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SWSH > SEC Filings for SWSH > Form 10-Q on 18-Mar-2013All Recent SEC Filings

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Form 10-Q for SWISHER HYGIENE INC.


18-Mar-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our unaudited Condensed Consolidated Financial Statements and the related notes thereto included in Item 1 of this Quarterly Report on Form 10-Q as well as our "Selected Financial Data" and our audited Consolidated Financial Statements and the related notes thereto included in Item 6 and Item 8, respectively, of our Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K"). In addition to historical consolidated financial information, this discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Actual results could differ from these expectations as a result of certain risk factors, including those described under Item 1A, "Risk Factors," of our 2011 Form 10-K.

Business Overview and Outlook

Swisher Hygiene Inc. provides essential hygiene and sanitizing solutions to customers throughout much of North America and internationally through its global network of company owned operations, franchises and master licensees. These solutions include essential products and services that are designed to promote superior cleanliness and sanitation in commercial environments, while enhancing the safety, satisfaction and well-being of employees and patrons. These solutions are typically delivered by employees on a regularly scheduled basis and involve providing our customers with: (i) consumable products such as soap, paper, cleaning chemicals, detergents, and supplies, together with the rental and servicing of dish machines and other equipment for the dispensing of those products; (ii) the rental of facility service items requiring regular maintenance and cleaning, such as floor mats, mops, bar towels, and linens; and
(iii) manual cleaning of their facilities. We serve customers in a wide range of end-markets, with a particular emphasis on the foodservice, hospitality, retail, industrial, and healthcare industries.

Prospectively, we intend to grow in both existing and new geographic markets through a combination of organic and acquisition growth. However, we will continue to focus our investments towards those opportunities which will most benefit our core businesses, chemical and linen processing services. Subsequent to the sale of our Waste segment in November 2012, we will offer outsourced waste and recycling services only through third-party providers.

See Note 17, "Audit Committee Review and Subsequent Events." in the Notes to Condensed Consolidated Financial Statements for significant developments subsequent to September 30, 2012.

Segments

On March 1, 2011, the Company completed its acquisition of Choice, a Florida based company that provides a complete range of solid waste and recycling collection, transportation, processing and disposal services. As a result of the acquisition of Choice, the Company operated in two segments: Hygiene and Waste. During the quarter ended June 30, 2012, the Company's Board of Directors determined to sell its Waste segment. On November 15, 2012, the Company completed a stock sale of Choice and other acquired businesses that comprise the Waste segment to Waste Services of Florida, Inc. for $123.3 million. As discussed in Note 2 to the Condensed Consolidated Financial Statements, the Company has applied discontinued operations accounting treatment and disclosures for this transaction on a retroactive basis. See Note 2, "Discontinued Operations" and Note 17, "Audit Committee Review and Subsequent Events" of the Notes to the Condensed Consolidated Financial Statements for further information. As a result of the sale of the Waste segment, the Company's continuing operations are classified in one business segment, Hygiene, for fiscal year 2012.


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Acquisitions

During the nine months ended September 30, 2012, the Company acquired four independent businesses and the remaining non-controlling interest in one of its subsidiaries. Aggregate consideration included cash of $4.3 million and assumed debt of $1.1 million. The Company made no acquisitions during the three months ended September 30, 2012.

See Note 4, "Acquisitions" of the Notes to Condensed Consolidated Financial Statements for a further description of the acquisitions.

Sale of Waste Segment

On November 15, 2012, the Company completed a stock sale of Choice and other acquired businesses that comprise the Waste segment, to Waste Services of Florida, Inc. for $123.3 million. The stock purchase agreement contains earn-out provisions that could provide additional sale proceeds to the Company of $1.8 million upon achievement of a predetermined revenue target and is also subject to customary purchase price adjustments, including revenue and EBITDA metrics. Ten percent of the purchase price is subject to a holdback and adjustment upon delivery of audited financial statements to the buyer.

