##### Table of Contents



(G&K SERVICES LOGO)
    UNITED
STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 30, 2006
 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
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
  o þ




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##### 



G&K Services, Inc.
Form 10-Q
 Table of Contents
 PAGEPART IItem 1. Financial StatementsConsolidated Condensed Balance Sheets as of
December 30, 2006 and July 1, 2006
    
    
    3Consolidated Statements of Operations for the three and six months ended
December 30, 2006 and December 31, 2005
    
    
    4Consolidated Condensed Statements of Cash Flows for the six
months ended December 30, 2006 and December 31, 2005
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART IIItem 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 6. Exhibits
    
    
    24Signatures
    
    
    25Amended and Restated Bylaws2006 Equity Incentive PlanCertification of CEOCertification of CFOCertification of CEOCertification of CFO
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PART I
FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED CONDENSED BALANCE SHEETS  G&K Services, Inc. and Subsidiaries
 December 30,
    
    
    July 1,2006
    
    
    2006(In thousands)
    
    (Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    14,032
    
    
    $
    19,690Accounts receivable, less allowance for doubtful
accounts of $3,287 and $3,011
    
    
    101,418
    
    
    
    94,964Inventories
    
    
    139,870
    
    
    
    141,031Prepaid expenses
    
    
    12,700
    
    
    
    15,552Total current assets
    
    
    268,020
    
    
    
    271,237Property, Plant and Equipment, net
    
    
    248,465
    
    
    
    249,001Goodwill, net
    
    
    352,625
    
    
    
    349,469Other Assets
    
    
    78,212
    
    
    
    81,385$
    947,322
    
    
    $
    951,092LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    27,074
    
    
    $
    27,404Accrued expenses
    
    
    72,155
    
    
    
    72,999Deferred income taxes
    
    
    10,197
    
    
    
    10,419Current maturities of long-term debt
    
    
    71,143
    
    
    
    18,199Total current liabilities
    
    
    180,569
    
    
    
    129,021Long-Term Debt, net of Current Maturities
    
    
    127,200
    
    
    
    195,355Deferred Income Taxes
    
    
    31,700
    
    
    
    34,343Other Noncurrent Liabilities
    
    
    46,787
    
    
    
    44,985Stockholders Equity
    
    
    561,066
    
    
    
    547,388$
    947,322
    
    
    $
    951,092
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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS  G&K Services, Inc. and Subsidiaries
 For the Three Months Ended
    
    
    For the Six Months EndedDecember 30,
    
    
    December 31,
    
    
    December 30,
    
    
    December 31,(In thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesRental operations
    
    $
    209,130
    
    
    $
    199,355
    
    
    $
    416,431
    
    
    $
    393,423Direct sales
    
    
    21,634
    
    
    
    19,993
    
    
    
    37,461
    
    
    
    33,873Total revenues
    
    
    230,764
    
    
    
    219,348
    
    
    
    453,892
    
    
    
    427,296Operating ExpensesCost of rental operations
    
    
    134,833
    
    
    
    127,672
    
    
    
    266,485
    
    
    
    252,178Cost of direct sales
    
    
    15,617
    
    
    
    14,155
    
    
    
    27,656
    
    
    
    24,356Selling and administrative
    
    
    50,042
    
    
    
    47,855
    
    
    
    99,921
    
    
    
    91,600Depreciation and amortization
    
    
    11,232
    
    
    
    10,644
    
    
    
    22,450
    
    
    
    21,243Total operating expenses
    
    
    211,724
    
    
    
    200,326
    
    
    
    416,512
    
    
    
    389,377Income from Operations
    
    
    19,040
    
    
    
    19,022
    
    
    
    37,380
    
    
    
    37,919Interest expense
    
    
    3,486
    
    
    
    3,302
    
    
    
    6,879
    
    
    
    6,317Income before Income Taxes
    
    
    15,554
    
    
    
