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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 27, 2008
 Commission
file number 0-4063
 G&K SERVICES, INC.
  MINNESOTA
    
    41-0449530(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 (952) 912-5500
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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G&K Services, Inc.
Form 10-Q
 Table of Contents
 PAGEPART IItem 1. Financial StatementsConsolidated Condensed Balance Sheets as of
December 27, 2008 and June 28, 2008
    
    
    3Consolidated Condensed Statements of Operations for the three and six
months ended December 27, 2008 and December 29, 2007
    
    
    4Consolidated Condensed Statements of Cash Flows for the six
months ended December 27, 2008 and December 29, 2007
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART IIItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Item 6. Exhibits
    
    
    28Signatures
    
    
    29EX-31.1EX-31.2EX-32.1EX-32.2
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PART I
FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 CONSOLIDATED CONDENSED BALANCE SHEETS  G&K Services, Inc. and Subsidiaries
 December 27,
    
    
    June 28,2008
    
    
    2008(In thousands)
    
    (Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    13,355
    
    
    $
    12,651Accounts receivable, less allowance for doubtful
accounts of $5,075 and $4,506
    
    
    103,274
    
    
    
    111,307Inventories, net
    
    
    152,146
    
    
    
    142,318Other current assets
    
    
    17,593
    
    
    
    26,181Total current assets
    
    
    286,368
    
    
    
    292,457Property, Plant and Equipment, net
    
    
    239,954
    
    
    
    253,041Goodwill
    
    
    424,030
    
    
    
    434,874Other Assets
    
    
    60,473
    
    
    
    72,802Total assets
    
    $
    1,010,825
    
    
    $
    1,053,174LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    32,874
    
    
    $
    30,873Accrued expenses
    
    
    86,795
    
    
    
    78,282Deferred income taxes
    
    
    5,429
    
    
    
    6,154Current maturities of long-term debt
    
    
    7,712
    
    
    
    7,891Total current liabilities
    
    
    132,810
    
    
    
    123,200Long-Term Debt, net of Current Maturities
    
    
    277,956
    
    
    
    280,428Deferred Income Taxes
    
    
    27,821
    
    
    
    35,190Accrued
Income Taxes  Long Term
    
    
    13,542
    
    
    
    12,343Other Noncurrent Liabilities
    
    
    39,914
    
    
    
    44,537Stockholders Equity
    
    
    518,782
    
    
    
    557,476Total liabilities and stockholders equity
    
    $
    1,010,825
    
    
    $
    1,053,174
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CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS  G&K Services, Inc. and Subsidiaries
 For the Three Months Ended
    
    
    For the Six Months EndedDecember 27,
    
    
    December 29,
    
    
    December 27,
    
    
    December 29,(In thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007RevenuesRental operations
    
    $
    221,206
    
    
    $
    232,208
    
    
    $
    450,339
    
    
    $
    458,276Direct sales
    
    
    20,547
    
    
    
    23,060
    
    
    
    36,650
    
    
    
    40,778Total revenues
    
    
    241,753
    
    
    
    255,268
    
    
    
    486,989
    
    
    
    499,054Operating ExpensesCost of rental operations
    
    
    152,039
    
    
    
    156,647
    
    
    
    313,871
    
    
    
    308,382Cost of direct sales
    
    
    15,217
    
    
    
    16,334
    
    
    
    27,301
    
    
    
    29,065Selling and administrative
    
    
    54,989
    
    
    
    58,555
    
    
    
    116,880
    
    
    
    114,039Total operating expenses
    
    
    222,245
    
    
    
    231,536
    
    
    
    458,052
    
    
    
    451,486Income from Operations
    
    
    19,508
    
    
    
    23,732
    
    
    
    28,937
    
    
    
    47,568Interest expense
    
    
    3,821
    
    
    
    3,990
    
    
    
    7,418
    
    
    
    7,948Income before Income Taxes
    
    
    15,687
    
    
    
    19,742
    
    
    
    21,519
    
    
    
    39,620Provision for income taxes
    
    
    6,149
    
    
    
    7,305
    
    
    
    10,523
    
    
    
    14,819Net Income
    
    $
    9,538
    
    
    $
    12,437
    
    
    $
    10,996
    
    
    $
    24,801Basic weighted average number
of shares outstanding
    
    
    18,490
    
    
    
    20,627
    
    
    
    18,557
    
    
    
    20,868Basic Earnings per Common Share
    
    $
    0.52
    
    
    $
    0.60
    
    
    $
    0.59
    
    
    $
    1.19Diluted weighted average number
of shares outstanding
    
    
    18,490
    
    
    
    20,783
    
    
    
    18,622
    
    
    
    21,054Diluted Earnings per Common Share
    
    $
    0.52
    
    
    $
    0.60
    
    
    $
    0.59
    
    
    $
    1.18Dividends per share
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.14
    
    
    $
    0.10
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  G&K Services, Inc. and Subsidiaries
 For the Six Months EndedDecember 27,
    
    
    December 29,(In thousands)
    
