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ECHO > SEC Filings for ECHO > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for ECHO GLOBAL LOGISTICS, INC.

Form 10-Q for ECHO GLOBAL LOGISTICS, INC.


31-Jul-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             Six Months Ended
                                                June 30,                      June 30,
                                           2014           2013           2014           2013
                                                              (Unaudited)
                                                 (in thousands, except per share data)
Consolidated statements of income
data:
Revenue                                $  305,120     $  224,051     $  552,790     $  428,028
Transportation costs                      251,782        184,391        457,242        349,917
Net revenue                                53,338         39,660         95,548         78,111
Operating expenses:
Commissions                                14,762          9,991         25,970         19,934
Selling, general and administrative
expenses                                   27,157         20,634         50,998         40,940
Contingent consideration expense            1,081           (345 )        1,305            414
Depreciation and amortization               3,410          2,612          6,366          5,207
Total operating expenses                   46,410         32,892         84,639         66,495
Income from operations                      6,928          6,768         10,909         11,616
Other expense                                 (63 )         (107 )         (117 )         (201 )
Income before provision for income
taxes                                       6,865          6,661         10,792         11,415
Income tax expense                         (2,621 )       (2,538 )       (4,118 )       (4,316 )
Net income                             $    4,244     $    4,123     $    6,674     $    7,099
Net income per share of common stock:
   Basic                               $     0.18     $     0.18     $     0.29     $     0.31
   Diluted                             $     0.18     $     0.18     $     0.28     $     0.30
Shares used in per share calculations:
   Basic                                   23,017         22,857         22,992         22,827
   Diluted                                 23,506         23,356         23,478         23,298

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 $552.8 million and $428.0 million for the six month periods ended June 30, 2014 and 2013, respectively, representing a period-over-period increase of 29.1%.

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 six month periods ended June 30, 2014 and 2013, Enterprise clients accounted for 27% and 30%, respectively, of our revenue and Transactional clients accounted for 73% 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 six month period ended June 30, 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 six month period ended June 30, 2013, TL accounted for 44% of our revenue, LTL accounted for 42% of our revenue, intermodal accounted for 8% of our revenue, small parcel accounted for 4% of our revenue and other transportation modes 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 six month periods ended June 30, 2014 and 2013, our net revenue was $95.5 million and $78.1 million, respectively, reflecting an increase of 22.3%.

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 six month periods ended June 30, 2014 and 2013, commission expense was 27.2% and 25.5%, 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 six month periods ended June 30, 2014 and 2013, our selling, general and administrative expenses were $51.0 million and $40.9 million, respectively. For the six month periods ended June 30, 2014 and 2013, selling, general and administrative expenses as a percentage of net revenue were 53.4% and 52.4%, respectively. The increase is due to additional operating support, additional operating expenses related to our 2014 acquisitions of Online Freight Services, Inc. ("OFS"), Comcar Logistics, LLC ("Comcar") and One Stop Logistics, Inc. ("One Stop"), and acquisition-related transaction costs associated with our 2014 acquisitions.

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


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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 six month periods ended June 30, 2014 and 2013, we recorded charges of $1.3 million and $0.4 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 six month periods ended June 30, 2014 and 2013, depreciation expense was $4.7 million and $4.0 million, respectively. The increase is primarily due to the depreciation of property and equipment related to the expansion of our Chicago headquarters.

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 six month periods ended June 30, 2014 and 2013, amortization expense was $1.7 million and $1.2 million, respectively. The increase is due to the amortization of intangible assets associated with the acquisitions of OFS, Comcar and One Stop.

Comparison of the six months ended June 30, 2014 and 2013

Revenue

Our revenue increased by $124.8 million, or 29.1%, to $552.8 million for the six month period ended June 30, 2014, from $428.0 million for the six month period ended June 30, 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 $47.2 million of additional revenue generated in 2014 from the acquisitions of OFS, Comcar, and One Stop.

