceeds its estimated fair value in the first step, a second step is
performed, in which the reporting units goodwill is written down to its implied fair
value. The second step requires us to allocate the fair value of the reporting unit derived
in the first step to the fair value of the reporting units net assets. The second step
also requires, among other things, determining the estimated fair market value of our
tangible and intangible assets. Any fair value in excess of amounts allocated to such net
assets represents the implied fair value of goodwill for that reporting unit.
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The goodwill impairment testing process is subject to inherent uncertainties and subjectivity.
Determination of fair value requires significant management judgment with respect to various
assumptions, including revenue volume, gross margins, SG&A rates, capital expenditures,
discount rates, terminal growth rates and the fair values of the reporting units tangible and
intangible assets and liabilities. The projected revenue levels, gross margins, SG&A rate, and
capital expenditure assumptions are based on our annual business plan or other forecasted results.
Discount rates reflect estimates of a market-based weighted average cost of capital taking into
consideration the risks associated with the projected cash flows directly resulting from the use of
those assets in operations. The estimates of fair value of reporting units are based on the best
information available as of the date of the assessment. The use of different assumptions would
increase or decrease the estimated fair value and could materially increase or decrease any
impairment charge. The discount rates used in step one and step two ranged from 9.7%-l 1.7% and
included certain risk premiums. Our forecasted future cash flows considered both current and
future economic conditions and a terminal growth rate of 2.5%-3.0%. Changing the discount rate
by 50 basis points would increase or decrease the calculated fair values of the U.S. Rental,
Canadian Rental and Direct Sales reporting units by approximately $45 million, $10 million and
$1 million, respectively. Changing the terminal growth rate by 50 basispoints would
increase or decrease the calculated fair values of the U.S. Rental, Canadian Rental and Direct Sales reporting
units by approximately $25 million, $5 million and $0, respectively. Increasing or
decreasing the fair values of the net assets of the impaired
reporting units by 5% as compared to the
values used in the preparation of these financial statements would increase or decrease the
goodwill impairment charge related to the U.S. Rental, and Direct Sales
reporting units by approximately $20 million, and $0, respectively.Long-Lived AssetsOur long-lived assets are accounted for in accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144).Asset impairment charges in the third quarter of fiscal 2009 include $7.2 million related to
properties held and used, $1.4 million related to properties held for sale, $7.6 million
related to computer software and $3.5 million related to customer contracts associated with
our Direct Sales reporting unit.In accordance with SFAS No. 144, long-lived assets held for use are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. During the third quarter, as a result of the continued and accelerated
deterioration in the economic environment and expectations regarding future operating
performance, management took a series of actions to increase profitability and productivity.
Due to a combination of these factors and actions, we determined that the carrying value of
certain assets held and used exceeded their fair value. Determination of recoverability of
long-lived assets is based on an estimate of undiscounted future cash flows resulting from the
use of those assets in operation. Measurement of an impairment loss for long-lived assets that
we expect to hold and use is based on the fair value of the asset. When an impairment loss is
recognized, the carrying amount of the asset is reduced to its estimated fair value. As a
result of our projected undiscounted future cash flows related to certain locations being less
than the carrying value of those assets, an impairment charge of $8.6 million was required.
The fair values of these asset groups were determined based on prices of similar assets.
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##### Table of Contents



In the third quarter of fiscal 2009, we made the decision to close and sell certain underperforming
production facilities. In connection with this decision and the plan to dispose of these asset
groups, we recorded an impairment charge of $1.4 million. The fair values of the asset groups to be
disposed of were determined based on prices of similar assets.In the third quarter of fiscal year 2009, due to the continued and accelerated deterioration in the
economic environment and expectations regarding future operating performance, we tested our Direct
Sales reporting units long-lived assets for impairment. It was determined that the carrying value
of certain computer software and customer contracts exceeded their associated fair values by
approximately $7.6 million and $3.5 million, respectively. The estimated fair values were
determined based on discounted cash flows.
 12.
    
