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 27, 2008
 Commission file number 0-4063
 G&K SERVICES, INC.
  MINNESOTA
    
    41-0449530(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 (952) 912-5500
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    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 27, 2008 and June 28, 2008
    
    
    3Consolidated Condensed Statements of Operations for the three months ended September 27, 2008 and September 29, 2007
    
    
    4Consolidated Condensed Statements of Cash Flows for the three months ended September 27, 2008 and September 29, 2007
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART IIItem 1.
    
    Legal Proceedings
    
    
    23Item 1A.
    
    Risk Factors
    
    
    24Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 6.
    
    Exhibits
    
    
    25Signatures
    
    
    26
  2




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PART I
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 G&K Services, Inc. and Subsidiaries
 September 27,2008
    
    
    June 28,(In thousands)
    
    (Unaudited)
    
    
    2008ASSETSCurrent AssetsCash and cash equivalents
    
    $
    21,118
    
    
    $
    12,651Accounts receivable, less allowance for doubtful
accounts of $4,498 and $4,506
    
    
    109,611
    
    
    
    111,307Inventories, net
    
    
    143,668
    
    
    
    142,318Other current assets
    
    
    25,321
    
    
    
    26,181Total current assets
    
    
    299,718
    
    
    
    292,457Property, Plant and Equipment, net
    
    
    248,162
    
    
    
    253,041Goodwill
    
    
    433,435
    
    
    
    434,874Other Assets
    
    
    67,996
    
    
    
    72,802Total assets
    
    $
    1,049,311
    
    
    $
    1,053,174LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    26,562
    
    
    $
    30,873Accrued expenses
    
    
    78,025
    
    
    
    78,282Deferred income taxes
    
    
    6,058
    
    
    
    6,154Current maturities of long-term debt
    
    
    7,832
    
    
    
    7,891Total current liabilities
    
    
    118,477
    
    
    
    123,200Long-Term Debt, net of Current Maturities
    
    
    291,845
    
    
    
    280,428Deferred Income Taxes
    
    
    33,905
    
    
    
    35,190Accrued Income Taxes  Long Term
    
    
    12,275
    
    
    
    12,343Other Noncurrent Liabilities
    
    
    44,592
    
    
    
    44,537Stockholders Equity
    
    
    548,217
    
    
    
    557,476Total liabilities and stockholders equity
    
    $
    1,049,311
    
    
    $
    1,053,174
  3




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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 G&K Services, Inc. and Subsidiaries
 For the Three Months EndedSeptember 27,
    
    
    September 29,(In thousands, except per share data)
    
    2008
    
    
    2007RevenuesRental operations
    
    $
    229,133
    
    
    $
    226,068Direct sales
    
    
    16,103
    
    
    
    17,718Total revenues
    
    
    245,236
    
    
    
    243,786Operating ExpensesCost of rental operations
    
    
    161,832
    
    
    
    151,735Cost of direct sales
    
    
    12,084
    
    
    
    12,731Selling and administrative
    
    
    61,891
    
    
    
    55,484Total operating expenses
    
    
    235,807
    
    
    
    219,950Income from Operations
    
    
    9,429
    
    
    
    23,836Interest expense
    
    
    3,597
    
    
    
    3,958Income before Income Taxes
    
    
    5,832
    
    
    
    19,878Provision for income taxes
    
    
    4,374
    
    
    
    7,514Net Income
    
    $
    1,458
    
    
    $
    12,364Basic weighted average number
of shares outstanding
    
    
    18,662
    
    
    
    21,108Basic Earnings per Common Share
    
    $
    0.08
    
    
    $
    0.59Diluted weighted average number
of shares outstanding
    
    
    18,793
    
    
    
    21,320Diluted Earnings per Common Share
    
    $
    0.08
    
    
    $
    0.58Dividends per share
    
    $
    0.07
    
    
    $
    0.05
  4




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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 G&K Services, Inc. and Subsidiaries
 For the Three Months EndedSeptember 27,
    
