(Unaudited)

Overview

G&K Services, Inc., founded in 1902 and headquartered in Minnetonka, Minnesota, is a service-focused market leader of branded uniform and facility services programs. We deliver value to our customers by enhancing their image and brand, and by promoting workplace safety, security and cleanliness. We accomplish this by providing high quality branded work apparel programs, and a variety of facility products and services including floor mats, towels, mops and restroom hygiene products.

Over the past three years we have made broad-based improvements to our business, by pursuing a strategy which included four key elements: focusing on customer satisfaction; improving day-to-day execution; increasing our focus on cost management; and addressing underperforming locations and assets. Executing this strategy has led to significant improvements in our financial results. We have delivered solid organic revenue growth, expanded operating margins and produced strong cash flows.

We believe it is healthy for a company to regularly evaluate and adjust, as appropriate, its strategy. In fiscal 2013, we modified our strategy, building on the improvements made over the past three years to drive further performance gains. Our approach has four parts:

1. Keep our customer promise

2. Improve how we target customers

3. Drive operational excellence

4. Strengthen our high performing team

To measure the progress of our strategy we have established two primary financial objectives, which include achieving operating income margin of 10% and return on invested capital (ROIC) of 10%. We define ROIC as adjusted net operating income after tax, divided by the sum of total debt less cash plus stockholders' equity. Our goal is to achieve these two financial targets by the end of our fiscal year 2014. We are also focused on maximizing free cash flow, which we define as net cash provided by operating activities less investments in property, plant and equipment.

Our industry continues to consolidate as many family-owned, local operators and regional companies have been acquired by larger providers. Historically, we have participated in this consolidation with an acquisition strategy focused on expanding our geographic presence and/or expanding our local market share in order to further leverage our existing production facilities. We remain active in evaluating quality acquisitions that would strengthen our business.

Over the past year our results have been adversely impacted by rising prices for commodities, especially cotton, polyester and crude oil. This has contributed to the significant increase in merchandise costs. We expect merchandise costs as a percentage of rental revenue to gradually moderate throughout fiscal year 2013.

Critical Accounting Policies

Our significant accounting policies are described in Note 1, "Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. The accounting policies used in preparing our interim fiscal year 2013 Condensed Consolidated Financial Statements are the same as those described in our Annual Report.

The discussion of the financial condition and results of operations are based upon the Condensed Consolidated Financial Statements, which have been prepared in conformity with United States generally accepted accounting principles (GAAP). As such, management is required to make certain estimates, judgments and assumptions that are believed to be reasonable based on the information available. These estimates and assumptions affect the reported amount of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as the most important and pervasive accounting policies used, areas most sensitive to material changes from external factors and those that are reflective of significant judgments and estimates. We believe our critical accounting policies are those related to:

• Revenue recognition

• Employee benefit plans

• Income taxes

• Share based payments

• Derivative financial instruments

• Inventories

• Goodwill and intangible assets

Results of Operations

The percentage relationships to revenues of certain income and expense items for
the three-month periods ended September 29, 2012 and October 1, 2011, and the
percentage changes in these income and expense items between periods are
presented in the following table:



                                           Three Months                  Percentage
                                               Ended                       Change
                                                                        Three Months
                                  September 29,        October 1,          FY 2013
                                      2012                2011           vs. FY 2012
    Revenues:
    Rental operations                       91.5 %            92.5 %              4.9 %
    Direct sales                             8.5               7.5               20.7

    Total revenues                         100.0             100.0                6.1
    Expenses:
    Cost of rental operations               68.2              68.9                3.8
    Cost of direct sales                    75.6              75.8               20.3

    Total cost of sales                     68.8              69.4                5.2
    Selling and administrative              22.4              23.2                2.3

    Income from operations                   8.8               7.4               26.3
    Interest expense                         0.5               0.8              (37.3 )

    Income before income taxes               8.3               6.6               33.9
    Provision for income taxes               3.0               2.6               19.7

    Net income                               5.3 %             4.0 %             43.4 %

Three months ended September 29, 2012 compared to three months ended October 1, 2011

Revenues. Total revenue in the first quarter of fiscal 2013 increased 6.1% to $222.4 million from $209.7 million in the first quarter of fiscal 2012.