    Goodwill and Intangible AssetsGoodwill includes the following:
 United States
    
    
    Canada
    
    
    TotalBalance as of June 28, 2008
    
    $
    367.5
    
    
    $
    67.4
    
    
    $
    434.9Impairment charges
    
    
    (107.0
    )
    
    
    
    
    
    
    (107.0
    )Foreign currency translation and other
    
    
    (0.4
    )
    
    
    (11.5
    )
    
    
    (11.9
    )Balance as of March 28, 2009
    
    $
    260.1
    
    
    $
    55.9
    
    
    $
    316.0
 Our other intangible assets, which are included in other assets on the Consolidated
Condensed Balance Sheets, are as follows:
 March 28,
    
    
    June 28,2009
    
    
    2008Other Intangible Assets:Customer Contracts
    
    $
    112.7
    
    
    $
    119.4Accumulated Amortization
    
    
    (82.7
    )
    
    
    (79.5
    )Net
    
    $
    30.0
    
    
    $
    39.9Non-Competition Agreements
    
    $
    11.0
    
    
    $
    11.1Accumulated Amortization
    
    
    (10.2
    )
    
    
    (10.0
    )Net
    
    $
    0.8
    
    
    $
    1.1
 The customer contracts include the combined value of the written service agreements and the
related customer relationship.Amortization expense was $5.6 million and $8.4 million for the nine months ended March 28,
2009 and March 29, 2008, respectively. Estimated amortization expense for each of the next
five fiscal years based on the intangible assets as of March 28, 2009 is as follows:
 2009 remaining
    
    $
    1.52010
    
    
    6.22011
    
    
    5.82012
    
    
    5.12013
    
    
    3.92014
    
    
    2.8
 13.
    
    Long-Term DebtWe maintain a $325.0 million unsecured revolving credit facility with a syndicate of banks,
which expires on August 31, 2010. As of March 28, 2009, borrowings outstanding under the
revolving credit facility were $167.1 million at rates ranging from 0.55% to 1.50% over the
London Interbank Offered Rate (LIBOR). 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 March 28, 2009, letters of credit
outstanding against the revolver totaled $20.8 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 facility requires that we maintain compliance
with certain covenants. The covenants in this agreement are the most restrictive when
compared to our other facilities. The following table illustrates compliance with regard to
the material covenants required by the terms of this facility as of March 28, 2009:
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##### Table of Contents



Required Covenant Amount
    
    
    Actual Covenant AmountMaximum Leverage Ratio (Debt/EBITDA)
    
    
    3.50
    
    
    
    2.38Minimum Interest Coverage Ratio
(EBITDA/Interest Expense)
    
    
    3.00
    
    
    
    8.08Minimum Net Worth
    
    $
    309.3
    
    
    $
    432.1
 Our debt covenants are calculated by allowing an add back for non-cash charges, such as the
non-cash impairment charges discussed in Note 11. As a result, the non-cash impairment charges recorded in the third quarter
of fiscal year 2009 did not have a material effect on compliance with our debt covenants.Borrowings under the revolving credit facility bear interest at 0.55% to 1.50% over the
LIBOR, or the Canadian prime rate for Canadian borrowings, based on a leverage ratio
calculated on a quarterly basis. Advances outstanding as of March 28, 2009 bear interest at
an average all-in rate of 1.39% (LIBOR plus 0.88%) for the Eurocurrency rate loans and an
all-in rate of 3.25% (Lender Prime Rate) for overnight Swingline and 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.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 March 28, 2009, the outstanding balance of the notes was $75.0
million at an all-in rate of 1.83% (LIBOR plus 0.60%).We maintain a receivable securitization facility whereby the lender will make loans to us on
a revolving basis up to a maximum of $60.0 million. The amount of funds available under the
loan agreement as of March 28, 2009 was $45.2 million, which was the amount of eligible
receivables less a reserve requirement. The agreement will expire on September 27, 2011.
We are required to pay interest on outstanding loan balances at a rate per annum of one
month LIBOR plus a margin or, if the lender is funding the loan through the issuance of
commercial paper to third parties, at a rate per annum equal to a margin plus the average
annual interest rate for such commercial paper. In connection with the loan agreement, we
granted a first priority security interest in certain of our U.S. based receivables. As of
March 28, 2009, there were no outstanding balances under this loan agreement. We are
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 to maturity,
we will repay $7.1 million of the principal amount at par. As of March 28, 2009, there was
$14.3 million outstanding under the notes.See Note 5 to the Consolidated Condensed Financial Statements for details of our interest
rate swap and hedging activities related to our outstanding debt.
 14.
    
    Share-Based CompensationWe 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 $1.9 million and $1.8 million for the three months
ended and $5.2 million and $4.4 million for the nine months ended March 28, 2009 and March
29, 2008, respectively. The number of options that have been exercised and restricted stock
that vested since June 28, 2008, was 0.1 million shares.
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##### Table of Contents



15.
    