    
    September 29,(In thousands)
    
    2008
    
    
    2007Operating Activities:Net income
    
    $
    1,458
    
    
    $
    12,364Adjustments to reconcile net income to net cash
provided by operating activities -Depreciation and amortization
    
    
    11,422
    
    
    
    11,594Other adjustments
    
    
    2,177
    
    
    
    (1,441
    )Changes in current operating items, exclusive of acquisitions
    
    
    (6,092
    )
    
    
    (11,344
    )Other assets and liabilities
    
    
    2,744
    
    
    
    3,165Net cash provided by operating activities
    
    
    11,709
    
    
    
    14,338Investing Activities:Property, plant and equipment additions, net
    
    
    (6,420
    )
    
    
    (2,365
    )Acquisitions of business assets, net
    
    
    14
    
    
    
    (40,294
    )Purchases of investments, net
    
    
    
    
    
    
    (1,348
    )Net cash used for investing activities
    
    
    (6,406
    )
    
    
    (44,007
    )Financing Activities:Payments of long-term debt
    
    
    (7,141
    )
    
    
    (7,314
    )Proceeds from revolving credit facilities, net
    
    
    18,500
    
    
    
    38,601Cash dividends paid
    
    
    (1,328
    )
    
    
    (1,074
    )Net issuance
of common stock, primarily under stock option plans
    
    
    207
    
    
    
    1,705Purchase of common stock
    
    
    (6,776
    )
    
    
    (11,244
    )Net cash provided by financing activities
    
    
    3,462
    
    
    
    20,674Increase/(Decrease) in Cash and Cash Equivalents
    
    
    8,765
    
    
    
    (8,995
    )Effect of Exchange Rates on Cash
    
    
    (298
    )
    
    
    701Cash and Cash Equivalents:Beginning of period
    
    
    12,651
    
    
    
    22,759End of period
    
    $
    21,118
    
    
    $
    14,465
  5




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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 September 27, 2008, and the results of our operations and our cash flows for
the three months ended September 27, 2008 and September 29, 2007. 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 27, 2008 and September
29, 2007 are not necessarily indicative of the results to be expected for the full year.The accounting policies we follow are set forth in Note 1 in our Annual Report on Form 10-K
for the fiscal year ended June 28, 2008.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. These reclassifications had the effect of eliminating the depreciation and
amortization line item by allocating the depreciation expense to the cost of rental
operations, cost of direct sales, and selling and administrative and the amortization
expense was reclassified to selling and administrative. Certain amounts related to
production and manufacturing previously classified as 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 first 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 or 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 September 29,
2007.
 For the Three Months EndedSeptember 29, 2007As Previously Reported
    
    Reclassifications
    
    As ReclassifiedOperating ExpensesCost of rental operations
    
    $
    143.0
    
    
    $
    8.7
    
    
    $
    151.7Cost of direct sales
    
    
    12.8
    
    
    
    
    
    
    
    12.8Selling and administration
    
    
    52.2
    
    
    
    3.3
    
    
    
    55.5Depreciation and
amortization
    
    
    12.0
    
    
    
    (12.0
    )
    
    
    Total operating expenses
    
    $
    220.0
    
    
    $
    
    
    
    $
    220.0
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For the Three Months EndedSeptember 29, 2007As PreviouslyReported
    
    Reclassifications
    
    As ReclassifiedOperating Activities:Depreciation and amortization
    
    $
    12.0
    
    
    $
    (0.4
    )
    
    $
    11.6Other assets and liabilities
    
    
    2.8
    
    
    
    0.4
    
    
    
    3.2Net cash provided by operating activities
    
    $
    14.3
    
    
    $
    
    
    