Rental revenue increased $9.5 million, or 4.9% in the first quarter of fiscal 2013 compared to the same period of the prior fiscal year. Our organic rental growth rate was 5.6% compared to 5.25% in the same period of the prior fiscal year. The improvement in the rental organic growth rate was driven by continued improved execution related to merchandise recovery billings, uniform preparation services, increased customer usage of our non-garment products and improved pricing. Our organic rental growth rate is calculated using rental revenue, adjusted to exclude the impact of foreign currency exchange rate changes, divestitures and acquisitions compared to prior-period results. We believe that the organic rental revenue reflects the growth of our existing rental business and is, therefore, useful in analyzing our financial condition and results of operations.

Direct sale revenue increased 20.7% to $19.0 million in the first quarter of fiscal 2013 compared to $15.7 million in the same period of fiscal 2012. The increase in direct sales was primarily driven by two large new accounts.

Cost of Rental. Cost of rental operations, which includes merchandise, production and delivery expenses, increased 3.8% to $138.7 million in the first quarter of fiscal 2013 from $133.6 million in the same period of fiscal 2012. As a percentage of rental revenue, our gross margin from rental operations increased to 31.8% in the first quarter of fiscal 2013 from 31.1% in the same period of fiscal 2012. The improvement in rental gross margin was primarily due to the favorable impact of fixed costs absorbed over a higher revenue base, continued improvements in production and delivery productivity, lower depreciation expense and lower natural gas and health insurance costs. These improvements were partially offset by a significant increase in merchandise costs driven by increased raw material costs, increased merchandise requirements to support new account growth and new customer additions, and a mix shift to higher cost specialty garments.

Cost of Direct Sales. Cost of direct sales increased to $14.3 million in the first quarter of fiscal 2013 from $11.9 million in the same period of fiscal 2012. Gross margin from direct sales of 24.4% in the first quarter of fiscal 2013 was essentially flat with the 24.2% reported in the first quarter of fiscal 2012.

Selling and Administrative. Selling and administrative expenses increased 2.3% to $49.9 million in the first quarter of fiscal 2013 from $48.7 million in the same period of fiscal 2012. As a percentage of total revenues, selling and administrative expenses decreased to 22.4% in the first quarter of fiscal 2013 from 23.2% in the first quarter of fiscal 2012. The decrease was primarily due to effective cost control as we leveraged costs over a higher revenue base, a decrease in depreciation expense and slightly lower selling costs.

Interest Expense. Interest expense was $1.0 million in the first quarter of fiscal 2013, down from $1.7 million in the same period of fiscal 2012. The decrease in interest expense is due to lower average interest rates resulting from the renewal of our unsecured revolving credit facility at a lower rate and the maturity of certain interest rate swap agreements. These decreases were partially offset by higher average debt balances.

Provision for Income Taxes. Our effective tax rate decreased to 35.7% in the first quarter of fiscal 2013 from 40.0% in the same period of fiscal 2012. The tax rate for the prior period was higher than the current period primarily due to the write-off of deferred tax assets associated with equity compensation in the prior year period and a decrease in reserves for uncertain tax positions due to resolution of a tax contingency in the current year period.

Liquidity, Capital Resources and Financial Condition

Our primary sources of cash are net cash flows from operations and borrowings under our debt arrangements. Primary uses of cash are working capital needs, payments on indebtedness, capital expenditures, acquisitions, dividends and general corporate purposes.

Working capital at September 29, 2012 was $150.3 million, a $32.9 million decrease from $183.2 million at June 30, 2012. The decrease in working capital is primarily due to the reclassification of the debt outstanding under our accounts receivable securitization facility to current from long-term, a decrease in in-service and new goods inventory and an improvement in the number of days payable outstanding.

Operating Activities. Net cash provided by operating activities was $19.8 million in the first three months of fiscal 2013 and net cash used for operating activities was $7.4 million in the same period of fiscal 2012. Net cash provided by operating activities increased due to improvements in working capital, higher net income and a lower contribution to our pension plan than in the prior year.

Investing Activities. Net cash used for investing activities was $10.3 million in the first three months of fiscal 2013 and $7.2 million in the same period of fiscal 2012. In fiscal 2013 and 2012, cash was used primarily for purchases of property, plant and equipment.

Financing Activities. Cash used for financing activities was $9.3 million in the first three months of fiscal 2013 and $0.8 million in the same period of fiscal 2012. Cash used for financing activities in fiscal 2013 increased compared to fiscal year 2012 due to higher debt payments as a result of stronger cash flow, offset by an increase in cash provided from the exercise of stock options and a decrease in dividend payment due to timing. In the fourth quarter of fiscal year 2012 we increased the quarterly dividend payout on our shares of common stock from $0.130 per share to $0.195 per share. The dividends declared in the first three months of fiscal 2013 were $3.7 million, however these dividends were not paid until our second fiscal quarter. Dividends declared and paid in the first three months of fiscal 2012 totaled $2.4 million.