    Employee Benefit PlansOn December 31, 2006, we froze our pension and supplemental executive retirement plans. The
net periodic pension cost for these plans for the three and nine months ended March 28, 2009
was $0.1 million and $0.4 million, respectively. The net periodic pension cost for these
plans was $0.1 million for both the three and nine months ended March 29, 2008. In
addition, the components of net periodic pension cost for these plans are immaterial for the
three and nine months ended March 28, 2009 and March 29, 2008.We do not anticipate that the recent decline in the global equity markets will have a
significant impact on our future expected long-term return on plan assets. However, if the
recent decline in economic conditions continues, or deteriorates further, we will consider
these developments when we determine our annual pension plan assumptions.16.
    
    Segment InformationWe 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, which includes rental of
garments, direct purchase items and non-apparel items such as floor mats, dust mops,
wiping towels, selected linen items and restroom products. During the nine months ended
March 28, 2009, and for the same period of the prior fiscal year, no single customer
accounts for more than 1.5% of our revenues. Substantially all of our customers are in
the United States or Canada.Income from operations includes the impact of an intercompany management fee which is
self-eliminated in the total income from operations below. As a result of a formal
transfer pricing study conducted at the end of fiscal year 2008, this intercompany
management fee was increased to 5.4% of Canadian revenue. The management fee was 5.4%
for the three and nine months ended March 28, 2009 and approximately 1.1% for the same
periods in the prior fiscal year.We evaluate performance based on income from operations. Financial information by
segment for the three and nine month periods ended March 28, 2009 and March 29, 2008 is
as follows:
 UnitedFor the Three Months Ended
    
    States
    
    
    Canada
    
    
    Elimination
    
    
    TotalThird Quarter Fiscal Year 2009:Revenues
    
    $
    197.0
    
    
    $
    34.0
    
    
    $
    
    
    
    $
    231.0(Loss)/Income from operations
    
    
    (114.4
    )
    
    
    2.1
    
    
    
    
    
    
    
    (112.3
    )Total assets
    
    
    822.1
    
    
    
    131.5
    
    
    
    (94.0
    )
    
    
    859.6Depreciation and amortization
expense
    
    
    9.8
    
    
    
    1.4
    
    
    
    
    
    
    
    11.2Third Quarter Fiscal Year 2008:Revenues
    
    $
    204.8
    
    
    $
    46.3
    
    
    $
    
    
    
    $
    251.1Income from operations
    
    
    14.5
    
    
    
    7.1
    
    
    
    
    
    
    
    21.6Total assets
    
    
    985.0
    
    
    
    174.7
    
    
    
    (106.1
    )
    
    
    1,053.6Depreciation and amortization
expense
    
    
    10.4
    
    
    
    1.8
    
    
    
    
    
    
    
    12.2
 19




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##### Table of Contents



UnitedFor the Nine Months Ended
    
    States
    
    
    Canada
    
    
    Elimination
    
    
    TotalFiscal Year 2009:Revenues
    
    $
    605.8
    
    
    $
    112.2
    
    
    $
    
    
    
    $
    718.0(Loss)/Income from operations
    
    
    (93.4
    )
    
    
    10.1
    
    
    
    
    
    
    
    (83.3
    )Total assets
    
    
    822.1
    
    
    
    131.5
    
    
    
    (94.0
    )
    
    
    859.6Depreciation and amortization
expense
    
    
    29.6
    
    
    
    4.3
    
    
    
    
    
    
    
    33.9Fiscal Year 2008:Revenues
    
    $
    613.4
    
    
    $
    136.8
    
    
    $
    
    
    
    $
    750.2Income from operations
    
    
    44.8
    
    
    
    24.3
    
    
    
    
    
    
    
    69.1Total assets
    
    
    985.0
    
    
    
    174.7
    
    
    
    (106.1
    )
    
    
    1,053.6Depreciation and amortization
expense
    
    
    30.4
    
    
    
    5.3
    
    
    
    
    
    
    
    35.7
 For the nine months ended March 29, 2008, the Canada segment results were positively
impacted by $0.7 million, resulting from the net effect of a gain on the sale of
property, offset by expenses associated with fires at two of our production facilities.
The net Canadian impact was offset by expenses in our United States segment during the
nine months ended March 29, 2008, which included severance associated with the
realignment of our manufacturing operations and certain management positions, an
increase in our inventory reserves and expenses associated with certain legal matters
all of which occurred in the first quarter of fiscal 2008. The net effect of these items
on the United States segment was approximately $1.7 million of expense for the nine
months ended March 29, 2008.During the third quarter of fiscal year 2009, we recorded a noncash charge for goodwill
and other impairments of $125.9 million in the U.S. segment and $0.8 million in our
Canadian segment. See Note 11 to the Consolidated Condensed Statements of Operations
for further discussion.The decline in Canadian revenue and income from operations from the third quarter of
fiscal 2009, compared to the third quarter of fiscal 2008 was due primarily to changes
in foreign currency exchange rates. The conversion rate changed from 0.9965 in the
third quarter of fiscal year 2008 to 0.8007 in the third quarter of fiscal year 2009.
This resulted in lower revenue and income from operations of approximately $8.4 million
and $0.6 million respectively for the three months ended March 28, 2009.17.
    
