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SWSH > SEC Filings for SWSH > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for SWISHER HYGIENE INC.

Form 10-Q for SWISHER HYGIENE INC.


11-Aug-2014

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, 2013 (the "2013 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 2013 Form 10-K and this Quarterly Report on Form 10-Q.

Business Overview

We currently operate in one business segment, Hygiene, which encompasses providing essential hygiene and sanitizing service solutions to customers in a wide range of end-markets including foodservice, hospitality, retail and the healthcare industries. We sell consumable products such as detergents, cleaning chemicals, soap, paper, water filters and supplies, together with the rental and servicing of dish machines and other equipment for the dispensing of those products as well as additional services such as the cleaning of restrooms and other facilities. As we progress into 2014, we are beginning to see the positive impact of cost efficiencies, capital resource management and planning, plant consolidations and route optimization efforts; however we believe we will need to increase revenues in order to maximize our profitability. We are committed to our philosophy of Service, People and Profitably. To that end, we have commenced a realignment of our field service and sales teams to better serve our customers since we believe this will ultimately drive increased revenues through improved customer retention and the ability to leverage our current customer base. See "Prior Period Reclassification" for a description of our realignment.

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 1 to the Consolidated Financial Statements in our 2013 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 2013 Form 10-K.

Newly Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers" (Topic 606). This ASU is intended to clarify the principles for recognizing revenue by providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices; and providing more useful information to users of financial statements through improved revenue disclosure requirements. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2016. We are currently evaluating the impact of this ASU.

Assets Held for Sale

During 2013, the Company commenced an active program to sell certain linen and dust operations that were determined to be under-performing, non-core businesses or routes. Additionally, a chemical manufacturing plant was closed in connection with the Company's 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 and the assets were adjusted to the lower of historical carrying amount or fair value. Fair value is based on the estimated sales price, less selling costs, of the assets. Estimates of the net sales proceeds are derived using Level 3 inputs, including the Company's estimates related to industry multiples of revenues or operating metrics, the status of ongoing sales negotiations and asset purchase agreements where available. The Company's estimates of fair value require significant judgement and are regularly reviewed and subject to change based on market conditions, changes in the customer base of the operations or routes and our continuing evaluation as to the facility's acceptable sale price.


During the second quarter of 2014, the Company updated its estimates of the fair value of certain routes and operations to reflect events that occurred during the period, resulting in an impairment loss of $1.0 million for the three months ended June 30, 2014. The cumulative impairment loss for the six months ended June 30, 2014 was $3.0 million, of which $1.7 million was attributable to a reduction in the estimate of net sales proceeds for a linen processing operation. The factors driving this reduction were the cancellation notifications, received during April and May 2014 from three major customers resulting in a significant loss of forecasted revenue; and the operation's first quarter loss which was in excess of the Company's estimates. The resulting revisions to estimates of fair value for this operation considered these developments as well as discussions with potential buyers.

The Company completed several sales transactions during the six months ended June 30, 2014, which resulted in the receipt of $1.1 million in cash and the remainder in receivables. A loss on these sales of $0.8 million was incurred and the Company wrote off $0.5 million of a receivable balance for sales proceeds that were contingent on post-close revenues of previously sold routes that were lower than estimated. The total loss of $0.2 million and $0.8 million for the three and six months ended June 30, 2014, respectively, is included in "Other expense, net" in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Assets held for sale at June 30, 2014 were $0.3 million. The 2013 annual revenue attributable to the linen assets held for sale and the sold linen assets was $14.1 million. For the three and six months ended June 30, 2014, linen related revenue attributable to the linen assets held for sale and the sold linen assets was $1.1 million and $2.5 million, respectively, and $3.8 million and $7.4 million for the three and six months ended June 30, 2013, respectively. The Company expects that the majority of the sales transactions, related to the assets held for sale, will be primarily completed within the next three months.

