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SWSH > SEC Filings for SWSH > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for SWISHER HYGIENE INC.


9-Aug-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, 2012 (the "2012 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 2012 Form 10-K.

Discontinued Operations and Assets Held for Sale

On November 15, 2012, the Company completed a stock sale of Choice Environmental Services, Inc. ("Choice"), and other acquired businesses, including Lawson Sanitation, LLC, Central Carting Disposal, Inc. and FSR Transporting and Crane Services, Inc., that comprised the Waste segment to Waste Services of Florida, Inc. for $123.3 million resulting in a gain of $13.8 million net of tax that was recognized in the fourth quarter of 2012. The stock purchase agreement stipulated customary purchase price adjustments related to closing balance sheet working capital targets and in addition, that $12.5 million of the purchase price consideration would be reserved and held back in escrow by the purchaser (the "holdback amount") and paid subject to certain financial adjustments. Management recorded the holdback amount in the calculation of the gain on sale of the Waste segment and the amount was classified on the balance sheet as "Receivable due from sale of discontinued operations" at December 31, 2012. The proceeds from this receivable were fully collected during the second quarter of 2013. During the three months ended June 30, 2013, the Company recorded a $0.5 million adjustment to a worker's compensation liability that was retained as a part of the sale of Choice. Net cash used in operating activities from discontinued operations represent the payment of certain liabilities for severance and professional fees, previously accrued as a part of the sale, and paid in the six months ended June 30, 2013.

Revenue for the three months and six months ended June 30, 2012, related to the Waste segment, were $17.9 million and $35.4 million, respectively. The loss, net of tax, was $0.9 million for the three and six months ended June 30, 2012.

During the second quarter of 2013, the Company commenced an active program to sell certain linen and dust routes and businesses that were determined to be an under-performing, non-core business or routes in non-core geographic markets. Additionally, one of the Company's manufacturing plants was closed in connection with our plant consolidation effort. In accordance with ASC 360, Property, Plant and Equipment, these assets have been classified as Assets Held for Sale in the Condensed Consolidated Balance Sheet at June 30, 2013. The assets have been adjusted to the lower of historical carrying amount or fair value. These adjustments resulted in the recording of an impairment of goodwill of $1.6 million during the second quarter of 2013. None of the disposal groups that could be classified as discontinued operations were material, individually or combined, to the Company's consolidated financial statements, and thus these results of operations were not separately classified in discontinued operations.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2 to the Consolidated Financial Statements in our 2012 Form 10-K, describe these significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. There have been no significant changes in our critical accounting policies since the filing of the 2012 Form 10-K.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets have been recognized in connection with the Company's acquisitions. We test our goodwill and infinite lived intangible asset balances during the fourth quarter of the year for impairment or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The impairment test performed during the fourth quarter of 2012 did not result in an impairment charge to goodwill or the infinite lived intangible assets. An impairment charge of $0.5 million was recognized related to certain finite lived intangible assets.


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On a quarterly basis, we monitor the key drivers of fair value to detect the existence of indicators or changes that would warrant an interim impairment test of our goodwill and intangible assets. Based on our assessment of these variables as well as the fact that our operating losses incurred to date are materially consistent with projections used in our 2012 annual impairment analysis, we concluded that there was no need to perform an impairment test during the three months ended June 30, 2013. The estimates used for our future cash flows and discount rates represent management's best estimates, which we believe to be reasonable, but future continued declines in business performance may impair the recoverability of our goodwill and intangible assets balances and result in an impairment charge being recorded in a future quarterly or annual reporting period.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued guidance and disclosure requirements for reporting amounts reclassified out of accumulated other comprehensive income. The guidance requires that an entity provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP. The guidance became effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. This standard was adopted in the first quarter of 2013.

RESULTS OF CONTINUING OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2013

Revenue

Revenue from chemical products is primarily comprised of the sales and delivery of consumable products such as detergents and cleaning chemicals, as well as the rental, sales and servicing of dish machines and other equipment used to dispense these products. Revenues from hygiene, rental and other are primarily comprised of the sale of paper items, manual cleaning and delivery service fees as well as rental fees, linen processing, ancillary other product sales and franchise revenue.

