##### Table of Contents



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 September 26, 2009
 Commission file number 0-4063
 
 G&K SERVICES, INC.
  MINNESOTA
    
    41-0449530(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 
 (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 September 26, 2009 and June 27, 2009
    
    
    3Consolidated Condensed Statements of Operations for the three months ended September 26, 2009 and September 27, 2008
    
    
    4Consolidated Condensed Statements of Cash Flows for the three months ended September 26, 2009 and September 27, 2008
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    24PART IIItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 6.
    
    Exhibits
    
    
    27Signatures
    
    
    28EX-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
 September 26,2009
    
    
    June 27,(In thousands)
    
    (Unaudited)
    
    
    2009ASSETSCurrent AssetsCash and cash equivalents
    
    $
    9,419
    
    
    $
    13,136Accounts receivable, less allowance for doubtful
accounts of $4,435 and $3,848
    
    
    83,065
    
    
    
    85,209Inventories, net
    
    
    131,747
    
    
    
    135,492Other current assets
    
    
    23,117
    
    
    
    21,241Total current assets
    
    
    247,348
    
    
    
    255,078Property, Plant and Equipment, net
    
    
    212,507
    
    
    
    216,736Goodwill
    
    
    323,329
    
    
    
    319,942Other Assets
    
    
    62,920
    
    
    
    59,412Total assets
    
    $
    846,104
    
    
    $
    851,168LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    25,915
    
    
    $
    29,134Accrued expenses
    
    
    73,068
    
    
    
    79,010Deferred income taxes
    
    
    3,606
    
    
    
    3,414Current maturities of long-term debt
    
    
    7,541
    
    
    
    7,744Total current liabilities
    
    
    110,130
    
    
    
    119,302Long-Term Debt, net of Current Maturities
    
    
    218,552
    
    
    
    224,781Deferred Income Taxes
    
    
    1,968
    
    
    
    1,893Accrued Income Taxes  Long Term
    
    
    12,022
    
    
    
    12,016Other Noncurrent Liabilities
    
    
    56,573
    
    
    
    55,820Stockholders Equity
    
    
    446,859
    
    
    
    437,356Total liabilities and stockholders equity
    
    $
    846,104
    
    
    $
    851,168
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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS  G&K Services, Inc. and Subsidiaries
 For the Three Months EndedSeptember 26,
    
    
    September 27,(In thousands, except per share data)
    
    2009
    
    
    2008RevenuesRental operations
    
    $
    195,666
    
    
    $
    229,133Direct sales
    
    
    12,465
    
    
    
    16,103Total revenues
    
    
    208,131
    
    
    
    245,236Operating ExpensesCost of rental operations
    
    
    138,430
    
    
    
    161,832Cost of direct sales
    
    
    9,405
    
    
    
    12,084Selling and administrative
    
    
    50,450
    
    
    
    61,891Total operating expenses
    
    
    198,285
    
    
    
    235,807Income from Operations
    
    
    9,846
    
    
    
    9,429Interest expense
    
    
    3,711
    
    
    
    3,597Income before Income Taxes
    
    
    6,135
    
    
    
    5,832Provision for income taxes
    
    
    2,867
    
    
    
    4,374Net Income
    
    $
    3,268
    
    
    $
    1,458Basic weighted average numberof shares outstanding
    
    
    18,223
    
    
    
    18,662Basic Earnings per Common Share
    
    $
    0.18
    
    
    $
    0.08Diluted weighted average numberof shares outstanding
    
    
    18,269
    
    
    
    18,793Diluted Earnings per Common Share
    
    $
    0.18
    
    
    $
    0.08Dividends per share
    
    $
    0.075
    
    
    $
    0.070
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  G&K Services, Inc. and Subsidiaries
 For the Three Months EndedSeptember 26,
    
    
    September 27,(In thousands)
    
    2009
    
    
    2008Operating Activities:Net income
    
    $
    3,268
    
    
    $
    1,458Adjustments to reconcile net income to net cashprovided by operating activities -Depreciation and amortization
    
    
    10,243
    
    
    
    11,422Other adjustments
    
    
    873
    
    
    
    2,177Changes in current operating items
    
    
    (4,394
    )
    
    
    (6,092
    )Other assets and liabilities
    
    
    226
    
    
    
    2,744Net cash provided by operating activities
    
    
    10,216
    
    
    
    11,709Investing Activities:Property, plant and equipment additions, net
    
    
    (3,520
    )
    
