##### 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 April 1, 2006
 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.)
 
 
  YES þ
    
    NO o
  þ o o
  YES o
    
    NO þ




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##### Table of Contents



G&K Services, Inc.
 Form 10-Q
 Table of Contents
 PAGEPART IItem 1.
    
    Financial StatementsConsolidated Condensed Balance Sheets as of April 1, 2006 and July 2, 2005
    
    
    3Consolidated Statements of Operations for the three and nine months ended April 1, 2006 and April 2, 2005
    
    
    4Consolidated Condensed Statements of Cash Flows for the nine months ended April 1, 2006 and April 2, 2005
    
    
    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
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    23PART IIItem 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 6.
    
    Exhibits
    
    
    24Signatures
    
    
    
    
    25Chief Executive Officer to Sec. 302 CertificationChief Financial Officer to Sec. 302 CertificationChief Executive Officer to Sec. 906 CertificationChief Financial Officer to Sec. 906 Certification
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##### Table of Contents



PART I
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 G&K Services, Inc. and Subsidiaries
 April 1,
    
    
    July 2,2006
    
    
    2005(In thousands)
    
    (Unaudited)
    
    
    (Restated)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    21,960
    
    
    $
    15,345Accounts receivable, less allowance for doubtful
accounts of $3,146 and $2,890
    
    
    95,426
    
    
    
    83,459Inventories
    
    
    137,290
    
    
    
    121,120Prepaid expenses
    
    
    14,630
    
    
    
    16,587Total current assets
    
    
    269,306
    
    
    
    236,511Property, Plant and Equipment, net
    
    
    249,896
    
    
    
    243,307Goodwill
    
    
    344,642
    
    
    
    338,701Other Assets
    
    
    84,336
    
    
    
    84,650$
    948,180
    
    
    $
    903,169LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    32,874
    
    
    $
    25,695Accrued expenses
    
    
    66,877
    
    
    
    71,483Deferred income taxes
    
    
    9,201
    
    
    
    8,971Current maturities of long-term debt
    
    
    17,925
    
    
    
    26,537Total current liabilities
    
    
    126,877
    
    
    
    132,686Long-Term Debt, net of Current Maturities
    
    
    212,066
    
    
    
    210,462Deferred Income Taxes
    
    
    30,756
    
    
    
    30,887Other Noncurrent Liabilities
    
    
    54,427
    
    
    
    47,691Stockholders Equity
    
    
    524,054
    
    
    
    481,443$
    948,180
    
    
    $
    903,169
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CONSOLIDATED STATEMENTS OF OPERATIONS
 G&K Services, Inc. and Subsidiaries
 For the Three Months Ended
    
    
    For the Nine Months EndedApril 2,
    
    
    
    
    
    
    April 2,April 1,
    
    
    2005
    
    
    April 1,
    
    
    2005(In thousands, except per share data)
    
    2006
    
    
    (Restated)
    
    
    2006
    
    
    (Restated)RevenuesRental operations
    
    $
    201,562
    
    
    $
    188,064
    
    
    $
    594,985
    
    
    $
    547,465Direct sales
    
    
    24,579
    
    
    
    15,746
    
    
    
    58,452
    
    
    
    33,912Total revenues
    
    
    226,141
    
    
    
    203,810
    
    
    
    653,437
    
    
    
    581,377Operating ExpensesCost of rental operations
    
    
    131,387
    
    
    
    119,139
    
    
    
    383,565
    
    
    
    346,563Cost of direct sales
    
    
    17,659
    
    
    
    12,011
    
    
    
    42,015
    
    
    
    25,348Selling and administrative
    
    
    49,619
    
    
    
    43,283
    
    
    
    141,219
    
    
    
    124,577Depreciation and amortization
    
    
    10,883
    
    
    
    10,407
    
    
    
    32,126
    
    
    
    30,726Total operating expenses
    
    
    209,548
    
    
    
    184,840
    
    
    
    598,925
    
    
    
    527,214Income from Operations
    
    
    16,593
    
    
    
    18,970
    
    
    
    54,512
    
    
    
    54,163Interest expense
    
    
    3,395
    
    
    
    2,891
    
    
    
    9,712
    
    
    
    8,080Income before Income Taxes
    
    
    13,198
    
    
    
    16,079
    
    
    
    44,800
    
    
    
    46,083Provision for income taxes
    
    
    2,840
    
    
    
