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ECHO > SEC Filings for ECHO > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for ECHO GLOBAL LOGISTICS, INC.

Form 10-Q for ECHO GLOBAL LOGISTICS, INC.


1-May-2014

Quarterly Report


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

Certain statements in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements involve a number of risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors which could materially affect such forward-looking statements can be found in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 and elsewhere in this Quarterly Report. Investors are urged to consider these factors carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

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 to and offer efficient and cost-effective solutions for our clients' shipping needs. We focus primarily on arranging transportation by truckload ("TL") and less than truckload ("LTL") carriers. We also offer intermodal (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.


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                             Results of Operations

The following table represents certain statement of operations data:
                                                                   Three Months Ended
                                                                       March 31,
                                                                 2014              2013
                                                                      (Unaudited)
                                                             (in thousands, except per share
                                                                         data)
Consolidated statements of income data:
Revenue                                                     $   247,670       $   203,977
Transportation costs                                            205,460           165,526
Net revenue                                                      42,210            38,451
Operating expenses:
Commissions                                                      11,208             9,943
Selling, general and administrative expenses                     23,840            20,305
Contingent consideration expense                                    224               759
Depreciation and amortization                                     2,956             2,595
Total operating expenses                                         38,228            33,602
Income from operations                                            3,982             4,849
Other expense                                                       (55 )             (94 )
Income before provision for income taxes                          3,927             4,755
Income tax expense                                               (1,497 )          (1,778 )
Net income                                                  $     2,430       $     2,977
Net income per share of common stock:
   Basic                                                    $      0.11       $      0.13
   Diluted                                                  $      0.10       $      0.13
Shares used in per share calculations:
   Basic                                                         22,967            22,796
   Diluted                                                       23,450            23,240

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 $247.7 million and $204.0 million for the three month periods ended March 31, 2014 and 2013, respectively, representing a period-over-period increase of 21.4%.

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. 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, 2014 and 2013, Enterprise clients accounted for 28% and 30%, respectively, of our revenue and Transactional clients accounted for 72% and 70%, 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, intermodal 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


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revenue growth. For the three month period ended March 31, 2014, TL accounted for 52% of our revenue, LTL accounted for 37% of our revenue, intermodal accounted for 6% of our revenue, small parcel accounted for 4% of our revenue and other transportation modes accounted for 1% of our revenue. For the three month period ended March 31, 2013, TL accounted for 43% of our revenue, LTL accounted for 42% of our revenue, intermodal accounted for 8% of our revenue, small parcel accounted for 5% 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 pricing 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. Our net revenue margin, however, 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, 2014 and 2013, our net revenue was $42.2 million and $38.5 million, respectively, reflecting an increase of 9.8%.

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 such sales personnel have primary responsibility. For the three month periods ended March 31, 2014 and 2013, commission expense was 26.6% and 25.9%, respectively, of our net revenue. The increase is due to the fluctuation of the composition of our net revenue 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 recorded as a prepaid expense. As our sales personnel earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any. Prepaid commissions and accrued commissions are presented on a net basis on our balance sheet.

Our selling, general and administrative expenses, which exclude commission expense and changes to contingent consideration, 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, 2014 and 2013, our selling, general and administrative expenses were $23.8 million and $20.3 million, respectively. For the three month periods ended March 31, 2014 and 2013, selling, general and administrative expenses as a percentage of net revenue were 56.5% and 52.8%, respectively. The increase is due to additional operating support, additional operating expenses related to acquisitions completed after the first quarter of 2013 and acquisition-related transaction costs associated with our 2014 acquisitions of OFS and Comcar.

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


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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, 2014 and 2013, we recorded charges of $0.2 million and $0.8 million, respectively, related to fair value adjustments to the contingent consideration obligation.

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, 2014 and 2013, depreciation expense was $2.3 million and $2.0 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 three month periods ended March 31, 2014 and 2013, amortization expense was $0.7 million and $0.6 million, respectively.

