##### 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 December 29, 2007
 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
  þ o o
 o þ




---



##### 



G&K Services, Inc.
Form 10-Q
 Table of Contents
 PAGEPART IItem 1.
    
    Financial StatementsConsolidated Condensed Balance Sheets as of
December 29, 2007 and June 30, 2007
    
    
    3Consolidated Condensed Statements of Operations for the three and six
months ended December 29, 2007 and December 30, 2006
    
    
    4Consolidated Condensed Statements of Cash Flows for the six
months ended December 29, 2007 and December 30, 2006
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    19PART IIItem 1A.
    
    Risk Factors
    
    
    20Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    21Item 6.
    
    Exhibits
    
    
    22Signatures
    
    
    23Certification of Chief Executive OfficerCertification of Chief Financial OfficerSection 1350 Certification of Chief Executive OfficerSection 1350 Certification of Chief Financial Officer
  2




---



##### Table of Contents



PART I
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED CONDENSED BALANCE SHEETS  G&K Services, Inc. and Subsidiaries
 December 29,
    
    
    June 30,2007
    
    
    2007(In thousands)
    
    (Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    14,953
    
    
    $
    22,759Accounts receivable, less allowance for doubtful
accounts of $3,766 and $3,405
    
    
    113,465
    
    
    
    98,276Inventories, net
    
    
    142,161
    
    
    
    140,780Prepaid expenses
    
    
    14,880
    
    
    
    14,912Total current assets
    
    
    285,459
    
    
    
    276,727Property, Plant and Equipment, net
    
    
    255,700
    
    
    
    255,996Goodwill, net
    
    
    421,674
    
    
    
    380,070Other Assets
    
    
    78,080
    
    
    
    79,021$
    1,040,913
    
    
    $
    991,814LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    25,521
    
    
    $
    21,911Accrued expenses
    
    
    73,698
    
    
    
    68,927Deferred income taxes
    
    
    6,913
    
    
    
    6,568Current maturities of long-term debt
    
    
    7,864
    
    
    
    65,838Total current liabilities
    
    
    113,996
    
    
    
    163,244Long-Term Debt, net of Current Maturities
    
    
    256,859
    
    
    
    149,005Deferred Income Taxes
    
    
    27,393
    
    
    
    34,298Accrued Income Taxes  Long Term
    
    
    11,349
    
    
    
    Other Noncurrent Liabilities
    
    
    47,867
    
    
    
    53,279Stockholders Equity
    
    
    583,449
    
    
    
    591,988$
    1,040,913
    
    
    $
    991,814
  3




---



##### Table of Contents



CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS  G&K Services, Inc. and Subsidiaries
 For the Three Months Ended
    
    
    For the Six Months EndedDecember 29,
    
    
    December 30,
    
    
    December 29,
    
    
    December 30,(In thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006RevenuesRental operations
    
    $
    232,208
    
    
    $
    209,130
    
    
    $
    458,276
    
    
    $
    416,431Direct sales
    
    
    23,060
    
    
    
    21,634
    
    
    
    40,778
    
    
    
    37,461Total revenues
    
    
    255,268
    
    
    
    230,764
    
    
    
    499,054
    
    
    
    453,892Operating ExpensesCost of rental operations*
    
    
    148,071
    
    
    
    134,833
    
    
    
    291,057
    
    
    
    266,485Cost of direct sales*
    
    
    16,492
    
    
    
    15,617
    
    
    
    29,226
    
    
    
    27,656Selling and administrative
    
    
    54,588
    
    
    
    50,042
    
    
    
    106,789
    
    
    
    99,921Depreciation and amortization
    
    
    12,385
    
    
    
    11,232
    
    
    
    24,414
    
    
    
    22,450Total operating expenses
    
    
    231,536
    
    
    
    211,724
    
    
    
    451,486
    
    
    
    416,512Income from Operations
    
    
    23,732
    
    
    
    19,040
    
    
    
    47,568
    
    
    
    37,380Interest expense
    
    
    3,990
    
    
    
    3,486
    
    
    
    7,948
    
    
    
    6,879Income before Income Taxes
    
    
    19,742
    
    
    
    15,554
    
    
    
    39,620
    
    
    
    30,501Provision for income taxes
    
    
    7,305
    
    
    
    5,910
    
    
    
    14,819
    
    
    
    11,665Net Income
    
    $
    12,437
    
    
    $
    9,644
    
    
    $
    24,801
    
    
    $
    18,836Basic weighted average number
of shares outstanding
    
    
    20,627
    
    
    