    Stock RepurchaseIn 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 months ended March 28, 2009
there were no share repurchases and for the three months ended March 29, 2008, we
repurchased 621,250 shares totaling $23.5 million. For the nine months ended March 28,
2009, we repurchased 650,387 shares totaling $16.1 million and for the nine months ended
March 29, 2008, we repurchased 1,791,735 shares totaling $69.7 million. As of March 28,
2009, we had $57.8 million remaining under this authorization.18.
    
    Restricted Stock Unit WithholdingsWe issue restricted stock units as part of our equity incentive plans. For the majority of
the restricted stock units granted, the number of shares issued on vesting date is net of
the minimum statutory tax withholding requirements that we pay in cash to the appropriate
taxing authorities on behalf of our employees. 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.
 20




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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
   Environmental Costs
  21




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Impairments of Long-Lived Assets
   Goodwill and Intangible Assets
   22




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Results of Operations
  Three Months
    
    Nine Months
    
    PercentageEnded
    
    Ended
    
    ChangeThree Months
    
    Nine MonthsMarch 28,
    
    March 29,
    
    March 28,
    
    March 29,
    
    FY 2009
    
    FY 20092009
    
    2008
    
    2009
    
    2008
    
    vs. FY 2008
    
    vs. FY 2008Revenues:Rental operations
    
    
    90.9
    %
    
    
    92.8
    %
    
    
    92.0
    %
    
    
    92.1
    %
    
    
    (9.9
    )%
    
    
    (4.5
    )%Direct sales
    
    
    9.1
    
    
    
    7.2
    
    
    
    8.0
    
    
    
    7.9
    
    
    
    16.4
    
    
    
    (1.9
    )Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    (8.0
    )
    
    
    (4.3
    )Expenses:Cost of rental operations
    
    
    70.1
    
    
    
    68.0
    
    
    
    69.8
    
    
    
    67.5
    
    
    
    (7.2
    )
    
    
    (1.3
    )Cost of direct sales
    
    
    73.5
    
    
    
    75.4
    
    
    
    74.1
    
    
    
    72.5
    
    
    
    13.5
    
    
    
    0.2Total cost of sales
    
    
    70.4
    
    
    
    68.5
    
    
    
    70.2
    
    
    
    67.9
    
    
    
    (5.5
    )
    
    
    (1.1
    )Selling and administrative
    
    
    23.4
    
    
    
    22.9
    
    
    
    23.8
    
    
    
    22.9
    
    
    
    (6.2
    )
    
    
    (0.4
    )Goodwill and other impairment charges
    
    
    54.9
    
    
    
    
    
    
    
    17.6
    
    
    
    
    
    
    
    
    
    
    
    (Loss)/Income from operations
    
    
    (48.6
    )
    
    
    8.6
    
    
    
    (11.6
    )
    
    
    9.2
    
    
    
    (620.8
    )
    
    
    (220.6
    )Interest expense
    
    
    1.4
    
    
    
    1.5
    
    
    
    1.5
    
    
    
    1.6
    
    
    
    (14.8
    )
    
    
    (9.3
    )(Loss)/Income before income taxes
    
    
    (50.0
    )
    
    
    7.1
    
    
    
    (13.1
    )
    
    
    7.6
    
    
    
    (751.7
    )
    
    
    (263.9
    )Provision for income taxes
    
    
    (12.7
    )
    
    
    2.8
    
    
    
    (2.6
    )
    
    
    2.9
    
    
    
    (512.8
    )
    
    
    (185.4
    )Net (loss)/income
    
    
    (37.4
    )%
    
    
    4.2
    %
    
    
    (10.5
    )%
    
    
    4.7
    %
    
    
    (910.6
    )%
    
    
    (312.4
    )%
 Three months ended March 28, 2009 compared to three months ended March 29, 2008
 Revenues
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##### Table of Contents