Total revenue and the revenue derived from each revenue type for the three months ended June 30, 2013 and 2012 are as follows:

                              2013          %          2012          %
Revenue                                    (In thousands)
Chemical products           $ 37,836        68.3 %   $ 41,846        69.5 %
Hygiene, rental and other     17,550        31.7       18,336        30.5
Total revenue               $ 55,386       100.0 %   $ 60,182       100.0 %

Consolidated revenue decreased $4.8 million to $55.4 million. The components of the decreased revenue were a decline in chemical products of $4.0 million to $37.8 million, hygiene services and products of $0.7 million to $11.2 million in 2013, and rental and other of $0.1 million to $6.3 million in 2013. The amounts represent decreases of 9.6%, 5.4% and 2.2%, respectively. Throughout these product lines, decreases in revenue were primarily attributable to the loss of customers from the integration of some of our smaller acquisitions as well as the loss of two large accounts, including a chemical wholesale customer representing $1.8 million of the decrease in quarterly revenue. In addition, the sale in 2012 of a non-core business resulted in a revenue decrease of approximately $0.7 million.


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Cost of Sales

Cost of sales consists primarily of the cost of chemical, paper, air freshener
and other consumable products sold to, or used in the servicing of, our
customers. These costs are exclusive of route expense and related depreciation
and amortization. Cost of sales for the three months ended June 30, 2013 and
2012 are as follows:

                              2013         %(1)        2012        %(1)
Cost of Sales                             (In thousands)
Chemical products           $ 17,052       45.1 %   $ 19,146       45.8 %
Hygiene, rental and other      7,347       41.9        7,686       41.9
Total cost of sales         $ 24,399       44.1 %   $ 26,832       44.6 %

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

Cost of sales decreased $2.4 million or 9.1% primarily due to a decrease in volume totaling $4.8 million from the prior period. Cost of sales as a percentage decreased slightly from 2012.

Route Expenses

Route expenses consist of costs incurred by the Company for the delivery of
products and providing services to customers. The components of route expenses
for the three months ended June 30, 2013 and 2012 are as follows:

                               2013         %(1)        2012        %(1)
                                           (In thousands)
Compensation                 $  7,384       13.3 %   $  7,305       12.2 %
Vehicle and other expenses      3,852        7.0        2,866        4.8
Total route expenses         $ 11,236       20.3 %   $ 10,171       17.0 %

(1) Represents route expenses as a percentage of total revenue.

Route expenses increased $1.1 million to $11.2 million. As a percentage of revenue, route expenses increased 3.3% to 20.3% due to the decrease in revenue. The components of this change were increases in compensation of $0.1 million and vehicle and other expenses of $1.0 million. The increase in compensation expense of $0.1 million is due to an increase in workers' compensation insurance. The increase in vehicle and other expenses of $1.0 million is due primarily to a decrease in company owned vehicles offset by an increase in company leased vehicles, increases in vehicle insurance and repairs and maintenance, and the change from cell phones to handheld devices.

Selling, General and Administrative Expenses

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

? Local 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 compensation and commission for local sales representatives and corporate account executives.

? Marketing expenses.

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

? Investigation and professional fees related to the Audit Committee review, restatement process, and other non-recurring fees related to completing our 2012 audit.


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The details of selling, general and administrative expenses for the three months ended June 30, 2013 and 2012 are as follows:

                                             2013           %(1)          2012          %(1)
Selling, General & Administrative
Expenses                                                     (In thousands)
Compensation                               $  15,354          27.7 %   $  15,733          26.1 %
Occupancy                                      2,290           4.1         2,559           4.3
Other                                          9,422          17.0        17,305          28.8
Total selling, general & administrative
expenses                                   $  27,066          48.9 %   $  35,597          59.2 %

(1) Represents expenses as a percentage of total revenue.

Selling, general, and administrative expenses decreased $8.5 million to $27.1 million. The components of this change were decreases in compensation of $0.4 million, occupancy of $0.3 million, and other expenses of $7.9 million. The decrease in compensation expense was due to the continuing effort to control and decrease compensation costs and a decrease in stock compensation expense from $1.1 million to $1.0 million.

Other selling, general and administrative expenses decreased $7.9 million or 45.6%. This decrease is primarily comprised of the decrease in professional fees of 64.3%, totaling $6.6 million, the decrease in provision for doubtful accounts of 75.6% totaling $0.7 million plus additional expense reduction initiatives. Professional fees related to investigation, review and other non-routine professional fees decreased $8.0 million to $1.5 million.

