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ECHO > SEC Filings for ECHO > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for ECHO GLOBAL LOGISTICS, INC.

Form 10-Q for ECHO GLOBAL LOGISTICS, INC.


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading provider of technology enabled transportation and supply chain management services, delivered on a proprietary technology platform serving the transportation and logistics needs of our clients. Our proprietary web-based technology platform compiles and analyzes data from our network of over 24,000 transportation providers to serve our clients' shipping and freight management needs. Our technology platform, composed of web-based software applications and a proprietary database, enables us to identify excess transportation capacity, obtain competitive rates and execute thousands of shipments every day while providing high levels of service and reliability. We focus primarily on arranging transportation across the major modes, including truckload ("TL"), less than truck load ("LTL") and small parcel, and we also offer inter-modal (which involves moving a shipment by rail and truck), domestic air, expedited and international transportation services.

We procured transportation and provided logistics services for 25,430 clients for the nine month period ended September 30, 2012 across a wide range of industries, such as manufacturing, construction, consumer products and retail. Our clients fall into two categories, enterprise and transactional. We typically enter into multi-year contracts with our enterprise clients, which are often on an exclusive basis for a specific transportation mode or point of origin. As part of our value proposition, we also provide core logistics services to these clients. We provide transportation and logistics services to our transactional clients on a shipment-by-shipment basis, typically with individual, or spot market, pricing.

                             Results of Operations

The following table represents certain statement of income data:
                                           Three Months Ended           Nine Months Ended
                                              September 30,               September 30,
                                           2012          2011          2012          2011
                                                             (Unaudited)
                                                (in thousands, except per share data)
Consolidated statements of income data:
Revenue                                 $ 192,738     $ 158,956     $ 546,538     $ 439,906
Transportation costs                      156,145       128,337       442,475       354,474
Net revenue                                36,593        30,619       104,063        85,432
Operating expenses:
Commissions                                10,414         9,321        29,826        25,971
Selling, general and administrative        17,562        13,800        50,943        39,816
Contingent consideration                        2          (127 )        (444 )        (247 )
Depreciation and amortization               2,295         2,174         6,510         6,153
Total operating expenses                   30,273        25,168        86,835        71,693
Income from continuing operations           6,320         5,451        17,228        13,739
Other expense                                (122 )         (80 )        (360 )        (219 )
Income before income taxes                  6,198         5,371        16,868        13,520
Income tax expense                         (2,381 )      (1,991 )      (6,336 )      (5,004 )
Net income                              $   3,817     $   3,380     $  10,532     $   8,516
Net income per share of common stock:
Basic                                   $    0.17     $    0.15     $    0.47     $    0.38
Diluted                                 $    0.17     $    0.15     $    0.46     $    0.38
Shares used in per share calculations:
Basic                                      22,383        22,153        22,273        22,125
Diluted                                    22,895        22,571        22,822        22,566


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Revenue

We generate revenue through the sale of transportation and logistics services to our clients. Revenue is recognized when the client's product is delivered by a third-party carrier. Our revenue was $546.5 million and $439.9 million for the nine month periods ended September 30, 2012 and 2011, respectively, a year over year increase of 24.2%.

Our revenue is generated from two different types of clients: enterprise and transactional. Our enterprise accounts typically generate higher dollar amounts and volume than our transactional relationships. We categorize a client as an enterprise client if we have a contract with the client for the provision of services on a recurring basis. Our contracts with enterprise clients typically have a multi-year term and are often exclusive for a certain transportation mode or point of origin. In several cases, we provide substantially all of a client's transportation and logistics requirements. We categorize all other clients as transactional clients. We provide services to our transactional clients on a shipment-by-shipment basis. As of September 30, 2012, we had 197 enterprise clients and, for the nine month period ended September 30, 2012, we served over 25,233 transactional clients. For the nine month period ended September 30, 2012, we entered into contracts with 20 new enterprise clients. For the nine month periods ended September 30, 2012 and 2011, enterprise clients accounted for 31% and 32%, respectively, and transactional clients accounted for 69% and 68%, respectively, of our revenue. We expect to continue to grow both our enterprise and transactional client base in the future, although the rate of growth for each type of client will vary depending on opportunities in the marketplace.