    2008
    
    
    2007Operating Activities:Net income
    
    $
    10,996
    
    
    $
    24,801Adjustments to reconcile net income to net cash
provided by operating activities -Depreciation and amortization
    
    
    22,653
    
    
    
    23,544Other adjustments
    
    
    2,343
    
    
    
    282Changes in current operating items, exclusive of acquisitions
    
    
    (1,758
    )
    
    
    (9,290
    )Other assets and liabilities
    
    
    3,281
    
    
    
    4,156Net cash provided by operating activities
    
    
    37,515
    
    
    
    43,493Investing Activities:Property, plant and equipment additions, net
    
    
    (13,766
    )
    
    
    (8,525
    )Acquisitions of business assets, net
    
    
    
    
    
    
    (45,204
    )Purchases of investments, net
    
    
    
    
    
    
    (1,887
    )Net cash used for investing activities
    
    
    (13,766
    )
    
    
    (55,616
    )Financing Activities:Payments of long-term debt
    
    
    (7,345
    )
    
    
    (7,133
    )Proceeds from revolving credit facilities, net
    
    
    4,700
    
    
    
    57,001Cash dividends paid
    
    
    (2,625
    )
    
    
    (2,100
    )Net issuance of common stock, primarily under stock option plans
    
    
    209
    
    
    
    3,289Purchase of common stock
    
    
    (16,769
    )
    
    
    (47,227
    )Net cash (used for) provided by financing activities
    
    
    (21,830
    )
    
    
    3,830Increase (Decrease) in Cash and Cash Equivalents
    
    
    1,919
    
    
    
    (8,293
    )Effect of Exchange Rates on Cash
    
    
    (1,215
    )
    
    
    487Cash and Cash Equivalents:Beginning of period
    
    
    12,651
    
    
    
    22,759End of period
    
    $
    13,355
    
    
    $
    14,953
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1.
    
    Basis of Presentation for Interim Financial StatementsThe consolidated condensed financial statements included herein, except for the June 28,
2008 balance sheet which was derived from the audited consolidated financial statements for
the fiscal year ended June 28, 2008, have been prepared by us, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In our opinion, the
accompanying unaudited consolidated condensed financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly our financial
position as of December 27, 2008, and the results of our operations for the three and six
months ended and our cash flows for the six months ended December 27, 2008 and December 29,
2007. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations, although we believe that
the disclosures herein are adequate to make the information presented not misleading. It is
suggested that these consolidated condensed financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in our latest report on
Form 10-K.The results of operations for the three and six month periods ended December 27, 2008 and
December 29, 2007 are not necessarily indicative of the results to be expected for the full
year.The accounting policies we follow are set forth in Note 1 in our Annual Report on Form 10-K
for the fiscal year ended June 28, 2008.ReclassificationsIn the fourth quarter of fiscal year ended June 28, 2008, we reclassified certain amounts in
the Consolidated Statements of Operations. The line items impacted were cost of rental
operations, cost of direct sales, selling and administrative, and depreciation and
amortization. Depreciation expense is included in the cost of rental operations, cost of
direct sales, and selling and administrative line items. Amortization expense is included
in selling and administrative. In addition, certain amounts related to production and
manufacturing previously classified as cost of direct sales and selling and administrative
expenses were reclassified to cost of rental operations.As a result of the reclassifications implemented in the fourth quarter of fiscal year 2008,
the results for the second quarter of fiscal year 2008 were reclassified to conform with the
current year presentation. These reclassifications had no impact on our previously reported
income from operations, net income, cash flows or the basic and diluted earnings per share
amounts or beginning retained earnings.
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The following table summarizes the changes to originally reported amounts and subtotals in
the Consolidated Condensed Statement of Operations for the three months ended December 29,
2007.
 For the Three Months EndedDecember 29, 2007As Previously Reported
    
    Reclassifications
    
    As ReclassifiedOperating ExpensesCost of rental operations
    
    $
    148.0
    
    
    $
    8.6
    
    
    $
    156.6Cost of direct sales
    
    
    16.5
    
    
    
    (0.2
    )
    
    
    16.3Selling and administration
    
    
    54.6
    
    
    
    4.0
    
    
    
    58.6Depreciation and
amortization
    
    
    12.4
    
    
    
    (12.4
    )
    
    
    Total operating expenses
    
    $
    231.5
    
    
    $
    
    
    
    $
    231.5
 The following table summarizes the changes to originally reported amounts and subtotals in
the Consolidated Condensed Statement of Operations for the six months ended December 29,
2007.
 For the Six Months EndedDecember 29, 2007As Previously Reported
    
    Reclassifications
    
    As ReclassifiedOperating ExpensesCost of rental operations
    
    $
    291.1
    
    
    $
    17.3
    
    
    $
    308.4Cost of direct sales
    
    
    29.2
    
    
    
    (0.1
    )
    
    
    29.1Selling and administration
    
    
    106.8
    
    
    
    7.2
    
    
    
    114.0Depreciation and
amortization
    
    
    24.4
    
    
    
    (24.4
    )
    
    
    Total operating expenses
    
    $
    451.5
    
    
    $
    
    
    
    $
    451.5
 The following table summarizes the changes to originally reported amounts and subtotals in
the Consolidated Condensed Statement of Cash Flows for the six months ended December 29,
2007.
 For the Six Months EndedDecember 29, 2007As Previously Reported
    
    Reclassifications
    
    As ReclassifiedOperating Activities:Depreciation and amortization
    
    $
    24.4
    
    
    $
    (0.9
    )
    
    $
    23.5Other assets and liabilities
    
    
    3.3
    
    
    
    0.9
    
    
    
    4.2Net cash provided by operating activities
    
    $
    43.5
    
    
    $
    
    
    
    $
    43.5
 2.
    