    15,720
    
    
    
    30,501
    
    
    
    31,602Provision for income taxes
    
    
    5,910
    
    
    
    5,486
    
    
    
    11,665
    
    
    
    10,997Net Income
    
    $
    9,644
    
    
    $
    10,234
    
    
    $
    18,836
    
    
    $
    20,605Basic weighted average number
of shares outstanding
    
    
    21,190
    
    
    
    21,083
    
    
    
    21,187
    
    
    
    21,037Basic Earnings per Common Share
    
    $
    0.46
    
    
    $
    0.49
    
    
    $
    0.89
    
    
    $
    0.98Diluted weighted average number
of shares outstanding
    
    
    21,385
    
    
    
    21,221
    
    
    
    21,374
    
    
    
    21,185Diluted Earnings per Common Share
    
    $
    0.45
    
    
    $
    0.48
    
    
    $
    0.88
    
    
    $
    0.97Dividends per share
    
    $
    0.0400
    
    
    $
    0.0175
    
    
    $
    0.0800
    
    
    $
    0.0350
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  G&K Services, Inc. and Subsidiaries
 For the Six Months EndedDecember 30,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005Operating Activities:Net income
    
    $
    18,836
    
    
    $
    20,605Adjustments to reconcile net income to net cash
provided by operating activities -Depreciation and amortization
    
    
    22,450
    
    
    
    21,243Stock-based compensation
    
    
    2,070
    
    
    
    2,118Deferred income taxes
    
    
    (338
    )
    
    
    371Changes in current operating items, exclusive of acquisitions
    
    
    (16,260
    )
    
    
    (21,198
    )Other assets and liabilities
    
    
    1,276
    
    
    
    977Net cash provided by operating activities
    
    
    28,034
    
    
    
    24,116Investing Activities:Property, plant and equipment additions, net
    
    
    (18,355
    )
    
    
    (16,482
    )Acquisitions of business assets
    
    
    50
    
    
    
    (11,515
    )Purchase of investments, net
    
    
    (1,393
    )
    
    
    (1,248
    )Net cash used for investing activities
    
    
    (19,698
    )
    
    
    (29,245
    )Financing Activities:Repayments of long-term debt
    
    
    (7,440
    )
    
    
    (7,484
    )Proceeds from (repayments of) short-term borrowings, net
    
    
    (7,759
    )
    
    
    10,550Cash dividends paid
    
    
    (857
    )
    
    
    (747
    )Sale of common stock
    
    
    2,743
    
    
    
    1,250Net cash (used for) provided by financing activities
    
    
    (13,313
    )
    
    
    3,569Decrease in Cash and Cash Equivalents
    
    
    (4,977
    )
    
    
    (1,560
    )Effect of Exchange Rates on Cash
    
    
    (681
    )
    
    
    295Cash and Cash Equivalents:Beginning of period
    
    
    19,690
    
    
    
    15,345End of period
    
    $
    14,032
    
    
    $
    14,080Supplemental Cash Flow Information:Non-Cash Transactions -Debt issued in connection with business acquisitions
    
    $
    
    
    
    $
    (1,419
    )
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The consolidated condensed financial statements included herein, except for the July 1, 2006
balance sheet which was derived from the audited consolidated financial statements for the
fiscal year ended July 1, 2006, have been prepared by G&K Services, Inc. (the Company),
without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of the Company as of
December 30, 2006, and the results of its operations for the three and six months ended and
its cash flows for the six months ended December 30, 2006 and December 31, 2005. 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 the Company believes 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 the Companys latest
report on Form 10-K.The results of operations for the three and six month periods ended December 30, 2006 and
December 31, 2005 are not necessarily indicative of the results to be expected for the full
year.1.
    