Revenue recognized per shipment will vary depending on the transportation mode, fuel prices, shipment weight and density and mileage of the product shipped. The primary modes of shipment that we transact in are TL, LTL, inter-modal and small parcel. Other transportation modes include domestic air, expedited services and international. Typically, our revenue is lower for an LTL shipment than for a TL shipment, and revenue per shipment is higher for shipments in modes other than TL, LTL and small parcel. Material shifts in the percentage of our revenue by transportation mode could have a significant impact on our revenue growth. For the nine month period ended September 30, 2012, LTL accounted for 46% of our revenue, TL accounted for 44% of our revenue, small parcel accounted for 5% of our revenue, intermodal accounted for 4% of our revenue and other transportation modes accounted for 1% of our revenue. For the nine month period ended September 30, 2011, LTL accounted for 48% of our revenue, TL accounted for 44% of our revenue, small parcel accounted for 5% of our revenue, intermodal accounted for 2% of our revenue and other transportation accounted for 1% of our revenue.

The transportation industry has historically been subject to seasonal sales fluctuations as shipments generally are lower during and after the winter holiday season because many companies ship goods and stock inventories prior to the winter holiday season. While we experience some seasonality, differences in our revenue between periods have been driven primarily by growth in our client base.

Transportation costs and net revenue

We act primarily as a service provider to add value and expertise in the procurement and execution of transportation and logistics services for our clients. Our fee structure is primarily variable, although we have entered into a limited number of fixed fee arrangements that represent an insignificant portion of our revenue. Net revenue equals revenue minus transportation costs. Our transportation costs consist primarily of the direct cost of transportation paid to the carrier.

Net revenue is the primary indicator of our ability to add value to our clients and is considered by management to be an important measurement of our success in the marketplace. Although our transportation costs are typically lower for an LTL shipment than for a TL shipment, our net revenue margin is typically higher for an LTL shipment than for a TL shipment. Material shifts in the percentage of our revenue by transportation mode, including small parcel, could have a significant impact on our net revenue. The discussion of results of operations below focuses on changes in our net revenue and expenses as a percentage of net revenue margin. For the nine month periods ended September 30, 2012 and 2011, our net revenue was $104.1 million and $85.4 million, respectively, reflecting an increase of 21.8%.

Operating expenses

Our costs and expenses, excluding transportation costs, consist of commissions paid to our sales personnel, general and administrative expenses to run our business, changes related to contingent consideration and depreciation and amortization.

Commissions paid to our sales personnel, including employees and agents, are a significant component of our operating expenses. These commissions are based on the net revenue we collect from the clients for which they have primary responsibility. For the nine month periods ended September 30, 2012 and 2011, commission expense was 28.7% and 30.4%,


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respectively, as a percentage of our net revenue. The percentage of net revenue paid as commissions will vary depending on the type of client, composition of the sales team and mode of transportation. Commission expense, stated as a percentage of net revenue, could increase or decrease in the future depending on the composition of our revenue growth and the relative impact of changes in sales teams and service offerings.

We accrue for commission expense when we recognize the related revenue. Some of our sales personnel receive a monthly advance to provide them with a more consistent income stream. Cash paid to our sales personnel in advance of commissions earned is reflected as a prepaid expense on our consolidated balance sheet. As our sales personnel earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any.

Our selling, general and administrative expenses, which exclude commission expense, consist of compensation costs for our sales, operations, information systems, finance and administrative support employees as well as occupancy costs, professional fees and other general and administrative expenses. For the nine month periods ended September 30, 2012 and 2011, our selling, general and administrative expenses were $50.9 million and $39.8 million, respectively. For the nine month periods ended September 30, 2012 and 2011, selling, general and administrative expenses as a percentage of net revenue were 49.0% and 46.6%, respectively.

Our contingent consideration expenses consist of the change in the fair market value of the contingent liabilities payable to the sellers of our acquired businesses. The contingent liabilities relate to expected earn-out payments that will be paid upon the achievement of certain performance measures by our acquired businesses. These liabilities are evaluated on a quarterly basis and the change in the contingent consideration is included in the selling, general and administrative expenses in our consolidated statement of income. For the nine month periods ended September 30, 2012 and 2011, we recorded a benefit of $0.4 million and $0.2 million, respectively, related to fair value adjustments to contingent consideration.

