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ECHO > SEC Filings for ECHO > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for ECHO GLOBAL LOGISTICS, INC.


3-May-2013

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 solutions. We utilize a proprietary technology platform to compile and analyze data from our multi-modal network of transportation providers to satisfy the transportation and logistics needs of our clients. This model enables us to quickly adapt and offer the most efficient and cost-effective solutions for our clients' shipping needs. We focus primarily on arranging transportation across truckload ("TL") and less than truckload ("LTL"), and we also offer inter-modal (which involves moving a shipment by rail and truck), small parcel, domestic air, expedited and international transportation services. Our core logistics services include rate negotiation, shipment execution and tracking, carrier management, routing compliance and performance management reporting.

We procure transportation and provide logistics services for clients 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
                                                                       March 31,
                                                                 2013              2012
                                                                      (Unaudited)
                                                             (in thousands, except per share
                                                                         data)
Consolidated statements of income data:
Revenue                                                     $   203,977       $   168,569
Transportation costs                                            165,526           135,899
Net revenue                                                      38,451            32,670
Operating expenses:
Commissions                                                       9,943             9,465
Selling, general and administrative expenses                     20,305            16,147
Contingent consideration expense                                    759              (328 )
Depreciation and amortization                                     2,595             2,029
Total operating expenses                                         33,602            27,313
Income from operations                                            4,849             5,357
Other expense                                                       (94 )            (110 )
Income before provision for income taxes                          4,755             5,247
Income tax expense                                               (1,778 )          (1,935 )
Net income                                                  $     2,977       $     3,312
Net income per share of common stock:
   Basic                                                    $      0.13       $      0.15
   Diluted                                                  $      0.13       $      0.15
Shares used in per share calculations:
   Basic                                                         22,796            22,182
   Diluted                                                       23,240            22,785


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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 $204.0 million and $168.6 million for the three month periods ended March 31, 2013 and 2012, respectively, a period-over-period increase of 21.0%.

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 on an exclusive basis for a specific transportation mode or point of origin. In several cases, we provide substantially all of a client's transportation and logistics requirements. For the three month period ended March 31, 2013, we entered into contracts with seven new Enterprise clients. We categorize all other clients as Transactional clients. We provide services to our Transactional clients on a shipment-by-shipment basis. For the three month periods ended March 31, 2013 and 2012, Enterprise clients accounted for 30% and 31%, respectively, of our revenue and Transactional clients accounted for 70% and 69%, 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, 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 three month period ended March 31, 2013, LTL accounted for 42% of our revenue, TL accounted for 43% of our revenue, small parcel accounted for 5% of our revenue, inter-modal accounted for 8% of our revenue and other transportation modes accounted for 2% of our revenue. For the three month period ended March 31, 2012, LTL accounted for 46% of our revenue, TL accounted for 43% of our revenue, small parcel accounted for 5% of our revenue, inter-modal accounted for 4% of our revenue and other transportation accounted for 2% 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. Our transportation costs are typically lower for an LTL shipment than for a TL shipment. Therefore, 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 three month periods ended March 31, 2013 and 2012, our net revenue was $38.5 million and $32.7 million, respectively, reflecting an increase of 17.7%.

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 three month periods ended March 31, 2013 and 2012, commission expense was 25.9% and 29.0%, respectively, of our net revenue. The decrease is due to a change with specific commission plans that became effective January 1, 2013. The percentage of net revenue paid as commissions will vary depending on the type of client, composition of the sales


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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 three month periods ended March 31, 2013 and 2012, our selling, general and administrative expenses were $20.3 million and $16.1 million, respectively. For the three month periods ended March 31, 2013 and 2012, selling, general and administrative expenses as a percentage of net revenue were 52.8% and 49.4%, respectively.

Our contingent consideration expenses consist of the change in the fair 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 three month periods ended March 31, 2013 and 2012, we recorded a charge of $0.8 million and a benefit $0.3 million, respectively, related to fair value adjustments to contingent consideration.

Our depreciation expense is primarily attributable to our depreciation of computer hardware and software, equipment, furniture and fixtures and internally developed software. For the three month periods ended March 31, 2013 and 2012, depreciation expense was $2.0 million and $1.5 million, respectively.

Our amortization expense is attributable to our amortization of intangible assets acquired from business combinations, including client relationships, trade names and non-compete agreements. For the three month periods ended March 31, 2013 and 2012, amortization expense was $0.6 million and $0.5 million, respectively.

Comparison of three months ended March 31, 2013 and 2012

Revenue

Our revenue increased by $35.4 million, or 21.0%, to $204.0 million for the three month period ended March 31, 2013, from $168.6 million for the three month period ended March 31, 2012. 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. Included in this first quarter increase was $20.3 million of additional revenue generated in 2013 from acquisitions completed after the first quarter of 2012.

