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| ECHO > SEC Filings for ECHO > Form 10-Q on 13-Nov-2009 | All Recent SEC Filings |
13-Nov-2009
Quarterly Report
Overview
We are a leading provider of technology enabled transportation and supply chain management services, delivered on a proprietary technology platform serving the transportation and logistics needs of our clients. Our proprietary web-based technology platform compiles and analyzes data from our network of over 22,000 transportation providers to serve our clients' shipping and freight management needs. Our technology platform, composed of web-based software applications and a proprietary database, enables us to identify excess transportation capacity, obtain competitive rates, and execute thousands of shipments every day while providing high levels of service and reliability. We focus primarily on arranging transportation across the major modes, including truckload (TL), less than truck load (LTL) and small parcel, and we also offer inter-modal (which involves moving a shipment by rail and truck), domestic air, expedited and international transportation services.
We procure transportation and provide logistics services for more than 14,800 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.
Revenue
We generate revenue through the sale of transportation and logistics services to our clients. Since our inception, our growth rates have decreased as our revenue has grown, and we expect this trend to continue. Our revenue was $148.2 million and $179.5 million for the nine months ended September 30, 2008 and 2009, respectively, an increase of 21.1%.
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 exclusive for a certain transportation mode or point of origin. In several cases, we provide substantially all of a client's transportation and logistics requirements. We categorize all other clients as transactional clients. We provide services to our transactional clients on a shipment-by-shipment basis. As of September 30, 2009, we had 114 enterprise clients and, for the nine months ended September 30, 2009 we served over 14,000 transactional clients. In the first nine months of 2009, we entered into contracts with 27 new enterprise clients. For the nine months ended September 30, 2008 and 2009, enterprise clients accounted for 43% and 41% of our revenue, respectively, and transactional clients accounted for 57% and 59% of our revenue, respectively. 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 is recognized when the client's product is delivered by a third-party carrier or when services have been rendered. We recognize revenue either on a gross basis or on a net basis depending on the specific terms of the shipment and the underlying agreement with our client. For the nine months ended September 30, 2009, we had two enterprise clients and a portion of our small parcel shipments recorded on a net basis. For the nine months ended September 30, 2009, we recognized $178.4 million of revenue on a gross basis and $1.1 million of revenue on a net basis.
Revenue recognized per shipment will vary depending on the transportation mode, fuel prices, shipment density and mileage of the product shipped. The primary modes of shipment that we transact
in are TL, LTL and small parcel. Other transportation modes include inter-modal, 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 months ended September 30, 2009, LTL accounted for 46% of our revenue, TL accounted for 41% of our revenue, small parcel accounted for 7% of our revenue and other transportation modes accounted for 6% 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 have experienced 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. The fixed fee arrangements that we have entered into are in the form of long-term enterprise contracts and are fixed in terms of fees earned per shipment. These arrangements are recorded as fee for services. The vast majority of our enterprise contracts have fee structures that are variable, and all of our transactional relationships have variable fee structures. The amount of transaction costs we record for each shipment depends on the qualification of the shipment as either gross or net. If the shipment is recorded at gross, our gross profit consists of transportation revenue minus transportation cost. Our transportation costs consists primarily of the direct cost of transportation paid to the carrier. If the shipment is recorded at net, our net revenue is our fee for service revenue, and no transportation cost is recorded for that shipment.
Net revenue is the primary indicator of our ability to procure services provided by carriers and other third-parties and is considered by management to be the primary measurement of our growth. Although our transportation cost is typically lower for an LTL shipment than for a TL shipment, our net revenue margin is typically higher for an LTL shipment than for a TL shipment. Material shifts in the percentage of our revenue by transportation mode, including small parcel, could have a significant impact on our net revenue. The discussion of results of operations below focuses on changes in our net revenues and expenses as a percentage of net revenue margin. For the nine months ended September 30, 2008 and 2009, our net revenue was $31.2 million and $39.7 million, respectively, an increase of 27.1%.