    
    (6,420
    )Divestitures of business assets, net
    
    
    1,402
    
    
    
    14Net cash used for investing activities
    
    
    (2,118
    )
    
    
    (6,406
    )Financing Activities:Payments of long-term debt
    
    
    (7,238
    )
    
    
    (7,141
    )(Payments of)/Proceeds from revolving credit facilities, net
    
    
    (2,967
    )
    
    
    18,500Cash dividends paid
    
    
    (1,385
    )
    
    
    (1,328
    )Net issuance of common stock, primarily under stock option
plans
    
    
    
    
    
    
    207Purchase of common stock
    
    
    (363
    )
    
    
    (6,776
    )Net cash (used)/provided by financing activities
    
    
    (11,953
    )
    
    
    3,462(Decrease)/Increase in Cash and Cash Equivalents
    
    
    (3,855
    )
    
    
    8,765Effect of Exchange Rates on Cash
    
    
    138
    
    
    
    (298
    )Cash and Cash Equivalents:Beginning of period
    
    
    13,136
    
    
    
    12,651End of period
    
    $
    9,419
    
    
    $
    21,118
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1.
    
    Basis of Presentation for Interim Financial Statements
 The consolidated condensed financial statements included herein, except for the June 27,
2009 balance sheet which was derived from the audited consolidated financial statements for
the fiscal year ended June 27, 2009, have been prepared by us, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In our opinion, the
accompanying unaudited consolidated condensed financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly our financial
position as of September 26, 2009, and the results of our operations and our cash flows for
the three months ended September 26, 2009 and September 27, 2008. Certain information and
footnote disclosures normally included in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although we believe that the disclosures herein are adequate to
make the information presented not misleading. It is suggested that these consolidated
condensed financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in our latest report on Form 10-K.
 The results of operations for the three-month periods ended September 26, 2009 and September
27, 2008 are not necessarily indicative of the results to be expected for the full year. We
have evaluated subsequent events through October 29, 2009 and have found none that warrant
discussion.
 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 27, 2009. Additional significant accounting
policies are identified below.
 2.
    
    Contingent Liabilities
 Environmental MattersWe are currently involved in several environmental-related proceedings by certain
governmental agencies which relate primarily to whether we operated certain facilities in
compliance with required permits. In addition to these proceedings, in the normal course of
our business, we are subject to, among other things, periodic inspections by regulatory
agencies. We continue to dedicate substantial operational and financial resources to
environmental compliance, and we remain fully committed to operating in compliance with all
environmental laws and regulations. As of September 26, 2009, we had reserves of
approximately $4.4 million related to various pending environmental-related matters. There
was no expense for these matters for the three months ended September 26, 2009. During the
three months ended September 27, 2008, a $4.5 million charge was recorded related to
environmental matters, which is recorded in the selling and administrative line of the
consolidated condensed statements of operations.
 While we cannot predict the ultimate outcome of any of these matters, currently, none of
them are expected to have a material adverse effect on our results of operations or
financial position. While we believe the possibility is remote, there is the potential that
we may incur additional losses in excess of established reserves, and these losses could be
material.
 3.
    
    Adoption of New Accounting Pronouncements
 In December 2007, the Financial Accounting Standards Board (FASB) issued revised guidance
regarding accounting for business combinations. The guidance retains the requirement that
the acquisition method of accounting (previously called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business combination.
This guidance also establishes principles and requirements for how the acquirer: (a)
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; (b) recognizes and
measures the goodwill acquired in the business combination or a gain from
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a bargain purchase; and (c) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business
combination. We adopted this revised guidance effective at the beginning of fiscal year
2010. Our adoption did not impact our consolidated financial position or results of
operations.
 In June 2009, the FASB issued Statement of Financial
Accounting Standards (SFAS)
No. 168, the FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principlesa replacement of FASB Statement No. 162. SFAS No. 168
was codified as Accounting Standards Codification Topic 105-10 and replaces SFAS No. 162,
the Hierarchy of Generally Accepted Accounting
Principles, to establish the FASB
Accounting Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be
applied by nongovernmental entities in preparation of
financial statements in conformity with generally accepted accounting
principles
in the United States. We adopted Accounting Standards Codification Topic 105-10 effective as
of September 26, 2009. The
adoption did not impact our financial position or
results of operations.
 4.
    
