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ECHO > SEC Filings for ECHO > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for ECHO GLOBAL LOGISTICS, INC.


1-Nov-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            Nine Months Ended
                                              September 30,                 September 30,
                                           2013            2012          2013          2012
                                                             (Unaudited)
                                                 (in thousands, except per share data)
Consolidated statements of income
data:
Revenue                                $   234,843     $  192,738     $ 662,871     $ 546,538
Transportation costs                       194,259        156,145       544,176       442,475
Net revenue                                 40,584         36,593       118,695       104,063
Operating expenses:
Commissions                                 10,188         10,414        30,122        29,826
Selling, general and administrative
expenses                                    20,592         17,562        61,531        50,943
Contingent consideration expense                31              2           445          (444 )
Acquisition related impairment loss              -          2,491             -         2,491
Depreciation and amortization                2,661          2,265         7,869         6,480
Total operating expenses                    33,472         32,734        99,967        89,296
Income from operations                       7,112          3,859        18,728        14,767
Other expense                                  (75 )         (122 )        (276 )        (360 )
Income before provision for income
taxes                                        7,037          3,737        18,452        14,407
Income tax expense                          (2,675 )       (1,451 )      (6,990 )      (5,406 )
Net income                             $     4,362     $    2,286     $  11,462     $   9,001
Net income per share of common stock:
   Basic                               $      0.19     $     0.10     $    0.50     $    0.40
   Diluted                             $      0.19     $     0.10     $    0.49     $    0.39
Shares used in per share calculations:
   Basic                                    22,889         22,383        22,848        22,273
   Diluted                                  23,461         22,895        23,352        22,822


Table of Contents

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 $662.9 million and $546.5 million for the nine month periods ended September 30, 2013 and 2012, respectively, a period-over-period increase of 21.3%.

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 nine month period ended September 30, 2013, we entered into contracts with twenty-one 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 nine month periods ended September 30, 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 nine month period ended September 30, 2013, LTL accounted for 42% of our revenue, TL accounted for 45% of our revenue, small parcel accounted for 5% of our revenue, inter-modal accounted for 7% of our revenue and other transportation modes accounted for 1% of our revenue. 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, inter-modal accounted for 4% 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. 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 nine month periods ended September 30, 2013 and 2012, our net revenue was $118.7 million and $104.1 million, respectively, reflecting an increase of 14.1%.

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 such sales personnel have primary responsibility. For the nine month periods ended September 30, 2013 and 2012, commission expense was 25.4% and


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28.7%, respectively, of our net revenue. The decrease is due to a change with specific commission plans that became effective January 1, 2013 and the fluctuation of the composition of our net revenues originating from sales employees and agents. 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, changes to contingent consideration and the acquisition related impairment loss, 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, 2013 and 2012, our selling, general and administrative expenses were $61.5 million and $50.9 million, respectively. For the nine month periods ended September 30, 2013 and 2012, selling, general and administrative expenses as a percentage of net revenue were 51.8% and 49.0%, respectively. The increase is due to additional operating support, investments in our truckload business and the additional expense related to our acquisitions after September 30, 2012.

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 nine month periods ended September 30, 2013 and 2012, we recorded a charge of $0.4 million and a benefit $0.4 million, respectively, related to fair value adjustments to contingent consideration.

Our acquisition related impairment loss consists of an impairment charge relating to the acquisition of the assets of Shipper Direct. Please refer to Note 11 for further information regarding the transaction. For the three and nine month periods ended September 30, 2012, we recorded a loss of $2.5 million relating to this impairment charge.

Our depreciation expense is primarily attributable to our depreciation of computer hardware and software, equipment, furniture and fixtures and internally developed software. For the nine month periods ended September 30, 2013 and 2012, depreciation expense was $6.1 million and $5.0 million, respectively.

Our amortization expense is attributable to our amortization of intangible assets acquired from business combinations, including customer relationships, trade names and non-compete agreements. For the nine month periods ended September 30, 2013 and 2012, amortization expense was $1.8 million and $1.5 million, respectively.

Comparison of nine months ended September 30, 2013 and 2012

Revenue

Our revenue increased by $116.4 million, or 21.3%, to $662.9 million for the nine month period ended September 30, 2013, from $546.5 million for the nine month period ended September 30, 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 increase was $52.2 million of additional revenue generated in 2013 from the acquisitions of Sharp Freight Systems, Inc. ("Sharp") and Open Mile, Inc. ("Open Mile").