    Summary of Significant Accounting PoliciesAccounting policies followed by the Company are set forth in Note 1 in the Companys Annual
Report on Form 10-K for the fiscal year ended July 1, 2006.Nature of BusinessG&K Services, Inc. (the Company) is a market leader in providing branded identity apparel
and facility services programs that enhance image and safety in the workplace. The Company
serves a wide variety of North American industries including automotive, warehousing,
distribution, transportation, energy, manufacturing, food processing, pharmaceutical,
semi-conductor, retail, restaurants and hospitality, and many others providing them with
rented uniforms and facility services products such as floor mats, dust mops, wiping towels,
restroom supplies and selected linen items. The Company also manufactures certain uniform
garments that it uses to support its garment rental programs. The Company has two operating
segments, United States and Canada, which have been identified as components of the Company
that are reviewed by the Companys Chief Executive Officer to determine resource allocation
and evaluate performance.Principles of ConsolidationThe accompanying consolidated condensed financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned. Significant intercompany
balances and transactions have been eliminated in consolidation.Revenue RecognitionThe Companys rental operations business is largely based on written service agreements
whereby it agrees to collect, launder and deliver uniforms and other related products. The
service agreements provide for weekly billing upon completion of the laundering process and
delivery to the customer. Accordingly, the Company recognizes revenue from rental
operations in the period in which the services are provided. Revenue from rental operations
also includes billings to customers for lost or damaged merchandise. Direct sale revenue is
recognized in the period in which the product is shipped.
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Derivative Financial InstrumentsThe Company uses derivative financial instruments principally to manage the risk that
changes in interest rates will affect the amount of its future interest payments. Interest
rate swap contracts are used to balance the proportion of total debt that is subject to
variable and fixed interest rates. The interest rate swap contracts are reflected at fair
value in the consolidated condensed balance sheet and the related gains or losses on these
contracts are deferred in stockholders equity (as a component of other comprehensive
income). Amounts to be paid or received under the contracts are accrued as interest rates
change and are recognized over the life of the contracts as an adjustment to interest
expense.Changing commodity costs could affect the future financial results of the Company. As a
result, the Company uses derivative financial instruments to manage this risk. The Company
purchases futures contracts to effectively hedge a portion of anticipated commodity
purchases. The futures contracts are reflected at fair value in the consolidated condensed
balance sheet and the related gains or losses on these contracts are deferred in
stockholders equity (as a component of other comprehensive income) or in the statements of
operations depending on the effectiveness of the cash flow hedge. Upon settlement of each
contract, the actual gain or loss is reflected in cost of rental operations.The Company may periodically hedge firm commitments with its foreign subsidiary, generally
with foreign currency contracts. These agreements are recorded at current market values and
the gains and losses are included in earnings. Gains and losses on such transactions were
not significant in the second quarter of fiscal 2007 or 2006.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 Ended
    
    
    Six Months EndedDecember 30,
    
    
    December 31,
    
    
    December 30,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average number of common
shares outstanding used in computation
of basic earnings per share
    
    
    21,190
    
    
    
    21,083
    
    
    
    21,187
    
    
    
    21,037Weighted average effect of non-vested
restricted stock grants and assumed
exercise of options
    
    
    195
    
    
    
    138
    
    
    
    187
    
    
    
    148Shares used in computation of
diluted earnings per share
    
    
    21,385
    
    
    
    21,221
    
    
    
    21,374
    
    
    
    21,185
 Potential common shares related to the Companys outstanding stock options of 505,000
and 522,000 for the three month periods, and 514,000 and 485,000 for the six month periods
ended December 30, 2006 and December 31, 2005, respectively, were excluded from the
computation of diluted earnings per share. Inclusion of these shares would have been
anti-dilutive as the exercise price of these shares exceeded market value.Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
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Recent Accounting PronouncementsIn September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 158 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of SFAS No. 87, 88, 106 and 132R which
will be effective for the Companys fiscal year ending June 30, 2007. The standard requires
the Company to:
 
    
    Recognize in its statement of financial position the over-funded or under-funded
status of a defined benefit postretirement plan measured as the difference between
the fair value of plan assets and the benefit obligation.
    
