##### Table of Contents



(G&K SERVICES LOGO)
 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 March 31, 2007
 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
  þ o 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
March 31, 2007 and July 1, 2006
    
    
    3Consolidated Condensed Statements of Operations for the
three and nine months ended March 31, 2007 and April 1, 2006
    
    
    4Consolidated Condensed Statements of Cash Flows for the nine
months ended March 31, 2007 and April 1, 2006
    
    
    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
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART IIItem 1A.
    
    Risk Factors
    
    
    23Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 6.
    
    Exhibits
    
    
    24Signatures
    
    
    
    
    25302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  2




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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
 March 31,
    
    
    July 1,2007
    
    
    2006(In thousands)
    
    (Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    16,758
    
    
    $
    19,690Accounts receivable, less allowance for doubtful
accounts of $3,304 and $3,011
    
    
    102,168
    
    
    
    94,964Inventories
    
    
    141,404
    
    
    
    141,031Prepaid expenses
    
    
    17,377
    
    
    
    15,552Total current assets
    
    
    277,707
    
    
    
    271,237Property, Plant and Equipment, net
    
    
    253,457
    
    
    
    249,001Goodwill, net
    
    
    376,994
    
    
    
    349,469Other Assets
    
    
    80,949
    
    
    
    81,385$
    989,107
    
    
    $
    951,092LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    23,617
    
    
    $
    27,404Accrued expenses
    
    
    76,791
    
    
    
    72,999Deferred income taxes
    
    
    10,370
    
    
    
    10,419Current maturities of long-term debt
    
    
    62,669
    
    
    
    18,199Total current liabilities
    
    
    173,447
    
    
    
    129,021Long-Term Debt, net of Current Maturities
    
    
    159,269
    
    
    
    195,355Deferred Income Taxes
    
    
    32,260
    
    
    
    34,343Other Noncurrent Liabilities
    
    
    48,002
    
    
    
    44,985Stockholders Equity
    
    
    576,129
    
    
    
    547,388$
    989,107
    
    
    $
    951,092
  3




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CONSOLIDATED STATEMENTS OF OPERATIONS  G&K Services, Inc. and Subsidiaries
 For the Three Months Ended
    
    
    For the Nine Months EndedMarch 31,
    
    
    April 1,
    
    
    March 31,
    
    
    April 1,(In thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006RevenuesRental operations
    
    $
    211,842
    
    
    $
    201,562
    
    
    $
    628,273
    
    
    $
    594,985Direct sales
    
    
    23,400
    
    
    
    24,579
    
    
    
    60,861
    
    
    
    58,452Total revenues
    
    
    235,242
    
    
    
    226,141
    
    
    
    689,134
    
    
    
    653,437Operating ExpensesCost of rental operations
    
    
    136,951
    
    
    
    131,387
    
    
    
    403,436
    
    
    
    383,565Cost of direct sales
    
    
    16,923
    
    
    
    17,659
    
    
    
    44,579
    
    
    
    42,015Selling and administrative
    
    
    50,110
    
    
    
    49,619
    
    
    
    150,031
    
    
    
    141,219Depreciation and amortization
    
    
    11,326
    
    
    
    10,883
    
    
    
    33,776
    
    
    
    32,126Total operating expenses
    
    
    215,310
    
    
    
    209,548
    
    
    
    631,822
    
    
    
    598,925Income from Operations
    
    
    19,932
    
    
    
    16,593
    
    
    
    57,312
    
    
    
    54,512Interest expense
    
    
    3,647
    
    
    
    3,395
    
    
    
    10,526
    
    
    
    9,712Income before Income Taxes
    
    
    16,285
    
    
    
    13,198
    
    
    
    46,786
    
    
    
    44,800Provision for income taxes
    
    
    4,136
    
    
    
    2,840
    
    
    
    15,801
    
    
    
    13,837Net Income
    
    $
    12,149
    
    
    $
    10,358
    
    
    $
    30,985
    
    
    $
    30,963Basic weighted average number
of shares outstanding
    
    
    21,304
    
    
    
    21,132
    
    
    
    21,227
    
    
    
    21,069Basic Earnings per Common Share
    
    $
    0.57
    
    
    $
    0.49
    
    
    $
    1.46
    
    
    $
    1.47Diluted weighted average number
of shares outstanding
    
    
    21,445
    
    
    
    21,311
    
    
    
    21,394
    
    
    