Depreciation and Amortization

Depreciation and amortization consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization of $5.5 million increased $0.3 million or 6.1%. The increase is primarily related to depreciation on capital expenditures unrelated to business combinations of $16.2 million made since June 30, 2012.

Other Expense, Net

Details of other expense, net for three months ended June 30, 2013 and 2012 are
as follows:

                                                                 2013          2012
Interest income                                                $      10     $       -
Interest expense                                                     (80 )        (531 )
Realized and unrealized net gain on fair value of
convertible debt and earn-outs                                         -           170
Foreign currency                                                      (1 )         (43 )
Other                                                                (17 )          31
Total other expense, net                                       $     (88 )   $    (373 )

The net gain on debt related fair value measurements is the result of the adjustment to fair value of the convertible promissory notes that were issued during the second half of 2011 and first quarter of 2012. The fair value of these convertible promissory notes is impacted by the market price of our stock. See Note 8, "Fair Value Measurements and Financial Instruments" of the Notes to Condensed Consolidated Financial Statements.

The reduction in interest expense reflects the lower borrowings outstanding in 2013 versus 2012.


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                     FOR THE SIX MONTHS ENDED JUNE 30, 2013

Total revenue and the revenue derived from each revenue type for the six months
ended June 30, 2013 and 2012 are as follows:

                              2013           %         2012            %
Revenue                                     (In thousands)
Chemical products           $  73,503        68.4 %   $  81,875        69.2 %
Hygiene, rental and other      33,906        31.6        36,460        30.8
Total revenue               $ 107,409       100.0 %   $ 118,335       100.0 %

Consolidated revenue decreased $10.9 million to $107.4 million. The components of the decreased revenue were a decline in chemical products of $8.4 million to $73.5 million, hygiene services and products of $2.1 million to $21.8 million in 2013, and rental and other of $0.4 million to $12.1 million in 2013. The amounts represent decreases of 10.2%, 8.9% and 3.4%, respectively. Throughout these product lines, decreases in revenue were primarily attributable to the loss of customers from the integration of some of our smaller acquisitions as well as the loss of two large accounts, including a chemical wholesale customer representing a decrease of $3.8 million of year to date revenue. In addition, the sale in 2012 of a non-core business resulted in a revenue decrease of approximately $1.3 million.

Cost of Sales

Cost of sales consists primarily of the cost of chemical, paper, air freshener
and other consumable products sold to, or used in the servicing of, our
customers. These costs are exclusive of route expense and related depreciation
and amortization. Cost of sales for the six months ended June 30, 2013 and 2012
are as follows:

                              2013         %(1)        2012        %(1)
Cost of Sales                             (In thousands)
Chemical products           $ 32,380       44.1 %   $ 37,727       46.1 %
Hygiene, rental and other     14,585       43.0       14,352       39.4
Total cost of sales         $ 46,965       43.7 %   $ 52,079       44.0 %

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

Cost of sales decreased $5.1 million or 9.8% primarily due to a decrease in volume totaling $10.9 million from the prior period. Cost of sales as a percentage of revenue decreased from 44.0% to 43.7%. As a percentage of sales, cost of hygiene, rental and other sales increased by 3.6% due primarily to a higher proportion of sales coming from paper and other consumable products that have a higher cost of sales than our hygiene service.

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 six months ended June 30, 2013 and 2012 are as follows:

                               2013         %(1)        2012        %(1)
                                           (In thousands)
Compensation                 $ 15,056       14.0 %   $ 14,815       12.6 %
Vehicle and other expenses      6,751        6.3        5,951        5.0
Total route expenses         $ 21,807       20.3 %   $ 20,766       17.6 %

(1) Represents route expenses as a percentage of total revenue.

Route expenses increased $1.0 million or 5.0%. As a percentage of revenue route expenses increased 2.7% to 20.3% of revenue due to the decrease in revenue. The components of this change were increases in compensation of $0.2 million and vehicle and other expenses of $0.8 million. The increase in compensation expense of $0.2 million is due to an increase in workers' compensation insurance. The increase in vehicle and other expenses of $0.8 million is due primarily to a decrease in company owned vehicles offset by an increase in company leased vehicles, increases in vehicle insurance and repairs and maintenance and the change from cell phones to handheld devices.


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Selling, General and Administrative Expenses

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

? Local 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 compensation and commission for local sales representatives and corporate account executives.

? Marketing expenses.