    $
    14.3
 Environmental MattersWe are currently involved in several environmental-related proceedings by certain
governmental agencies. We have now resolved two of these proceedings and have established
reserves for the settlement of these actions. In addition to these proceedings, we have
also recently experienced increased activity around the area of overall environmental
compliance, including inspections by regulatory agencies. We have always committed
substantial operational and financial resources to environmental compliance, and we remain
fully committed to operating in complete compliance with all environmental laws and
regulations. During the first quarter of fiscal year 2009, as a result of this increased
activity, 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 expect to gain additional assurance with respect to
our environmental compliance. During the first quarter of fiscal year 2009, we made
progress in completing these inspections and are undertaking appropriate corrective actions
with respect to issues discovered. Accordingly, based on the resolution of the two
proceedings previously noted, the results of the regulatory agency inspections, internal
reviews and other available information, we have increased our reserves for environmental
matters by approximately $3.9 million and we incurred additional expenses during the
quarter, including consulting and legal fees of approximately $0.6 million. These charges
are recorded on the selling and administrative line item of the Consolidated Condensed
Statement of Operations for three months ended September 27, 2008.Compensation MattersAs a result of recent changes to prevailing compensation laws, together with other similarly
situated companies, we have 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 have established a reserve of approximately $3.3 million for this liability, which we
believe is sufficient to resolve this matter. This amount is recorded on the cost of rental
line of the Consolidated Condensed Statement of Operations for the three months ended
September 27, 2008. 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
address the situation.2.
    
    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 at
the beginning of the quarter ended September 27, 2008. Our adoption did not impact our
consolidated financial position or results of operations. See Note 3 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
 7




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##### 



without having to apply complex hedge accounting provisions. We adopted SFAS
No. 159 at the beginning of the
quarter ended September 27, 2008, and did not elect the fair value option for eligible items
that existed at the date of adoption.Accounting Pronouncements Not Yet AdoptedIn 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. This statement is effective for fiscal years and interim
periods beginning after November 15, 2008. Adoption of SFAS No. 161 will result in enhanced
disclosure regarding our derivatives should we have any outstanding.In 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 SFAS 161 and SFAS 141(r) will have a material impact on our consolidated
financial statements.3.
    
    Fair Value MeasurementsAs discussed in Note 2, we adopted SFAS No. 157 at the beginning of the quarter ended
September 27, 2008, subject to the deferral provisions of FSP No. 157-2, on June 29, 2008.
This standard defines fair value, establishes a 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:
 
 Level 3
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Three Months Ended September 27, 2008Fair Value Measurements Using Inputs Considered asLevel 1
    
    Level 2
    
    TotalOther current assets:Derivative financial instruments
    
    $
    
    
    
    $
    1.8
    
    
    $
    1.8Other assets:Non-qualified, non-contributory retirement plan
assets
    
    
    
    
    
    
    9.0
    
    
    
    9.0Non-qualified deferred compensation plan assets
    
    
    18.0
    
    
    
    
    
    
    
    18.0Accrued expenses:Derivative financial instruments
    
    
    
    
    
    
    3.6
    
    
    
    3.6Other noncurrent liabilities:Non-qualified deferred compensation plan liability
    
    
    18.1
    
    
    
    
    
    
    
    18.1Total
    
    $
    36.1
    
    
    $
    14.4
    
    
    $
    50.5
 4.
    
    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 any payments
associated with these actions to be completed by September 30, 2009.We recorded approximately $2.6 million
of expense in the Consolidated Condensed Statement of Operations
for the three months ended September 27, 2008.  These changes 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.5.
    
    Income TaxesOur effective tax rate increased to 75.0% in the first quarter
of fiscal year 2009 from 37.8% in the same period of fiscal year
2008. The current year tax rate is significantly higher than our
statutory rate primarily due to the non-deductibility of certain
environmental related charges in the current year and the write-off of
deferred tax assets associated with certain expiring stock options.
These two items accounted for an increase in the current year
effective tax rate of 29.5% and 7.4%, respectively.
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6.
    