Prior Period Reclassification

In the first quarter of 2014, the Company began implementing a realignment of its field service and sales organization and as a result the primary function of certain job titles has shifted from primarily a sales to a service focus. The additional service activities involve more frequent field visits to perform preventative maintenance, repairs, evaluation of product and service solutions and required inventory levels. This realignment of the field service and sales organization is being implemented in stages during 2014. Payroll expense related to these job titles was historically classified within "Selling, general and administrative expenses" in the Condensed Consolidated Statement of Operations and Comprehensive Loss, based on the primary job focuses of sales and administration. Based on the changes in the job functions, the related payroll expense will be classified within route expense, which the Company defines as the employee costs incurred to provide service and deliver products to customers. To facilitate comparability between the periods presented in the Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended June 30, 2013, certain selling, general and administrative expense have been reclassified to route expense to conform to the current period's presentation as follows: $2.9 million increase in route expense from $11.3 million to $14.2 million and a $2.9 million decrease in selling, general and administrative expense from $27.0 million to $24.1 million. The reclassifications for the six months ended June 30, 2013 were $5.6 million increase in route expense from $21.8 million to $27.4 million and a $5.6 million decrease in selling, general and administrative expense from $57.1 million to $51.5 million. There was no impact to loss from continuing operations, net loss or loss per share as a result of the 2013 reclassifications.


RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2014

Revenue

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

Total revenue and the revenue derived from each revenue type for the three months ended June 30, 2014 and 2013 are as follows:

                        2014          %          2013          %
Revenue                              (In thousands)
Products              $ 44,780        89.7 %   $ 48,996        88.4 %
Services                 4,809         9.6 %      5,909        10.7 %
Franchise and other        366         0.7 %        481         0.9 %
Total revenue         $ 49,955       100.0 %   $ 55,386       100.0 %

Consolidated revenue decreased $5.4 million or 9.8% to $50.0 million for the three months ended June 30, 2014 compared to 2013. Excluding revenue generated from linen assets sold and held for sale for the three months ended June 30, 2014 and 2013, consolidated revenue decreased 5.3% on a comparable basis. Product revenue decreased $4.2 million primarily due to a $2.1 million decrease related to linen routes and businesses sold plus a $0.7 million decrease attributed to the loss of customers at existing linen operations. Service revenues declined $1.1 million due to the loss of hygiene customers and customers sold in connection with assets held for sale. Franchise and other revenue remained fairly consistent period over period.

     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, 2014 and
2013 are as follows:

                        2014         % (1)        2013        %(1)
Cost of Sales                         (In thousands)
Products              $ 22,778        50.9 %   $ 23,699       48.4 %
Services                   131         2.7 %        311        5.3 %
Franchise and other         64        17.5 %        389       80.9 %
Total cost of sales   $ 22,973        46.0 %   $ 24,399       44.1 %

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

Cost of sales decreased $1.4 million or 5.8% to $23.0 million for the three months ended June 30, 2014 compared to 2013. Reported in the 2014 cost of sales amount is a $0.5 million realignment of freight costs that were classified in selling, general and administrative expenses in 2013. The Company has elected not to reclassify this amount in its prior period Condensed Consolidated Statements of Operations and Comprehensive Loss for comparability purposes since it is considered immaterial. As a percentage of sales, consolidated cost of sales increased from 44.1% to 46.0%. Without the $0.5 million realignment, 2014 total cost of sales as a percentage of revenue is 44.9%. The remaining quarter over quarter percentage increase is driven by the overall revenue mix, including the loss of linen revenues, and the mix of revenue within products.


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, 2014 and 2013 are as follows:

                               2014         %  (1)        2013        %  (1)
Route Expenses                                (In thousands)
Compensation                 $  9,847         19.9 %   $ 10,344         18.8 %
Vehicle and other expenses      2,751          5.5 %      3,852          7.0 %
Total route expenses         $ 12,598         25.4 %   $ 14,196         25.8 %

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

Route expenses decreased $1.6 million or 11.3% to $12.6 million for the three months ended June 30, 2014 compared to 2013. The components of this change were decreases in compensation of $0.5 million and decreases in vehicle and other expenses of $1.1 million. Route expense as a percentage of total revenue was 25.4% and 25.8% for the three months ended June 30, 2014 and 2013, respectively.

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 commissions for local sales representatives and corporate account representatives.

? Marketing expenses.