    Recognize as a component of other comprehensive income, net of tax, the actuarial
gains and losses and the prior service costs and credits that arise during the
period but pursuant to SFAS 87 and 106 are not recognized as components of net
periodic benefit cost.
    
    Recognize as an adjustment to the opening balance of retained earnings, net of
tax, any transition asset or transition obligation remaining from the initial
application of SFAS 87 or 106.
    
    Measure defined benefit plan assets and defined benefit plan obligations as of
the date of the employers statement of financial position.
    
    Disclose additional information in the notes to financial statements about
certain effects on net periodic benefit cost in the upcoming fiscal year that arise
from delayed recognition of the actuarial gains and losses and the prior service
costs and credits.
  The Company is currently evaluating the impact of this standard on its consolidated financial
statements.2.
    
    Comprehensive IncomeFor the three and six month periods ended December 30, 2006 and December 31, 2005, the
components of comprehensive income were as follows:
 Three Months Ended
    
    
    Six Months EndedDecember 30,
    
    
    December 31,
    
    
    December 30,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    9,644
    
    
    $
    10,234
    
    
    $
    18,836
    
    
    $
    20,605Other comprehensive income:Foreign currency translation
adjustments, net of tax
    
    
    (6,753
    )
    
    
    (298
    )
    
    
    (6,766
    )
    
    
    6,736Net unrealized holding gain (loss) on
derivative financial instruments,
net of tax
    
    
    (260
    )
    
    
    (154
    )
    
    
    (1,497
    )
    
    
    518Comprehensive income
    
    $
    2,631
    
    
    $
    9,782
    
    
    $
    10,573
    
    
    $
    27,859
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3.
    
    Goodwill and Intangible AssetsThe changes in the carrying amount of goodwill for the six months ended December 30, 2006,
by operating segment, are as follows:
 United States
    
    
    Canada
    
    
    TotalBalance as of July 1, 2006
    
    $
    286,170
    
    
    $
    63,299
    
    
    $
    349,469Goodwill acquired during the
period, net of purchase price
adjustments
    
    
    6,052
    
    
    
    (340
    )
    
    
    5,712Other, primarily foreign
currency translation
    
    
    
    
    
    
    (2,556
    )
    
    
    (2,556
    )Balance as of December 30, 2006
    
    $
    292,222
    
    
    $
    60,403
    
    
    $
    352,625
 In connection with the Companys acquisition of the direct sale uniform group and
related assets from Lion Apparel, Inc., in December 2004, the sellers were entitled to
additional consideration after year two following this acquisition if certain financial and
other conditions were met. During the three months ended December 30, 2006, these
conditions were met, resulting in an additional $6,000 earned by the former owners, which
will be paid in January 2007. No future earn-out related to this acquisition will be due as
the term of the arrangement expired in December 2006.Information regarding the Companys other intangible assets, which are included in other
assets on the consolidated condensed balance sheet, are as follows:
 As of December 30, 2006Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer contracts
    
    $
    105,707
    
    
    $
    62,661
    
    
    $
    43,046Non-competition agreements
    
    
    10,880
    
    
    
    8,926
    
    
    
    1,954Total
    
    $
    116,587
    
    
    $
    71,587
    
    
    $
    45,000
 As of July 1, 2006Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer contracts
    
    $
    106,408
    
    
    $
    58,158
    
    
    $
    48,250Non-competition agreements
    
    
    10,908
    
    
    
    8,446
    
    
    
    2,462Total
    
    $
    117,316
    
    
    $
    66,604
    
    
    $
    50,712
 The customer contracts include the combined value of the written service agreements and
the related customer relationship. It has been determined that there is no significant
separate value in any customer relationships.Amortization expense was $5,385 and $5,311 for the six months ended December 30, 2006 and
December 31, 2005, respectively. Estimated amortization expense for each of the next five
fiscal years based on the intangible assets as of December 30, 2006 is as follows:
 2007 remaining
    
    $
    5,2262008
    
    
    10,0272009
    
    
    6,3052010
    
    
    6,1352011
    
    
    5,4592012
    
    
    4,702
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4.
    