Our depreciation expense is primarily attributable to our depreciation of purchases of computer hardware and software, equipment, furniture and fixtures, and internally developed software. For the nine month periods ended September 30, 2012 and 2011, depreciation expense was $5.0 million and $4.3 million, respectively.

Our amortization expense is attributable to our amortization of intangible assets acquired from business combinations, including client relationships, tradenames and non-compete agreements. For the nine month periods ended September 30, 2012 and 2011, amortization expense was $1.5 million and $1.8 million, respectively.

Comparison of nine months ended September 30, 2012 and 2011

Revenue

Our revenue increased by $106.6 million, or 24.2%, to $546.5 million for the nine month period ended September 30, 2012, from $439.9 million for the nine month period ended September 30, 2011. The increase was attributable to the increase in the number of our clients, and the total number of shipments executed on behalf of, and services provided to, these clients. Also, $15.0 million of revenue was generated for the nine month period ended September 30, 2012 from acquisitions completed subsequent to September 30, 2011.

Our revenue from enterprise clients increased by $28.3 million, or 20.0%, to $169.7 million for the nine month period ended September 30, 2012, from $141.4 million for the nine month period ended September 30, 2011. The increase was attributable to an increase in the number of enterprise clients and the number of shipments executed and services provided to existing enterprise clients. As we increased our transactional revenue, our percentage of revenue from enterprise clients decreased to 31% of our revenue during the nine month period ended September 30, 2012 from 32% for the nine month period ended September 30, 2011. As of September 30, 2012, we had 197 enterprise clients under contract, which was an increase of 28 compared to 169 enterprise clients under contract as of September 30, 2011.

Our revenue from transactional clients increased by $78.3 million, or 26.2%, to $376.8 million for the nine month period ended September 30, 2012, from $298.5 million for the nine month period ended September 30, 2011. The growth in revenue from transactional clients during this period was driven by the increase in revenue per transactional client as well as an increase in transactional clients served. Our percentage of revenue from transactional clients increased to 69% of our revenue for the nine month period ended September 30, 2012, from 68% of our revenue for the nine month period ended September 30, 2011. Our revenue per transactional client increased by approximately 24.0% in the nine months ended September 30, 2012 when compared to the same period in 2011.


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Transportation costs

Our transportation costs increased by $88.0 million, or 24.8%, to $442.5 million for the nine month period ended September 30, 2012, from $354.5 million for the nine month period ended September 30, 2011. The growth in the total number of shipments executed on behalf of our clients accounted for most of the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue increased to 81.0% for the nine month period ended September 30, 2012, from 80.6% for the nine month period ended September 30, 2011 due to an increased number of TL and intermodal shipments in the composition of our sales volume.

Net revenue

Net revenue increased by $18.7 million, or 21.8%, to $104.1 million for the nine month period ended September 30, 2012, from $85.4 million for the nine month period ended September 30, 2011. The growth in the total number of shipments executed on behalf of our clients accounted for most of the increase in our net revenue during this period. Net revenue margins decreased to 19.0% for the nine month period ended September 30, 2012, from 19.4% for the nine month period ended September 30, 2011. The decrease in net revenue margins was the result of a lower mix of LTL revenue in the nine month period ended September 30, 2012.

Operating expenses

Commission expense increased by $3.8 million, or 14.8%, to $29.8 million for the nine month period ended September 30, 2012, from $26.0 million for the nine month period ended September 30, 2011. This increase is primarily attributable to the increase in net revenue.

Selling, general and administrative expenses increased by $11.1 million, or 27.9%, to $50.9 million for the nine month period ended September 30, 2012, from $39.8 million for the nine month period ended September 30, 2011. The increase is primarily the result of hiring personnel to support our growth and training initiatives and increases in other general and administrative expenses due to the increase in the number of employees and the ongoing expansion of our business. As a percentage of net revenue, selling, general and administrative expenses increased to 49.0% for the nine month period ended September 30, 2012, from 46.6% for the nine month period ended September 30, 2011. The increase, as a percentage of net revenue, is primarily attributable to increases in expenses associated with the growth of our business and non-recurring charges of $0.7 million related to the settlement of a 2010 lawsuit with a former enterprise client in May of 2012.