Comparison of the three months ended March 31, 2014 and 2013

Revenue

Our revenue increased by $43.7 million, or 21.4%, to $247.7 million for the three month period ended March 31, 2014, from $204.0 million for the three month period ended March 31, 2013. 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 $15.7 million of additional revenue generated in 2014 from the acquisitions of Online Freight Services, Inc. ("OFS") and Comcar Logistics, LLC ("Comcar").

Our revenue from Enterprise clients increased by $9.2 million, or 15.1%, to $70.1 million for the three month period ended March 31, 2014, from $60.9 million for the three month period ended March 31, 2013, 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 28% of our revenue for the period ended March 31, 2014 from 30% for the period ended March 31, 2013 due to an increase in the number of Transactional shipments and an increase in average revenue per Transactional account for the three month period ended March 31, 2014 compared to the same period in 2013.

Our revenue from Transactional clients increased by $34.5 million, or 24.1%, to $177.6 million for the three month period ended March 31, 2014, from $143.1 million for the three month period ended March 31, 2013. Our percentage of revenue from Transactional clients increased to 72% of our revenue for the three month period ended March 31, 2014, from 70% of our revenue for the three month period ended March 31, 2013. The increase in Transactional revenue was driven by increases in both the number and productivity of sales employees as well as by the acquisitions of OFS and Comcar. Our revenue per Transactional client increased by approximately 12.7% for the three month period ended March 31, 2014 compared to the same period in 2013.

Transportation costs

Our transportation costs increased by $40.0 million, or 24.1%, to $205.5 million for the three month period ended March 31, 2014, from $165.5 million for the three month period ended March 31, 2013. The growth in the total number of shipments accounted for most of the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue increased to 83.0% for the three month period ended March 31, 2014 from 81.1% for the three month period ended March 31, 2013 due to an increased percentage of TL shipments in the composition of our sales volume. Also included in this increase is the transportation costs associated with the revenue generated from acquisitions completed after the first quarter of 2013.

Net revenue

Net revenue increased by $3.7 million, or 9.8%, to $42.2 million for the three month period ended March 31, 2014, from $38.5 million for the three month period ended March 31, 2013. 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 17.0% for the three month period ended March 31, 2014, from 18.9% for the three month period ended March 31, 2013. The decrease in net revenue margins was primarily the result of a higher percentage of TL revenue as a percentage of total revenue in the three month period ended March 31, 2014 when compared to the same period in 2013.


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Operating expenses

Commission expense increased by $1.3 million, or 12.7%, to $11.2 million for the three month period ended March 31, 2014, from $9.9 million for the three month period ended March 31, 2013. This increase is primarily attributable to the increase in net revenue. For the three month periods ended March 31, 2014 and 2013, commission expense was 26.6% and 25.9%, respectively, of our net revenue. This increase is due to the fluctuation of the composition of our net revenue originating from sales employees and agents.

Selling, general and administrative expenses increased by $3.5 million, or 17.4%, to $23.8 million for the three month period ended March 31, 2014, from $20.3 million for the three month period ended March 31, 2013. 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, along with acquisition-related transaction costs related to the 2014 acquisitions of OFS and Comcar. As a percentage of net revenue, selling, general and administrative expenses increased to 56.5% for the three month period ended March 31, 2014, from 52.8% for the three month period ended March 31, 2013. 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 to our contingent consideration obligation for the three month periods ended March 31, 2014 and 2013. The resulting expense recognized in our consolidated statement of income from the change in the contingent consideration obligation was $0.2 million for the three month period ended March 31, 2014 compared to $0.8 million for the three month period ended March 31, 2013. For the three month periods ended March 31, 2014 and 2013, the increases in the contingent liability were due to greater probability of acquisitions achieving EBITDA earn-out targets and changes to the time value of money. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of March 31, 2014.

Depreciation and amortization

Depreciation expense increased by $0.3 million, or 12.9%, to $2.3 million for the three month period ended March 31, 2014, from $2.0 million for the three month period ended March 31, 2013. 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 $0.1 million, or 17.1%, to $0.7 million for the three month period ended March 31, 2014, from $0.6 million for the three month period ended March 31, 2013. The increase in amortization expense is the result of additional amortization expense of intangible assets acquired after March 31, 2013.