We have a $250.0 million, five-year unsecured revolving credit facility with a syndicate of banks, which expires on March 7, 2017. Borrowings in U.S. dollars under this credit facility, at our election, bear interest at (a) the adjusted London Interbank Offered Rate ("LIBOR") for specified interest periods plus a margin, which can range from 1.00% to 2.00%, determined with reference to our consolidated leverage ratio or (b) a floating rate equal to the greatest of
(i) JPMorgan's prime rate, (ii) the federal funds rate plus 0.50% and (iii) the adjusted LIBOR for a one month interest period plus 1.00%, plus, in each case, a margin determined with reference to our consolidated leverage ratio. Base rate loans will, at our election, bear interest at (i) the rate described in clause
(b) above or (ii) a rate to be agreed upon by us and JPMorgan. Borrowings in Canadian dollars under the credit facility will bear interest at (a) the Canadian deposit offered rate plus 0.10% for specified interest periods plus a margin determined with reference to our consolidated leverage ratio or (b) a floating rate equal to the greater of (i) the Canadian prime rate and (ii) the Canadian deposit offered rate for a one month interest period plus 1.00%, plus, in each case, a margin determined with reference to our consolidated leverage ratio.

As of September 29, 2012, borrowings outstanding under the revolving credit facility were $102.0 million. The unused portion of the revolver may be used for general corporate purposes, acquisitions, share repurchases, dividends, working capital needs and to provide up to $50.0 million in letters of credit. As of September 29, 2012, letters of credit outstanding against the revolver totaled $0.6 million and primarily related to our property and casualty insurance programs. No amounts have been drawn upon these letters of credit. Availability of credit under this facility requires that we maintain compliance with certain covenants.

The covenants under this agreement are the most restrictive when compared to our other credit facilities. The following table illustrates compliance with regard to the material covenants required by the terms of this facility as of September 29, 2012:

                                                               Required      Actual
  Maximum Leverage Ratio (Debt/EBITDA)                              3.50        2.08
  Minimum Interest Coverage Ratio (EBITDA/Interest Expense)         3.00       20.06
  Minimum Net Worth                                           $    379.2     $ 417.6

Our maximum leverage ratio and minimum interest coverage ratio covenants are calculated by adding back non-cash charges, as defined in our debt agreement.

Advances outstanding as of September 29, 2012 bear interest at a weighted average all-in rate of 1.36% (LIBOR plus 1.125%) for the Eurocurrency rate loans and an all-in rate of 3.25% (Lender Prime Rate) for overnight base rate 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. At September 29, 2012 this fee was 0.175% of the unused daily balance.

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 September 29, 2012, the outstanding balance of the notes was $75.0 million at an all-in rate of 0.96%.

We maintain a $50.0 million accounts receivable securitization facility, which expires on September 27, 2013. Under the terms of the facility, we pay interest at a rate per annum equal to a margin of 0.76%, plus LIBOR. The facility is subject to customary fees for the issuance of letters of credit and any unused portion of the facility. As is customary with transactions of this nature, our eligible accounts receivable are sold to a consolidated subsidiary. As of September 29, 2012, there was $28.6 million outstanding under this loan agreement at an all-in interest rate of 0.99% and $21.4 million of letters of credit were outstanding, primarily related to our property and casualty insurance programs.

See Note 5, "Derivative Financial Instruments" of the Notes to the Condensed Consolidated Financial Statements for details of our interest rate swap and hedging activities related to our outstanding debt.

Cash Obligations.Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under the revolving credit facility, capital lease obligations and rent payments required under operating leases with initial or remaining terms in excess of one year.

At September 29, 2012, we had approximately $147.4 million of available capacity under our revolving and accounts receivable credit facilities. Our revolving credit facility contributes all of the liquidity as our accounts receivable securitization facility is fully utilized. We anticipate that cash flows from operations and our available capacity under our revolving credit facility will be sufficient to satisfy our cash commitments, including payment of the $28.7 million of debt due in the next 12 months, and capital requirements for fiscal 2013. We estimate that capital expenditures in fiscal 2013 will be approximately $35-$40 million.

Off Balance Sheet Arrangements

At September 29, 2012, we had $22.0 million of stand-by letters of credit that were issued and outstanding, primarily in connection with our property and casualty insurance programs. No amounts have been drawn upon these letters of credit.