    Fair Value Measurements
 Generally accepted accounting principles (GAAP) defines fair value, establishes a framework
for measuring fair value and establishes disclosure requirements about fair value
measurements. Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the
measurement date. We considered non-performance risk when determining fair value of our
derivative financial instruments. The fair value hierarchy prescribed under GAAP contains
three levels as follows:
 Level 1 Unadjusted quoted prices that are available in active markets for the identical
assets or liabilities at the measurement date.
 Level 2 Other observable inputs available at the measurement date, other than quoted
prices included in Level 1, either directly or indirectly, including:
 
    
    Quoted prices for similar assets or liabilities in active markets;
    
    Quoted prices for identical or similar assets in non-active markets;
    
    Inputs other than quoted prices that are observable for the asset or liability; and
    
    Inputs that are derived principally from or corroborated by other observable market data.
 Level 3 Unobservable inputs that cannot be corroborated by observable market data and
reflect the use of significant management judgment. These values are generally determined
using pricing models for which the assumptions utilize managements estimates of market
participant assumptions.
 The following table summarizes the balances of assets and liabilities measured at fair value
on a recurring basis:
 As of September 26, 2009Fair Value Measurements Using Inputs Considered asLevel 1
    
    Level 2
    
    TotalOther assets:Non-qualified, non-contributory retirement
plan assets
    
    $
    0.1
    
    
    $
    9.4
    
    
    $
    9.5Non-qualified deferred compensation plan assets
    
    
    16.9
    
    
    
    
    
    
    
    16.9Total assets
    
    $
    17.0
    
    
    $
    9.4
    
    
    $
    26.4Accrued expenses:Derivative financial instruments
    
    $
    
    
    
    $
    10.0
    
    
    $
    10.0Total liabilities
    
    $
    
    
    
    $
    10.0
    
    
    $
    10.0
 The fair value of cash, trade receivables and borrowings under credit agreements approximates current value.
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5.
    
    Derivative Financial Instruments
 All derivative financial instruments are recognized at fair value and are recorded in the
other current assets or accrued expenses line items in the consolidated condensed balance
sheets. The accounting for changes in the fair value of a derivative financial instrument
depends on whether it has been designated and qualifies as 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 contracts on energy
commodities are entered into to manage the price risk associated with forecasted purchases
of gasoline and diesel fuel used in our rental operations. Forward exchange contracts on
foreign currencies are periodically entered into to manage the foreign currency exchange
risk associated with firm commitments denominated in foreign currencies. We designate
interest rate swap contracts as cash flow hedges of the interest expense related to variable
rate debt and futures contracts on energy commodities as cash flow hedges of forecasted
purchases of gasoline and diesel fuel. We have not designated our forward exchange contracts
on foreign currencies as hedging instruments.
 For derivative financial instruments that are designated and qualify as cash flow hedges,
the effective portion of the gain or loss on the derivative financial instrument is reported
as a component of accumulated other comprehensive income and reclassified into the
consolidated condensed statements of operations in the same line item associated with the
forecasted transaction and in the same period as the expenses from the cash flows of the
hedged items are recognized. We perform an assessment at the inception of the hedge and on
a quarterly basis thereafter, to determine whether our derivatives are highly effective in
offsetting changes in the value of the hedged items. Any changes in the fair value resulting
from hedge ineffectiveness, is immediately recognized as income or expense.
 We use interest rate swap contracts to limit exposure to changes in interest rates and to
balance the total debt that is subject to variable and fixed interest rates. The interest
rate swap contracts we utilize effectively modify our exposure to interest rate risk by
converting variable rate debt to a fixed rate without an exchange of the underlying
principal amount. Approximately 71% of our outstanding variable rate debt had its interest
payments hedged using interest rate swap contracts as of September 26, 2009.
 In addition, we purchase fuel commodity futures contracts to limit exposure to energy prices
and effectively hedge a portion of our anticipated gasoline and diesel fuel purchases. The
objective of these hedges is to reduce the variability of cash flows associated with the
forecasted purchases of those commodities without an exchange of the underlying commodity.
Approximately 39% of our anticipated gasoline and diesel fuel purchases for the next twelve
months are hedged using futures contracts as of September 26, 2009.
 We do not engage in speculative transactions or fair value hedging nor do we hold or issue
financial instruments for trading purposes.
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The following tables summarize the classification and fair value of the interest rate swap
agreements and fuel commodity futures contracts which have been designated as cash flow
hedging instruments:
 Asset Derivatives Fair ValueRelationship:
    