Our revenue from Enterprise clients increased by $21.3 million, or 16.8%, to $148.3 million for the six month period ended June 30, 2014, from $127.0 million for the six month period ended June 30, 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 26.8% of our revenue for the period ended June 30, 2014 from 29.7% for the period ended June 30, 2013 due to an increase in the number of Transactional shipments.

Our revenue from Transactional clients increased by $103.5 million, or 34.4%, to $404.5 million for the six month period ended June 30, 2014, from $301.0 million for the six month period ended June 30, 2013. Our percentage of revenue from Transactional clients increased to 73.2% of our revenue for the six month period ended June 30, 2014, from 70.3% of our revenue for the six month period ended June 30, 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, Comcar, and One Stop. Our revenue per Transactional client increased by approximately 12.2% for the six month period ended June 30, 2014 compared to the same period in 2013.

Transportation costs

Our transportation costs increased by $107.3 million, or 30.7%, to $457.2 million for the six month period ended June 30, 2014, from $349.9 million for the six month period ended June 30, 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 82.7% for the six month period ended June 30, 2014 from 81.8% for the six month period ended June 30, 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 our 2014 acquisitions.

Net revenue

Net revenue increased by $17.4 million, or 22.3%, to $95.5 million for the six month period ended June 30, 2014, from $78.1 million for the six month period ended June 30, 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 17.3% for the six month period ended June 30, 2014, from 18.2% for the six month period ended June 30, 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 six month period ended June 30, 2014 when compared to the same period in 2013.


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Operating expenses

Commission expense increased by $6.1 million, or 30.3%, to $26.0 million for the six month period ended June 30, 2014, from $19.9 million for the six month period ended June 30, 2013. This increase is primarily attributable to the increase in net revenue. For the six month periods ended June 30, 2014 and 2013, commission expense was 27.2% and 25.5%, 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 $10.1 million, or 24.6%, to $51.0 million for the six month period ended June 30, 2014, from $40.9 million for the six month period ended June 30, 2013. The increase is primarily the result of hiring sales personnel to drive continued growth of our business, hiring operational personnel to support our growth in customers and shipment volume, and acquisition-related transaction costs for our 2014 acquisitions. As a percentage of net revenue, selling, general and administrative expenses increased to 53.4% for the six month period ended June 30, 2014, from 52.4% for the six month period ended June 30, 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 six month periods ended June 30, 2014 and 2013. The resulting expense recognized in our consolidated statement of income from the change in the contingent consideration obligation was $1.3 million for the six month period ended June 30, 2014 compared to $0.4 million for the six month period ended June 30, 2013. For the six month periods ended June 30, 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 June 30, 2014.

Depreciation and amortization

Depreciation expense increased by $0.7 million, or 17.4%, to $4.7 million for the six month period ended June 30, 2014, from $4.0 million for the six month period ended June 30, 2013. The increase in depreciation expense is primarily attributable to the depreciation of property and equipment related to the expansion of our Chicago headquarters. Amortization expense increased by $0.5 million, or 38.6%, to $1.7 million for the six month period ended June 30, 2014, from $1.2 million for the six month period ended June 30, 2013. The increase in amortization expense is attributable to the amortization of intangible assets related to our 2014 acquisitions.

Income from operations

Income from operations decreased by $0.7 million, or 6.1%, to $10.9 million for the six month period ended June 30, 2014, from $11.6 million for the six month period ended June 30, 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 decreased to $0.1 million for the six month period ended June 30, 2014 from $0.2 million for the six month period ended June 30, 2013.

Income tax expense decreased to $4.1 million for the six month period ended June 30, 2014, from $4.3 million for the six month period ended June 30, 2013. This decrease was due to the decrease in income from operations discussed above. Our effective tax rate for the six month period ended June 30, 2014 increased to 38.2%, from 37.8% for the six month period ended June 30, 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 $0.4 million, or 22.3%, to $6.7 million for the six month period ended June 30, 2014, from $7.1 million for the six month period ended June 30, 2013, due to the items previously discussed.