As a result of the sale the Waste segment, the Company operates in one business segment, Hygiene, for fiscal year 2012 filings. In connection with the acquisition of Choice on March 1, 2011, the Company recorded deferred tax liabilities that allowed the Company to make a determination that the valuation allowance for the deferred tax asset of $2.4 million recorded at December 31, 2010 was no longer necessary at March 31, 2011. Upon the sale of the Waste segment in the fourth quarter of 2012 and with our history of operating losses, a valuation allowance is projected to be necessary in 2012, as discussed more fully in Note 14 "Income Taxes" of the Notes to Condensed Consolidated Financial Statements.

Acquisition and Merger Expenses

Acquisition and merger expenses include costs directly-related to the acquisition of four independent businesses and the remaining non-controlling interest in one of its subsidiaries during the nine months ended September 30, 2012. These costs include costs directly related to acquisitions and the merger and include third party due diligence, legal, accounting and professional service expenses.

Critical Accounting Policies and Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP involves the use of estimates and assumptions that affect the recorded amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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, revenue and expenses, and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions. These critical accounting policies have not changed since the filing of our 2011 Form 10-K.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, the most important and pervasive accounting policies used and areas most sensitive to material changes from external factors.


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Adoption of Newly Issued Accounting Pronouncements

Fair Value: In May 2011, the FASB issued updated accounting guidance on fair value measurements. The updated guidance resulted in common fair value measurement and disclosure requirements between U.S. GAAP and IFRS. The Company adopted this guidance effective January 1, 2012. The adoption did not have a material impact on the disclosures of the Company's consolidated financial information.

Comprehensive Income: In June 2011 and subsequently amended in December 2011, the FASB issued final guidance on the presentation of comprehensive income. Under the newly issued guidance, net income and comprehensive income may only be presented either as one continuous statement or in two separate but consecutive statements. The Company adopted this guidance effective January 1, 2012, with net loss and comprehensive loss shown as one continuous statement.

RESULTS OF CONTINUING OPERATIONS

Impact of Acquisitions

During the year ended December 31, 2011, we acquired nine franchisees and 54 independent businesses, including four in our Waste segment. During the nine months ended September 30, 2012, we acquired four independent businesses. The term "Acquisitions" refers to the nine franchisees and 54 independent businesses acquired during the year ended December 31, 2011 and the four independent businesses and the remaining non-controlling interest of one of our subsidiaries acquired during the nine months ended September 30, 2012, including the subsequent growth in existing customer revenue existing at the time of acquisition as well as revenue from new customer relationships created by the acquired business. See Note 17, "Audit Committee Review and Subsequent Events." of the Notes to Condensed Consolidated Financial Statements for information concerning the sale of businesses subsequent to September 30, 2012.

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012

Revenue

We derive our revenue from the delivery of a wide variety of hygiene and sanitation products and services. We deliver these products and services on a regularly scheduled basis which include providing our customers with
(i) consumable products such as soap, paper, cleaning chemicals, detergents, and supplies, together with the rental and servicing of dish machines and other equipment for the dispensing of those products; (ii) the rental of facility service items requiring regular maintenance and cleaning, such as floor mats, mops, bar towels, and linens; and (iii) manual cleaning of their facilities. We serve customers in a wide range of end-markets with a particular emphasis on the foodservice, hospitality, retail, industrial, and healthcare industries.

Total revenue and the revenue derived from each revenue type for the three months ended September 30, 2012 and 2011 are as follows:

                                   2012          %          2011          %
Revenue                                         (In thousands)
Company-owned operations:
Chemical products                $ 40,985        69.4 %   $ 34,128        69.3 %
Hygiene product and services       11,064        18.7       11,245        22.9
Rental and other                    6,605        11.2        3,229         6.5
Total Company-owned operations     58,654        99.4       48,602        98.7
Franchise products and fees:          365         0.6          638         1.3

Total revenue                    $ 59,019       100.0 %   $ 49,240       100.0 %


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Consolidated revenue increased $9.8 million to $59.0 million for the three month period ending September 30, 2012 as compared to $49.2 million for the same period in 2011. The components of the revenue growth were a $10.1 million increase in revenue from Company-owned operations offset by a $0.3 million reduction in revenue from franchise products and fees. These amounts represented revenue changes of 19.9% for total revenue, 20.7% for Company-owned operations, and (42.8%) for franchise revenue.