    Contingent LiabilitiesEnvironmental mattersWe are currently involved in several environmental-related proceedings by certain
governmental agencies. We have recently resolved two of these proceedings and have paid the
negotiated penalties in these two actions. In addition to these proceedings, we continue to
experience increased activity around the area of overall environmental compliance, including
inspections by regulatory agencies. We continue to dedicate substantial operational and
financial resources to environmental compliance, and we remain fully committed to operating
in compliance with all environmental laws and regulations. During the first quarter of
fiscal year 2009, as a result of this increased activity, we decided to enhance our
oversight by engaging a recognized international environmental consulting firm to conduct
reviews of all of our production facilities. By hiring experts in this complex area, we
expect to gain additional assurance with
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respect to our environmental compliance. As of
December 27, 2008, we have substantially completed these inspections and,
where required, are undertaking appropriate corrective actions. Based on the results of the
regulatory agency inspections, internal reviews and other available information, for the
quarter ended December 27, 2008, we have established reserves for environmental matters of
approximately $4.2 million. Total expense for these matters was $3.9 million and $0.2 million in the first quarter and second quarter of fiscal 2009, respectively.Compensation MattersAs a result of recent changes to prevailing compensation laws, we determined that it is probable that we will be required to pay
additional compensation to certain affected employees for services previously rendered.
While rulemaking regarding this law remains ongoing, in an effort to estimate the amount, we
have conducted extensive financial analysis and have inspected available historical records.
We have established a reserve of approximately $3.3 million for this liability, which we
believe is sufficient to resolve this matter. This amount was recorded in the cost of
rental line of the Consolidated Condensed Statement of Operations in the first quarter of
fiscal year 2009. We do not expect this change in compensation law to materially impact our
ongoing operations as we are in the process of implementing operational changes to correct
the issue.3.
    
    Adoption of New Accounting PronouncementsIn September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). This
statement provides a definition of fair value, provides guidance for measuring fair value in
U.S. GAAP and expands disclosures about fair value measurement. We adopted SFAS No. 157 at
the beginning of the quarter ended September 27, 2008. Our adoption did not impact our
consolidated financial position or results of operations. See Note 4 of the consolidated
condensed financial statements for additional disclosures.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159). This statement permits companies to choose to
measure many financial instruments and certain other items at fair value. The objective is
to improve financial reporting by providing companies with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. We adopted SFAS
No. 159 at the beginning of the quarter ended September 27, 2008, and did not elect the fair
value option for eligible items that existed at the date of adoption.Accounting Pronouncements Not Yet AdoptedIn March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS No. 161). This statement establishes enhanced disclosures about
derivative and hedging activities. This statement is effective for fiscal years and interim
periods beginning after November 15, 2008. Adoption of SFAS No. 161 will result in enhanced
disclosure regarding our derivatives.In December 2007, the FASB issued SFAS No. 141(r), Business Combinations (SFAS No. 141
(r)). This statement replaces SFAS No. 141, Business Combinations. This statement retains
the fundamental requirements in SFAS No. 141 that the acquisition method of accounting
(which SFAS No. 141 called the purchase method) be used for all business combinations and
for an acquirer to be identified for each business combination. This statement also
establishes principles and requirements for how the acquirer: a) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and c) determines what
information to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. SFAS No. 141(r) will apply prospectively
to business combinations that are consummated after June 27, 2009.We do not believe SFAS 161 and SFAS 141(r) will have a material impact on our consolidated
financial statements.
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4.
    
    Fair Value MeasurementsAs discussed in Note 3, we adopted SFAS No. 157 at the beginning of the quarter ended
September 27, 2008, subject to the deferral provisions of FSP No. 157-2, on June 29, 2008.
This standard defines fair value, establishes a framework for measuring fair value and
expands disclosure requirements about fair value measurements. SFAS No. 157 defines fair
value as the price that would be received to sell an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. We considered
non-performance risk when determining fair value of our derivative financial instruments.
The fair value hierarchy prescribed by SFAS No. 157 contains three levels as follows:
Level 1 Unadjusted quoted prices that are available in active markets for the identical
assets or liabilities at the measurement date.
Level 2 Other observable inputs available at the measurement date, other than quoted
prices included in Level 1, either directly or indirectly, including:-Quoted prices for similar assets or liabilities in active markets;
-Quoted prices for identical or similar assets in non-active markets;
-Inputs other than quoted prices that are observable for the asset or liability; and
-Inputs that are derived principally from or corroborated by other observable market data.Level 3 Unobservable inputs that cannot be corroborated by observable market data and
reflect the use of significant management judgment.  These values are generally determined
using pricing models for which the assumptions utilize managements estimates of market
participant assumptions.
  As of December 27, 2008Fair Value Measurements Using Inputs Considered asLevel 1
    