    Balance Sheet Classification:
    
    September 26, 2009
    
    
    June 27, 2009Interest rate swap contracts
    
    Other current assets
    
    $
    
    
    
    $
    Fuel commodity futures contracts
    
    Other current assets
    
    
    
    
    
    
    0.3Total derivatives designated as cash flow hedging instruments
    
    $
    
    
    
    $
    0.3Liability Derivatives Fair ValueRelationship:
    
    Balance Sheet Classification:
    
    September 26, 2009
    
    
    June 27, 2009Interest rate swap contracts
    
    Accrued expenses
    
    $
    9.4
    
    
    $
    9.3Fuel commodity futures contracts
    
    Accrued expenses
    
    
    0.2
    
    
    
    0.2Total derivatives designated as cash flow hedging instruments
    
    $
    9.6
    
    
    $
    9.5
 The fair value of derivative financial instruments not designated as hedging instruments
totaled $0.4 million as of September 26, 2009. As of June 27, 2009, all derivative financial
instruments were designated as hedging instruments.
 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 $5.1 million
loss deferred in accumulated other comprehensive income as of September 26, 2009, a $3.5
million loss is expected to be reclassified to interest expense in the next twelve months.
 As of September 26, 2009, we had interest rate swap contracts to pay fixed rates of interest
and to receive variable rates of interest based on three-month London Interbank Offered Rate
(LIBOR) on $185.0 million notional amount, of which $20.0 million
are forward starting interest
rate swap contracts. Of the $185.0 million notional amount, $70.0 million matures
in 12 months, $45.0 million matures in 13-24 months, $45.0 million matures in 25-36 months and $25.0 million matures later than 36 months.
The average rate on the $185 million of interest rate swap contracts was 4.1% as
of September 26, 2009. These interest rate swap contracts have been designated as highly
effective cash flow hedges and accordingly, gains or losses on any ineffectiveness was not
material to any period.
 As our fuel commodity futures contracts qualify for cash flow hedge designation, the related
gains or losses on these contracts are deferred as a component of other comprehensive income
or loss (net of related income taxes) until the expense is recognized on the hedged
commodity. Upon purchase of the hedged commodity the other comprehensive income or loss is
reclassified to the cost of rental operations line item in the consolidated condensed
statements of operations. All of the $0.1 million loss deferred in accumulated other
comprehensive income as of September 26, 2009 is expected to be reclassified to cost of
rental operations in the next twelve months.
 As of September 26, 2009, we had fuel commodity futures contracts to pay fixed prices of
unleaded gasoline and diesel fuel and receive variable prices based on the Department of
Energy (DOE) index on 1.8 million gallons, of which 1.8 million gallons will occur in the
next twelve months. The weighted average fixed price on the 1.8 million gallons of fuel
commodity futures contracts was $2.78 per gallon as of September 26, 2009. These commodity
contracts have been designated as highly effective cash flow hedges and accordingly, gains
or losses on any ineffectiveness was not material to any period.
 We may also enter into foreign currency exchange contracts to hedge firm commitments with
our foreign subsidiary. These agreements are recorded at fair value and the gains and
losses are included in earnings. There were no outstanding foreign currency exchange
contracts as of September 26, 2009 and June 27, 2009.
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The following tables summarize the amount of gain or loss recognized in accumulated other
comprehensive income or loss and the classification and amount of gains or losses
reclassified from accumulated other comprehensive income or loss into the consolidated
condensed statements of operations for the three months ended September 26, 2009 and
September 27, 2008 related to derivative financial instruments used in cash flow hedging:
 Amount of Gain or (Loss) Recognized inAccumulated Other Comprehensive Income (Loss)Three Months EndedRelationship:
    
    September 26, 2009
    
    
    September 27, 2008Interest rate swap contracts
    
    $
    (0.8
    )
    
    $
    (0.5
    )Fuel commodity futures contracts
    
    
    (0.3
    )
    
    
    (0.7
    )Total derivatives designated as cash flow hedging instruments
    
    $
    (1.1
    )
    
    $
    (1.2
    )
 Amount of Gain or (Loss) ReclassifiedFrom Accumulated Other ComprehensiveIncome (Loss) to ConsolidatedStatements of OperationsStatement of Operations
    
    Three Months EndedRelationship:
    
    Classification:
    
    September 26, 2009
    
    
    September 27, 2008Interest rate swap contracts
    
    Interest expense
    
    $
    (0.9
    )
    
    $
    (0.4
    )Fuel commodity futures contracts
    
    Cost of rental operations
    
    
    
    
    
    
    0.3Total derivatives designated as
cash flow hedging instruments
    
    
    
    $
    (0.9
    )
    
    $
    (0.1
    )
 6.
    