    21,228Diluted Earnings per Common Share
    
    $
    0.57
    
    
    $
    0.49
    
    
    $
    1.45
    
    
    $
    1.46Dividends per share
    
    $
    0.0400
    
    
    $
    0.0175
    
    
    $
    0.1200
    
    
    $
    0.0525
  4




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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  G&K Services, Inc. and Subsidiaries
 For the Nine Months EndedMarch 31,
    
    
    April 1,(In thousands)
    
    2007
    
    
    2006Operating Activities:Net income
    
    $
    30,985
    
    
    $
    30,963Adjustments to reconcile net income to net cash
provided by operating activities Depreciation and amortization
    
    
    33,776
    
    
    
    32,126Stock-based compensation
    
    
    3,597
    
    
    
    3,060Deferred income taxes
    
    
    (257
    )
    
    
    354Changes in current operating items, exclusive of acquisitions
    
    
    (18,772
    )
    
    
    (17,320
    )Other assets and liabilities
    
    
    1,862
    
    
    
    829Net cash provided by operating activities
    
    
    51,191
    
    
    
    50,012Investing Activities:Property, plant and equipment additions, net
    
    
    (23,214
    )
    
    
    (26,414
    )Acquisitions of business assets, net
    
    
    (47,543
    )
    
    
    (11,300
    )Purchase of investments, net
    
    
    (2,043
    )
    
    
    (1,720
    )Net cash used for investing activities
    
    
    (72,800
    )
    
    
    (39,434
    )Financing Activities:Repayments of long-term debt
    
    
    (7,579
    )
    
    
    (7,661
    )Proceeds from short-term borrowings, net
    
    
    26,446
    
    
    
    2,050Cash dividends paid
    
    
    (2,575
    )
    
    
    (1,112
    )Sale of common stock
    
    
    3,004
    
    
    
    2,395Net cash provided by (used for) financing activities
    
    
    19,296
    
    
    
    (4,328
    )(Decrease)/Increase in Cash and Cash Equivalents
    
    
    (2,313
    )
    
    
    6,250Effect of Exchange Rates on Cash
    
    
    (619
    )
    
    
    365Cash and Cash Equivalents:Beginning of period
    
    
    19,690
    
    
    
    15,345End of period
    
    $
    16,758
    
    
    $
    21,960Supplemental Cash Flow Information:Non-Cash Transactions Debt issued to seller in connection with business acquisitions
    
    $
    
    
    
    $
    (1,419
    )
  5




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1.
    
    Summary of Significant Accounting Policies
  Nature of Business
  Principles of Consolidation
  Revenue Recognition
  6




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Derivative Financial Instruments
   Per Share Data
  Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    April 1,
    
    
    March 31,
    
    
    April 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted average number of common
shares outstanding used in computation
of basic earnings per share
    
    
    21,304
    
    
    
    21,132
    
    
    
    21,227
    
    
    
    21,069Weighted average effect of non-vested
restricted stock grants and assumed
exercise of options
    
    
    141
    
    
    
    179
    
    
    
    167
    
    
    
    159Shares used in computation of
diluted earnings per share
    
    
    21,445
    
    
    
    21,311
    
    
    
    21,394
    
    
    
    21,228
  Use of Estimates
  7




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Recent Accounting Pronouncements
  
    
    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.
    2.
    
    Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    April 1,
    
    
    March 31,
    
    
    April 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    12,149
    
    
    $
    10,358
    
    
    $
    30,985
    
    
    $
    30,963Other comprehensive income:Foreign currency translation
adjustments, net of tax
    
    
    1,479
    
    
    
    (405
    )
    
    
    (5,287
    )
    
    
    6,331Net unrealized holding gain (loss) on
derivative financial instruments,
net of tax
    
    
    513
    
    
    
    457
    
    
    
    (984
    )
    
    
    975Comprehensive income
    
    $
    14,141
    
    
    $
    10,410
    
    
    $
    24,714
    
    
    $
    38,269
 8




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3.
    
    Goodwill and Intangible Assets
  United States
    
    
    Canada
    
    
    TotalBalance as of July 1, 2006
    
    $
    286,170
    
    
    $
    63,299
    
    
    $
    349,469Acquisitions/purchase accounting adjustments
    
    
    29,812
    
    
    
    (340
    )
    
    
    29,472Currency exchange and other
    
    
    
    
    
    
    (1,947
    )
    
    
    (1,947
    )Balance as of March 31, 2007
    
    $
    315,982
    
    
    $
    61,012
    
    
    $
    376,994
    March 31, 2007
    
    July 1, 2006Other Intangible Assets:Customer Contracts
    
    $
    110,421
    
    
    $
    106,408Accumulated Amortization
    
    
    (65,203
    )
    
    
    (58,158
    )Net
    
    $
    45,218
    
    
    $
    48,250Non-Competition Agreements
    
    $
    11,041
    
    
    $
    10,908Accumulated Amortization
    
    
    (9,152
    )
    
    
    (8,446
    )Net
    
    $
    1,889
    
    
    $
    2,462
   2007 remaining
    
    $
    2,7292008
    
    
    10,5122009
    
    
    6,7912010
    
    
    6,6202011
    
    
    5,9442012
    
    
    5,177
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4.
    
