G&K Services, Inc. reported operating results for the third quarter of its fiscal year 2013, which ended on March 30, 2013. Third quarter revenue grew by 3.6 percent to $226.6 million, up from $218.8 million in last year’s third quarter, driven by solid growth in rental operations, partially offset by lower revenue in direct sales.
Third quarter net earnings per diluted share grew 33 percent to a record $0.69, up from adjusted earnings of $0.52 per diluted share in the prior-year period. Adjusted earnings in the prior-year period excluded charges of $0.78 per share. Including these charges, the company recorded a net loss of $0.26 per share in the prior-year period.
“Our team delivered another terrific quarter, achieving a new all-time high for quarterly earnings per share,” said Douglas A. Milroy, Chief Executive Officer. “The execution of our game plan continues to produce substantial margin improvements. We’re also pleased with the company’s success in managing working capital and converting our improved earnings into strong cash flow.”
Income Statement Review
Third quarter revenue from rental operations grew 4.9 percent to $210.0 million, up from $200.2 million in the prior-year quarter. The rental organic growth rate, which adjusts for the impact of currency exchange rate differences, acquisitions and divestitures, was 3.8 percent. Acquisitions, along with currency exchange rates, added 1.1 percent to rental growth during the quarter. Third quarter revenue from direct sales was $16.6 million, down from $18.6 million in the prior-year, primarily due to lower catalog sales.
Operating margin expanded to 9.4 percent, a 190 basis point improvement from the 7.5 percent adjusted operating margin in last year’s third quarter. Adjusted operating margin in the prior-year period excluded the impact of the previously mentioned charges. Including these charges, operating margin in the prior-year quarter was negative 4.4 percent.
The improvement in this quarter’s operating margin was primarily driven by increased operating leverage from revenue growth, productivity improvements in rental production and delivery, and lower health insurance costs. Direct sale gross margin also improved compared to the prior year, primarily due to a change in sales mix and productivity gains in our distribution centers.
Earnings benefited from lower interest expense, which was $1.1 million, down from $1.5 million in the prior-year period, primarily due to a lower effective interest rate, partially offset by higher total debt. The effective tax rate in the quarter was 32.7 percent, benefitting from the resolution of a prior-year IRS audit.