    21,190
    
    
    
    20,868
    
    
    
    21,187Basic Earnings per Common Share
    
    $
    0.60
    
    
    $
    0.46
    
    
    $
    1.19
    
    
    $
    0.89Diluted weighted average number
of shares outstanding
    
    
    20,783
    
    
    
    21,385
    
    
    
    21,054
    
    
    
    21,374Diluted Earnings per Common Share
    
    $
    0.60
    
    
    $
    0.45
    
    
    $
    1.18
    
    
    $
    0.88Dividends per share
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.10
    
    
    $
    0.08
 *
    
    Excludes depreciation and intangible amortization
  4




---



##### Table of Contents



CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  G&K Services, Inc. and Subsidiaries
 For the Six Months EndedDecember 29,
    
    
    December 30,(In thousands)
    
    2007
    
    
    2006Operating Activities:Net income
    
    $
    24,801
    
    
    $
    18,836Adjustments to reconcile net income to net cash
provided by operating activities -Depreciation and amortization
    
    
    24,414
    
    
    
    22,450Other Adjustments
    
    
    282
    
    
    
    1,732Changes in current operating items, exclusive of acquisitions
    
    
    (9,290
    )
    
    
    (16,260
    )Other assets and liabilities
    
    
    3,286
    
    
    
    1,276Net cash provided by operating activities
    
    
    43,493
    
    
    
    28,034Investing Activities:Property, plant and equipment additions, net
    
    
    (8,525
    )
    
    
    (18,355
    )Acquisitions of business assets, net
    
    
    (45,204
    )
    
    
    50Purchase of investments, net
    
    
    (1,887
    )
    
    
    (1,393
    )Net cash used for investing activities
    
    
    (55,616
    )
    
    
    (19,698
    )Financing Activities:Repayments of long-term debt
    
    
    (7,133
    )
    
    
    (7,440
    )Proceeds from (repayments of) short-term borrowings, net
    
    
    57,001
    
    
    
    (7,759
    )Cash dividends paid
    
    
    (2,100
    )
    
    
    (857
    )Sale of common stock
    
    
    3,289
    
    
    
    2,743Repurchase of common stock shares
    
    
    (47,227
    )
    
    
    Net cash provided by (used for) financing activities
    
    
    3,830
    
    
    
    (13,313
    )Decrease in Cash and Cash Equivalents
    
    
    (8,293
    )
    
    
    (4,977
    )Effect of Exchange Rates on Cash
    
    
    487
    
    
    
    (681
    )Cash and Cash Equivalents:Beginning of period
    
    
    22,759
    
    
    
    19,690End of period
    
    $
    14,953
    
    
    $
    14,032
  5




---



##### Table of Contents



1.
    
    Basis of Presentation for Interim Financial StatementsThe consolidated condensed financial statements included herein, except for the June 30,
2007 balance sheet which was derived from the audited consolidated financial statements for
the fiscal year ended June 30, 2007, 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 December 29, 2007, and the results of our operations for the three and six
months ended and our cash flows for the six months ended December 29, 2007 and December 30,
2006. 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 accounting policies we follow are set forth in Note 1 in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2007.The results of operations for the three and six month periods ended December 29, 2007 and
December 30, 2006 are not necessarily indicative of the results to be expected for the full
year.2.
    
    Adoption of New Accounting PronouncementsOn July 13, 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes  an Interpretation of FASB
Statement No. 109, which fundamentally changes the way that we are required to account for
our uncertain tax positions for financial accounting purposes and is effective for our
fiscal year beginning July 1, 2007. FIN 48 prescribes rules regarding how we should
recognize, measure and disclose in our financial statements the tax positions that we have
taken or will take on our tax return that are reflected in measuring current or deferred
income tax assets and liabilities for interim or annual periods. Differences between tax
positions taken in a tax return and amounts recognized in the financial statements will
generally result in an increase in a liability for income taxes payable, or a reduction in a
deferred tax asset or an increase in a deferred tax liability.As a result of the implementation of FIN 48, we recognized a $1.6 million decrease to the
beginning balance of retained earnings on our balance sheet. At the adoption date of July
1, 2007, we had $13.7 million of unrecognized tax benefits, of which $4.2 million would
favorably affect our effective tax rate in any future periods, if recognized.We or one or more of our subsidiaries file income tax returns in the U.S., Canada and
multiple state jurisdictions. We have substantially concluded on all U.S. Federal and
Canadian income tax examinations through fiscal years 2004 and 2003, respectively. With few
exceptions, we are no longer subject to state and local income tax examinations for years
before fiscal year 2003.We continue to recognize interest and penalties related to uncertain tax positions as a
component of income tax expense. Upon adoption of FIN 48, we had $1.8 million of accrued
interest and penalties related to uncertain tax positions, of which $1.4 million would
favorably affect our effective tax rate in any future periods, if recognized.We are not aware of any tax positions for which it is reasonably possible that the total
amounts of unrecognized tax benefits will significantly change in the next 12 months.
 6