    6,129
    
    
    
    13,837
    
    
    
    17,338Net Income
    
    $
    10,358
    
    
    $
    9,950
    
    
    $
    30,963
    
    
    $
    28,745Basic weighted average number
of shares outstanding
    
    
    21,132
    
    
    
    20,994
    
    
    
    21,069
    
    
    
    20,910Basic Earnings per Common Share
    
    $
    0.49
    
    
    $
    0.47
    
    
    $
    1.47
    
    
    $
    1.37Diluted weighted average number
of shares outstanding
    
    
    21,311
    
    
    
    21,322
    
    
    
    21,228
    
    
    
    21,362Diluted Earnings per Common Share
    
    $
    0.49
    
    
    $
    0.47
    
    
    $
    1.46
    
    
    $
    1.35Dividends per share
    
    $
    0.0175
    
    
    $
    0.0175
    
    
    $
    0.0525
    
    
    $
    0.0525
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 G&K Services, Inc. and Subsidiaries
 For the Nine Months EndedApril 2,April 1,
    
    
    2005(In thousands)
    
    2006
    
    
    (Restated)Operating Activities:Net income
    
    $
    30,963
    
    
    $
    28,745Adjustments to reconcile net income to net cash
provided by operating activities Depreciation and amortization
    
    
    32,126
    
    
    
    30,726Stock-based compensation
    
    
    3,060
    
    
    
    2,891Deferred income taxes
    
    
    354
    
    
    
    1,095Changes in current operating items, exclusive of acquisitions
    
    
    (17,320
    )
    
    
    (20,253
    )Other assets and liabilities
    
    
    829
    
    
    
    1,159Net cash provided by operating activities
    
    
    50,012
    
    
    
    44,363Investing Activities:Property, plant and equipment additions, net
    
    
    (26,414
    )
    
    
    (10,194
    )Acquisitions of business assets and other
    
    
    (13,020
    )
    
    
    (74,895
    )Net cash used for investing activities
    
    
    (39,434
    )
    
    
    (85,089
    )Financing Activities:Repayments of long-term debt
    
    
    (7,661
    )
    
    
    (21,317
    )Proceeds from short-term borrowings, net
    
    
    2,050
    
    
    
    41,200Cash dividends paid
    
    
    (1,112
    )
    
    
    (1,100
    )Sale of common stock
    
    
    2,395
    
    
    
    4,268Net cash (used for) provided by financing activities
    
    
    (4,328
    )
    
    
    23,051Increase (Decrease) in Cash and Cash Equivalents
    
    
    6,250
    
    
    
    (17,675
    )Effect of Exchange Rates on Cash
    
    
    365
    
    
    
    1,608Cash and Cash Equivalents:Beginning of period
    
    
    15,345
    
    
    
    26,931End of period
    
    $
    21,960
    
    
    $
    10,864Supplemental Cash Flow Information:Non-Cash Transactions Debt issued in connection with business acquisitions
    
    $
    (1,419
    )
    
    $
    11,890
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The consolidated condensed financial statements included herein, except for the July 2, 2005
balance sheet which was derived from the audited consolidated financial statements for the
fiscal year ended July 2, 2005, 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 April
1, 2006, and the results of its operations for the three and nine months ended and its cash
flows for the nine months ended April 1, 2006 and April 2, 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 nine month periods ended April 1, 2006 and April
2, 2005 are not necessarily indicative of the results to be expected for the full year.
 1.
    
    Summary of Significant Accounting Policies
 Accounting 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 2, 2005.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 industrial, service and high-technology companies providing them
with rented uniforms or purchase options as well as facility services products such as floor
mats, dust mops, wiping towels, selected linen items and several restroom products. 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 abused 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 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 sheets and the related gains or losses on these contracts are
recorded in other comprehensive income, which is a component of stockholders equity.
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. The net
effect of this accounting is that interest expense on the portion of variable rate debt
being hedged is generally recorded based on fixed interest rates.The Company also uses derivative financial instruments to manage the risk that changes in
gasoline cost will affect the future financial results of the Company. The Company
purchases futures contracts to effectively hedge a portion of anticipated actual gasoline
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 recorded in other
comprehensive income, which is a component of stockholders equity or in the statements of
operations depending on the effectiveness of the hedge. Upon settlement of each contract,
the actual gain or loss is reflected in gasoline expense.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 third quarter of fiscal 2006 or 2005.Per Share DataBasic earnings per common share were 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 nonvested restricted stock, using the treasury stock method.
 Three Months Ended
    