    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 assumed exercise of dilutive options and other dilutive
securities, including non-vested restricted stock, using the treasury stock method.
 Three Months EndedSeptember 27,
    
    
    September 29,2008
    
    
    2007Weighted average number of common
shares outstanding used in computation
of basic earnings per share
    
    
    18.7
    
    
    
    21.1Weighted average effect of non-vested
restricted stock grants and assumed
exercise of options
    
    
    0.1
    
    
    
    0.2Shares used in computation of
diluted earnings per share
    
    
    18.8
    
    
    
    21.3
  7.
    
    Comprehensive IncomeFor the three-month periods ended September 27, 2008 and September 29, 2007, the components
of comprehensive income were as follows:
 Three Months EndedSeptember 27,
    
    
    September 29,2008
    
    
    2007Net income
    
    $
    1.5
    
    
    $
    12.4Other comprehensive income:Foreign currency translation
adjustments, net of tax
    
    
    (3.3
    )
    
    
    9.9Net unrealized holding gain (loss) on
derivative financial instruments,
net of tax
    
    
    (1.1
    )
    
    
    (1.1
    )Comprehensive (loss) income
    
    $
    (2.9
    )
    
    $
    21.2
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8.
    
    InventoriesThe components of inventory as of September 27, 2008 and June 28, 2008 are as follows:
 September 27,
    
    
    June 28,2008
    
    
    2008Raw Materials
    
    $
    4.1
    
    
    $
    5.3Work in Process
    
    
    4.9
    
    
    
    4.7Finished Goods
    
    
    56.1
    
    
    
    50.9New Goods
    
    $
    65.1
    
    
    $
    60.9Merchandise In Service
    
    $
    78.6
    
    
    $
    81.4Total Inventories
    
    $
    143.7
    
    
    $
    142.3
 9.
    
    Goodwill and Intangible AssetsGoodwill includes the following:
 United States
    
    
    Canada
    
    
    TotalBalance as of June 28, 2008
    
    $
    367.5
    
    
    $
    67.4
    
    
    $
    434.9Acquisitions, net of purchase
accounting adjustments
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )Foreign currency translation and other
    
    
    
    
    
    
    (1.4
    )
    
    
    (1.4
    )Balance as of September 27, 2008
    
    $
    367.4
    
    
    $
    66.0
    
    
    $
    433.4
  September 27,
    
    
    June 28,2008
    
    
    2008Other Intangible Assets:Customer Contracts
    
    $
    119.0
    
    
    $
    119.4Accumulated Amortization
    
    
    (81.1
    )
    
    
    (79.5
    )Net
    
    $
    37.9
    
    
    $
    39.9Non-Competition Agreements
    
    $
    11.1
    
    
    $
    11.1Accumulated Amortization
    
    
    (10.1
    )
    
    
    (10.0
    )Net
    
    $
    1.0
    
    
    $
    1.1
   2009 remaining
    
    $
    5.62010
    
    
    7.42011
    
    
    6.72012
    
    
    6.02013
    
    
    4.42014
    
    
    3.0
 11




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10.
    
    Long-Term DebtWe maintain a revolving credit facility of $325.0 million expiring August 31, 2010. As of
September 27, 2008, borrowings outstanding under the revolving credit facility were $209.0
million at rates ranging from 0.55% to 1.50% over the London Interbank Offered Rate
(LIBOR). Borrowings under this facility are unsecured. 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 27, 2008, letters of credit outstanding against the revolver were $20.8 million
and primarily relate to our property and casualty insurance programs. No amounts have been
drawn upon these letters of credit.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 September 27, 2008 bear
interest at an all-in rate of 3.86% (LIBOR plus 0.88%). 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 27, 2008, the outstanding balance of the notes was $75.0
million at an all-in rate of 3.40% (LIBOR plus 0.60%).We maintain a loan agreement whereby the lender will make loans to us on a revolving basis
up to $60.0 million. The agreement was originally scheduled to terminate October 21, 2010
but was renegotiated in October 2008 and is scheduled to terminate 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. The
amount of funds available under the loan agreement will be based on the amount of eligible
receivables less various reserve requirements. We utilize the net proceeds of this loan to
reduce indebtedness under our unsecured credit facilities. At September 27, 2008, there was
no amount outstanding under the agreement. We are also required to pay a fee on the unused
balance of the facility.We have $50.0 million, 8.4% unsecured fixed rate private placement notes with certain
institutional investors. The 10-year notes have a nine-year average life with a final
maturity on July 20, 2010. Beginning on July 20, 2004, and annually thereafter to maturity,
we will repay $7.1 million of the principal amount at par. As of September 27, 2008, there
was $14.3 million outstanding under the notes.11.
    