Our revenue from Enterprise clients increased by $8.2 million, or 15.5%, to $60.9 million for the three month period ended March 31, 2013, from $52.7 million for the three month period ended March 31, 2012, resulting from increases in the number of Enterprise clients, shipments executed on behalf of these clients and transportation rates. Our percentage of revenue from Enterprise clients decreased to 30% of our revenue for the period ended March 31, 2013 from 31% for the period ended March 31, 2012 due to an increase in revenue per Transactional account for the three month period ended March 31, 2013 compared to the same period 2012.

Our revenue from Transactional clients increased by $27.2 million, or 23.5%, to $143.1 million for the three month period ended March 31, 2013, from $115.9 million for the three month period ended March 31, 2012. Our percentage of revenue from Transactional clients increased to 70% of our revenue for the three month period ended March 31, 2013, from 69% of our revenue for the three month period ended March 31, 2012. During 2012, we made investments in our training program that exposed new hires to both our operational and sales departments. As a result, we noted increased sales representative productivity as tenured sales representatives could further penetrate accounts with increased operational support and experience. This was further evidenced by the fact that the number of shipments per Transactional client increased over the same period in 2012. Our revenue per Transactional client increased by approximately 31.8% for the three month period ended March 31, 2013 compared to the same period in 2012.


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Transportation costs

Our transportation costs increased by $29.6 million, or 21.8%, to $165.5 million for the three month period ended March 31, 2013, from $135.9 million for the three month period ended March 31, 2012. 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 81.1% for the three month period ended March 31, 2013 from 80.6% for the three month period ended March 31, 2012 due to a decreased number of LTL shipments in the composition of our sales volume. Also included in this increase is the related transportation costs associated with the revenue generated from acquisitions completed after the first quarter of 2012.

Net revenue

Net revenue increased by $5.8 million, or 17.7%, to $38.5 million for the three month period ended March 31, 2013, from $32.7 million for the three month period ended March 31, 2012. 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 18.9% for the three month period ended March 31, 2013, from 19.4% for the three month period ended March 31, 2012. The decrease in net revenue margins was primarily the result of a lower percentage of LTL revenue as a percentage of total revenue in the three month period ended March 31, 2013 when compared to the same period 2012. Conversely, the decrease in net revenue percentage was attributable to the higher percentage of TL and intermodal revenue as a percentage of total revenue in the three month period ended March 31, 2013 when compared to the same period 2012.

Operating expenses

Commission expense increased by $0.4 million, or 5.1%, to $9.9 million for the three month period ended March 31, 2013, from $9.5 million for the three month period ended March 31, 2012. This increase is primarily attributable to the increase in net revenue.

Selling, general and administrative expenses increased by $4.2 million, or 25.8%, to $20.3 million for the three month period ended March 31, 2013, from $16.1 million for the three month period ended March 31, 2012. The increase is primarily the result of hiring sales personnel who are expected to drive continued growth of our business and operational personnel to support our growth in customers and shipment volume. As a percentage of net revenue, selling, general and administrative expenses increased to 52.8% for the three month period ended March 31, 2013, from 49.4% for the three month period ended March 31, 2012. 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 resulted in a net increase and net decrease to our contingent consideration obligation for the three month periods ended March 31, 2013 and 2012, respectively. The resulting loss recognized in our consolidated statement of income from the change in the contingent consideration obligation is $0.8 million for the three month period ended March 31, 2013 compared to a benefit of $0.3 million for the three month period ended March 31, 2012. For the three month period ended March 31, 2013, the loss primarily related to increases in the contingent liability due to greater probability of acquisitions achieving the EBITDA earn-out targets and the time value of money. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of March 31, 2013. For the three month period ended March 31, 2012, the benefit was primarily related to increases in the contingent liability due to Lubenow Logistics, LLC, a 2010 acquisition, and Freight Management Inc., a 2009 acquisition, of $0.1 million and $0.1 million, respectively, and a decrease in the contingent liability due to DNA Freight Inc, a 2010 acquisition, of $0.4 million. These adjustments were the result of changes to the forecasted financial performance of each acquired business.

Depreciation and amortization

Depreciation expense increased by $0.5 million, or 29.9%, to $2.0 million for the three month period ended March 31, 2013, from $1.5 million for the three month period ended March 31, 2012. The increase in depreciation expense is primarily attributable to purchases of computer hardware and software, equipment, furniture and fixtures, and the capitalization of internally developed software. Amortization expense increased by $0.1 million, or 26.8%, to $0.6 million for the three month period ended March 31, 2013, from $0.5 million for the three month period ended March 31, 2012. The increase in amortization expense is the result of additional amortization expense of intangible assets acquired after March 31, 2012.