    
    Nine Months EndedApril 1,
    
    
    April 2,
    
    
    April 1,
    
    
    April 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average number of common
shares outstanding used in computation
of basic earnings per share
    
    
    21,132
    
    
    
    20,994
    
    
    
    21,069
    
    
    
    20,910Weighted average effect of nonvested
restricted stock grants and assumed
exercise of options
    
    
    179
    
    
    
    328
    
    
    
    159
    
    
    
    452Shares used in computation of
diluted earnings per share
    
    
    21,311
    
    
    
    21,322
    
    
    
    21,228
    
    
    
    21,362
 Potential common shares related to the Companys outstanding stock options and
restricted stock grants of 492,000 and 84,000 for the three month periods, and 487,000 and
210,000 for the nine month periods ended April 1, 2006 and April 2, 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.
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ReclassificationsCertain prior period amounts have been reclassified to conform with current year
presentation. These reclassifications did not impact current or historical net income or
stockholders equity.2.
    
    Comprehensive IncomeFor the three and nine month periods ended April 1, 2006 and April 2, 2005, the components
of comprehensive income were as follows:
 Three Months Ended
    
    
    Nine Months EndedApril 1,
    
    
    April 2,
    
    
    April 1,
    
    
    April 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    10,358
    
    
    $
    9,950
    
    
    $
    30,963
    
    
    $
    28,745Other comprehensive incomeForeign currency translation
adjustments, net of tax
    
    
    (405
    )
    
    
    (1,205
    )
    
    
    6,331
    
    
    
    9,233Net unrealized holding gain on
derivative financial
instruments, net of tax
    
    
    457
    
    
    
    575
    
    
    
    975
    
    
    
    804Comprehensive income
    
    $
    10,410
    
    
    $
    9,320
    
    
    $
    38,269
    
    
    $
    38,782
 3.
    
    Goodwill and Intangible AssetsThe changes in the carrying amount of goodwill for the nine months ended April 1, 2006, by
operating segment, are as follows:
 United States
    
    
    Canada
    
    
    TotalBalance as of July 2, 2005
    
    $
    286,313
    
    
    $
    52,388
    
    
    $
    338,701Goodwill acquired during
the period, net of
purchase price adjustments
    
    
    (229
    )
    
    
    3,388
    
    
    
    3,159Other, primarily foreign
currency translation
    
    
    
    
    
    
    2,782
    
    
    
    2,782Balance as of April 1, 2006
    
    $
    286,084
    
    
    $
    58,558
    
    
    $
    344,642
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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 April 1, 2006Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer contracts
    
    
    $105,683
    
    
    
    $55,344
    
    
    
    $50,339Non-competition agreements
    
    
    10,879
    
    
    
    8,142
    
    
    
    2,737Total
    
    
    $116,562
    
    
    
    $63,486
    
    
    
    $53,076
 As of July 2, 2005Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    NetCustomer contracts
    
    
    $102,021
    
    
    
    $47,821
    
    
    
    $54,200Non-competition agreements
    
    
    10,829
    
    
    
    7,239
    
    
    
    3,590Total
    
    
    $112,850
    
    
    
    $55,060
    
    
    
    $57,790
 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 $8,056 and $6,803 for the nine months ended April 1, 2006 and April
2, 2005, respectively. Estimated amortization expense for each of the five succeeding
fiscal years based on the intangible assets as of April 1, 2006 is as follows:
 2006 remaining
    
    $
    2,7702007
    
    
    10,6102008
    
    
    10,0482009
    
    
    6,3292010
    
    
    6,1522011
    
    
    5,482
 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 April 1, 2006, borrowings outstanding under the revolving credit facility were $58,300.
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 April 1,
2006, letters of credit outstanding against the revolver were $33,140.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 April
1, 2006 bear interest at LIBOR plus 0.875%. The Company also pays a fee on the unused daily
balance of the revolver based on a leverage ratio calculated each quarter.
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5.
    