Operating expenses
Our costs and expenses excluding transportation costs consist of commissions paid to our sales personnel, general and administrative expenses, including stock-based compensation expenses, to run our business and depreciation and amortization.
Commissions paid to our sales personnel, including employees and agents, are a significant component of our operating expenses. These commissions are based on the net revenue we collect from the clients for which they have primary responsibility. For the nine months ended September 30, 2008 and 2009, commission expense was 28.2% and 28.2%, respectively, as a percentage of our net revenue. The percentage of net revenue paid as commissions will vary depending on the type of client, composition of the sales team and mode of transportation. Commission expense, stated as a percentage of net revenue, could increase or decrease in the future depending on the composition of our revenue growth and the relative impact of changes in sales teams and service offerings.
We accrue for commission expense when we recognize the related revenue. Some of our sales personnel receive a monthly advance to provide them with a more consistent income stream. Cash paid to our sales personnel in advance of commissions earned is reflected as a prepaid expense on our 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 general and administrative expenses, which excludes commission expense, primarily consist of compensation costs for our operations, information systems, finance and administrative support employees, and stock-based compensation. For the nine months ended September 30, 2008 and 2009, our general and administrative expenses were $16.5 million and $21.3 million, respectively. For the nine months ended September 30, 2008 and 2009, general and administrative expenses as a percentage of net revenue were 52.9% and 53.7%, respectively.
For the nine months ended September 30, 2008 and 2009, our stock-based compensation expense was $0.5 million and $0.6 million, respectively. In 2009, our stock-based compensation expense increased due to additional stock options we granted in the fourth quarter of 2008.
Our depreciation expense is primarily attributable to our depreciation of purchases of computer hardware and software, equipment, furniture and fixtures, and the capitalization of internally developed software. For the nine months ended September 30, 2008 and 2009, depreciation expense was $1.8 million and $2.8 million, respectively.
Our amortization expense is attributable to our amortization of intangible assets acquired from business combinations, including client relationships, tradenames and non-compete agreements. For the nine months ended September 30, 2008 and 2009, amortization expense was $0.5 million and $0.6 million, respectively.
Reverse Stock Split and Recapitalization
On September 25, 2009, we effectuated a one-for-two reverse stock split of all outstanding shares of our common stock, Series B preferred stock and Series D preferred stock. Immediately following the reverse stock split, we exchanged all outstanding shares of our common stock, Series B preferred stock and Series D preferred stock for newly issued shares of common stock on approximately a one-for-one basis.
Income Taxes
On June 7, 2006, our company completed a conversion pursuant to which Echo Global Logistics, LLC, a limited liability company, converted to Echo Global Logistics, Inc., a corporation. As a limited liability company, we were treated as a partnership for federal income tax purposes. As a result, all items of income, expense, gain and loss of Echo were generally reportable on the tax returns of members of Echo Global Logistics, LLC.
As a result of our conversion, we now account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, under which deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases. In connection with our conversion, we used $9.4 million of our net proceeds from the issuance of our Series D preferred stock to redeem certain of our Series A common units. Because we redeemed the units as a limited liability company, the cash distribution was taxable to the members and our tax basis increased resulting in the recognition of a deferred tax asset of $3.8 million, for which we recorded a valuation allowance of $1.9 million and a corresponding net increase to additional paid in capital of $1.9 million.
Comparison of nine months ended September 30, 2009 and 2008
Our revenue increased by $31.3 million, or 21.1%, to $179.5 million during the nine months ended September 30, 2009 from $148.2 million during the nine months ended September 30, 2008. The increase was attributable to the $8.5 million generated from the RayTrans Distribution Services acquisition, the increase in the number of our clients, and the total number of shipments executed on behalf of, and services provided to, these clients, and was partially offset by a decrease in the transportation rates due to pricing declines caused by a weaker economy.