    Level 2
    
    TotalOther assets:Non-qualified, non-contributory retirement
plan assets
    
    $
    
    
    
    $
    8.6
    
    
    $
    8.6Non-qualified deferred compensation plan assets
    
    
    13.7
    
    
    
    
    
    
    
    13.7Total assets
    
    $
    13.7
    
    
    $
    8.6
    
    
    $
    22.3Accrued expenses:Derivative financial instruments
    
    $
    
    
    
    $
    12.8
    
    
    $
    12.8Total liabilities
    
    $
    
    
    
    $
    12.8
    
    
    $
    12.8
 5.
    
    Exit, Disposal and Related ActivitiesIn the first quarter of fiscal year 2009, we closed three processing plants, two branch
locations, reduced selected headcount and outsourced our fleet maintenance function. We
expect all payments associated with these actions to be completed by September 30, 2009.We recorded approximately $2.6 million of expense in the Consolidated Condensed Statement of
Operations during the first quarter of fiscal year 2009. These charges principally impacted
our United States operating segment. Of these amounts, approximately $1.0 million was
recorded in the cost of rental operations line item and the remaining $1.6 million was
recorded in the selling and administrative line item.
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6.
    
    Income TaxesOur fiscal 2009 year to date effective tax rate increased to 48.9% for the first six months
of fiscal year 2009 from 37.4% in the same period of fiscal year 2008. The current year tax
rate is significantly higher than our statutory rate primarily due to the non-deductibility
of certain environmental related charges and the write-off of deferred tax assets associated
with certain expiring stock options in the first quarter of fiscal 2009. Together, these
two items increased the current year to date effective tax rate by 9.0%.7.
    
    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 27,
    
    
    December 29,
    
    
    December 27,
    
    
    December 29,2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average number of common
shares outstanding used in computation
of basic earnings per share
    
    
    18.5
    
    
    
    20.6
    
    
    
    18.6
    
    
    
    20.9Weighted average effect of non-vested
restricted stock grants and assumed
exercise of options
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2Shares used in computation of
diluted earnings per share
    
    
    18.5
    
    
    
    20.8
    
    
    
    18.6
    
    
    
    21.1
 Potential common shares related to our outstanding stock options and restricted stock grants
of 2.1 million and 1.0 million for the three months ended December 27, 2008 and December 29,
2007, respectively, and 1.6 million and 0.7 million for the six months ended December 27,
2008 and December 29, 2007, 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.8.
    
    Comprehensive IncomeFor the three and six month periods ended December 27, 2008 and December 29, 2007, the
components of comprehensive income were as follows:
 Three Months Ended
    
    
    Six Months EndedDecember 27,
    
    
    December 29,
    
    
    December 27,
    
    
    December 29,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    9.5
    
    
    $
    12.4
    
    
    $
    11.0
    
    
    $
    24.8Other comprehensive income:Foreign currency translation
adjustments, net of tax
    
    
    (22.3
    )
    
    
    2.6
    
    
    
    (25.6
    )
    
    
    12.6Net unrealized holding gain (loss) on
derivative financial instruments,
net of tax
    
    
    (7.1
    )
    
    
    (0.8
    )
    
    
    (8.2
    )
    
    
    (2.0
    )Comprehensive (loss) income
    
    $
    (19.9
    )
    
    $
    14.2
    
    
    $
    (22.8
    )
    
    $
    35.4
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9.
    
    InventoriesThe components of inventory as of December 27, 2008 and June 28, 2008 are as follows:
 December 27,
    
    
    June 28,2008
    
    
    2008Raw Materials
    
    $
    7.7
    
    
    $
    5.3Work in Process
    
    
    6.1
    
    
    
    4.7Finished Goods
    
    
    64.1
    
    
    
    50.9New Goods
    
    $
    77.9
    
    
    $
    60.9Merchandise in Service
    
    $
    74.2
    
    
    $
    81.4Total Inventories
    
    $
    152.1
    
    
    $
    142.3
 10.
    