---



##### Table of Contents



Accounting Pronouncements Not Yet AdoptedIn September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurement (SFAS 157). SFAS 157 provides a definition of fair value,
provides guidance for measuring fair value in U.S. GAAP and expands disclosures about fair
value measurement. SFAS 157 will be effective at the beginning of fiscal 2009.In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159
permits entities to choose to measure many financial instruments and certain other items at
fair value. SFAS 159 will be effective at the beginning of fiscal 2009.In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141
(revised 2007), Business Combinations (SFAS 141(R)). SFAS 141(R) will change how business
acquisitions are accounted for and will impact financial statements both on the acquisition
date and in subsequent periods. SFAS 141(R) will be effective at the beginning of fiscal
2010.We are currently evaluating the impact of SFAS 157, SFAS 159 and SFAS 141(R) on our
consolidated financial statements.3.
    
    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 29,
    
    
    December 30,
    
    
    December 29,
    
    
    December 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted average number of common
shares outstanding used in computation
of basic earnings per share
    
    
    20.6
    
    
    
    21.2
    
    
    
    20.9
    
    
    
    21.2Weighted average effect of non-vested
restricted stock grants and assumed
exercise of options
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Shares used in computation of
diluted earnings per share
    
    
    20.8
    
    
    
    21.4
    
    
    
    21.1
    
    
    
    21.4
 Potential common shares related to our outstanding stock options and restricted stock grants
of 1.0 million and 0.5 million for the three months ended December 29, 2007 and December 30,
2006, respectively, and 0.7 million and 0.5 million for the six months ended December 29,
2007 and December 30, 2006, 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 their market value.
 7




---



##### Table of Contents



4.
    
    Comprehensive IncomeFor the three and six month periods ended December 29, 2007 and December 30, 2006, the
components of comprehensive income were as follows:
 Three Months Ended
    
    
    Six Months EndedDecember 29,
    
    
    December 30,
    
    
    December 29,
    
    
    December 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    12.4
    
    
    $
    9.6
    
    
    $
    24.8
    
    
    $
    18.8Other comprehensive income:Foreign currency translation
adjustments, net of tax
    
    
    2.6
    
    
    
    (6.7
    )
    
    
    12.6
    
    
    
    (6.7
    )Net unrealized holding loss on
derivative financial
instruments, net of tax
    
    
    (0.8
    )
    
    
    (0.3
    )
    
    
    (2.0
    )
    
    
    (1.5
    )Comprehensive income
    
    $
    14.2
    
    
    $
    2.6
    
    
    $
    35.4
    
    
    $
    10.6
 5.
    
    InventoriesThe components of inventory as of December 29, 2007 and June 30, 2007 are as follows:
 December 29,
    
    
    June 30,2007
    
    
    2007Raw Materials
    
    $
    6.2
    
    
    $
    5.5Work in Process
    
    
    3.5
    
    
    
    4.4Finished Goods
    
    
    51.0
    
    
    
    52.9New Goods
    
    $
    60.7
    
    
    $
    62.8Merchandise In Service
    
    $
    81.5
    
    
    $
    78.0Total Inventories
    
    $
    142.2
    
    
    $
    140.8
 6.
    