    Long-Term Debt
     5.
    
    Share-Based Compensation
  10




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6.
    
    Employee Benefit Plans
  Supplemental ExecutivePension Plan
    
    
    Retirement PlanThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    April 1,
    
    
    March 31,
    
    
    April 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    
    
    
    $
    1,190
    
    
    $
    
    
    
    $
    234Interest cost
    
    
    774
    
    
    
    809
    
    
    
    173
    
    
    
    188Expected return on assets
    
    
    (703
    )
    
    
    (617
    )
    
    
    
    
    
    
    Prior service cost
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    11Loss
    
    
    
    
    
    
    341
    
    
    
    
    
    
    
    76Net periodic pension cost
    
    $
    71
    
    
    $
    1,736
    
    
    $
    173
    
    
    $
    509
  Supplemental ExecutivePension Plan
    
    
    Retirement PlanNine Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    April 1,
    
    
    March 31,
    
    
    April 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    1,432
    
    
    $
    3,571
    
    
    $
    317
    
    
    $
    702Interest cost
    
    
    2,322
    
    
    
    2,427
    
    
    
    518
    
    
    
    565Expected return on assets
    
    
    (2,110
    )
    
    
    (1,850
    )
    
    
    
    
    
    
    Prior service cost
    
    
    8
    
    
    
    39
    
    
    
    8
    
    
    
    32Loss
    
    
    
    
    
    
    1,021
    
    
    
    
    
    
    
    228Net periodic pension cost
    
    $
    1,652
    
    
    $
    5,208
    
    
    $
    843
    
    
    $
    1,527
  7.
    
    Segment Information
  11




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UnitedFor the Three Months Ended
    
    States
    
    
    Canada
    
    
    TotalThird Quarter Fiscal Year 2007:Revenues
    
    $
    195,797
    
    
    $
    39,445
    
    
    $
    235,242Income from operations
    
    
    13,817
    
    
    
    6,115
    
    
    
    19,932Capital expenditures
    
    
    4,471
    
    
    
    388
    
    
    
    4,859Depreciation and amortization
expense
    
    
    9,781
    
    
    
    1,545
    
    
    
    11,326Third Quarter Fiscal Year 2006:Revenues
    
    $
    186,965
    
    
    $
    39,176
    
    
    $
    226,141Income from operations
    
    
    10,254
    
    
    
    6,339
    
    
    
    16,593Capital expenditures
    
    
    9,144
    
    
    
    788
    
    
    
    9,932Depreciation and amortization
expense
    
    
    9,389
    
    
    
    1,494
    
    
    
    10,883
 UnitedFor the Nine Months Ended
    
    States
    
    
    Canada
    
    
    TotalFiscal Year 2007:Revenues
    
    $
    570,154
    
    
    $
    118,980
    
    
    $
    689,134Income from operations
    
    
    38,282
    
    
    
    19,030
    
    
    
    57,312Capital expenditures
    
    
    21,671
    
    
    
    1,543
    
    
    
    23,214Depreciation and amortization
expense
    
    
    28,999
    
    
    
    4,777
    
    
    
    33,776Fiscal Year 2006:Revenues
    
    $
    541,459
    
    
    $
    111,978
    
    
    $
    653,437Income from operations
    
    
    35,419
    
    
    
    19,093
    
    
    
    54,512Capital expenditures
    
    
    24,320
    
    
    
    2,094
    
    
    
    26,414Depreciation and amortization
expense
    
    
    27,653
    
    
    
    4,473
    
    
    
    32,126
 8.
    