    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 for awards 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 $1.6 million and $1.2 million for the three months
ended September 27, 2008 and September 29, 2007. The number of options that have been
exercised and restricted stock that vested since June 28, 2008, was 0.1 million shares.
 12




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##### 



12.
    
    Employee Benefit PlansThe components of net periodic pension cost are as follows for the three months ended
September 27, 2008 and September 29, 2007:
 Supplemental ExecutivePension Plan
    
    
    Retirement PlanThree Months Ended
    
    
    Three Months EndedSeptember 27,
    
    
    September 29,
    
    
    September 27,
    
    
    September 29,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest cost
    
    $
    0.9
    
    
    $
    0.8
    
    
    $
    0.2
    
    
    $
    0.2Expected return on assets
    
    
    (0.9
    )
    
    
    (0.8
    )
    
    
    
    
    
    
    Net periodic pension (income) cost
    
    $
    
    
    
    $
    
    
    
    $
    0.2
    
    
    $
    0.2
 13.
    
    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. No single customers
transactions accounted for more than 1.5% of our revenues. Substantially all of our
customers are in the United States or Canada.The segment 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 increased to 5.4% of Canadian revenue. The management fee
for the first quarter of fiscal year 2009 and fiscal year 2008 is approximately 5.4% and
1.1% respectively.We evaluate performance based on income from operations. Financial information by
segment for the three-month periods ended September 27, 2008 and September 29, 2007 is
as follows:
 UnitedFor the Three Months Ended
    
    States
    
    
    Canada
    
    
    TotalFirst Quarter Fiscal Year 2009:Revenues
    
    $
    203.5
    
    
    $
    41.7
    
    
    $
    245.2Income from operations
    
    
    5.6
    
    
    
    3.8
    
    
    
    9.4Depreciation and amortization
expense
    
    
    9.8
    
    
    
    1.6
    
    
    
    11.4First Quarter Fiscal Year 2008:Revenues
    
    $
    200.3
    
    
    $
    43.5
    
    
    $
    243.8Income from operations
    
    
    14.4
    
    
    
    9.4
    
    
    
    23.8Depreciation and amortization
expense
    
    
    9.8
    
    
    
    1.8
    
    
    
    11.6
 14.
    
    Stock RepurchaseIn May 2008, we announced the authorization to expand our share repurchase program from $100.0
million to $175.0 million, which increases the share repurchase program previously approved by
our Board of Directors in May 2007. For the three months ended September 27, 2008, we
repurchased 196,219 shares totaling $6.2 million and for the three months ended September 29,
2007, we repurchased 257,300 shares totaling $10.2 million. Cash
spent on the repurchase of shares totaled approximately $6.2 million during the three months ended September 27, 2008 and $11.2 million
during the three months ended September 29, 2007. The amount of cash expended during the three
month period ending September 29, 2007 included
 13




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$1.0 million for shares repurchased in the
fourth quarter of fiscal year 2007 but not paid until July 2, 2007. As of September 27, 2008,
we had $67.8 million remaining under this authorization.
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   Critical Accounting Policies
   14




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Results of Operations
  Three Months
    
    
    Percentage ChangeEnded
    
    
    Three MonthsSeptember 27,
    
    
    September 29,
    
    
    Fiscal Year 20092008
    
    
    2007
    
    
    vs. Fiscal Year 2008Revenues:Rental operations
    
    
    93.4
    %
    
    
    92.7
    %
    
    
    1.4
    %Direct sales
    
    
    6.6
    
    
    