    Exit, Disposal and Related Activities
 We continuously monitor our operations and related cost structure to ensure that our
resources match our revenue levels and from time to time make adjustments to ensure that we
utilize our resources in an efficient manner. These adjustments may consist of facility
closures, divestitures, expansions and increases or decreases in staffing levels. During
the three months ended September 27, 2008 and September 26, 2009 we made a number of
adjustments to our business, the most significant of which are discussed below.
 In the first quarter of fiscal year 2009, we closed three processing plants, two branch
locations, reduced selected headcount and outsourced our fleet maintenance function. As a
result of these actions, we recorded approximately $2.6 million of expense in the
consolidated condensed statements of operations during fiscal year 2009. These charges principally
impacted our United States operating segment. Of these amounts, approximately $1.0 million
was recorded in the cost of rental operations line item and the remaining $1.6 million was
recorded in the selling and administrative line item. All severance associated with this
action was paid by September 26, 2009.
 During the first quarter of fiscal year 2010, we continued to align our operations and
workforce to better match our cost structure with our revenue levels. As a result, we
reduced selected headcount of certain administrative, regional and corporate personnel and divested an
unprofitable business. As a result of these actions, we recorded approximately $1.4 million
in associated severance costs on the selling and administrative line in the first quarter of
fiscal year 2010. Of the $1.4 million in severance, $0.6 million was paid by September 26,
2009, with the remaining $0.8 million to be paid over the next twelve months. These actions
primarily impacted our United States operating segment.
 7.
    
    Income Taxes
 Our effective tax rate decreased to 46.7% in the first quarter of fiscal 2010 from 75.0% in
the same period of fiscal 2009. The current year tax rate was higher than our statutory
rate primarily due to the write-off of deferred tax assets associated with equity
compensation. The prior year tax rate was higher than our statutory rate primarily due to
the non-deductibility of certain environmental related charges and the write-off of deferred
tax assets associated with the expiration of certain stock options.
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8.
    
    Per Share Data
 Basic earnings per common share was computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings per common
share was computed similarly to the computation of basic earnings per share, except that the
denominator is increased for the assumed exercise of dilutive options and other dilutive
securities, including non-vested restricted stock, using the treasury stock method.
 Three Months EndedSeptember 26,
    
    
    September 27,2009
    
    
    2008Weighted average number of common
shares outstanding used in computation
of basic earnings per share
    
    
    18.2
    
    
    
    18.7Weighted 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
    
    
    18.3
    
    
    
    18.8
 We excluded potential common shares related to our outstanding equity compensation
grants of 2.0 million and 1.2 million for the three months ended September 26, 2009 and
September 27, 2008, respectively, from the computation of diluted earnings per share.
Inclusion of these shares would have been anti-dilutive.
 9.
    
    Comprehensive Income
 For the three months ended September 26, 2009 and September 27, 2008, the components of
comprehensive income were as follows:
 Three Months EndedSeptember 26,
    
    
    September 27,2009
    
    
    2008Net income
    
    $
    3.3
    
    
    $
    1.5Other comprehensive income/(loss):Foreign currency translation adjustments, net of tax
    
    
    6.8
    
    
    
    (3.3
    )Derivative financial instruments (loss) recognized, net of tax
    
    
    (1.1
    )
    
    
    (1.2
    )Derivative financial instruments gain (loss) reclassified, net of tax
    
    
    0.9
    
    
    
    0.1Total comprehensive income/(loss)
    
    $
    9.9
    
    
    $
    (2.9
    )
 10.
    
    Inventories
 The components of inventory as of September 26, 2009 and June 27, 2009 are as follows:
 September 26,
    
    
    June 27,2009
    
    
    2009Raw Materials
    
    $
    8.3
    
    
    $
    9.2Work in Process
    
    
    3.4
    
    
    
    3.6Finished Goods
    
    
    54.2
    
    
    
    55.1New Goods
    
    $
    65.9
    
    
    $
    67.9Merchandise In Service
    
    $
    65.8
    
    
    $
    67.6Total Inventories
    
    $
    131.7
    
    
    $
    135.5
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11.
    