? Corporate office expenses which include executive management, information technology, human resource, accounting, purchasing and other support costs.

? Investigation and 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 three months ended June 30, 2014 and 2013 are as follows:

                                             2014           %(1)          2013         %  (1)
Selling, General & Administrative
Expenses                                                      (In thousands)
Compensation                               $  10,007          20.0 %   $  12,394          22.4 %
Occupancy                                      1,820           3.6 %       2,290           4.1 %
Other                                          5,307          10.6 %       9,422          17.0 %
Total selling, general & administrative
expenses                                   $  17,134          34.3 %   $  24,106          43.5 %

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

Selling, general and administrative expenses decreased $7.0 million to $17.1 million for the three months ended June 30, 2014 compared to 2013. The components of this change were decreases in compensation of $2.4 million, occupancy of $0.5 million, and other expenses of $4.1 million. Compensation expense decreased primarily due to ongoing cost efficiencies, a reduction in stock based compensation and the sale of the linen business. Occupancy decreased due to the sale of a linen plant and due to ongoing efforts to reduce facility infrastructure needs. Other expenses decreased primarily due to the decrease in professional fees of $2.3 million; the decrease in bad debt expense of $0.4 million; the decrease related to realigning freight costs in cost of sales of $0.5 million, plus additional expense reduction initiatives.


Depreciation and Amortization

Depreciation and amortization consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization decreased $0.3 million to $5.2 million or 6.0% for the three months ended June 30, 2014. The decrease is due in part to the categorization of certain fixed assets as assets held for sale.

Impairment Related to Goodwill

In conjunction with its goodwill impairment test, the Company incurred a non-cash goodwill impairment charge of $5.8 million during the three months ended June 30, 2014, see Note 4, "Goodwill and Other Intangible Assets" for further discussion of the impairment.

     Other Expense, Net

Details of other expense, net for three months ended June 30, 2014 and 2013 are
as follows:

                             2014        2013
                             (In thousands)
Interest income            $       3     $  10
Interest expense                (145 )     (80 )
Foreign currency                 (85 )      (1 )
Other                           (274 )     (17 )
Total other expense, net   $    (501 )   $ (88 )

The increase in other expense is primarily due to the $0.2 million loss on assets held for sale.

Income Tax Expense

In projecting the Company's income tax expense for 2014, 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, 2014. Therefore, the Company has not recognized a tax benefit as it relates to the current loss for the period ended June 30, 2014.

For the three months ended June 30, 2014, 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, 2014. 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 tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change to the valuation allowance. However, due to the impairment of goodwill for book purposes as of June 30, 2014, a deferred tax asset now exists related to goodwill. The change from a net deferred tax liability to a net deferred tax asset resulted in a tax benefit.


RESULTS OF CONTINUING OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2014

Revenue

Total revenue and the revenue derived from each revenue type for the six months
ended June 30, 2014 and 2013 are as follows:

                        2014          %          2013           %
Revenue                               (In thousands)
Products              $ 88,021        89.6 %   $  95,033        88.5 %
Services                 9,503         9.7 %      11,653        10.8 %
Franchise and other        726         0.7 %         723         0.7 %
Total revenue         $ 98,250       100.0 %   $ 107,409       100.0 %

Consolidated revenue decreased $9.2 million or 8.5% to $98.3 million for the six months ended June 30, 2014 compared to 2013. Excluding revenue generated from linen assets sold and held for sale for the six months ended June 30, 2014 and 2013, consolidated revenue decreased 4.3% on a comparable basis. Product revenue decreased $7.0 million primarily due to a $5.0 million decrease related to linen routes and businesses sold. The remaining product revenue decrease is primarily due to a $1.3 million decrease from the loss of customers at existing linen operations, offset by the addition of $0.9 million in revenues previously classified as service revenues. Service revenues declined $2.1 million due to the loss of hygiene customers, approximately $0.2 million of which related to divested linen routes and customers sold in connection with assets held for sale. Franchise and other revenue remained consistent period over period.