Contingent consideration

The change in contingent consideration for the nine month periods ended September 30, 2012 and 2011, respectively, resulted in a net decrease in our contingent consideration obligation. The resulting benefit recognized in our consolidated statement of income from the change in the contingent consideration obligation increased by $0.2 million, to $0.4 million for the nine month period ended September 30, 2012, from $0.2 million for the nine month period ended September 30, 2011. For the nine month period ended September 30, 2012, the benefit primarily related to a decrease in the contingent liability due to DNA Freight Inc. ("DNA") of $1.0 million and increases in the contingent liability due to other acquisitions totaling approximately $0.6 million in aggregate. These adjustments were the result of changes to the forecasted financial performance of each acquisition. As of September 30, 2012, DNA has not experienced the growth needed to achieve the second year EBITDA performance measures set forth in the amended asset purchase agreement. The measurement date for the second year measurement is November 30, 2012. As a result, the value of the second year earn-out payment was reduced to zero and the fair value of the third-year earn-out payment was significantly reduced to reflect the likelihood that EBITDA earn-out targets will be achieved in future years. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of September 30, 2012. For the nine month period ended September 30, 2011, the benefit was primarily related to increases in the contingent liability due to Freight Management Inc. ("FMI"), Distribution Services Inc. ("DSI") and Lubenow of $0.4 million, $0.4 million and $0.2 million, respectively, and a decrease in the contingent liability due to DNA and Advantage Transport, Inc. ("Advantage") of $1.1 million and $0.3 million, respectively. These adjustments were the result of changes to the forecasted financial performance of each acquisition as well as an amendment to the terms of the DNA purchase agreement related to contingent consideration.

Depreciation and amortization

Depreciation expense increased by $0.7 million, or 15.8%, to $5.0 million for the nine month period ended September 30, 2012 from $4.3 million for the nine month period ended September 30, 2011. The increase in depreciation


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expense is primarily attributable to purchases of computer hardware and software, equipment, furniture and fixtures, and the capitalization of internally developed software. Amortization expense decreased by $0.3 million, or 18.1%, to $1.5 million for the nine month period ended September 30, 2012, from $1.8 million for the nine month period ended September 30, 2011. The decrease in amortization expense is the result of the amortization period expiring for certain intangibles related to acquisitions that occurred in 2007.

Income from operations

Income from operations increased by $3.5 million, or 25.4%, to $17.2 million for the nine month period ended September 30, 2012, from $13.7 million for the nine month period ended September 30, 2011. The increase in income from operations is attributable to the increase in net revenue in excess of the increase in operating expenses.

Other expense and income tax expense

Other expense increased to $0.4 million for the nine month period ended September 30, 2012 from $0.2 million for the nine month period ended September 30, 2011.

Income tax expense increased to $6.3 million for the nine month period ended September 30, 2012 from $5.0 million for the nine month period ended September 30, 2011. Our effective tax rate for the nine month period ended September 30, 2012 increased to 37.6% when compared to 37.0% for the nine month period ended September 30, 2011. The increase in our effective tax rate was due to slightly higher state rates upon filing the 2011 state tax returns in the third quarter of 2012, as a result of apportionment in high tax states.

Net Income

Net income increased by $2.0 million, or 23.7%, to $10.5 million for the nine month period ended September 30, 2012 from $8.5 million for the nine month period ended September 30, 2011 related to the items previously discussed.

Comparison of three months ended September 30, 2012 and 2011

Revenue

Our revenue increased by $33.7 million, or 21.3%, to $192.7 million for the three month period ended September 30, 2012, from $159.0 million for the three month period ended September 30, 2011. The increase was attributable to the increase in the number of our clients, and the total number of shipments executed on behalf of, and services provided to, these clients. Also, $7.6 million of revenue was generated for the three month period ended September 30, 2012 from acquisitions completed subsequent to September 30, 2011.