    Stock-Based CompensationThe Company maintains Stock Option and Compensation Plans (the Employee Plans) to grant
certain stock awards, including stock options at fair market value and restricted shares, to
key employees of the Company. Exercise periods for stock options are limited to a maximum
of 10 years and a minimum of one year. A maximum of 3,000,000 stock awards can be granted
under the Employee Plans and 1,039,194 awards were available for grant as of April 1, 2006.The Company also maintains the 1996 Director Stock Option Plan (the Directors Plan). The
Directors Plan provides for automatic grant of 3,000 nonqualified stock options (initial
grants) to nonemployee directors of the Company as of the later of August 1996 or the date
such individuals became directors of the Company and 1,500 nonqualified stock options on
each subsequent annual shareholder meeting date and 500 stock grants on the first business
day of each calendar year that each nonemployee director is serving. The Company has
reserved 100,000 shares of Class A common stock for issuance under the Directors Plan.
These options expire within 10 years of grant and are exercisable one year from the date of
grant, except for the initial grants, of which, one-third of the total options are
exercisable each year beginning with the first anniversary of the date of grant. The option
price will be the average market price of the Class A common stock during the 10 business
days preceding the date of grant.The Company has adopted the provisions of the Statement of Financial Accounting Standards
No. 123 (revised 2004) Share-Based Payment (SFAS 123(r)) in the first quarter of fiscal
2006 under the modified retrospective transition method. SFAS 123(r) eliminates accounting
for share-based compensation transactions using the intrinsic value method prescribed in APB
Opinion No. 25, Accounting for Stock Issued to Employees, and requires instead that the
fair value of all share-based transactions, including grants of employee stock options, be
recognized in the income statement. Under the modified retrospective transition method, all
prior period financial statements were restated to recognize compensation cost in the
amounts previously reported in the Notes to Consolidated Financial Statements.As a result of adopting SFAS 123(r) on July 3, 2005, income before income taxes and net
income have been restated by $765 and $476 for the three month period, and $2,214 and $1,378
for the nine month period ended April 2, 2005, respectively. Basic and diluted earnings per
share have been restated by $0.03 and $0.02 per share for the three month period, and $0.07
and $0.07 per share for the nine month period ended April 2, 2005, respectively. The
beginning balances of deferred taxes, paid in capital and retained earnings have been
restated by $6,013, $18,496 and $12,483, respectively, to recognize compensation cost for
fiscal years 1996 through 2005 in the amounts previously reported in the Notes to
Consolidated Financial Statements under provisions of SFAS No.123, Accounting for
Stock-Based Compensation.
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The following schedule summarizes activity in the plans for the three and nine month periods
ended April 1, 2006:
 Stock OptionsWeightedEmployee
    
    
    Directors
    
    
    
    
    
    
    AveragePlans
    
    
    Plan
    
    
    Grant Price
    
    
    Exercise PriceThree months:Outstanding at December 31,
2005
    
    
    1,358,744
    
    
    
    60,500
    
    
    $
    25.00  53.34
    
    
    $
    35.81Granted
    
    
    2,350
    
    
    
    1,500
    
    
    
    38.09  38.34
    
    
    
    38.25Exercised
    
    
    (32,349
    )
    
    
    
    
    
    
    27.95  36.41
    
    
    
    31.55Canceled
    
    
    (5,662
    )
    
    
    
    
    
    
    27.95  46.00
    
    
    
    39.33Outstanding at April 1, 2006
    
    
    1,323,083
    
    
    
    62,000
    
    
    $
    25.00  53.34
    
    
    $
    35.87Nine months:Outstanding at July 2, 2005
    
    
    1,161,547
    
    
    
    55,000
    
    
    $
    25.00  53.34
    
    
    $
    34.21Granted
    
    
    260,015
    
    
    
    15,000
    
    
    
    38.09  42.97
    
    
    
    42.08Exercised
    
    
    (66,026
    )
    
    
    (8,000
    )
    
    
    25.00  41.56
    
    
    
    31.38Canceled
    
    
    (32,453
    )
    
    
    
    
    
    
    27.95  46.00
    
    
    
    38.28Outstanding at April 1, 2006
    
    
    1,323,083
    
    
    
    62,000
    
    
    $
    25.00  53.34
    
    
    $
    35.87Exercisable at April 1, 2006
    
    
    849,555
    
    
    
    43,000
    
    
    $
    25.00  53.34
    
    
    $
    34.12
 The following schedule summarizes the information related to stock options outstanding at
April 1, 2006:
 Options Outstanding
    
    
    Options ExercisableAverageRemaining
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    Number
    
    
    Option Life
    
    
    Average
    
    
    Number
    
    
    AverageExercise Price
    
    Outstanding
    
    
    (Years)
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$16.50  25.00
    
    
    42,300
    
    
    