    Goodwill and Intangible AssetsThe carrying value of goodwill is evaluated on an annual basis and also when events occur or
circumstances change that would more likely than not reduce the fair value of the reporting
unit to which goodwill is assigned below its carrying amount. When evaluating whether
goodwill is impaired, the fair value of the reporting unit to which goodwill is assigned is
compared to its carrying amount, including goodwill. If the carrying amount of a reporting
unit exceeds its fair value, then the amount of the impairment loss must be measured. The
impairment loss would be calculated by comparing the implied fair value of the goodwill with
its carrying amount. In calculating the implied fair value of goodwill, the fair value of
the reporting unit is allocated to all of the other assets and liabilities of that unit
based on their fair values. The excess of the fair value of a reporting unit over the
amount assigned to its other assets and liabilities is the implied fair value of goodwill.
Our last annual impairment analysis was performed in the fourth quarter of fiscal year 2008,
which indicated that the estimated fair value of each reporting unit exceeded its carrying
amount, including recorded goodwill. As a result, no impairment existed at that time.During the second quarter of fiscal year 2009, there was a significant deterioration in
general economic conditions and in the market value of our stock. The
resulting decline in
our market capitalization prompted us to conduct a goodwill analysis to determine if an
impairment of goodwill existed as of December 27, 2008. Our analysis evaluated the
estimated fair value of each reporting unit relative to the net book value.  We prepared a discounted cash flow model to estimate fair value, which validated the reasonableness of
the estimated market value plus a control premium. As a result of this analysis no impairment was recorded as of
December 27, 2008.While we cannot predict the impact of future economic conditions or the market value of our
stock, continued depressed economic conditions and/or a sustained decline in our market
capitalization could negatively and materially impact our assumptions and assessment of the
fair value of our business. If general economic conditions or our financial performance do
not improve we may be required to record a goodwill impairment charge in the future which
may materially impact our financial results. We do not believe a future goodwill impairment
charge, if any, will impact compliance with the debt covenants associated with our various
credit facilities.Goodwill includes the following:
 United States
    
    
    Canada
    
    
    TotalBalance as of June 28, 2008
    
    $
    367.5
    
    
    $
    67.4
    
    
    $
    434.9Acquisitions, net of purchase
accounting adjustments
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.2
    )Foreign currency translation and other
    
    
    (0.2
    )
    
    
    (10.5
    )
    
    
    (10.7
    )Balance as of December 27, 2008
    
    $
    367.1
    
    
    $
    56.9
    
    
    $
    424.0
 11




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##### Table of Contents



Our other intangible assets, which are included in other assets on the consolidated
condensed balance sheet, are as follows:
 December 27,
    
    
    June 28,2008
    
    
    2008Other Intangible Assets:Customer Contracts
    
    $
    116.5
    
    
    $
    119.4Accumulated Amortization
    
    
    (81.2
    )
    
    
    (79.5
    )Net
    
    $
    35.3
    
    
    $
    39.9Non-Competition Agreements
    
    $
    11.0
    
    
    $
    11.1Accumulated Amortization
    
    
    (10.1
    )
    
    
    (10.0
    )Net
    
    $
    0.9
    
    
    $
    1.1
 The customer contracts include the combined value of the written service agreements and the
related customer relationship.Amortization expense was $3.8 million and $5.6 million for the six months ended December 27,
2008 and December 29, 2007, respectively. Estimated amortization expense for each of the
next five fiscal years based on the intangible assets as of December 27, 2008 is as follows:
 2009 remaining
    
    $
    3.62010
    
    
    7.32011
    
    
    6.62012
    
    
    5.82013
    
    
    4.32014
    
    
    2.9
 11.
    
    Long-Term DebtWe maintain a revolving credit facility of $325.0 million expiring August 31, 2010. As of
December 27, 2008, borrowings outstanding under the revolving credit facility were $170.2
million at rates ranging from 0.55% to 1.50% over the London Interbank Offered Rate
(LIBOR). Borrowings under this facility are unsecured. The unused portion of the
revolver may be used for general corporate purposes, acquisitions, share repurchases,
working capital needs and to provide up to $50.0 million in letters of credit. As of
December 27, 2008, letters of credit outstanding against the revolver were $20.8 million and
primarily relate to our property and casualty insurance programs. No amounts have been
drawn upon these letters of credit.Borrowings under the revolving credit facility bear interest at 0.55% to 1.50% over the
LIBOR, or the Canadian prime rate for Canadian borrowings, based on a leverage ratio
calculated on a quarterly basis. Advances outstanding as of December 27, 2008 bear interest
at an all-in rate of 3.86% (LIBOR plus 0.88%) for the Eurodollar loans and an all-in rate of
3.25% (Lender Prime Rate) for overnight Swing-Line loans. We also pay a fee on the unused
daily balance of the revolving credit facility based on a leverage ratio calculated on a
quarterly basis.We have $75.0 million of variable rate unsecured private placement notes. The notes bear
interest at 0.60% over LIBOR and are scheduled to mature on June 30, 2015. The notes do not
require principal payments until maturity. Interest payments are reset and paid on a
quarterly basis. As of December 27, 2008, the outstanding balance of the notes was $75.0
million at an all-in rate of 4.36% (LIBOR plus 0.60%).
 12