Within Company-owned operations excluding acquisitions for the three months ended September 30, 2012, the $1.2 million in revenue growth from the same period in 2011 was comprised primarily of growth in chemical products of $1.3 million.

Excluding the impact of Acquisitions, revenue from Company-owned operations increased by 3.0% and total revenue increased 1.9%. The lower percentage increase in total revenue is attributable to the decline in franchise products and fees due to the purchase of Swisher franchisees.

The change in revenue mix as well as the growth of the Company-owned operations was primarily attributable to (i) acquisition efforts focused on chemical product and service companies to round out our North American operating footprint, (ii) our emphasis on the expansion of our core ware-washing and laundry chemical offerings both through direct sales efforts and via distributors, (iii) with a reduction in focus on our legacy hygiene services offering, and (iv) strategic expansion in the linen rental marketplace.

Cost of Sales

Cost of sales consists primarily of paper, air freshener, chemical and other
consumable products sold to our customers, franchisees and international
licensees. Cost of sales for the three months ended September 30, 2012 and 2011
are as follows:

                                2012        %(1)        2011        %(1)
Cost of Sales                               (In thousands)
Company-owned operations      $ 25,682       43.8 %   $ 21,130       43.5 %
Franchise products and fees        363       99.3          187       29.3

Total cost of sales           $ 26,045       44.1 %   $ 21,317       43.3 %

(1) Represents cost as a percentage of the respective product line revenue.


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Cost of sales increased $4.7 million or 22.2% to $26.0 million for the three months ended September 30, 2012 as compared to the same period in 2011, which includes $3.8 million of total cost of sales related to Acquisitions. Excluding the impact of Acquisitions, cost of sales increased $0.9 million or 5.8% for the three months ended September 30, 2012 as compared to the same period in 2011.

Company-owned operations cost of sales increased $4.6 million or 21.5% to $25.7 million for the three months ended September 30, 2012 as compared to the same period in 2011 and includes $8.7 million related to Acquisitions. Excluding the impact of Acquisitions, Company-owned cost of sales increased $0.8 million to $17.0 million or 41.0% of related revenue for the three months ended September 30, 2012 as compared to $16.1 million or 40.3% of related revenue for the same period in 2011. The decrease in the percentage of Company-owned cost of sales for the three months ended September 30, 2012, is a result of the increased revenue from chemical products, including direct and wholesale chemical sales, which have a higher cost to produce versus other Company-owned products, offset by efficiencies from the Company's shift to internal manufacturing.

Route Expenses

Route expenses consist of costs incurred by the Company for the delivery of
products and providing services to customers. The details of route expenses for
the three months ended September 30, 2012 and 2011 are as follows:

                               2012         %(1)       2011        %(1)
Route Expenses                              (In thousands)
Company-owned operations:
Compensation                 $  7,921       13.5 %   $ 6,898       14.2 %
Vehicle and other expenses      3,069        5.2       2,413        5.0
Total route expenses         $ 10,990       18.7 %   $ 9,311       19.2 %

(1) Represents route expenses as a percentage of total revenue from Company-owned operations.

Route expenses increased $1.7 million or 18.0% to $11.0 million for the three months ended September 30, 2012 as compared to $9.3 million in the same period in 2011, including an increase of $0.9 million or 8.1% of total route expenses related to Acquisitions. Excluding the impact of Acquisitions, route expenses increased $0.8 million or 8.5% for the three months ended September 30, 2012 and 2011 compared to the same period in 2011 as a result of a decrease in compensation and vehicle costs in the amount of $0.5 million and $0.3 million, respectively, related to the increase in revenue. As a percentage of revenue, route expenses decreased 0.2 percentage points to 18.7%

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of the costs incurred for:

? Branch office and field management support costs that are related to field operations. These costs include compensation, occupancy expense and other general and administrative expenses.

? Selling expenses, which include marketing expenses and compensation and commission for branch sales representatives and corporate account executives.