    4.2
    
    
    $
    25.00
    
    
    
    42,300
    
    
    $
    25.0025.01  37.00
    
    
    860,794
    
    
    
    7.0
    
    
    
    32.57
    
    
    
    647,682
    
    
    
    31.7637.01  53.34
    
    
    481,989
    
    
    
    5.9
    
    
    
    42.71
    
    
    
    202,573
    
    
    
    43.581,385,083
    
    
    
    6.5
    
    
    $
    35.87
    
    
    
    892,555
    
    
    $
    34.12
 The weighted average fair value of options granted was $11.47 and $12.76 for the three month
periods, and $10.90 and $10.96 for the nine month periods ended April 1, 2006 and April 2,
2005, respectively. The weighted average exercise price was $31.55 and $30.26 for the three
month periods, and $31.38 and $29.37 for the nine month periods ended April 1, 2006 and
April 2, 2005, respectively.The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average assumptions used:
risk-free interest rates of 4.40% and 3.88% for the three month periods, and 3.91% and 3.37%
for the nine month periods ended April 1, 2006 and April 2, 2005, respectively; expected
annual dividends of $0.07 per share; expected lives of 4 years and 5 years for the three and
nine months ended April 1, 2006 and April 2, 2005, respectively; and expected volatility of
24.52% and 25.85% for the three month periods, and 24.46% and 26.41% for the nine month
periods ended April 1, 2006 and April 2, 2005, respectively.
 11




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##### Table of Contents



Compensation cost for stock options is recognized on a straight-line basis over the
requisite service period of the award (or to an employees eligible retirement date, if
earlier). Total compensation expense related to stock options was $600 and $765 for the
three month periods, and $2,205 and $2,214 for the nine month periods ended April 1, 2006
and April 2, 2005, respectively.Under the Employee Plans, the Company grants restricted stock to key employees for nominal
consideration. The restrictions lapse over periods up to seven years. The Company granted
450 shares of restricted stock in the three month period ended April 1, 2006 and 80,185 and
12,250 shares of restricted stock in the nine month periods ended April 1, 2006 and April 2,
2005, respectively. The weighted average grant date fair value per share of restricted
stock granted during the three month period ended April 1, 2006 was $39.09, and for the nine
month periods ended April 1, 2006 and April 2, 2005 was $42.57 and $36.41, respectively.
Compensation expense is recognized as the restrictions are removed from the stock for the
difference between the par value and fair market value as of the grant date. Total
compensation expense related to restricted stock was $342 and $154 for the three month
periods, and $855 and $677 for the nine month periods ended April 1, 2006 and April 2, 2005,
respectively.6.
    
    Employee Benefit PlansThe components of net periodic pension cost are as follows for the three months ended April
1, 2006 and April 2, 2005:
 Supplemental ExecutivePension Plan
    
    
    Retirement PlanThree Months Ended
    
    
    Three Months EndedApril 1,
    
    
    April 2,
    
    
    April 1,
    
    
    April 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    1,190
    
    
    $
    948
    
    
    $
    234
    
    
    $
    198Interest cost
    
    
    809
    
    
    
    681
    
    
    
    188
    
    
    
    171Expected return on assets
    
    
    (617
    )
    
    
    (545
    )
    
    
    
    
    
    
    Prior service cost
    
    
    13
    
    
    
    14
    
    
    
    11
    
    
    
    11Loss
    
    
    341
    
    
    
    129
    
    
    
    76
    
    
    
    47Net periodic pension cost
    
    $
    1,736
    
    
    $
    1,227
    
    
    $
    509
    
    
    $
    427
 The components of net periodic pension cost are as follows for the nine months ended
April 1, 2006 and April 2, 2005:
 Supplemental ExecutivePension Plan
    
    
    Retirement PlanNine Months Ended
    
    
    Nine Months EndedApril 1,
    
    
    April 2,
    
    
    April 1,
    
    
    April 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    3,571
    
    
    $
    2,843
    
    
    $
    702
    
    
    $
    588Interest cost
    
    
    2,427
    
    
    
    2,042
    
    
    
    565
    
    
    
    509Expected return on assets
    
    
    (1,850
    )
    
    
    (1,634
    )
    
    
    
    
    
    
    Prior service cost
    
    
    39
    
    
    
    42
    
    
    