Income from operations


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Income from operations decreased by $0.6 million, or 9.5%, to $4.8 million for the three month period ended March 31, 2013, from $5.4 million for the three month period ended March 31, 2012. The decrease in income from operations is attributable to the loss related to the change in contingent consideration which is discussed above.

Other expense and income tax expense

Other expense remained relatively consistent decreasing to $94.2 thousand for the three month period ended March 31, 2013, from $109.6 thousand for the three month period ended March 31, 2012.

Income tax expense decreased to $1.8 million for the three month period ended March 31, 2013, from $1.9 million for the three month period ended March 31, 2012. Our effective tax rate for the three month period ended March 31, 2013 increased to 37.4% as compared to 36.9% for the three month period ended March 31, 2012.

Net Income

Net income decreased by $0.3 million, or 10.1%, to $3.0 million for the three month period ended March 31, 2013, from $3.3 million for the three month period ended March 31, 2012 related to the items previously discussed.

Liquidity and Capital Resources

As of March 31, 2013, we had $44.1 million in cash and cash equivalents, $75.2 million in working capital and $10.0 million available under our credit facility, which expires on July 31, 2013.

Cash provided by operating activities

For the three month period ended March 31, 2013, $6.2 million of cash was provided by operating activities, representing an increase of $1.8 million compared to the three month period ended March 31, 2012. For the three month period ended March 31, 2013, we generated $7.8 million in cash from net income, adjusted for non-cash operating items as compared to $6.2 million for the three month period ended March 31, 2012. For the three month periods ended March 31, 2013 and 2012, cash flow generation was offset by $1.5 million and $1.7 million, respectively, in changes to net working capital due to the growth of our business.

Cash used in investing activities

Cash used in investing activities was $4.2 million and $2.2 million during the three month periods ended March 31, 2013 and 2012, respectively. For the three month period ended March 31, 2013, the primary investing activity was related to the procurement of computer hardware and software, the internal development of computer software and the acquisition of Open Mile. For the three month period ended March 31, 2012, the primary investing activity was related to the procurement of computer hardware and software, and the internal development of computer software.

Cash provided by (used in) financing activities

During the three month period ended March 31, 2013, net cash provided by financing activities was $0.2 million compared to cash used in financing activities of $1.0 million for the three month period ended March 31, 2012. This was primarily attributable to the exercise of employee stock options for the three month period ended March 31, 2013, offset by the use of cash to satisfy employee tax withholdings upon the vesting of restricted stock. For the three month period ended March 31, 2012, the cash used in financing activities was primarily related to the exercise of employee stock options offset by contingent consideration payments of $1.2 million.

Credit facility

As of March 31, 2013, we had no amounts outstanding on our $10.0 million line of credit with JPMorgan Chase Bank, N.A., which is due to expire on July 31, 2013. Any outstanding borrowings are collateralized by substantially all of our assets. The maximum amount outstanding under our line of credit cannot exceed 80% of the book value of our eligible accounts receivable. Our line of credit contains limitations on our ability to incur indebtedness, create liens and make certain investments. Interest on the line of credit is payable monthly at an interest rate equal to either: (1) the prime rate or (2) LIBOR plus 2.25%. We have discretion in determining if specific advances against the line of credit are drawn down as a prime rate


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advance or a LIBOR advance. The terms of the credit line include various covenants, including covenants that require us to maintain a maximum leverage ratio and a minimum interest coverage ratio. As of March 31, 2013, we were not in violation of any of these covenants.

Anticipated uses of cash

Our priority is to continue to grow our revenue and net revenue. We anticipate that our operating expenses and planned expenditures will constitute a material use of cash, and we expect to use available cash to expand our sales force, to enhance our technology, to acquire or make strategic investments in complementary businesses and for working capital and other general corporate purposes. We also expect to use available cash to make approximately $5.1 million of potential earn-out payments for the remainder of 2013 due in connection with our acquisitions. We currently expect to use up to $8.8 million for capital expenditures for the remainder of 2013. We expect the use of cash for working capital purposes will be offset by the cash flow generated from operating earnings during this period.

Historically, our average accounts receivable lifecycle has been longer than our average accounts payable lifecycle, meaning that we have used cash to pay carriers in advance of collecting from our clients. We elect to provide this benefit to foster strong relationships with our clients and carriers. As our business grows, we expect this use of cash to continue. The amount of cash we use will depend on the growth of our business.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued an update to the authoritative guidance which requires disclosure information about the amounts reclassified out of accumulated other comprehensive income. This update does not apply to the Company since there are no items of other comprehensive income in any period presented.

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