    Goodwill and Intangible Assets
 Goodwill includes the following:
 United States
    
    
    Canada
    
    
    TotalBalance as of June 30, 2007
    
    $
    315.8
    
    
    $
    64.3
    
    
    $
    380.1Acquisitions, net of purchase
accounting adjustments
    
    
    36.3
    
    
    
    
    
    
    
    36.3Currency exchange and other
    
    
    
    
    
    
    5.3
    
    
    
    5.3Balance as of December 29, 2007
    
    $
    352.1
    
    
    $
    69.6
    
    
    $
    421.7
 The net increase in goodwill includes an increase of approximately $36.3 million related to
two acquisitions in fiscal 2008 and an increase of approximately $5.3 million resulting from
a change in foreign currency exchange rates.
 8




---



##### Table of Contents



Our other intangible assets, which are included in other assets on the consolidated
condensed balance sheet, are as follows:
 December 29,
    
    
    June 30,2007
    
    
    2007Other Intangible Assets:Customer Contracts
    
    $
    117.6
    
    
    $
    111.7Accumulated Amortization
    
    
    (74.6
    )
    
    
    (68.5
    )Net
    
    $
    43.0
    
    
    $
    43.2Non-Competition Agreements
    
    $
    11.1
    
    
    $
    11.1Accumulated Amortization
    
    
    (9.8
    )
    
    
    (9.4
    )Net
    
    $
    1.3
    
    
    $
    1.7
 The customer contracts include the combined value of the written service agreements and the
related customer relationship. We have determined that there are no customer relationships
with a significant separate value.
 Amortization expense was $5.6 million and $5.4 million for the six months ended December 29,
2007 and December 30, 2006, respectively. Estimated amortization expense for each of the
next five fiscal years based on the intangible assets as of December 29, 2007 is as follows:
 2008 remaining
    
    $
    5.42009
    
    
    7.42010
    
    
    7.22011
    
    
    6.52012
    
    
    5.72013
    
    
    4.2
 7.
    
    Long-Term DebtWe maintain a $325.0 million unsecured revolving credit facility which expires in August
2010. As of December 29, 2007, borrowings outstanding under the revolving credit facility
were $106.5 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 December 29, 2007, letters of credit outstanding
against the revolver were $21.0 million.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 29, 2007 bear interest at a rate of 5.52%. 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 issued $50.0 million of 8.4% unsecured fixed rate private placement notes with
certain institutional investors. The 10-year notes have an eight-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 December 29,
2007, the outstanding balance was $21.4 million.We maintain a loan agreement whereby the lender will make loans to us on a revolving basis
up to $60.0 million. This agreement has a termination date of October 21, 2010. 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
 9




---



##### Table of Contents



amount of eligible receivables less
various reserve requirements. We used the net proceeds of this loan to reduce indebtedness
under our unsecured credit facilities. At December 29, 2007, there was $60.0 million
outstanding under the agreement at a current interest rate of 4.78%.We have $75.0 million of unsecured variable rate 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. The interest rate and interest payments are reset and paid on a quarterly basis. As of
December 29, 2007, the outstanding balance of the notes was $75.0 million at a current rate
of 5.46%.
 8.
    
    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 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. Our
estimated forfeiture rate is reviewed and updated 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 $1.5 million and $1.1 million
for the three months ended and $2.6 million and $2.1 million for the six months ended
December 29, 2007 and December 30, 2006. The number of options that have been exercised and
restricted stock that vested since June 30, 2007, was 0.1 million shares.9.
    
    Employee Benefit PlansEffective January 1, 2007, we froze our pension and Supplemental Executive Retirement Plan
(SERP). As a result, there has been no future growth in benefits since December 31, 2006.
As noted below, net periodic pension cost has been significantly reduced.The components of net periodic pension cost are as follows for the three months ended
December 29, 2007 and December 30, 2006:
 Supplemental ExecutivePension Plan
    
    
    Retirement PlanThree Months Ended
    
    
    Three Months EndedDecember 29,
    
    
    December 30,
    
    
    December 29,
    
    
    December 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    
    
    
    $
    0.7
    
    
    $
    
    
    
    $
    0.1Interest cost
    
    
    0.8
    
    
    
    0.8
    
    
    
    0.2
    
    
    
    0.2Expected return on assets
    
    
    (1.1
    )
    
    
    (0.7
    )
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    (0.3
    )
    
    $
    0.8
    
    
    $
    0.2
    
    
    $
    0.3
 The components of net periodic pension cost are as follows for the six months ended December
29, 2007 and December 30, 2006:
 Supplemental ExecutivePension Plan
    
    
    Retirement PlanSix Months Ended
    
    
    Six Months EndedDecember 29,
    
    
    December 30,
    
    
    December 29,
    
    
    December 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    
    
    
    $
    1.4
    
    
    $
    
    
    
    $
    0.3Interest cost
    
    
    1.6
    
    
    
    1.6
    
    
    
    0.4
    
    
    
    0.4Expected return on assets
    
    
    (1.8
    )
    
    
    (1.4
    )
    
    
    
    
    
    
    Net periodic pension cost
    
    $
    (0.2
    )
    
    $
    1.6
    
    
    $
    0.4
    
    
    $
    0.7
 10




---



##### Table of Contents



10.
    