    Goodwill and Intangible AssetsGoodwill by segment includes the following:
 United States
    
    
    Canada
    
    
    TotalBalance as of June 27, 2009
    
    $
    260.2
    
    
    $
    59.7
    
    
    $
    319.9Acquisitions, net of purchase
accounting adjustments
    
    
    0.2
    
    
    
    
    
    
    
    0.2Foreign currency translation and other
    
    
    0.1
    
    
    
    3.1
    
    
    
    3.2Balance as of September 26, 2009
    
    $
    260.5
    
    
    $
    62.8
    
    
    $
    323.3
 Our other intangible assets, which are included in other assets on the consolidated
condensed balance sheet, are as follows:
 September 26,
    
    
    June 27,2009
    
    
    2009Other Intangible Assets:Customer Contracts
    
    $
    114.3
    
    
    $
    113.8Accumulated Amortization
    
    
    (87.0
    )
    
    
    (85.0
    )Net
    
    $
    27.3
    
    
    $
    28.8Non-Competition Agreements
    
    $
    11.1
    
    
    $
    11.0Accumulated Amortization
    
    
    (10.5
    )
    
    
    (10.3
    )Net
    
    $
    0.6
    
    
    $
    0.7
 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 $1.6 million and $1.9 million for the three months ended September
26, 2009 and September 27, 2008, respectively. Estimated amortization expense for each of
the next five fiscal years based on the intangible assets as of September 26, 2009 is as
follows:
 2010 remaining
    
    $
    4.22011
    
    
    5.22012
    
    
    4.02013
    
    
    2.92014
    
    
    1.92015
    
    
    1.4
 12.
    
    Long-Term Debt
 On July 1, 2009, we completed a new $300.0 million, three-year unsecured revolving credit
facility with a syndicate of banks, which expires on July 1, 2012. This facility replaces
our $325.0 million unsecured revolving credit facility, which was scheduled to mature in
August 2010. Borrowings in U.S. dollars under the new credit facility will, at our
election, bear interest at (a) the adjusted London Interbank Offered Rate (LIBOR) for
specified interest periods plus a margin, which can range from 2.25% to 3.25%, determined
with reference to our consolidated leverage ratio or (b) a floating rate equal to the
greatest of (i) JPMorgans prime rate, (ii) the federal funds rate plus 0.5% and (iii) the
adjusted LIBOR for a one month interest period plus 1%, plus, in each case, a margin
determined with reference to our consolidated leverage ratio. Swingline loans will, at our
election, bear interest at (i) the rate described in clause (b) above or (ii) a rate to be
agreed upon by us and JPMorgan. Borrowings in Canadian dollars under the credit facility
will bear interest at the greater of (a) the Canadian Prime Rate and (b) the Adjusted LIBOR
for a one month Interest Period on such day (or if such day is not a Business Day, the
immediately preceding Business Day) plus 1%. Effective July 1, 2009, the interest rate
spread on this new facility is 1.875% higher than the previous facility. We
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also pay a fee on the unused daily balance of the revolving credit facility based on a
leverage ratio calculated on a quarterly basis.
 As of September 26, 2009, borrowings outstanding under the revolving credit facility were
$118.1 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 September 26, 2009, letters of credit outstanding
against the revolver totaled $20.7 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
customary 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 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 September 26, 2009:
 Required
    
    
    ActualMaximum Leverage Ratio (Debt/EBITDA)
    
    
    3.50
    
    
    
    2.46Minimum Interest Coverage Ratio
(EBITDA/Interest Expense)
    
    
    3.00
    
    
    