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

? Investigation and professional fees related to the Audit Committee review, restatement process, and other non-recurring fees related to completing our 2012 audit.

The details of selling, general and administrative expenses for the six months ended June 30, 2013 and 2012 are as follows:

                                             2013           %(1)          2012          %(1)
Selling, General & Administrative
Expenses                                                     (In thousands)
Compensation                               $  30,893          28.8 %   $  33,358          28.2 %
Occupancy                                      4,750           4.4         4,978           4.2
Other                                         21,402          19.9        27,230          23.0
Total selling, general & administrative
expenses                                   $  57,045          53.1 %   $  65,566          55.4 %

(1) Represents expenses as a percentage of total revenue.

Selling, general, and administrative expenses decreased $8.5 million to $57.0 million. The primary components of this change were decreases in compensation of $2.5 million and in other expenses of $5.8 million. The decrease in compensation expense primarily relates to cost savings initiatives which began in late 2012 and continue in 2013 and a decrease in stock compensation expense of $0.4 million to $1.7 million.

Other selling, general and administrative expenses decreased $5.8 million or 21.4%. This decrease is comprised of $3.3 million, or 24.6% in professional fees, $1.4 million or 81.4% in the provision for doubtful accounts plus additional expense reduction initiatives. Professional fees related to investigation, review and non-routine professional fees decreased $5.9 million to $5.4 million.

Depreciation and Amortization

Depreciation and amortization consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization of $11.2 million increased $1.0 million or 9.7%. The increase is primarily related to depreciation on capital expenditures unrelated to business combinations of $16.2 million made since June 30, 2012.


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Other Expense, Net

Details of other expense, net for the six months ended June 30, are as follows:

                                                                 2013          2012
Interest income                                                $      25     $       -
Interest expense                                                    (182 )      (1,112 )
Realized and unrealized net gain on fair value of
convertible debt and earn-outs                                         -           199
Foreign currency                                                      (2 )         (40 )
Other                                                                  -           154
Total other expense, net                                       $    (159 )   $    (799 )

The net gain on debt related fair value measurements is the result of the required adjustment to fair value of the convertible promissory notes that were issued during the second half of 2011 and first quarter of 2012. The fair value of these convertible promissory notes is impacted by the market price of our stock. See Note 8, "Fair Value Measurements and Financial Instruments" of the Notes to Condensed Consolidated Financial Statements.

The reduction in interest expense reflects the lower borrowings outstanding in 2013 versus 2012.

Income Tax Expense

In projecting the Company's income tax expense for 2013, management has concluded that it is not more likely than not that the Company will realize the benefit of its deferred tax assets and as a result a full valuation allowance will be required as of December 31, 2013. Therefore, the Company has not recognized a tax benefit as it relates to the current loss for the period ended June 30, 2013.

For the three months and six months ended June 30, 2013, the Company has recorded an estimate for income taxes based on the Company's projected income tax expense for the twelve month period ending December 31, 2013. The Company's tax provision has an unusual relationship to pretax loss mainly because of the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, tax expense recorded in the first and second quarter of 2013 included the accrual of income tax expense related to additional valuation allowance in connection with the tax amortization of the Company's indefinite-lived intangible assets that was not available to offset existing deferred tax assets (termed a "naked credit"). Specifically, the Company does not consider the deferred tax liabilities related to indefinite lived intangibles assets when determining the need for a valuation allowance.

Cash Flows Summary

The following table summarizes cash flows from continuing operations for the six
months ended June 30, 2013 and 2012:

                                                                 2013          2012
                                                                   (In thousands)
Net cash used in operating activities                          $ (13,800 )   $ (23,278 )
Net cash provided by (used in) investing activities                3,906       (15,451 )
Net cash used in financing activities                             (4,108 )      (6,819 )
Net decrease in cash from continuing operations                  (14,002 )     (45,548 )
Net (decrease) increase in cash from discontinued operations      (2,822 )       3,897
Net decrease in cash and cash equivalents                      $ (16,824 )   $ (41,651 )

Net cash used in operating activities was $13.8 million. The decrease in cash used of $9.5 million is primarily due to a net inflow of cash from changes in working capital components of $2.7 million versus a net outflow of $6.0 million in the prior period, offset by an increase in the net loss of $0.8 million.


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Net cash used in investing activities decreased $19.4 million. This decrease is primarily due to a $12.6 million collection of a receivable due from sale of . . .

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