    Long-Term DebtOn August 31, 2005, the Company amended and restated its revolving credit facility. The
amended and restated revolving credit facility of $325,000 expires on August 31, 2010. As
of December 30, 2006, borrowings outstanding under the revolving credit facility were
$30,000. The unused portion of the revolver may be used for general corporate purposes,
acquisitions, working capital needs and to provide up to $50,000 in letters of credit. As
of December 30, 2006, letters of credit outstanding against the revolver were $33,141.Borrowings under the revolving credit facility bear interest at 0.55% to 1.50% over the
London Interbank Offered Rate (LIBOR), or the Canadian prime rate for Canadian borrowings,
based on a leverage ratio calculated on a quarterly basis. Advances outstanding as of
December 30, 2006 bear interest at a rate of 6.11%. The Company also pays a fee on the
unused daily balance of the revolving credit facility based on a leverage ratio calculated
on a quarterly basis.The Company issued $50,000 of 8.4% unsecured fixed rate private placement notes with certain
institutional
investors. The 10-year notes have a seven-year average life with a final maturity on July
20, 2010. Each year until maturity, the Company is required to repay $7,143 of the
principal amount at par. As of December 30, 2006, the outstanding balance was $28,571.The Company maintains a revolving loan agreement up to $60,000 expiring on October 23, 2007.
The Company is 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, the
Company granted a first priority security interest in certain of its 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. At December 30, 2006, there was
$53,000 outstanding under the agreement at a current interest rate of 5.34%. The Company
expects to renew or refinance this credit facility before it expires.The Company has $75,000 of unsecured variable rate private placement notes. The notes do
not require principal payments until maturity on June 30, 2015. The interest rate is reset
and interest payments are paid on a quarterly basis. As of December 30, 2006, the
outstanding balance of the notes was $75,000 at a current rate of 5.96%.5.
    
    Share-Based CompensationThe Company maintains Stock Option and Compensation Plans in order to grant certain stock
awards, including stock options and restricted shares of stock to key employees and external
directors of the Company. Stock options granted to employees generally vest annually in
equal amounts over three years and stock options granted on an annual basis to external
directors, vest over one year. The stock options have an exercise price equal to the market
price of the Companys common stock on the date of grant. Restricted stock granted to
employees prior to January 1, 2002, vest annually in equal amounts over seven years and
grants after January 1, 2002, vest annually in equal amounts over five years. Generally the
Company recognizes compensation expense for share-based compensation on a straight-line
basis over the pertinent vesting period. Total compensation expense related to share-based
awards was $1,141 and $1,111 for the three months ended and $2,070 and $2,118 for the six
months ended December 30, 2006,
and December 31, 2005, respectively. The number of options that have been exercised and
restricted stock that vested since July 1, 2006, was 108,916 shares.
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6.
    
    Employee Benefit PlansThe components of net periodic pension cost are as follows for the three months ended
December 30, 2006 and December 31, 2005:
 Supplemental ExecutivePension Plan
    
    
    Retirement PlanThree Months Ended
    
    
    Three Months EndedDecember 30,
    
    
    December 31,
    
    
    December 30,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    715
    
    
    $
    1,191
    
    
    $
    158
    
    
    $
    234Interest cost
    
    
    774
    
    
    
    809
    
    
    
    173
    
    
    
    189Expected return on assets
    
    
    (703
    )
    
    
    (617
    )
    
    
    
    
    
    
    Prior service cost
    
    
    4
    
    
    
    13
    
    
    
    4
    
    
    
    10Loss
    
    
    
    
    