    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, 2014 and 2013
are as follows:

                        2014         %  (1)        2013        %(1)
Cost of Sales                         (In thousands)
Products              $ 44,358         50.4 %   $ 45,658       48.0 %
Services                   265          2.8 %        683        5.9 %
Franchise and other        162         22.3 %        624       86.3 %
Total cost of sales   $ 44,785         45.6 %   $ 46,965       43.7 %

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

Cost of sales decreased $2.2 million or 4.6% to $44.8 million for the six months ended June 30, 2014 compared to 2013. Reported in the 2014 cost of sales amount is a $1.0 million realignment of freight costs that were classified in selling, general and administrative expenses in 2013. The Company has elected not to reclassify this amount in its prior period Condensed Consolidated Statement of Operations and Comprehensive Loss for comparability purposes since it is considered immaterial. As a percentage of sales, consolidated cost of sales increased from 43.7% to 45.6%. Without the $1.0 million realignment, 2014 total cost of sales as a percentage of revenue is 44.5%. The remaining quarter over quarter percentage increase is driven by the overall revenue mix, including the loss of linen revenue, and the mix of revenue within products.


    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 six months ended June 30, 2014 and 2013 are as follows:

                               2014         %(1)        2013        %   (1)
Route Expenses                                (In thousands)
Compensation                 $ 19,264       19.8 %   $ 20,632          19.3 %
Vehicle and other expenses      5,697        5.8 %      6,751           6.3 %
Total route expenses         $ 24,961       25.6 %   $ 27,383          25.7 %

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

Route expenses decreased $2.4 million or 8.8% to $25.0 million for the six months ended June 30, 2014 compared to 2013. The primary components of this change were decreases in compensation of $1.4 million and decreases in vehicle and other expenses of $1.1 million. Route expense as a percentage of total revenue was 25.6% and 25.7% for the six months ended June 30, 2014 and 2013, respectively.

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 commissions for local sales representatives and corporate account representatives.

? Marketing expenses.

? Corporate office expenses which include executive management, information technology, human resource, accounting, purchasing and other support costs.

? Investigation and 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, 2014 and 2013 are as follows:

                                             2014           %(1)          2013         %  (1)
Selling, General & Administrative
Expenses                                                      (In thousands)
Compensation                               $  20,922          21.3 %   $  25,317          23.6 %
Occupancy                                      3,901           4.0 %       4,750           4.4 %
Other                                         12,081          12.3 %      21,402          19.9 %
Total selling, general & administrative
expenses                                   $  36,904          37.6 %   $  51,469          47.9 %

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

Selling, general and administrative expenses decreased $14.6 million to $36.9 million. The components of this change were decreases in compensation of $4.4 million, occupancy of $0.8 million, and other expenses of $9.3 million. Compensation expense decreased primarily due to ongoing cost efficiencies, a reduction in stock based compensation and the sale of the linen business. Occupancy decreased due to the sale of a linen plant and due to ongoing efforts to reduce facility infrastructure needs. Other expenses decreased primarily due to the decrease in professional fees of $6.1 million; the decrease in travel expenses of $0.6 million; the decrease related to realigning freight costs in cost of sales of $1.0 million, plus additional expense reduction initiatives.


Depreciation and Amortization

Depreciation and amortization consists of depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization decreased $0.6 million to $10.5 million or 5.6%. The decrease is due in part to the categorization of certain fixed assets as assets held for sale.

Impairment Related to Goodwill

In conjunction with its goodwill impairment test, the Company incurred a non-cash goodwill impairment charge of $5.8 million during the six months ended June 30, 2014, see Note 4, "Goodwill and Other Intangible Assets" for further discussion of the impairment.

     Other Expense, Net

Details of other expense, net for the six months ended June 30, 2014 and 2013
are as follows:

                             2014        2013
                             (In thousands)
Interest income            $      7     $   25
Interest expense               (223 )     (182 )
Foreign currency               (100 )       (2 )
Other                          (903 )        -
Total other expense, net   $ (1,219 )   $ (159 )

The increase in other expense is primarily due to the $0.8 million loss on assets held for sale.

Income Tax Expense

In projecting the Company's income tax expense for 2014, 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, 2014. Therefore, the Company has not . . .

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