    7.12Minimum Net Worth
    
    $
    313.1
    
    
    $
    446.9
 Our maximum leverage ratio and minimum coverage ratio covenants are calculated after
adding back non-cash charges.
 Advances outstanding as of September 26, 2009 bear interest at a weighted average all-in
rate of 3.18% (LIBOR plus 2.75%) for the Eurocurrency rate loans and an all-in rate of 5.0%
(Lender Prime Rate) for overnight Swingline 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 September 26, 2009, the outstanding balance of the notes was $75.0
million at an all-in rate of 1.20% (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 September 26, 2009 was $45.9 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 commercial
paper rate. In connection with the loan agreement, we granted a first priority security
interest in certain of our U.S. based receivables. As of September 26, 2009, there was
$25.0 million outstanding under this loan agreement at an all-in interest rate of 1.98%
(commercial paper plus 0.85%). We are also required to pay a fee on the unused balance of
the facility.
 On September 30, 2009, we entered into an amendment to our receivable securitization
facility discussed above. The agreement was scheduled to expire on September 27, 2011 and
has been extended to expire on September 26, 2012. This amendment lowered the facility
limit from $60.0 million to $50.0 million, increased the default ratio by 0.25% to 2.00%,
increased the delinquency ratio by 0.25% to 2.75% and allows for the termination of the
facility in the event the Lender or Administrator is downgraded by any Rating Agency.
 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 September 26, 2009, there
was $7.1 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.
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13.
    
    Share-Based Compensation
 We grant share-based awards, including restricted stock and options to purchase our common
stock. Stock option grants are for a fixed number of shares to employees and directors with
an exercise price equal to the fair value of the shares at the date of grant. Share-based
compensation is recognized in the consolidated condensed statements of operations on a
straight-line basis over the requisite service period. The amortization of share-based
compensation reflects estimated forfeitures adjusted for actual forfeiture experiences. We
review our estimated forfeiture rates on an annual basis. As share-based compensation
expense is recognized, a deferred tax asset is recorded that represents an estimate of the
future tax deduction from the exercise of stock options or release of restrictions on the
restricted stock. At the time share-based awards are exercised, cancelled, expire or
restrictions lapse, we recognize adjustments to income tax expense. Total compensation
expense related to share-based awards was $1.4 million and $1.6 million for the three months
ended September 26, 2009 and September 27, 2008. The number of options that have been
exercised and restricted stock that vested since June 27, 2009, was 0.1 million shares.
 14.
    
    Employee Benefit Plans
 On December 31, 2006, we froze our pension and supplemental executive retirement plans. The
net periodic pension cost for these plans for the three months ended September 26, 2009 and
September 27, 2008 was $0.6 million and $0.2 million, respectively. In addition, the
components of net periodic pension cost for these plans are immaterial for the three months
ended September 26, 2009 and September 27, 2008.
 15.
    
    Segment Information
 We have two operating segments, United States (includes the Dominican Republic and
Ireland Operations) and Canada, which have been identified as components of our
organization that are reviewed by our Chief Executive Officer to determine resource
allocation and evaluate performance. Each operating segment derives revenues from the
branded identity apparel and facility services industry. During the three months ended
September 26, 2009, and for the same period of the prior fiscal year, no single customer
accounts for more than 1.5% of our total revenues. Our customers are primarily located
in the United States and Canada.
 Income from operations includes the impact of an intercompany management fee which is
self-eliminated in the total income from operations below. This intercompany management
fee for the first quarter of fiscal year 2010 and fiscal year 2009 was approximately
$2.4 million and $2.3 million respectively.
 We evaluate performance based on income from operations. Financial information by
segment for the three-month periods ended September 26, 2009 and September 27, 2008 is
as follows:
 UnitedStates
    
    
    Canada
    
    
    Elimination
    
    
    TotalFirst Quarter Fiscal Year 2010:Revenues
    
    $
    173.3
    
    
    $
    34.8
    
    
    $
    
    
    
    $
    208.1Income from operations
    
    
    8.2
    
    
    
    1.6
    
    
    
    
    
    
    
    9.8Total assets
    
    
    793.9
    
    
    
    139.7
    
    
    
    (87.5
    )
    
    
    846.1Depreciation and amortization
expense
    
    
    8.8
    
    
    
    1.4
    
    
    
    
    
    
    
    10.2First Quarter Fiscal Year 2009:Revenues
    
    $
    203.5
    
    
    $
    41.7
    
    
    $
    
    
    
    $
    245.2Income from operations
    
    
    5.6
    
    
    
    3.8
    
    
    
    
    
    
    
    9.4Total assets
    
    
    983.3
    
    
    
    169.8
    
    
    
    (103.8
    )
    
    
    1,049.3Depreciation and amortization
expense
    
    
    9.8
    
    
    
    1.6
    
    
    
    
    
    
    
    11.4
 16.
    
    Stock Repurchase
 In May 2008, we announced the authorization to expand our share repurchase program from
$100.0 million to $175.0 million, which increased the share repurchase program previously
approved by our Board of Directors in May 2007. For the three months ended September 26,
2009, there were no share repurchases and for the three months ended September 27, 2008, we
repurchased 196,219 shares totaling $6.2 million for which we expended the same amount of
cash. As of September 26, 2009, we had approximately $57.8 million remaining under this
authorization.
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17.
    