    Segment InformationWe have two operating segments, United States and Canada, which have been identified as
components of our Company 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 garment rental and non-apparel items such
as floor mats, dust mops, wiping towels, selected linen items and restroom products. No
single customer accounted for more than 1.5% of our consolidated revenue.Corporate expenses are allocated to the segments based on segment revenue. We evaluate
performance based on income from operations. Financial information by geographic
location for the three and six month periods ended December 29, 2007 and December 30,
2006 is as follows:
 UnitedFor the Three Months Ended
    
    States
    
    
    Canada
    
    
    TotalSecond Quarter Fiscal Year 2008:Revenues
    
    $
    208.3
    
    
    $
    47.0
    
    
    $
    255.3Income from operations
    
    
    15.9
    
    
    
    7.8
    
    
    
    23.7Depreciation and amortization
expense
    
    
    10.6
    
    
    
    1.8
    
    
    
    12.4Second Quarter Fiscal Year 2007:Revenues
    
    $
    191.1
    
    
    $
    39.7
    
    
    $
    230.8Income from operations
    
    
    12.5
    
    
    
    6.5
    
    
    
    19.0Depreciation and amortization
expense
    
    
    9.6
    
    
    
    1.6
    
    
    
    11.2
 UnitedFor the Six Months Ended
    
    States
    
    
    Canada
    
    
    TotalFiscal Year 2008:Revenues
    
    $
    408.6
    
    
    $
    90.5
    
    
    $
    499.1Income from operations
    
    
    30.4
    
    
    
    17.2
    
    
    
    47.6Depreciation and amortization
expense
    
    
    20.8
    
    
    
    3.6
    
    
    
    24.4Fiscal Year 2007:Revenues
    
    $
    374.4
    
    
    $
    79.5
    
    
    $
    453.9Income from operations
    
    
    24.5
    
    
    
    12.9
    
    
    
    37.4Depreciation and amortization
expense
    
    
    19.2
    
    
    
    3.3
    
    
    
    22.5
   11




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
      Critical Accounting Policies
   12




---



##### Table of Contents



Results of Operations
  Three Months
    
    Six Months
    
    PercentageEnded
    
    Ended
    
    ChangeThree Months
    
    Six MonthsDecember 29,
    
    December 30,
    
    December 29,
    
    December 30,
    
    FY 2008
    
    FY 20082007
    
    2006
    
    2007
    
    2006
    
    vs. FY 2007
    
    vs. FY 2007Revenues:Rental
    
    
    91.0
    %
    
    
    90.6
    %
    
    
    91.8
    %
    
    
    91.7
    %
    
    
    11.0
    %
    
    
    10.0
    %Direct
    
    
    9.0
    
    
    
    9.4
    
    
    
    8.2
    
    
    
    8.3
    
    
    
    6.6
    
    
    
    8.9Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    10.6
    
    
    
    9.9Expenses:Cost of rental sales
    
    
    63.8
    
    
    
    64.5
    
    
    
    63.5
    
    
    
    64.0
    
    
    
    9.8
    
    
    
    9.2Cost of direct sales
    
    
    71.5
    
    
    
    72.2
    
    
    
    71.7
    
    
    
    73.8
    
    
    
    5.6
    
    
    
    5.7Total cost of sales
    
    
    64.5
    
    
    
    65.2
    
    
    
    64.2
    
    
    
    64.8
    
    
    
    9.4
    
    
    
    8.9Selling and administrative
    
    
    21.4
    
    
    
    21.7
    
    
    
    21.4
    
    
    
    22.0
    
    
    
    9.1
    
    
    
    6.9Depreciation and
amortization
    
    
    4.8
    
    
    
    4.8
    
    
    
    4.9
    
    
    
    5.0
    
    
    
    10.3
    
    
    
    8.7Income from operations
    
    
    9.3
    
    
    
    8.3
    
    
    
    9.5
    
    
    
    8.2
    
    
    
    24.6
    
    
    
    27.3Interest expense
    
    
    1.6
    
    
    
    1.6
    
    
    
    1.6
    
    
    
    1.5
    
    
    
    14.5
    
    
    
    15.5Income before income taxes
    
    
    7.7
    
    
    
    6.7
    
    
    
    7.9
    
    
    