Our revenue from enterprise clients increased by $9.6 million, or 19.0%, to $60.2 million for the three month period ended September 30, 2012, from $50.6 million for the three month period ended September 30, 2011, resulting from an increase in the number of enterprise clients and shipments executed and services provided. As we increased our transactional revenue, our percentage of revenue from enterprise clients decreased to 31% of our revenue during the three month period ended September 30, 2012 from 32% for the three month period ended September 30, 2011. As of September 30, 2012, we had 197 enterprise clients under contract, which was an increase of 28 compared to 169 enterprise clients under contract as of September 30, 2011.

Our revenue from transactional clients increased by $24.1 million, or 22.3%, to $132.5 million for the three month period ended September 30, 2012, from $108.4 million for the three month period ended September 30, 2011. The growth in revenue from transactional clients during this period was driven by the increase in the revenue per transactional client. Our percentage of revenue from transactional clients increased to 69% of our revenue for the three month period ended September 30, 2012, from 68% of our revenue for the three month period ended September 30, 2011. We served approximately 16,143 transactional clients in the three month period ended September 30, 2012, a decrease of 438, or 2.6%, compared to the 16,581 transactional clients served in the three month period ended September 30, 2011. The decrease in transactional clients is primarily due to an increased focus on current transactional clients, economic conditions and a continuing training program. This renewed focus has allowed us to increase the number of shipments per transactional client over the same period in 2011. Our revenue per transactional client increased by approximately 25.6% in the three months ended September 30, 2012 as compared to the same period in 2011.


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Transportation costs

Our transportation costs increased by $27.8 million, or 21.7%, to $156.1 million for the three month period ended September 30, 2012, from $128.3 million for the three month period ended September 30, 2011. The growth in the total number of shipments executed on behalf of our clients accounted for most of the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue increased to 81.0% for the three month period ended September 30, 2012 from 80.7% for the three month period ended September 30, 2011 due primarily to an increased number of TL and intermodal shipments in the composition of our sales volume.

Net revenue

Net revenue increased by $6.0 million, or 19.5%, to $36.6 million for the three month period ended September 30, 2012, from $30.6 million for the three month period ended September 30, 2011. The growth in the total number of shipments executed on behalf of our clients accounted for most of the increase in our net revenue during this period. Net revenue margins decreased to 19.0% for the three month period ended September 30, 2012, from 19.3% for the three month period ended September 30, 2011. The decrease in net revenue margins was primarily the result of a lower mix of LTL revenue in the three month period ended September 30, 2012.

Operating expenses

Commission expense increased by $1.1 million, or 11.7%, to $10.4 million for the three month period ended September 30, 2012, from $9.3 million for the three month period ended September 30, 2011. This increase is primarily attributable to the increase in net revenue.

Selling, general and administrative expenses increased by $3.8 million, or 27.3%, to $17.6 million for the three month period ended September 30, 2012, from $13.8 million for the three month period ended September 30, 2011. The increase is primarily the result of hiring personnel to support our growth and training initiatives and increases in other general and administrative expenses due to the increase in the number of employees and the ongoing expansion of our business. As a percentage of net revenue, selling, general and administrative expenses increased to 48.0% for the three month period ended September 30, 2012, from 45.1% for the three month period ended September 30, 2011. The increase, as a percentage of net revenue, is primarily attributable to increases in expenses associated with the growth of our business.

Contingent consideration

The change in contingent consideration for the three month periods ended September 30, 2012 and 2011, respectively, resulted in a net increase in our contingent consideration obligation. The resulting loss recognized in our consolidated statement of income from the change in the contingent consideration obligation is $2,072 for the three month period ended September 30, 2012 compared to a benefit of $0.1 million for the three month period ended September 30, 2011. For the three month period ended September 30, 2012, the loss primarily related to a decrease in the contingent liability due to DNA of $0.3 million offset by increases in the contingent liability due to Advantage of $0.2 million and increases in the contingent liability due to other acquisitions of $0.1 million. These increases were the result of changes to the forecasted financial performance of these acquisitions. As of September 30, 2012, DNA has not experienced the growth needed to achieve the second year EBITDA performance measures set forth in the amended asset purchase agreement. The measurement date for the second year measurement is November 30, 2012. As a result, the value of the second year earn-out payment was reduced to zero and the fair value of the third year earn-out payment was significantly reduced to reflect the likelihood that EBITDA earn-out targets will be achieved in future years. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of September 30, 2012. The increase in Advantage was the result . . .

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