    
    340
    
    
    
    
    
    
    
    76Net periodic pension cost
    
    $
    790
    
    
    $
    1,736
    
    
    $
    335
    
    
    $
    509
 The components of net periodic pension cost are as follows for the six months ended
December 30, 2006 and December 31, 2005:
 Supplemental ExecutivePension Plan
    
    
    Retirement PlanSix Months Ended
    
    
    Six Months EndedDecember 30,
    
    
    December 31,
    
    
    December 30,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    1,432
    
    
    $
    2,381
    
    
    $
    316
    
    
    $
    468Interest cost
    
    
    1,548
    
    
    
    1,618
    
    
    
    346
    
    
    
    377Expected return on assets
    
    
    (1,407
    )
    
    
    (1,233
    )
    
    
    
    
    
    
    Prior service cost
    
    
    8
    
    
    
    26
    
    
    
    8
    
    
    
    21Loss
    
    
    
    
    
    
    680
    
    
    
    
    
    
    
    152Net periodic pension cost
    
    $
    1,581
    
    
    $
    3,472
    
    
    $
    670
    
    
    $
    1,018
 7.
    
    Segment InformationThe Company has two operating segments, United States and Canada, which have been
identified as components of the Company that are reviewed by the Companys 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 garment rental and non-apparel items such as floor
mats, dust mops,
wiping towels, selected linen items and several restroom products. No single customers
transactions accounted for more than 1.5% of the Companys revenues.
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##### Table of Contents



The accounting policies of the segments are the same as those described in the summary
of significant accounting policies (see Note 1). Corporate expenses are allocated to
the segments based on segment revenue. The Company evaluates performance based on
income from operations. Financial information by geographic location for the three and
six month periods ended December 30, 2006 and December 31, 2005 is as follows:
 UnitedFor the Three Months Ended
    
    States
    
    
    Canada
    
    
    TotalSecond Quarter Fiscal Year 2007:Revenues
    
    $
    191,047
    
    
    $
    39,717
    
    
    $
    230,764Income from operations
    
    
    12,475
    
    
    
    6,565
    
    
    
    19,040Capital expenditures
    
    
    8,130
    
    
    
    456
    
    
    
    8,586Depreciation and amortization
expense
    
    
    9,612
    
    
    
    1,620
    
    
    
    11,232Second Quarter Fiscal Year 2006:Revenues
    
    $
    181,298
    
    
    $
    38,050
    
    
    $
    219,348Income from operations
    
    
    12,342
    
    
    
    6,680
    
    
    
    19,022Capital expenditures
    
    
    7,426
    
    
    
    550
    
    
    
    7,976Depreciation and amortization
expense
    
    
    9,156
    
    
    
    1,488
    
    
    
    10,644
 UnitedFor the Six Months Ended
    
    States
    
    
    Canada
    
    
    TotalFiscal Year 2007:Revenues
    
    $
    374,357
    
    
    $
    79,535
    
    
    $
    453,892Income from operations
    
    
    24,465
    
    
    
    12,915
    
    
    
    37,380Capital expenditures
    
    
    17,200
    
    
    
    1,155
    
    
    
    18,355Depreciation and amortization
expense
    
    
    19,218
    
    
    
    3,232
    
    
    
    22,450Fiscal Year 2006:Revenues
    
    $
    354,494
    
    
    $
    72,802
    
    
    $
    427,296Income from operations
    
    
    25,165
    
    
    
    12,754
    
    
    
    37,919Capital expenditures
    
    
    15,176
    
    
    
    1,306
    
    
    
    16,482Depreciation and amortization
expense
    
    
    18,264
    
    
    
    2,979
    
    
    
    21,243
 8.
    