Cost of Rental
 Cost of Direct Sales
 Selling and Administrative
 Impairment Charges
 Interest Expense
 Provision for Income Taxes
 Nine months ended March 28, 2009 compared to nine months ended March 29, 2008
 Revenues
   Cost of Rental.
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##### Table of Contents



Cost of Direct Sales.
 Selling and Administrative
 Impairment Charges
 Interest Expense
 Provision for Income Taxes
 Liquidity, Capital Resources and Financial Condition
   Operating Activities.
 Investing Activities.
 Financing Activities.
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Required Covenant Amount
    
    
    Actual Covenant AmountMaximum Leverage Ratio (Debt/EBITDA)
    
    
    3.50
    
    
    
    2.38Minimum Interest Coverage Ratio
(EBITDA/Interest Expense)
    
    
    3.00
    
    
    
    8.08Minimum Net Worth
    
    $
    309.3
    
    
    $
    432.1
       Cash Obligations.
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Off Balance Sheet Arrangements
  Pension Obligations
     27




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Reclassifications
    For the Three Months EndedMarch 29, 2008As Previously Reported
    
    
    Reclassifications
    
    
    As ReclassifiedOperating ExpensesCost of rental operations
    
    $
    148.9
    
    
    $
    9.5
    
    
    $
    158.4Cost of direct sales
    
    
    14.3
    
    
    
    (0.6
    )
    
    
    13.7Selling and administration
    
    
    53.8
    
    
    
    3.7
    
    
    
    57.5Depreciation and
amortization
    
    
    12.6
    
    
    
    (12.6
    )
    
    
    Total operating expenses
    
    $
    229.6
    
    
    $
    
    
    
    $
    229.6
  For the Nine Months EndedMarch 29, 2008As Previously Reported
    
    
    Reclassifications
    
    
    As ReclassifiedOperating ExpensesCost of rental operations
    
    $
    439.9
    
    
    $
    26.9
    
    
    $
    466.8Cost of direct sales
    
    
    43.6
    
    
    
    (0.9
    )
    
    
    42.7Selling and administration
    
    
    160.6
    
    
    
    11.0
    
    
    
    171.6Depreciation and
amortization
    
    
    37.0
    
    
    
    (37.0
    )
    
    
    Total operating expenses
    
    $
    681.1
    
    
    $
    
    
    
    $
    681.1
  28




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For the Nine Months EndedMarch 29, 2008As Previously Reported
    
    
    Reclassifications
    
    
    As ReclassifiedOperating Activities:Depreciation and amortization
    
    $
    37.0
    
    
    $
    (1.3
    )
    
    $
    35.7Other assets and liabilities
    
    
    4.2
    
    
    
    1.3
    
    
    
    5.5Net cash provided by operating activities
    
    $
    73.0
    
    
    $
    
    
    
    $
    73.0
 Exit, Disposal and Related Activities
    Litigation
   Environmental Matters
  Compensation Matters
  29




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Share-Based Compensation
  Adoption of New Accounting Pronouncements
    Accounting Pronouncements Not Yet Adopted
   30




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Cautionary Statements Regarding Forward-Looking Statements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest Rate Risk
   Energy Cost Risk
  31




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Foreign Currency Exchange Risk
  
 ITEM 4. CONTROLS AND PROCEDURES
   
 PART II
OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   32




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ITEM 1A. RISK FACTORS
  We periodically review the carrying value of goodwill for possible impairment; if future
circumstances indicate that goodwill is impaired, we could be required to write down amounts of
goodwill and record impairment charges .
  33




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Compliance with environmental laws and regulations could result in significant costs that adversely
affect our operating results.
    Volatility in the global economy could adversely affect results.
  Fluctuations in demand for our products and services may harm our financial results and are
difficult to forecast.
  34




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##### Table of Contents




    
    changes in business and economic conditions, including a further downturn in the automobile industry and/or the
overall economy;
    
    changes in consumer confidence caused by changes in market conditions, including changes in the credit market,
expectations for inflation, and energy prices;
    
    competitive pressures, including pricing pressures, from companies that have competing products and services;
    
    changes in customer needs;
    
    changes in the employment levels at our customers which impacts the number of users of our products and services;
    
    strategic actions taken by our competitors; and
    
    market acceptance of our products and services.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 6. EXHIBITS
  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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##### Table of Contents



G&K SERVICES, INC.
(Registrant)Date:      May 1, 2009
    By:
    /s/ Jeffrey L. WrightJeffrey L. WrightSenior Vice President and
Chief Financial Officer
(Principal Financial Officer)By:
    /s/ Thomas J. DietzThomas J. DietzVice President and Controller

(Principal Accounting Officer) 36