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##### Table of Contents



We maintain a loan agreement whereby the lender will make loans to us on a revolving basis
up to a maximum of $60.0 million. The amount of funds available under the loan agreement as
of December 27, 2008 was $53.1 million, which was the amount of eligible receivables less a
reserve requirement. The agreement was originally scheduled to terminate October 21, 2010
but was renegotiated in October 2008 and is now scheduled to
terminate on September 27, 2011. We are required to pay interest on outstanding loan balances at a rate per annum of
one month LIBOR plus a margin or, if the lender is funding the loan through the issuance of
commercial paper to third parties, at a rate per annum equal to a margin plus the average
annual interest rate for such commercial paper. In connection with the loan agreement, we
granted a first priority security interest in certain of our U.S. based receivables. At
December 27, 2008, the outstanding balance under this loan agreement was $25.0 million at an
all-in rate of 1.10% (commercial paper plus 0.85%). We are also required to pay a fee on
the unused balance of the facility.We have $50.0 million, 8.4% unsecured fixed rate private placement notes with certain
institutional investors. The 10-year notes have a nine-year average life with a final
maturity on July 20, 2010. Beginning on July 20, 2004, and annually thereafter to maturity,
we will repay $7.1 million of the principal amount at par. As of December 27, 2008, there
was $14.3 million outstanding under the notes.12.
    
    Share-Based CompensationWe grant share-based awards, including restricted stock and options to purchase our common
stock. Stock option grants are for a fixed number of shares to employees and directors with
an exercise price equal to the fair value of the shares at the date of grant. Share-based
compensation for awards is recognized in the Consolidated Condensed Statements of Operations
on a straight-line basis over the requisite service period. The amortization of share-based
compensation reflects estimated forfeitures adjusted for actual forfeiture experiences. We
review our estimated forfeiture rates on an annual basis. As share-based compensation
expense is recognized, a deferred tax asset is recorded that represents an estimate of the
future tax deduction from the exercise of stock options or release of restrictions on the
restricted stock. At the time share-based awards are exercised, cancelled, expire or
restrictions lapse, we recognize adjustments to income tax expense. Total compensation
expense related to share-based awards was $1.7 million and $1.5 million for the three months
ended and $3.3 million and $2.6 million for the six months ended December 27, 2008 and
December 29, 2007. The number of options that have been exercised and restricted stock that
vested since June 28, 2008, was 0.1 million shares.13.
    
    Employee Benefit PlansOn December 31, 2006, we froze our pension and supplemental executive retirement
plans. The net periodic pension cost for these plans for the three and six months ended
December 27, 2008 was $0.1 million and $0.3 million, respectively. The net periodic pension
income for these plans for the three months ended December 29, 2007, was $0.1 million and
the net periodic pension cost for these plans for the six months ended December 29, 2007,
was $0.2 million. In addition, the components of net periodic pension cost for these plans
are immaterial for the three and six months ended December 27, 2008 and December 29, 2007.14.
    
    Segment InformationWe have two operating segments, United States (includes the Dominican Republic and
Ireland Operations) and Canada, which have been identified as components of our
organization that are reviewed by our Chief Executive Officer to determine resource
allocation and evaluate performance. Each operating segment derives revenues from the
branded identity apparel and facility services industry, which includes rental of
garments, direct purchase items and non-apparel items such as floor mats, dust mops,
wiping towels, selected linen items and restroom products. No single customers
transactions accounted for more than 1.5% of our revenues. Substantially all of our
customers are in the United States or Canada.Income from operations includes the impact of an intercompany management fee which is
self-eliminated in the total income from operations below. As a result of a formal
transfer pricing study conducted at the end of fiscal year 2008, this intercompany
management fee was increased to 5.4% of Canadian revenue. The management fee was 5.4%
for the three and six months ended December 27, 2008 and 1.1% for the same periods in
the prior fiscal year.
 13




---



##### Table of Contents



We evaluate performance based on income from operations. Financial information by
segment for the three and six month periods ended December 27, 2008 and December 29,
2007 is as follows:
 UnitedFor the Three Months Ended
    
    States
    
    
    Canada
    
    
    TotalSecond Quarter Fiscal Year 2009:Revenues
    
    $
    205.4
    
    
    $
    36.4
    
    
    $
    241.8Income from operations
    
    
    15.4
    
    
    
    4.1
    
    
    
    19.5Depreciation and amortization
expense
    
    
    9.9
    
    
    
    1.4
    
    
    
    11.3Second Quarter Fiscal Year 2008:Revenues
    
    $
    208.3
    
    
    $
    47.0
    
    
    $
    255.3Income from operations
    
    
    15.9
    
    
    
    7.8
    
    
    
    23.7Depreciation and amortization
expense
    
    
    10.1
    
    
    
    1.9
    
    
    
    12.0
 UnitedFor the Six Months Ended
    
    States
    
    
    Canada
    
    
    TotalFiscal Year 2009:Revenues
    
    $
    408.8
    
    
    $
    78.2
    
    
    $
    487.0Income from operations
    
    
    21.0
    
    
    
    7.9
    
    
    
    28.9Depreciation and amortization
expense
    
    
    19.7
    
    
    
    3.0
    
    
    
    22.7Fiscal Year 2008:Revenues
    
    $
    408.6
    
    
    $
    90.5
    
    
    $
    499.1Income from operations
    
    
    30.4
    
    
    
    17.2
    
    
    
    47.6Depreciation and amortization
expense
    
    
    19.9
    
    
    
    3.6
    
    
    