    32
    
    
    
    32Loss
    
    
    1,021
    
    
    
    387
    
    
    
    228
    
    
    
    151Net periodic pension cost
    
    $
    5,208
    
    
    $
    3,680
    
    
    $
    1,527
    
    
    $
    1,280
 12




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##### Table of Contents



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
one customers transactions account for 1.0% or more of the Companys revenues.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. Income from operations for the three and nine
months ended April 1, 2006, for United States operating segment, includes a provision of
$2,050 related to the pending resolution of two specific legal matters. The Company
evaluates performance based on income from operations. Financial information by
geographic location for the three and nine month periods ended April 1, 2006 and April
2, 2005 is as follows:
 UnitedFor the Three Months Ended
    
    States
    
    
    Canada
    
    
    TotalThird Quarter Fiscal Year 2006:Revenues
    
    $
    186,965
    
    
    $
    39,176
    
    
    $
    226,141Income from operations
    
    
    10,254
    
    
    
    6,339
    
    
    
    16,593Property, plant and equipment
additions, net
    
    
    9,144
    
    
    
    788
    
    
    
    9,932Depreciation and amortization
expense
    
    
    9,389
    
    
    
    1,494
    
    
    
    10,883Third Quarter Fiscal Year 2005:Revenues
    
    $
    170,069
    
    
    $
    33,741
    
    
    $
    203,810Income from operations
    
    
    12,510
    
    
    
    6,460
    
    
    
    18,970Property, plant and equipment
additions, net
    
    
    4,884
    
    
    
    1,215
    
    
    
    6,099Depreciation and amortization
expense
    
    
    8,976
    
    
    
    1,431
    
    
    
    10,407
 UnitedFor the Nine Months Ended
    
    States
    
    
    Canada
    
    
    TotalFiscal Year 2006:Revenues
    
    $
    541,459
    
    
    $
    111,978
    
    
    $
    653,437Income from operations
    
    
    35,419
    
    
    
    19,093
    
    
    
    54,512Property, plant and equipment
additions, net
    
    
    24,320
    
    
    
    2,094
    
    
    
    26,414Depreciation and amortization
expense
    
    
    27,653
    
    
    
    4,473
    
    
    
    32,126Fiscal Year 2005:Revenues
    
    $
    489,113
    
    
    $
    92,264
    
    
    $
    581,377Income from operations
    
    
    36,263
    
    
    
    17,900
    
    
    
    54,163Property, plant and equipment
additions, net
    
    
    7,119
    
    
    
    3,075
    
    
    
    10,194Depreciation and amortization
expense
    
    
    26,683
    
    
    
    4,043
    
    
    
    30,726
 13




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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
   14




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Revenue Recognition and Allowance for Doubtful Accounts
  Inventories
  Goodwill, Intangibles and Other Long-Lived Assets
   15




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##### Table of Contents



Insurance
  Income Taxes
    Results of Operations
  Three Months
    
    
    Nine Months
    
    
    PercentageEnded
    
    
    Ended
    
    
    ChangeThree Months
    
    
    Nine MonthsApril 1,
    
    
    April 2,
    
    
    April 1,
    
    
    April 2,
    
    
    FY 2006
    
    
    FY 20062006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    vs. FY 2005
    
    
    vs. FY 2005Revenues:Rental
    
    
    89.1
    %
    
    
    92.3
    %
    
    
    91.1
    %
    
    
    94.2
    %
    
    
    7.2
    %
    
    
    8.7
    %Direct
    
    
    10.9
    
    
    
    7.7
    
    
    
    8.9
    
    
    
    5.8
    
    
    
    56.1
    
    
    
    72.4Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    11.0
    
    
    
    12.4Expenses:Cost of rental sales
    
    
    65.2
    
    
    
    63.4
    
    
    
    64.5
    
    
    
    63.3
    
    
    
    10.3
    
    
    
    10.7Cost of direct sales
    
    
    71.8
    
    
    
    76.3
    
    
    
    71.9
    
    
    
    74.7
    
    
    
    47.0
    
    
    
    65.8Total cost of sales
    
    
    65.9
    
    
    
    64.3
    
    
    
    65.1
    
    
    
    64.0
    
    
    
    13.6
    
    
    
    14.4Selling and administrative
    
    
    22.0
    
    
    
    21.3
    
    
    
    21.7
    
    
    
    21.4
    
    
    
    14.6
    
    
    