    Inventory
  March 31,
    
    
    July 1,2007
    
    
    2006Raw Materials
    
    $
    5,363
    
    
    $
    5,742Work in Process
    
    
    4,494
    
    
    
    4,587Finished Goods
    
    
    54,650
    
    
    
    52,457New Goods
    
    $
    64,507
    
    
    $
    62,786Merchandise In Service
    
    $
    76,897
    
    
    $
    78,245Total Inventories
    
    $
    141,404
    
    
    $
    141,031
 12




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
       Critical Accounting Policies
   13




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Revenue Recognition and Allowance for Doubtful Accounts
  Inventories
  Goodwill, Intangibles and Other Long-Lived Assets
   14




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Insurance
  Income Taxes
    15




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Results of Operations
  Three Months
    
    Nine Months
    
    PercentageEnded
    
    Ended
    
    ChangeThree Months
    
    Nine MonthsMarch 31,
    
    April 1,
    
    March 31,
    
    April 1,
    
    FY 2007
    
    FY 20072007
    
    2006
    
    2007
    
    2006
    
    vs. FY 2006
    
    vs. FY 2006Revenues:Rental
    
    
    90.1
    %
    
    
    89.1
    %
    
    
    91.2
    %
    
    
    91.1
    %
    
    
    5.1
    %
    
    
    5.6
    %Direct
    
    
    9.9
    
    
    
    10.9
    
    
    
    8.8
    
    
    
    8.9
    
    
    
    (4.8
    )
    
    
    4.1Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    4.0
    
    
    
    5.5Expenses:Cost of rental sales
    
    
    64.6
    
    
    
    65.2
    
    
    
    64.2
    
    
    
    64.5
    
    
    
    4.2
    
    
    
    5.2Cost of direct sales
    
    
    72.3
    
    
    
    71.8
    
    
    
    73.2
    
    
    
    71.9
    
    
    
    (4.2
    )
    
    
    6.1Total cost of sales
    
    
    65.4
    
    
    
    65.9
    
    
    
    65.0
    
    
    
    65.1
    
    
    
    3.2
    
    
    
    5.3Selling and administrative
    
    
    21.3
    
    
    
    22.0
    
    
    
    21.8
    
    
    
    21.7
    
    
    
    1.0
    
    
    
    6.2Depreciation and
amortization
    
    
    4.8
    
    
    
    4.8
    
    
    
    4.9
    
    
    
    4.9
    
    
    
    4.1
    
    
    
    5.1Income from operations
    
    
    8.5
    
    
    
    7.3
    
    
    
    8.3
    
    
    
    8.3
    
    
    
    20.1
    
    
    
    5.1Interest expense
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.5
    
    
    
    1.4
    
    
    
    7.4
    
    
    
    8.4Income before income taxes
    
    
    6.9
    
    
    
    5.8
    
    
    
    6.8
    
    
    
    6.9
    
    
    
    23.4
    
    
    
    4.4Provision for income taxes
    
    
    1.7
    
    
    
    1.2
    
    
    
    2.3
    
    
    
    2.2
    
    
    
    45.6
    
    
    
    14.2Net income
    
    
    5.2
    %
    
    
    4.6
    %
    
    
    4.5
    %
    
    
    4.7
    %
    
    
    17.3
    %
    
    
    0.1
    %
 Three months ended March 31, 2007 compared to three months ended April 1, 2006
 Revenues.
   16




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Cost of Rental and Direct Sale.
  Selling and Administrative.
 Depreciation and Amortization
 Interest Expense
 Provision for Income Taxes
 Nine months ended March 31, 2007 compared to Nine months ended April 1, 2006
 Revenues.
  Cost of Rental and Direct Sale.
 17




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Selling and Administrative.
 Depreciation and Amortization
 Interest Expense
 Provision for Income Taxes
 Liquidity, Capital Resources and Financial Condition
   Operating Activities.
 Investing Activities.
 Financing Activities.
 18




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Cash Obligations.
   Off Balance Sheet Arrangements
  Pension Obligations
  19




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Impact of Inflation
   Litigation
  Share-Based Compensation
  20




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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
  21




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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 (orTotal Number of
    
    Approximate DollarShares (or Units)
    
    Value) of SharesPurchased as Part
    
    (or Units) that MayTotal Number of
    
    
    
    
    
    of Publicly
    
    Yet be PurchasedShares (or Units)
    
    Average Price Paid
    
    Announced Plans or
    
    Under the Plans orPeriod
    
    Purchased
    
    per Share (or Unit)
    
    Programs
    
    ProgramsMonth #1
(Fiscal month ending
February 3, 2007)
    
    
    327
    
    
    $
    0.00
    
    
    
    
    
    
    
    Month #2
(Fiscal month ending
March 3, 2007)
    
    
    747
    
    
    $
    0.00
    
    
    
    
    
    
    
    Month #3
(Fiscal month ending
March 31, 2007)
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    
    
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ITEM 6. EXHIBITS
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##### Table of Contents



G&K SERVICES, INC.
(Registrant)Date: May 4, 2007
    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) 25