    23.5
 For the three months ended December 29, 2007, the Canada segment results were negatively
impacted by $0.9 million, resulting from a fire at a production facility. These
expenses included our insurance deductible, estimated unrecoverable expenses incurred
and associated partial impairment of our customer intangible assets.For the six months ended December 29, 2007, the Canada segment results were positively
impacted by $0.7 million, resulting from the net effect of a gain on the sale of
property, offset by the expenses associated with the fire noted above. The net Canadian
impact was offset by expenses in our United States segment during the six months ended
December 29, 2007, which included severance associated with the realignment of our
manufacturing operations and certain management positions, an increase in our inventory
reserves and expenses associated with certain legal matters all of which occurred in the
first quarter of fiscal 2008. The net effect of these items on the United States segment
was approximately $1.7 million of expense for the six months ended December 29, 2007.15.
    
    Stock RepurchaseIn May 2008, we announced the authorization to expand our share repurchase program from
$100.0 million to $175.0 million, which increased the share repurchase program previously
approved by our Board of Directors in May 2007. For the three months ended December 27,
2008, we repurchased 454,168 shares totaling $10.0 million and for the three months ended
December 29, 2007, we repurchased 913,185 shares totaling $36.0 million. For the six months
ended December 27, 2008, we repurchased 650,387 shares totaling $16.1 million and for the
six months ended December 29, 2007, we repurchased 1,170,485 shares totaling $46.2 million.
As of December 27, 2008, we had $57.8 million remaining under this authorization.Restricted Stock Unit Withholdings
 14




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##### Table of Contents



We issue restricted stock units as part of our equity incentive plans. For the majority of
the restricted stock units granted, the number of shares issued on vesting date is net of
the minimum statutory withholding requirements that we pay in cash to the appropriate taxing
authorities on behalf of our employees. Although shares withheld are not issued, they are
treated as common stock repurchases in our financial statements, as they reduce the number
of shares that would have been issued upon vesting.
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
    Critical Accounting Policies
   Goodwill and Other Intangibles Assets
  15




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Results of Operations
  Three Months
    
    Six Months
    
    PercentageEnded
    
    Ended
    
    ChangeThree Months
    
    Six MonthsDecember 27,
    
    December 29,
    
    December 27,
    
    December 29,
    
    FY 2009
    
    FY 20092008
    
    2007
    
    2008
    
    2007
    
    vs. FY 2008
    
    vs. FY 2008Revenues:Rental operations
    
    
    91.5
    %
    
    
    91.0
    %
    
    
    92.5
    %
    
    
    91.8
    %
    
    
    (4.7
    )%
    
    
    (1.7
    )%Direct sales
    
    
    8.5
    
    
    
    9.0
    
    
    
    7.5
    
    
    
    8.2
    
    
    
    (10.9
    )
    
    
    (10.1
    )Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    (5.3
    )
    
    
    (2.4
    )Expenses:Cost of rental operations
    
    
    68.7
    
    
    
    67.5
    
    
    
    69.7
    
    
    
    67.3
    
    
    
    (2.9
    )
    
    
    1.8Cost of direct sales
    
    
    74.1
    
    
    
    70.8
    
    
    
    74.5
    
    
    
    71.3
    
    
    
    (6.8
    )
    
    
    (6.1
    )Total cost of sales
    
    
    69.2
    
    
    
    67.8
    
    
    
    70.1
    
    
    
    67.6
    
    
    
    (3.3
    )
    
    
    1.1Selling and administrative
    
    
    22.7
    
    
    
    22.9
    
    
    
    24.0
    
    
    
    22.9
    
    
    
    (6.1
    )
    
    
    2.5Income from operations
    
    
    8.1
    
    
    
    9.3
    
    
    
    5.9
    
    
    
    9.5
    
    
    
    (17.8
    )
    
    
    (39.2
    )Interest expense
    
    
    1.6
    
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.6
    
    
    
    (4.2
    )
    
    
    (6.7
    )Income before income taxes
    
    
    6.5
    
    
    
    7.7
    
    
    
    4.4
    
    
    
    7.9
    
    
    
    (20.5
    )
    
    
    (45.7
    )Provision for income taxes
    
    
    2.5
    
    
    
    2.8
    
    
    
    2.2
    
    
    
    2.9
    
    
    
    (15.8
    )
    
    
    (29.0
    )Net income
    
    
    3.9
    %
    
    
    4.9
    %
    
    
    2.3
    %
    
    
    5.0
    %
    
    
    (23.3
    )%
    
    
    (55.7
    )%
 Three months ended December 27, 2008 compared to three months ended December 29, 2007
 Revenues
  16




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##### Table of Contents



Cost of Rental
 Cost of Direct Sales
 Selling and Administrative
 Interest Expense
 Provision for Income Taxes
 Six months ended December 27, 2008 compared to six months ended December 29, 2007
 Revenues
   Cost of Rental.
 17




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##### Table of Contents



Cost of Direct Sales.
 Selling and Administrative
 Interest Expense
 Provision for Income Taxes
 Liquidity, Capital Resources and Financial Condition
   Operating Activities.
 Investing Activities.
 Financing Activities.
  18