    13.4Depreciation and
amortization
    
    
    4.8
    
    
    
    5.1
    
    
    
    4.9
    
    
    
    5.3
    
    
    
    4.6
    
    
    
    4.6Income from operations
    
    
    7.3
    
    
    
    9.3
    
    
    
    8.3
    
    
    
    9.3
    
    
    
    (12.5
    )
    
    
    0.6Interest expense
    
    
    1.5
    
    
    
    1.4
    
    
    
    1.4
    
    
    
    1.4
    
    
    
    17.4
    
    
    
    20.2Income before income taxes
    
    
    5.8
    
    
    
    7.9
    
    
    
    6.9
    
    
    
    7.9
    
    
    
    (17.9
    )
    
    
    (2.8
    )Provision for income taxes
    
    
    1.2
    
    
    
    3.0
    
    
    
    2.2
    
    
    
    3.0
    
    
    
    (53.7
    )
    
    
    (20.2
    )Net income
    
    
    4.6
    %
    
    
    4.9
    %
    
    
    4.7
    %
    
    
    4.9
    %
    
    
    4.1
    %
    
    
    7.7
    %
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##### Table of Contents



Three months ended April 1, 2006 compared to three months ended April 2, 2005
 Revenues.
   Cost of Rental and Direct Sale.
  Selling and Administrative.
 Depreciation and Amortization
 Interest Expense
 Provision for Income Taxes
 17




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##### Table of Contents



Nine months ended April 1, 2006 compared to nine months ended April 2, 2005
 Revenues.
  Cost of Rental and Direct Sale.
  Selling and Administrative.
 Depreciation and Amortization
 Income from Operations.
 Interest Expense
 18




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##### Table of Contents



Provision for Income Taxes
 Liquidity, Capital Resources and Financial Condition
  Operating Activities.
  Investing Activities.
 Financing Activities.
   Cash Obligations.
 19




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##### Table of Contents



2011 and2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    There-Remaining
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    after
    
    
    TotalVariable rate revolving
credit facility
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    58,300
    
    
    $
    
    
    
    $
    58,300Variable rate senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    75,000Variable rate senior loan
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000Fixed rate notes
    
    
    
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    7,143
    
    
    
    7,142
    
    
    
    35,714Other debt arrangements, including
capital leases
    
    
    38
    
    
    
    10,777
    
    
    
    120
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    10,977Operating leases
    
    
    4,546
    
    
    
    16,387
    
    
    
    13,404
    
    
    
    9,070
    
    
    
    6,541
    
    
    
    6,014
    
    
    
    55,962Total contractual cash obligations
    
    $
    4,584
    
    
    $
    34,307
    
    
    $
    70,667
    
    
    $
    16,255
    
    
    $
    71,984
    
    
    $
    88,156
    
    
    $
    285,953
    Pension Obligations
   20




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Impact of Inflation
   Litigation
  Stock-Based Compensation
    21




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##### Table of Contents



Cautionary Statements Regarding Forward-Looking Statements
   22




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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
   23




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PART II
 OTHER INFORMATION
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 At the beginning of the third quarter, the Company had two classes of voting securities
outstanding: Class A Common Stock, $0.50 par value per share, and Class B Common Stock,
$0.50 par value per share. Each share of Class A Common Stock is entitled to one vote, and
each share of Class B Common Stock was entitled to 10 votes, in each case, on matters
submitted to a vote of the Companys shareholders. Class A Common Stock may be acquired by
holders of Class B Common Stock upon conversion of their shares of Class B Common Stock, at
any time, on the basis of one share of Class A Common Stock for each share of Class B Common
Stock converted. On February 3, 2006 and March 23, 2006 the Company issued 1,208,256 and
67,573 shares of Class A Common Stock, respectively, to three of its shareholders upon the
conversion by such shareholders of a like number of shares of Class B Common Stock. The
Company received no proceeds from such issuance. The Company relied on available exemptions
from registration to complete this transaction.
 
 ITEM 6. EXHIBITS
      24




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##### Table of Contents



G&K SERVICES, INC.
(Registrant)Date: May 5, 2006
    By:
    /s/ Jeffrey L. WrightJeffrey L. WrightSenior Vice President
and Chief Financial Officer
(Principal Financial Officer)By:
    /s/ Michael F. WoodardMichael F. WoodardVice President and Controller
(Principal Accounting Officer) 25