Pension Obligations

Pension expense is recognized on an accrual basis over the employees' approximate service periods. Pension expense is generally independent of funding decisions or requirements. We recognized expense for our defined benefit pension plan of $0.7 million and $0.4 million for the three months ended September 29, 2012 and October 1, 2011, respectively. At June 30, 2012, the fair value of our pension plan assets totaled $53.8 million.

Effective January 1, 2007, we froze our defined benefit pension plan and related supplemental executive retirement plan. Future growth in benefits has not occurred beyond this date.

Multi-Employer Pension Plans

We participate in a number of union sponsored, collectively bargained multi-employer pension plans ("MEPPs"). We record the required cash contributions to the MEPPs as an expense in the period incurred and a liability is recognized for any contributions due and unpaid, consistent with the accounting for defined contribution plans. In addition, we are responsible for our proportional share of any unfunded vested benefits related to the MEPPs. However, under applicable accounting rules, we are not required to record a liability until we withdraw from the plan or when it becomes probable that a withdrawal will occur.

In the third quarter of fiscal year 2012, we concluded negotiations with a union to discontinue our participation in the Central States Southeast and Southwest Areas Pension Fund ("Central States MEPP") for two of our locations. In addition, we also closed two redundant branch facilities that participated in the Central States MEPP. In the first quarter of fiscal 2013, we successfully concluded negotiations to discontinue participation at two additional locations. We continue to participate in the Central States MEPP at one remaining location, although, subject to our good faith bargaining obligations, we believe it is probable that we will also withdraw from the Central States MEPP at this location, thus completely discontinuing our participation in the Central States MEPP.

Employer's accounting for MEPPs (ASC 715-80) provides that a withdrawal liability should be recorded if circumstances that give rise to an obligation become probable and estimable. As a result of the actions noted above, in the third quarter of fiscal year 2012, we recorded a pre-tax charge of $24.0 million. This charge included the estimated discounted actuarial value of the total withdrawal liability, incentives for union participants and other related costs that had been incurred. We expect to pay the withdrawal liability over a period of 20 years. The amount of the withdrawal liability recorded is based on the best information available and is subject to change and any change could have a material impact on our results of operations and financial condition.

A partial or full withdrawal from a MEPP may be triggered by circumstances beyond our control. As evidenced by the negotiations above, we could also trigger the liability by successfully negotiating with the union to discontinue participation in the MEPP. If a future withdrawal from a plan occurs, we will record our proportional share of any unfunded vested benefits in the period in which the withdrawal occurs.

The ultimate amount of the withdrawal liability assessed by the MEPPs is impacted by a number of factors, including, among other things, investment returns, benefit levels, interest rates, financial difficulty of other participating employers in the plan and our continued participation with other employers in the MEPPs, each of which could impact the ultimate withdrawal liability.

Based upon the most recent plan data available from the trustees managing the remaining MEPPs, our estimated share of the undiscounted, unfunded vested benefits for the remaining MEPPs is estimated to be $3.0 million to $4.0 million as of September 29, 2012.

Litigation

We are involved in a variety of legal actions relating to personal injury, employment, environmental and other legal matters that arise in the normal course of business. In addition, we are party to certain additional legal matters described in "Part II Item 1. Legal Proceedings" of this report.

Cautionary Statements Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. Forward-looking statements may be identified by words such as "estimates," "anticipates," "projects," "plans," "expects," "intends," "believes," "seeks," "could," "should," "may" and "will" or the negative versions thereof and similar expressions and by the context in which they are used. Such statements are based upon our current expectations and speak only as of the date made. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ from those set forth in or implied by this Quarterly Report on Form 10-Q. Factors that might cause such a difference include, but are not limited to, the possibility of greater than anticipated operating costs, lower sales volumes, the performance and costs of integration of acquisitions or assumption of unknown liabilities in connection with acquisitions, fluctuations in costs of materials and labor, costs and possible effects of union organizing or other union activities, strikes, loss of key management, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, failure to achieve and maintain effective internal controls for financial reporting required by the Sarbanes-Oxley Act of 2002, the initiation or outcome of litigation or government investigation, higher than assumed sourcing or distribution costs of products, the disruption of operations from catastrophic events, disruptions in capital markets, the liquidity of counterparties in financial transactions, changes in federal and state tax laws, economic uncertainties and the reactions of competitors in terms of price and service. We undertake no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made except as required by law. Additional information concerning potential factors that could affect future financial results is included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.