? Corporate office expenses that are related to general support services, which include executive management compensation and related costs, as well as department cost for information technology, human resources, accounting, purchasing and other support functions.


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The details of selling, general and administrative expenses for the three months ended September 30, 2012 and 2011 are as follows:

                                             2012           %(1)          2011          %(1)
Selling, General & Administrative
Expenses                                                     (In thousands)
Compensation                               $  15,902          27.1 %   $  15,077          31.0 %
Occupancy                                      2,499           4.3         1,626           3.3
Other                                         11,631          19.8         4,248           8.7

Total selling, general & administrative
expenses                                   $  30,032          51.2 %   $  20,951          43.1 %

(1) Represents expenses as a percentage of the related revenue.

Selling, general, and administrative expenses increased $9.0 million or 43.3% to $30.0 million for the three months ended September 30, 2012 as compared to $21.0 million in the same period of 2011 and includes $4.3 million from Acquisitions. Excluding the impact from Acquisitions, selling, general, and administrative expenses increased $4.8 million or 22.9%.

Compensation expenses increased $0.8 million or 5.5% to $15.9 million for the three months ended September 30, 2012 as compared to $15.1 million in the same period of 2011 and includes $2.3 million related to Acquisitions. Excluding the impact of these Acquisitions, hygiene compensation expense decreased $1.5 million or 11.4% to $11.8 million for the three months ended September 30, 2012 as compared to the same period in 2011. This decrease is primarily due to a planned reduction in compensation.

Occupancy expenses increased $0.9 million or 53.7% to $2.5 million for the three months ended September 30, 2012 as compared to $1.6 million in the same period of 2011 and is a result of Acquisitions.

Other selling, general and administrative expenses increased $7.4 million or 173.8% to $11.6 million for the three months ended September 30, 2012 as compared to $4.2 million in the same period in 2011 and includes an increase of $1.3 million related to acquisitions. Excluding the impact from Acquisitions, other expenses increased $6.1 million or 159.1% to $10.0 million primarily due to the expansion of our business that included increases in expenses for professional fees, including $5.0 in investigation and review-related expenses, reserve for allowance for bad debt, utilities, office equipment, and other office and administrative expenses, many of which relate to our transition from a private company to a public company.

Depreciation and Amortization

Depreciation and amortization consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization increased $1.8 million or 46.5% to $5.7 million for the three months ended September 30, 2012 as compared to $3.9 million during the same period of 2011. This decrease includes $1.1 million for Acquisitions and is primarily the result of amortization for acquired other intangible assets including customer contracts and relationships and non-compete agreements obtained as part of these acquisitions. The remaining increase is primarily related to depreciation on capital expenditures unrelated to business combinations of $6.8 million made since September 30, 2011.


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 Other Expense, Net

Details of other expense, net for the three months ended September 30, 2012 and
2011 follows:

                                                                 2012          2011

Interest income                                                $       0     $      61
Interest expenses                                                   (433 )      (1,007 )
Realized and unrealized net gain (loss) on fair value of
financial instruments                                                  -           819
Foreign currency                                                      39          (105 )
Other                                                               (113 )         (11 )

Total other expense, net                                       $    (507 )   $    (243 )

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

Revenue

Total revenue and the revenue derived from each revenue type for the nine months ended September 30, 2012 and 2011 are as follows:

                                   2012           %          2011           %
Revenue                                          (In thousands)
Company-owned operations:
Chemical products                $ 122,859        69.3 %   $  63,570        60.6 %
Hygiene product and services        34,412        19.4        31,229        29.8
Rental and other                    19,154        10.8         6,852         6.5
Total Company-owned operations     176,425        99.5       101,651        96.8
Franchise products and fees:           928         0.5         3,307         3.1

Total revenue                    $ 177,353       100.0 %   $ 104,958       100.0 %

Consolidated revenue increased $72.4 million to $177.4 million for the nine month period ending September 30, 2012 as compared to $105 .0 million for the same period in 2011. The components of the revenue growth were a $74.8 million increase in revenue from Company-owned operations offset by a $2.4 million reduction in revenue from franchise products and fees. These amounts represented revenue changes of 69.0% for total revenue, 73.6% for Company-owned operations, and (71.9%) for franchise revenue.