    7.3
    
    
    
    (9.1
    )Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    0.6Expenses:Cost of rental operations
    
    
    70.6
    
    
    
    67.1
    
    
    
    6.7Cost of direct sales
    
    
    75.0
    
    
    
    71.9
    
    
    
    (5.1
    )Total cost of sales
    
    
    70.9
    
    
    
    67.5
    
    
    
    5.7Selling and administrative
    
    
    25.2
    
    
    
    22.8
    
    
    
    11.5Income from operations
    
    
    3.8
    
    
    
    9.8
    
    
    
    (60.4
    )Interest expense
    
    
    1.5
    
    
    
    1.6
    
    
    
    (9.1
    )Income before income taxes
    
    
    2.4
    
    
    
    8.2
    
    
    
    (70.7
    )Provision for income taxes
    
    
    1.8
    
    
    
    3.1
    
    
    
    (41.8
    )Net income
    
    
    0.6
    %
    
    
    5.1
    %
    
    
    (88.2
    )%
 Three months ended September 27, 2008 compared to three months ended September 29, 2007
 Revenues
   Cost of Rental
 15




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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.
   16




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##### 



Cash Obligations.
   Off Balance Sheet Arrangements
   17




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##### 



Pension Obligations
     Reclassifications
    For the Three Months EndedSeptember 29, 2007As Previously Reported
    
    Reclassifications
    
    As ReclassifiedOperating ExpensesCost of rental operations
    
    $
    143.0
    
    
    $
    8.7
    
    
    $
    151.7Cost of direct sales
    
    
    12.8
    
    
    
    
    
    
    
    12.8Selling and administration
    
    
    52.2
    
    
    
    3.3
    
    
    
    55.5Depreciation and
amortization
    
    
    12.0
    
    
    
    (12.0
    )
    
    
    Total operating expenses
    
    $
    220.0
    
    
    $
    
    
    
    $
    220.0
 18




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##### 



For the Three Months EndedSeptember 29, 2007As PreviouslyReported
    
    Reclassifications
    
    As ReclassifiedOperating Activities:Depreciation and amortization
    
    $
    12.0
    
    
    $
    (0.4
    )
    
    $
    11.6Other assets and liabilities
    
    
    2.8
    
    
    
    0.4
    
    
    
    3.2Net cash provided by operating activities
    
    $
    14.3
    
    
    $
    
    
    
    $
    14.3
 Exit, Disposal and Related Activities
   Litigation
   Environmental Matters
  19




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##### 



Compensation Matters
  Share-Based Compensation
  Adoption of New Accounting Pronouncements
   Accounting Pronouncements Not Yet Adopted
  20




---



##### 



Cautionary Statements Regarding Forward-Looking Statements
  21




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##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest Rate Risk
  Energy Cost Risk
  Foreign Currency Exchange Risk
  
 ITEM 4. CONTROLS AND PROCEDURES
   22




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##### 



PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
       23




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##### 



ITEM 1A. RISK FACTORS
  Compliance with environmental laws and regulations could result in significant costs that adversely
affect our operating results.
    24




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##### 



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 29,
2008 and ending
August 2, 2008)
    
    
    196,219
    
    
    $
    31.33
    
    
    
    196,219
    
    
    $
    67,822,146Month #2
(Fiscal month
beginning August 3,
2008 and ending
August 30, 2008)
    
    
    
    $
    
    
    
    
    
    $
    67,822,146Month #3
(Fiscal month
beginning August
31, 2008 and ending
September 27, 2008)
    
    
    
    $
    
    
    
    
    
    $
    67,822,146
  
 ITEM 6. EXHIBITS
 a.
    
    Exhibits
      25




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##### 



G&K SERVICES, INC.
(Registrant)Date: October 31, 2008
    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) 26