G&K Services Inc. reported operating results for the first quarter of its fiscal year 2013, which ended on September 29, 2012. First quarter revenue grew by 6.1 percent to $222.4 million, up from $209.7 million in last year's first quarter, driven by solid growth in both rental operations and direct sales.
First quarter net earnings per diluted share grew to $0.62, a 38 percent increase from earnings of $0.45 per diluted share in the prior-year period. This was the highest quarterly earnings per diluted share in the company's history.
"The first quarter was a terrific start to our fiscal year, continuing our momentum," said Douglas A. Milroy, Chief Executive Officer. "We were particularly pleased with our strong operating margin improvement, which reflects crisp execution of our game plan, especially a company-wide commitment to service excellence and a focus on improving operations."
Income Statement Review
First quarter revenue from rental operations grew solidly to $203.5 million, up from $194.0 million in the prior-year quarter. The rental organic growth rate was 5.6 percent. The organic growth rate is calculated using revenue adjusted for foreign currency exchange rate differences, acquisitions and divestitures. First quarter direct sales grew by 20.7 percent to $19.0 million, up from $15.7 million in the prior-year. Direct sales growth was primarily due to increased sales from new accounts.
Operating margin expanded to 8.8 percent, a 140 basis point improvement from the 7.4 percent margin in last year's first quarter. The operating margin increase was primarily due to revenue growth leveraging fixed costs, productivity improvements in rental production and delivery, and lower energy and healthcare costs. These improvements were partially offset by an expected increase in rental merchandise expense.
Net earnings also benefited from lower interest expense and a lower effective tax rate. Interest expense in the first quarter was $1.0 million, down from $1.7 million in the prior-year period, primarily due to a lower effective interest rate, partially offset by higher total debt. The effective tax rate was 35.7 percent, compared to 40.0 percent in last year's first quarter. The lower tax rate was due to the resolution of a tax contingency in the current period and the prior-year write-off of deferred tax assets related to equity compensation.
Balance Sheet and Cash Flow
The company ended the first quarter with total debt, net of cash, of $185.5 million and a debt to total capital ratio of 33.0 percent. The company reduced its total debt by $12.5 million during the quarter. Total stockholders' equity at the end of the quarter was $417.6 million.
The company generated strong cash flow during the quarter. Cash provided by operating activities in the first quarter improved to $19.8 million, an increase of $27.2 million compared to negative $7.4 million in last year’s first quarter.
The stronger cash flow was primarily due to improvements in working capital, higher net income, and a lower contribution to the company’s pension plan than in the prior year. Capital expenditures were $10.2 million, up from $7.2 million in the prior year period, due to increased investments to enhance productivity and support profitable revenue growth.
Outlook
The company expects to drive continued performance gains in fiscal 2013, despite persistent weakness in the economy, slow employment growth and considerable political uncertainty. The company continues to expect fiscal 2013 revenue in a range of $890 million to $910 million.
Based on first quarter performance, the company is raising its full-year earnings guidance to a range of $2.25 to $2.45 per diluted share, up from the previously announced range of $2.20 to $2.40.
G&K Services, Inc. is a service-focused market leader of branded uniform and facility services programs in the United States, and is the largest such provider in Canada.