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Within Company-owned operations, excluding acquisitions, for the nine months ended September 30, 2012, the $6.9 million in revenue growth from the same period in 2011 was comprised of growth in chemical products of $9.2 million, offset by a decrease in franchise revenue of $2.4 million. These changes in revenue represent 19.5% and (71.9%), respectively.

Excluding the impact of Acquisitions, revenue from Company-owned operations increased by 6.8% and total revenue increased 6.6%. The lower percentage increase in total revenue is attributable to the decline in franchise products and fees due to the purchase of Swisher franchisees.

The change in revenue mix as well as the growth of the Company-owned operations was primarily attributable to (i) acquisition efforts focused on chemical product and service companies to round out our North American operating footprint, (ii) our emphasis on the expansion of our core ware-washing and laundry chemical offerings both through direct sales efforts and via distributors, (iii) with a reduction in focus on our legacy hygiene services offering, and (iv) strategic expansion in the linen rental marketplace.

Cost of Sales

Cost of sales for the nine months ended September 30, 2012 and 2011 are as
follows:

                                 2012        %(1)        2011        %(1)
Cost of Sales                                 (In thousands)
Company-owned operations      $ 77,404       43.9 %   $ 40,930       40.3 %
Franchise products and fees        720       77.6        1,781       53.9

Total cost of sales           $ 78,124       44.0 %   $ 42,711       40.7 %

(1) Represents cost as a percentage of the respective product line revenue.

Cost of sales increased $35.4 million or 82.9% for the nine months ended September 30, 2012 as compared to the same period in 2011, which includes an increase of $29.9 million of total cost of sales related to Acquisitions. Excluding the impact of Acquisitions, cost of sales increased $5.5 million or 16.8% for the nine months ended September 30, 2012 as compared to the same period in 2011.

Company-owned operations cost of sales increased $36.5 million or 89.1% to $77.4 million for the nine months ended September 30, 2012 as compared to the same period in 2011 and includes an increase of $30.8 million related to Acquisitions. Excluding the impact of Acquisitions, Company-owned cost of sales increased $5.7 million to $36.5 million or 4.6% of related revenue for the nine months ended September 30, 2012 as compared to $31.0 million or 37.8% of related revenue for the same period in 2011. The increase of Company-owned cost of sales for the nine months ended September 30, 2012, is a result of the increased revenue from chemical products, including direct and wholesale chemical sales; the decrease in the percentage is due to a higher cost incurred in chemical versus other products.


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Route Expenses

The details of route expenses for the nine months ended September 30, 2012 and
2011 are as follows:

                               2012         %(1)        2011        %(1)
Route Expenses                              (In thousands)
Company-owned operations:
Compensation                 $ 22,735       12.9 %   $ 16,416       16.1 %
Vehicle and other expenses      9,021        5.1        5,654        5.6
Total route expenses         $ 31,756       18.0 %   $ 22,070       21.7 %

(1) Represents route expenses as a percentage of total revenue from Company-owned operations.

Route expenses increased $9.7 million or 43.9% to $31.8 million for the nine months ended September 30, 2012 as compared to $22.0 million in the same period in 2011, including an increase of $8.3 million or 37.6% of total route expenses related to Acquisitions. Excluding the impact of Acquisitions, route expenses increased $1.4 million or 6.3% for the nine months ended September 30, 2012 and 2011 compared to the same period in 2011 as a result of a change in compensation and vehicle costs in the amount of $0.4 million and $1.0 million, respectively, related to the increase in revenue. As a percentage of revenue, route expenses decreased 17.1% to 18.0% due to the Company's ability to leverage its revenue growth in Company-owned operations.

Selling, General and Administrative Expenses

The details of selling, general and administrative expenses for the nine months
ended September 30, 2012 and 2011 are as follows:

                                             2012           %(1)          2011          %(1)
. . .
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