    InventoryThe components of inventory are as follows for the six months ended December 30, 2006 and
July 1, 2006:
 Six Months EndedDecember 30,
    
    
    July 1,2006
    
    
    2006Raw Materials
    
    $
    5,649
    
    
    $
    5,742Work in Process
    
    
    3,466
    
    
    
    4,587Finished Goods
    
    
    54,274
    
    
    
    52,457New Goods
    
    $
    63,389
    
    
    $
    62,786Merchandise In Service
    
    $
    76,481
    
    
    $
    78,245Total Inventories
    
    $
    139,870
    
    
    $
    141,031
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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
   Revenue Recognition and Allowance for Doubtful Accounts
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Inventories
  Goodwill, Intangibles and Other Long-Lived Assets
   Insurance
  Income Taxes
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##### Table of Contents



Results of Operations
  Three Months
    
    
    Six Months
    
    
    PercentageEnded
    
    
    Ended
    
    
    ChangeThree Months
    
    
    Six MonthsDecember 30,
    
    
    December 31,
    
    
    December 30,
    
    
    December 31,
    
    
    FY 2007
    
    
    FY 20072006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    vs. FY 2006
    
    
    vs. FY 2006Revenues:Rental
    
    
    90.6
    %
    
    
    90.9
    %
    
    
    91.7
    %
    
    
    92.1
    %
    
    
    4.9
    %
    
    
    5.8
    %Direct
    
    
    9.4
    
    
    
    9.1
    
    
    
    8.3
    
    
    
    7.9
    
    
    
    8.2
    
    
    
    10.6Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    5.2
    
    
    
    6.2Expenses:Cost of rental sales
    
    
    64.5
    
    
    
    64.0
    
    
    
    64.0
    
    
    
    64.1
    
    
    
    5.6
    
    
    
    5.7Cost of direct sales
    
    
    72.2
    
    
    
    70.8
    
    
    
    73.8
    
    
    
    71.9
    
    
    
    10.3
    
    
    
    13.5Total cost of sales
    
    
    65.2
    
    
    
    64.7
    
    
    
    64.8
    
    
    
    64.7
    
    
    
    6.1
    
    
    
    6.4Selling and administrative
    
    
    21.7
    
    
    
    21.8
    
    
    
    22.0
    
    
    
    21.4
    
    
    
    4.6
    
    
    
    9.1Depreciation and
amortization
    
    
    4.8
    
    
    
    4.8
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.5
    
    
    
    5.7Income from operations
    
    
    8.3
    
    
    
    8.7
    
    
    
    8.2
    
    
    
    8.9
    
    
    
    0.1
    
    
    
    (1.4
    )Interest expense
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.5
    
    
    
    1.5
    
    
    
    5.6
    
    
    
    8.9Income before income taxes
    
    
    6.7
    
    
    
    7.2
    
    
    
    6.7
    
    
    
    7.4
    
    
    
    (1.1
    )
    
    
    (3.5
    )Provision for income taxes
    
    
    2.5
    
    
    
    2.5
    
    
    
    2.6
    
    
    
    2.6
    
    
    
    7.7
    
    
    
    6.1Net income
    
    
    4.2
    %
    
    
    4.7
    %
    
    
    4.1
    %
    
    
    4.8
    %
    
    
    (5.8
    )%
    
    
    (8.6
    )%
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##### Table of Contents



Three months ended December 30, 2006 compared to three months ended December 31, 2005
 Revenues.
   Cost of Rental and Direct Sale.
  Selling and Administrative.
 Depreciation and Amortization
 Interest Expense
 Provision for Income Taxes
 Six months ended December 30, 2006 compared to six months ended December 31, 2005
 Revenues.
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##### Table of Contents



Cost of Rental and Direct Sale.
  Selling and Administrative.
 Depreciation and Amortization
 Interest Expense
 Provision for Income Taxes
 Liquidity, Capital Resources and Financial Condition
   Operating Activities.
 Investing Activities.
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##### Table of Contents



Financing Activities.
      Cash Obligations.
   Off Balance Sheet Arrangements
  18




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Pension Obligations
     Impact of Inflation
   Litigation
  Share-Based Compensation
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##### Table of Contents



Recent Accounting Pronouncements
  
    
    Recognize in our statement of financial position the over-funded or under-funded status
of a defined benefit postretirement plan measured as the difference between the fair value
of plan assets and the benefit obligation.
    