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##### Table of Contents



Cash Obligations.
   Off Balance Sheet Arrangements
  19




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##### Table of Contents



Pension Obligations
     Reclassifications
    For the Three Months EndedDecember 29, 2007As Previously Reported
    
    Reclassifications
    
    As ReclassifiedOperating ExpensesCost of rental operations
    
    $
    148.0
    
    
    $
    8.6
    
    
    $
    156.6Cost of direct sales
    
    
    16.5
    
    
    
    (0.2
    )
    
    
    16.3Selling and administration
    
    
    54.6
    
    
    
    4.0
    
    
    
    58.6Depreciation and
amortization
    
    
    12.4
    
    
    
    (12.4
    )
    
    
    Total operating expenses
    
    $
    231.5
    
    
    $
    
    
    
    $
    231.5
 20




---



##### Table of Contents



For the Six Months EndedDecember 29, 2007As Previously Reported
    
    Reclassifications
    
    As ReclassifiedOperating ExpensesCost of rental operations
    
    $
    291.1
    
    
    $
    17.3
    
    
    $
    308.4Cost of direct sales
    
    
    29.2
    
    
    
    (0.1
    )
    
    
    29.1Selling and administration
    
    
    106.8
    
    
    
    7.2
    
    
    
    114.0Depreciation and
amortization
    
    
    24.4
    
    
    
    (24.4
    )
    
    
    Total operating expenses
    
    $
    451.5
    
    
    $
    
    
    
    $
    451.5
  For the Six Months EndedDecember 29, 2007As PreviouslyReported
    
    Reclassifications
    
    As ReclassifiedOperating Activities:Depreciation and amortization
    
    $
    24.4
    
    
    $
    (0.9
    )
    
    $
    23.5Other assets and liabilities
    
    
    3.3
    
    
    
    0.9
    
    
    
    4.2Net cash provided by operating activities
    
    $
    43.5
    
    
    $
    
    
    
    $
    43.5
 Exit, Disposal and Related Activities
   Litigation
   21




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##### Table of Contents



Environmental Matters
  Compensation Matters
  Share-Based Compensation
  Adoption of New Accounting Pronouncements
   Accounting Pronouncements Not Yet Adopted
 22




---



##### Table of Contents



Cautionary Statements Regarding Forward-Looking Statements
  23




---



##### 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
   24




---



##### Table of Contents



PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
      25




---



##### Table of Contents



ITEM 1A. RISK FACTORS
  Compliance with environmental laws and regulations could result in significant costs that adversely
affect our operating results.
    Volatility in the global economy could adversely affect results.
  26




---



##### Table of Contents



Fluctuations in demand for our products and services may harm our financial results and are
difficult to forecast.
  
    
    changes in business and economic conditions, including a further downturn in the automobile industry and/or the
overall economy;
    
    changes in consumer confidence caused by changes in market conditions, including changes in the credit market,
expectations for inflation, and energy prices;
    
    competitive pressures, including pricing pressures, from companies that have competing products and services;
    
    changes in customer needs;
    
    changes in the employment levels at our customers which impacts the number of users of our products and services;
    
    strategic actions taken by our competitors; and
    
    market acceptance of our products and services.
  
 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
28, 2008 and ending
November 1, 2008)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    67,822,146Month #2
(Fiscal month
beginning November
2, 2008 and ending
November 29, 2008)
    
    
    339,568
    
    
    $
    21.92
    
    
    
    339,568
    
    
    $
    60,367,118Month #3
(Fiscal month
beginning November
30, 2008 and ending
December 27, 2008)
    
    
    114,600
    
    
    $
    22.05
    
    
    
    114,600
    
    
    $
    57,836,737
  27




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 a.
    
    The Company held its Annual Meeting of Shareholders on November 13, 2008.b.
    
    The following three persons were elected as directors: Lynn Crump-Caine, J.
Patrick Doyle and M. Lenny Pippin. The following six persons comprise the other
directors whose terms of office continued after the Annual Meeting of Shareholders:
Paul Baszucki, John S. Bronson, Wayne M. Fortun, Richard L. Marcantonio, Ernest J.
Mrozek and Alice M. Richter.c.
    
    1. Each director nominee received the following votes:
 SharesIn Favor
    
    Withhold Authority
    
    Broker Non-VotesMs. Crump-Caine
    
    
    16,819,068
    
    
    
    258,279
    
    
    
    0Mr. Doyle
    
    
    9,140,229
    
    
    
    7,937,118
    
    
    
    0Mr. Pippin
    
    
    16,824,918
    
    
    
    252,429
    
    
    
    0
 2.
    
    Shareholders ratified the appointment of Ernst & Young LLP, Independent
Registered Public Accounting Firm, as the Companys independent auditors for fiscal
2009: 16,957,457 shares in favor, 104,676 shares voting against and 15,214 shares
abstaining. There were no broker non-votes.
 
 ITEM 6. EXHIBITS
 a.
    
    Exhibits
     28




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G&K SERVICES, INC.
(Registrant)Date: January 30, 2009
    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) 29