Income from operations

Income from operations decreased by $0.8 million, or 17.9%, to $4.0 million for the three month period ended March 31, 2014, from $4.8 million for the three month period ended March 31, 2013. The decrease in income from operations is attributable to the increase in operating expenses in excess of the increase in net revenue.

Other expense and income tax expense

Other expense remained relatively consistent at $0.1 million for both the three month periods ended March 31, 2014 and March 31, 2013.

Income tax expense decreased to $1.5 million for the three month period ended March 31, 2014, from $1.8 million for the three month period ended March 31, 2013. This decrease was due to the decrease in income from operations discussed above. Our effective tax rate for the three month period ended March 31, 2014 increased to 38.1%, from 37.4% for the three month period ended March 31, 2013. The increase in our effective tax rate was primarily due to the timing and reenactment of the research and development tax credit which occurred in early 2013 for both the 2012 and 2013 tax years.

Net Income

Net income decreased by $0.6 million, or 18.4%, to $2.4 million for the three month period ended March 31, 2014, from $3.0 million for the three month period ended March 31, 2013, due to the items previously discussed.


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Liquidity and Capital Resources

As of March 31, 2014, we had $42.6 million in cash and cash equivalents, $76.1 million in working capital and $10.0 million available under our credit facility, which matures on July 31, 2014.

Cash provided by operating activities

For the three month period ended March 31, 2014, $10.2 million of cash was provided by operating activities, representing an increase of $4.0 million compared to the three month period ended March 31, 2013. For the three month period ended March 31, 2014, we generated $7.4 million in cash from net income, adjusted for non-cash operating items, as compared to $7.8 million for the three month period ended March 31, 2013. For the three month periods ended March 31, 2014 and 2013, cash flow generation increased by $2.8 million and was offset by $1.5 million, respectively, in changes to net working capital, primarily due to the growth of our business.

Cash used in investing activities

Cash used in investing activities was $18.1 million and $4.2 million during the three month periods ended March 31, 2014 and 2013, respectively. For the three month period ended March 31, 2014, the primary investing activities were the acquisition related payments to OFS and Comcar, the procurement of computer hardware and software, and the internal development of computer software. For the three month period ended March 31, 2013, the primary investing activities were related to the procurement of computer hardware and software, the internal development of computer software and the acquisition of Open Mile, Inc.

Cash (used in) provided by financing activities

During the three month period ended March 31, 2014, net cash used in financing activities was $2.0 million compared to net cash provided by financing activities of $0.2 million for the three month period ended March 31, 2013. For the three month period ended March 31, 2014, the use of cash in financing activities was primarily attributable to contingent consideration payments of $1.2 million and the use of cash to satisfy employee tax withholdings upon the vesting of restricted stock. For the three month period ended March 31, 2013, the net cash provided by financing activities was primarily related to the exercise of employee stock options offset by the use of cash to satisfy employee tax withholdings upon the vesting of restricted stock.

Credit facility

As of March 31, 2014, we had no amounts outstanding on a $10.0 million line of credit with JPMorgan Chase Bank, N.A., which is due to expire on July 31, 2014. Any outstanding borrowings would be 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 1.75%. We have discretion in determining if specific advances against the line of credit are drawn down as a prime rate 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, 2014, we were in compliance with all 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 $4.6 million of potential earn-out payments for the remainder of 2014 due in connection with our acquisitions. We currently expect to use up to $11.0 million for capital expenditures for the remainder of 2014. We expect our use of cash for working capital purposes and other purposes to be offset by the cash flow generated from operating activities during the same 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.


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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

In July 2013, the FASB issued authoritative guidance under Accounting Standard Update ("ASU") 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss ("NOL") carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This accounting standard update requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. The provisions of this new guidance were effective as of the beginning of our 2014 fiscal year and did not have a material impact on our financial statements.

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