    6.7
    
    
    
    26.9
    
    
    
    29.9Provision for income taxes
    
    
    2.8
    
    
    
    2.5
    
    
    
    2.9
    
    
    
    2.6
    
    
    
    23.6
    
    
    
    27.0Net income
    
    
    4.9
    %
    
    
    4.2
    %
    
    
    5.0
    %
    
    
    4.1
    %
    
    
    29.0
    %
    
    
    31.7
    %
 Three months ended December 29, 2007 compared to three months ended December 30, 2006
 Revenues
 13




---



##### Table of Contents



Cost of Rental
 Cost of Direct Sales
 Selling and Administrative
 Depreciation and Amortization
 Interest Expense
 Provision for Income Taxes
 Six months ended December 29, 2007 compared to six months ended December 30, 2006
 Revenues
 Cost of Rental and Direct Sale
 14




---



##### Table of Contents



Selling and Administrative
 Depreciation and Amortization.
 Interest Expense
 Provision for Income Taxes
 Liquidity, Capital Resources and Financial Condition
   Operating Activities.
 Investing Activities.
 Financing Activities.
   15




---



##### Table of Contents



Cash Obligations.
   Off Balance Sheet Arrangements
  Pension Obligations
    16




---



##### Table of Contents



Litigation
  Share-Based Compensation
  Adoption of New Accounting Pronouncements
    17




---



##### Table of Contents



Accounting Pronouncements Not Yet Adopted
     Cautionary Statements Regarding Forward-Looking Statements
  18




---



##### 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
   19




---



##### Table of Contents



PART II
 OTHER INFORMATION
 
 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 September
30, 2007 and ending
November 3, 2007)
    
    
    186,700
    
    
    $
    39.73
    
    
    
    186,700
    
    
    $
    73,447,243Month #2(Fiscal month
beginning November
4, 2007 and ending
December 1, 2007)
    
    
    299,078
    
    
    $
    39.80
    
    
    
    299,078
    
    
    $
    61,534,484Month #3(Fiscal month
beginning December
2, 2007 and ending
December 29, 2007)
    
    
    427,407
    
    
    $
    38.91
    
    
    
    427,407
    
    
    $
    44,889,770
  20




---



##### 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 15, 2007.b.
    
    The following three persons were elected as directors: John S. Bronson, Wayne
M. Fortun and Ernest J. Mrozek. The following six persons comprise the other directors
whose terms of office continued after the Annual Meeting of Shareholders: Michael G.
Allen, Paul Baszucki, J. Patrick Doyle, Richard L. Marcantonio, M. Lenny Pippin and
Alice M. Richter.c.
    
    1.   Each director nominee received the following votes:
 SharesIn Favor
    
    Withhold Authority
    
    Broker Non-VotesMr. Bronson
    
    
    19,223,250
    
    
    
    255,769
    
    
    
    0Mr. Fortun
    
    
    19,072,418
    
    
    
    406,601
    
    
    
    0Mr. Mrozek
    
    
    19,223,507
    
    
    
    255,511
    
    
    
    0
 2.
    
    Shareholders ratified the appointment of Ernst & Young LLP, Independent
Registered Public Accounting Firm, as the Companys independent auditors for fiscal
2008: 19,265,180 shares in favor, 195,301 shares voting against and 18,535 shares
abstaining. There were no broker non-votes.
 21




---



##### Table of Contents



ITEM 6. EXHIBITS
  10.1 Amendment to Executive Employment Agreement with Richard L. Marcantonio, dated
November 16, 2007 (incorporated herein by reference to Registrants Form 8-K filed
November 20, 2007).10.2 Amendment to Executive Employment Agreement with Douglas A. Milroy, dated
November 16, 2007 (incorporated herein by reference to Registrants Form 8-K filed
November 20, 2007).10.3 Amendment to Executive Employment Agreement with David M. Miller, dated November
16, 2007 (incorporated herein by reference to Registrants Form 8-K filed November 20,
2007).10.4 Amendment to Executive Employment Agreement with Robert G. Wood, dated November
16, 2007 (incorporated herein by reference to Registrants Form 8-K filed November 20,
2007).10.5 Amendment to Executive Employment Agreement with Jeffrey L. Wright, dated
November 16, 2007 (incorporated herein by reference to Registrants Form 8-K filed
November 20, 2007).31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 22




---



##### Table of Contents



G&K SERVICES, INC.
(Registrant)Date: February 1, 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) 23