G&K Services, Inc. (NASDAQ: GKSR) today reported operating results for the third quarter of its fiscal year 2012, which ended on March 31, 2012. Third quarter revenue grew by 4.0 percent to $218.8 million, up from $210.3 million in the prior-year period. Excluding the impact of foreign currency exchange rate differences, total organic growth was 4.9%. Revenue growth was driven by continued strong new account sales, increased revenue from existing rental customers, improved pricing and increased direct sales volume.
The company reported third quarter adjusted net earnings of $0.52 per diluted share, an increase of 21 percent from earnings of $0.43 per diluted share in the prior-year period. Third quarter adjusted earnings excluded previously announced charges of $0.79 per share for withdrawal from a multi-employer pension plan and associated expenses, and $0.07 per share in connection with an equitable adjustment to outstanding stock options related to the company’s recent special dividend. Third quarter adjusted earnings also excluded a $0.08 per share non-recurring tax benefit. Including these items, the company recorded a net loss of $0.26 per share in the third quarter (see reconciliation table). The adjusted earnings growth in the quarter was driven by lower interest expense, a lower tax rate and increased operating income.
“Our core rental business performed well during the quarter, allowing the company to achieve continued revenue and earnings growth,” said Douglas A. Milroy, Chief Executive Officer. “We took several important actions during the quarter that strengthen the company’s ability to deliver improved long-term shareholder returns, and we exited the quarter more confident than ever in our future.”
Income Statement Review Third quarter revenue from rental operations was $200.2 million, up from $192.8 million in the prior-year quarter. The rental organic growth rate was 4.8 percent. The organic growth rate is calculated using revenue adjusted for foreign currency exchange rate differences, acquisitions and divestitures. Rental organic growth was primarily driven by continued strong new account sales, increased revenue from existing rental customers, and improved pricing. Third quarter direct sales grew by 6.0 percent to $18.6 million, up from $17.5 million in the prior-year. Direct sales growth was driven by the launch of new program business and stronger catalog sales.Third quarter adjusted operating margin was 7.5 percent, down from an operating margin of 7.6 percent in the prior-year period. The adjusted operating margin excludes the impact of the previously mentioned charges for the pension withdrawal and equitable adjustments to outstanding stock options. Including these charges, the company’s operating margin for the quarter was negative 4.4 percent. The slightly lower adjusted operating margin was primarily due to the expected significant increase in rental merchandise expense and lower gross margin on direct sales. These items were largely offset by revenue growth leveraging fixed costs, lower selling and administrative expenses and efficiency gains in rental production and delivery.