    Recognize as a component of other comprehensive income, net of tax, the actuarial gains
and losses and the prior service costs and credits that arise during the period but
pursuant to FAS 87 and 106 are not recognized as components of net periodic benefit cost.
    
    Recognize as an adjustment to the opening balance of retained earnings, net of tax, any
transition asset or transition obligation remaining from the initial application of FAS 87
or 106.
    
    Measure defined benefit plan assets and defined benefit plan obligations as of the date
of our statement of financial position.
    
    Disclose additional information in our notes to financial statements about certain
effects on net periodic benefit cost in the upcoming fiscal year that arise from delayed
recognition of the actuarial gains and losses and the prior service costs and credits.
   Cautionary Statements Regarding Forward-Looking Statements
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##### Table of Contents



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



PART II
 OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Maximum Number(or ApproximateTotal Number of
    
    Dollar Value) ofShares (or Units)
    
    Shares (or Units) thatTotal Number of
    
    Average Price
    
    Purchased as Part of
    
    May Yet beShares (or Units)
    
    Paid per Share
    
    Publicly Announced
    
    Purchased Under thePeriod
    
    Purchased
    
    (or Unit)
    
    Plans or Programs
    
    Plans or ProgramsMonth #1
(Fiscal month
ending November 4,
2006)
    
    
    198
    
    
    $
    0.00
    
    
    
    
    
    
    
    Month #2
(Fiscal month
ending December 2,
2006)
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    
    Month #3
(Fiscal month
ending December 30,
2006)
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    
    
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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 a.
    
    The Company held its Annual Meeting of Shareholders on November 16, 2006.b.
    
    The following three persons were elected as directors: Richard L. Marcantonio,
Paul Baszucki, and Alice M. Richter. The following six persons comprise the other
directors whose terms of office continued after the Annual Meeting of Shareholders:
Michael G. Allen, John S. Bronson, J. Patrick Doyle, Wayne M. Fortun, Ernest J. Mrozek
and M. Lenny Pippin.c.
    
    1.      Each director nominee received the following votes:
 SharesIn Favor
    
    
    Withhold AuthorityMr. Marcantonio
    
    
    19,660,314
    
    
    
    285,246Mr. Baszucki
    
    
    19,667,489
    
    
    
    278,071Ms. Richter
    
    
    19,751,635
    
    
    
    193,925
 2.
    
    Shareholders voted on a proposal to approve the Companys 2006 Equity
Incentive Plan: 13,606,715 shares in favor, 3,843,416 shares voting against and
25,002 shares abstaining.3.
    
    Shareholders voted on a proposal to approve an amendment to the Companys
Amended and Restated Bylaws to require a quorum consisting of a majority of the
voting power of the issued and outstanding shares and to clarify authority to adjourn
meetings when a quorum is not present: 15,948,828 shares in favor, 1,491,782 shares
voting against and 34,523 shares abstaining.4.
    
    Shareholders ratified the appointment of Ernst & Young LLP, Independent
Registered Public Accounting Firm, as the Companys independent auditors for fiscal
2007: 19,874,155 shares in favor, 62,566 shares voting against and 8,839 shares
abstaining.
 
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##### Table of Contents



ITEM 6. EXHIBITS
 a.
    
    Exhibits
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G&K SERVICES, INC.
(Registrant)Date: February 2, 2007
    
    By:
    
    /s/ Jeffrey L. WrightJeffrey L. Wright
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)By:
    
    /s/ Thomas J. DietzThomas J. Dietz
Vice President and Controller
(Principal Accounting Officer)
 
 25