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Comparison of the three months ended June 30, 2014 and 2013

Revenue

Our revenue increased by $81.0 million, or 36.2%, to $305.1 million for the three month period ended June 30, 2014, from $224.1 million for the three month period ended June 30, 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 $31.5 million of additional revenue generated in 2014 from the acquisitions of OFS, Comcar, and One Stop.

Our revenue from Enterprise clients increased by $12.1 million, or 18.3%, to $78.2 million for the three month period ended June 30, 2014, from $66.1 million for the three month period ended June 30, 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 25.6% of our revenue for the period ended June 30, 2014 from 29.5% for the period ended June 30, 2013 due to an increase in the number of Transactional shipments.

Our revenue from Transactional clients increased by $68.9 million, or 43.6%, to $226.9 million for the three month period ended June 30, 2014, from $158.0 million for the three month period ended June 30, 2013. Our percentage of revenue from Transactional clients increased to 74.4% of our revenue for the three month period ended June 30, 2014, from 70.5% of our revenue for the three month period ended June 30, 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, Comcar, and One Stop. Our revenue per Transactional client increased by approximately 19.9% for the three month period ended June 30, 2014 compared to the same period in 2013.

Transportation costs

Our transportation costs increased by $67.4 million, or 36.5%, to $251.8 million for the three month period ended June 30, 2014, from $184.4 million for the three month period ended June 30, 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 82.5% for the three month period ended June 30, 2014 from 82.3% for the three month period ended June 30, 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 our 2014 acquisitions.

Net revenue

Net revenue increased by $13.6 million, or 34.5%, to $53.3 million for the three month period ended June 30, 2014, from $39.7 million for the three month period ended June 30, 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 17.5% for the three month period ended June 30, 2014, from 17.7% for the three month period ended June 30, 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 June 30, 2014 when compared to the same period in 2013.

Operating expenses

Commission expense increased by $4.8 million, or 47.8%, to $14.8 million for the three month period ended June 30, 2014, from $10.0 million for the three month period ended June 30, 2013. This increase is primarily attributable to the increase in net revenue. For the three month periods ended June 30, 2014 and 2013, commission expense was 27.7% and 25.2%, 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 $6.6 million, or 31.6%, to $27.2 million for the three month period ended June 30, 2014, from $20.6 million for the three month period ended June 30, 2013. The increase is primarily the result of hiring sales personnel to drive continued growth of our business, hiring operational personnel to support our growth in customers and shipment volume, and acquisition-related transaction costs for the One Stop acquisition that occurred during the quarter. As a percentage of net revenue, selling, general and administrative expenses decreased to 50.9% for the three month period ended June 30, 2014, from 52.0% for the three month period ended June 30, 2013. The percentage growth in net revenue has outpaced the percentage growth in selling, general and administrative expenses due to increases in productivity from sales personnel.


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Contingent consideration

The change in contingent consideration resulted in a net increase and a net decrease to our contingent consideration obligation for the three month periods ended June 30, 2014 and 2013, respectively. The resulting expense recognized in our consolidated statement of income from the change in the contingent consideration obligation was $1.1 million for the three month period ended June 30, 2014 compared to a benefit of $0.3 million for the three month period ended June 30, 2013. For the three month period ended June 30, 2014, the increase in the contingent liability was due to greater probability of acquisitions achieving EBITDA earn-out targets and changes to the time value of money. For the three month period ended June 30, 2013, the decrease in the contingent liability was due to a reduced probability of acquisitions achieving EBITDA earn-out targets. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of June 30, 2014.

Depreciation and amortization

Depreciation expense increased by $0.4 million, or 21.7%, to $2.4 million for the three month period ended June 30, 2014, from $2.0 million for the three month period ended June 30, 2013. The increase in depreciation expense is primarily attributable to the depreciation of property and equipment related to the expansion of our Chicago headquarters. Amortization expense increased by $0.4 million, or 60.1%, to $1.0 million for the three month period ended . . .

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