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G&K Services, Inc. (NASDAQ: GK) today reported operating results for the first quarter of its fiscal year 2014, which ended on September 28, 2013. Revenue in the quarter grew by 3.1 percent to $229.3 million, up from $222.4 million in last year’s first quarter, driven by growth in rental operations, partially offset by lower revenue from direct sales and a lower Canadian exchange rate.
First quarter adjusted earnings per diluted share grew 8 percent to $0.67, up from $0.62 per diluted share in the prior year period. Adjusted earnings in the quarter excluded a $0.07 per share benefit from the previously announced change in estimated merchandise amortization lives and a $0.05 per share charge for an increase to the company’s estimated multi-employer pension plan withdrawal liability (see reconciliation table for details). Including these items, the company recorded net earnings per diluted share of $0.69.
“Our team continues to make terrific progress,” said Douglas A. Milroy, Chief Executive Officer. “We delivered another quarter of profitable growth, with solid revenue gains and operating margin improving to 10.2 percent, the highest level in over a decade.”
Income Statement ReviewFirst quarter revenue from rental operations grew 4.7 percent to $213.0 million, compared to $203.5 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 3.7 percent. First quarter revenue from direct sales decreased to $16.3 million, from $19.0 million in the prior-year, primarily due to lower program sales. Direct sale revenue in the prior year was higher due to sales from a large new customer program launch.
First quarter adjusted operating income grew 19 percent to $23.3 million, compared to $19.5 million in the prior year quarter. Adjusted operating margin expanded to 10.2 percent, a 140 basis point increase from 8.8 percent in last year’s first quarter. The improvement in adjusted operating margin was primarily driven by improved rental gross margin and increased operating leverage from revenue growth, partially offset by higher selling and administrative costs. Rental operations’ costs related to production, merchandise, and delivery were all lower as a percentage of revenue compared to the prior year. Operating margin also benefited from lower health insurance and workers compensation costs. First quarter adjusted operating income and adjusted operating margin excluded the previously mentioned benefit from a change in estimated merchandise amortization lives and the charge related to an increase in the company’s estimated multi-employer pension plan withdrawal liability. Including these items, operating income in the first quarter was $23.9 million and operating margin was 10.4 percent (see reconciliation table).