Our revenue from Enterprise clients increased by $28.5 million, or 16.8%, to $198.2 million for the nine month period ended September 30, 2013, from $169.7 million for the nine month period ended September 30, 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 nine month period ended September 30, 2013 from 31% for the nine month period ended September 30, 2012 due to an increase in revenue per Transactional account for the nine month period ended September 30, 2013 compared to the same period 2012.

Our revenue from Transactional clients increased by $87.9 million, or 23.3%, to $464.7 million for the nine month period ended September 30, 2013, from $376.8 million for the nine month period ended September 30, 2012. Our percentage of revenue from Transactional clients increased to 70% of our revenue for the nine month period ended September 30, 2013, from


69% of our revenue for the nine month period ended September 30, 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 of new hires. This was further evidenced by the fact that the number of shipments per Transactional client and number of shipments per sales representative increased over the same period in 2012. Our revenue per Transactional client increased by approximately 24.0% for the nine month period ended September 30, 2013 compared to the same period in 2012.

Transportation costs

Our transportation costs increased by $101.7 million, or 23.0%, to $544.2 million for the nine month period ended September 30, 2013, from $442.5 million for the nine month period ended September 30, 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 82.1% for the nine month period ended September 30, 2013 from 81.0% for the nine month period ended September 30, 2012 due to a decreased percentage 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 third quarter of 2012.

Net revenue

Net revenue increased by $14.6 million, or 14.1%, to $118.7 million for the nine month period ended September 30, 2013, from $104.1 million for the nine month period ended September 30, 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 17.9% for the nine month period ended September 30, 2013, from 19.0% for the nine month period ended September 30, 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 nine month period ended September 30, 2013 when compared to the same period 2012. TL and inter-modal revenue, which usually earn less net revenue margin percentage, increased significantly as a percentage of total revenue in the nine month period ended September 30, 2013 when compared to the same period in 2012. The cost of obtaining TL capacity has continued to increase in 2013 with new industry regulations, while demand has not been as strong as expected. This has led to a reduction of net revenue margins in the TL component of our business in 2013.

Operating expenses

Commission expense increased by $0.3 million, or 1.0%, to $30.1 million for the nine month period ended September 30, 2013, from $29.8 million for the nine month period ended September 30, 2012. This increase is primarily attributable to the increase in net revenue. As a percentage of net revenue, the commission percentage of net revenue has decreased from the prior period. This decrease is due to a change with specific commission plans that became effective January 1, 2013 and the fluctuation of the composition of our net revenues originating from sales employees and agents.

Selling, general and administrative expenses increased by $10.6 million, or 20.8%, to $61.5 million for the nine month period ended September 30, 2013, from $50.9 million for the nine month period ended September 30, 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 51.8% for the nine month period ended September 30, 2013, from 49.0% for the nine month period ended September 30, 2012. The increase, as a percentage of net revenue, is primarily attributable to increased compensation and facilities 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 nine month periods ended September 30, 2013 and 2012, respectively. The resulting expense recognized in our consolidated statement of income from the change in the contingent consideration obligation is $0.4 million for the nine month period ended September 30, 2013 compared to a benefit of $0.4 million for the nine month period ended September 30, 2012. For the nine month period ended September 30, 2013, the expense is due to a $1.2 million increase in the contingent liability, primarily related to the $0.9 million increase in the contingent consideration related to our DNA Freight Inc. ("DNA") acquisition, due to greater probability of acquisitions achieving the EBITDA earn-out targets and the time value of money. This increase was offset by a $0.6 million and $0.2 million decrease in the contingent consideration related to our Sharp and Purple Plum Logistics, LLC ("Purple Plum") acquisitions, respectively. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of September 30, 2013. For the nine month period ended September 30, 2012,


the benefit was primarily related to a decrease in the contingent liability due to DNA of $1.0 million offset by 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 acquired business.

Acquisition related impairment loss

In the nine month period ended September 30, 2012, we recorded an acquisition related impairment loss of $2.5 million. This acquisition related impairment charge relates to the impairment of goodwill and intangible assets related to the acquisition of the assets of Shipper Direct.