    Restricted Stock Unit Withholdings
 We issue restricted stock units as part of our equity incentive plans. Upon vesting, the
participant may elect to have shares withheld to pay the minimum statutory tax withholding
requirements. Although shares withheld are not issued, they are treated as common stock
repurchases in our financial statements as they reduce the number of shares that would have
been issued upon vesting.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
    Critical Accounting Policies
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Results of Operations
  PercentageThree Months
    
    ChangeEnded
    
    Three MonthsSeptember 26,
    
    September 27,
    
    Fiscal Year 20102009
    
    2008
    
    vs. Fiscal Year 2009Revenues:Rental operations
    
    
    94.0
    %
    
    
    93.4
    %
    
    
    (14.6
    )%Direct sales
    
    
    6.0
    
    
    
    6.6
    
    
    
    (22.6
    )Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    (15.1
    )Expenses:Cost of rental operations
    
    
    70.7
    
    
    
    70.6
    
    
    
    (14.5
    )Cost of direct sales
    
    
    75.5
    
    
    
    75.0
    
    
    
    (22.2
    )Total cost of sales
    
    
    71.0
    
    
    
    70.9
    
    
    
    (15.0
    )Selling and administrative
    
    
    24.2
    
    
    
    25.2
    
    
    
    (18.5
    )Income from operations
    
    
    4.7
    
    
    
    3.8
    
    
    
    4.4Interest expense
    
    
    1.8
    
    
    
    1.5
    
    
    
    3.2Income before income taxes
    
    
    2.9
    
    
    
    2.4
    
    
    
    5.2Provision for income taxes
    
    
    1.4
    
    
    
    1.8
    
    
    
    (34.5
    )Net income
    
    
    1.6
    %
    
    
    0.6
    %
    
    
    124.1
    %
 Three months ended September 26, 2009 compared to three months ended September 27, 2008
 Revenues
   Cost of Rental
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Cost of Direct Sales
 Selling and Administrative
 Interest Expense
 Provision for Income Taxes
 Liquidity, Capital Resources and Financial Condition
   Operating Activities.
 Investing Activities.
 Financing Activities.
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Required
    
    
    ActualMaximum Leverage Ratio (Debt/EBITDA)
    
    
    3.50
    
    
    
    2.46Minimum Interest Coverage Ratio (EBITDA/Interest
Expense)
    
    
    3.00
    
    
    
    7.12Minimum Net Worth
    
    $
    313.1
    
    
    $
    446.9
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Cash Obligations.
    Off Balance Sheet Arrangements
  Pension Obligations
     20




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Union Pension Plans
  Exit, Disposal and Related Activities
    Litigation
   Environmental Matters
  21




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Share-Based Compensation
  Adoption of New Accounting Pronouncements
   Cautionary Statements Regarding Forward-Looking Statements
  22




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest Rate Risk
   Energy Cost Risk
    Foreign Currency Exchange Risk
  23




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ITEM 4. CONTROLS AND PROCEDURES
   24




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PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
     25




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ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Maximum NumberTotal Number of
    
    (or ApproximateShares (or Units)
    
    Dollar Value) ofPurchased as
    
    Shares (or Units)Total Number
    
    Average
    
    Part of Publicly
    
    that May Yet beof Shares
    
    Price Paid
    
    Announced
    
    Purchased Under(or Units)
    
    per Share
    
    Plans or
    
    the Plans orPeriod
    
    Purchased
    
    (or Unit)
    
    Programs
    
    ProgramsMonth #1
(Fiscal month
beginning June 28,
2009 and ending
August 1, 2009)
    
    
    117
    
    
    $
    21.15
    
    
    
    
    
    
    $
    57,836,737Month #2
(Fiscal month
beginning August 2,
2009 and ending
August 29, 2009)
    
    
    9,197
    
    
    $
    22.76
    
    
    
    
    
    
    $
    57,836,737Month #3
(Fiscal month
beginning August
30, 2009 and ending
September 26, 2009)
    
    
    6,377
    
    
    $
    23.63
    
    
    
    
    
    
    $
    57,836,737
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ITEM 6. EXHIBITS
        27




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G&K SERVICES, INC. 
(Registrant)Date: October 30, 2009
    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) 28