Depreciation and amortization

Depreciation expense increased by $1.1 million, or 21.0%, to $6.1 million for the nine month period ended September 30, 2013, from $5.0 million for the nine month period ended September 30, 2012. The increase in depreciation expense is primarily attributable to depreciation on purchases of computer hardware and software, equipment, furniture and fixtures, and depreciation on the capitalization of internally developed software. Amortization expense increased by $0.3 million, or 22.8%, to $1.8 million for the nine month period ended September 30, 2013, from $1.5 million for the nine month period ended September 30, 2012. The increase in amortization expense is the result of additional amortization expense on intangible assets acquired after September 30, 2012.

Income from operations

Income from operations increased by $3.9 million, or 26.8%, to $18.7 million for the nine month period ended September 30, 2013, from $14.8 million for the nine month period ended September 30, 2012. 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 remained relatively consistent decreasing to $0.28 million for the nine month period ended September 30, 2013, from $0.36 million for the nine month period ended September 30, 2012.

Income tax expense increased to $7.0 million for the nine month period ended September 30, 2013, from $5.4 million for the nine month period ended September 30, 2012. Our effective tax rate for the nine month period ended September 30, 2013 increased to 37.9% as compared to 37.5% for the nine month period ended September 30, 2012, primarily due to slightly higher state rates and a geographic shift in our business due to acquisitions that reside in higher tax jurisdictions.

Net Income

Net income increased by $2.5 million, or 27.3%, to $11.5 million for the nine month period ended September 30, 2013, from $9.0 million for the nine month period ended September 30, 2012 related to the items previously discussed.

Comparison of three months ended September 30, 2013 and 2012

Revenue

Our revenue increased by $42.1 million, or 21.8%, to $234.8 million for the three month period ended September 30, 2013, from $192.7 million for the three month period ended September 30, 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 increase was $18.1 million of additional revenue generated in 2013 from the acquisitions of Sharp and Open Mile.

Our revenue from Enterprise clients increased by $10.9 million, or 18.1%, to $71.1 million for the three month period ended September 30, 2013, from $60.2 million for the three month period ended September 30, 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 September 30, 2013 from 31% for the period ended September 30, 2012 due to an increase in revenue per Transactional account for the three month period ended September 30, 2013 compared to the same period 2012.


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Our revenue from Transactional clients increased by $31.2 million, or 23.5%, to $163.7 million for the three month period ended September 30, 2013, from $132.5 million for the three month period ended September 30, 2012. Our percentage of revenue from Transactional clients increased to 70% of our revenue for the three month period ended September 30, 2013, from 69% of our revenue for the three month period ended September 30, 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 and number of shipments per sales representative increased over the same period in 2012. Our revenue per Transactional client increased by approximately 16.9% for the three month period ended September 30, 2013 compared to the same period in 2012.

Transportation costs

Our transportation costs increased by $38.2 million, or 24.4%, to $194.3 million for the three month period ended September 30, 2013, from $156.1 million for the three month period ended September 30, 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 82.7% for the three month period ended September 30, 2013 from 81.0% for the three month period ended September 30, 2012 due to a decreased percentage 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 third quarter of 2012.

Net revenue

Net revenue increased by $4.0 million, or 10.9%, to $40.6 million for the three month period ended September 30, 2013, from $36.6 million for the three month period ended September 30, 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 17.3% for the three month period ended September 30, 2013, from 19.0% for the three month period ended September 30, 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 September 30, 2013 when compared to the same period 2012. Conversely, the decrease in net revenue percentage was attributable to the higher percentage of TL and inter-modal revenue as a percentage of total revenue in the three month period ended September 30, 2013 when compared to the same period 2012 primarily due to our acquisition of Sharp in the fourth quarter of 2012. The cost of obtaining TL capacity has continued to increase in 2013 with new industry regulations, while demand has not been as strong as expected. This has led to a reduction of net revenue margins in the TL component of our business in 2013.

Operating expenses

Commission expense decreased by $0.2 million, or 2.2%, to $10.2 million for the three month period ended September 30, 2013, from $10.4 million for the three month period ended September 30, 2012. This decrease is primarily attributable to adjustments in commission plans and sales channel mix. For the three month periods ended September 30, 2013 and 2012, commission expense was 25.1% and 28.5%, respectively, of our net revenue. This decrease is due to a change with specific commission plans that became effective January 1, 2013 and the fluctuation of the composition of our net revenue originating from sales employees and agents.

Selling, general and administrative expenses increased by $3.0 million, or . . .

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