Our revenue from enterprise clients increased by $9.6 million, or 15.1%, to $73.3 million during the nine months ended September 30, 2009 from $63.7 million during the nine months ended September 30, 2008, resulting from an increase in the number of enterprise clients and shipments executed and services provided. As we increased our number of transactional clients, our percentage of revenue from enterprise clients decreased to 41% of our revenue during the nine months ended September 30, 2009 from 43% of our revenue during the nine months ended September 30, 2008. As of September 30, 2009, we had 114 enterprise clients under contract, which was an increase of 27, compared to 87 enterprise clients under contract as of September 30, 2008. Our shipment volume and revenue per enterprise client decreased for the nine months ended September 30, 2009 due to the overall domestic economic climate.
Our revenue from transactional clients increased by $21.7 million, or 25.7%, to $106.2 million during the nine months ended September 30, 2009 from $84.5 million during the nine months ended September 30, 2008. The growth in revenue from transactional clients during this period was driven by the increase in the number of our transactional clients due to the addition of transactional sales representatives and sales agents, including those acquired in connection with the acquisition of RayTrans Distribution Services. Our percentage of revenue from transactional clients increased to 59% of our revenue during the nine months ended September 30, 2009 from 57% of our revenue during the nine months ended September 30, 2008. We served over 14,000 transactional clients during the nine months ended September 30, 2009, an increase of approximately 5,000 compared to the 9,000 transactional clients served during the nine months ended September 30, 2008.
Transportation costs
Our transportation costs increased by $22.8 million, or 19.5%, to $139.8 million during the nine months ended September 30, 2009 from $117.0 million during the nine months ended September 30, 2008. 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 decreased to 77.9% during the nine months ended September 30, 2009 from 78.9% during the nine months ended September 30, 2008. The improvement as a percentage of revenue is primarily due to a higher percentage of shipments from our transactional clients. Our transactional clients have typically given us more LTL volume than TL volume, and typically the transportation costs per shipment are lower for LTL than TL.
Net revenue
Net revenue increased by $8.5 million, or 27.1%, to $39.7 million during the nine months ended September 30, 2009 from $31.2 million during the nine months ended September 30, 2008. 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. The remaining increase in net revenue was the result of the $1.9 million generated from the RayTrans Distribution Services acquisition. Net revenue margins increased to 22.1% during the nine months ended September 30, 2009 from 21.1% during the nine months ended September 30, 2008. The increase in net revenue margins was the result of our ability to
negotiate more favorable terms on our shipments and an increase in our transactional sales, which typically have higher net revenue margins.
Operating expenses
Commission expense increased by $2.4 million, or 27.1%, to $11.2 million during the nine months ended September 30, 2009 from $8.8 million during the nine months ended September 30, 2008. This increase is attributable to the increase in net revenue.
General and administrative expenses increased by $4.8 million, or 29.0%, to $21.3 million during the nine months ended September 30, 2009 from $16.5 million during the nine months ended September 30, 2008. The increase is primarily the result of hiring personnel to support our growth. As a percentage of net revenue, general and administrative expenses increased to 53.7% during the nine months ended September 30, 2009 from 52.9% during the nine months ended September 30, 2008. The increase, as a percentage of net revenue, was largely due to the expansion of our facilities in order to grow our transactional business.
Stock-based compensation increased by $105,278, or 21.4%, to $598,249 during the nine months ended September 30, 2009 from $492,971 during the nine months ended September 30, 2008 due to additional stock options granted between September 30, 2008 and September 30, 2009.
Depreciation and amortization
Depreciation expense increased by $1.0 million, or 53.7%, to $2.8 million during the nine months ended September 30, 2009 from $1.8 million during the nine months ended September 30, 2008. 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 $.1 million, or 19.6%, to $0.6 million during the nine months ended September 30, 2009 from $0.5 million during the nine months ended September 30, 2008. The increase in amortization expense the result of the intangibles acquired in the RayTrans acquisition completed in June 2009.
Income from operations
Income from operations increased by $0.2 million to $3.8 million during the nine months ended September 30, 2009 from $3.6 million during the nine months ended September 30, 2008. The increase in income from operations is primarily attributable to an increase in net revenue margin from 21.1% to 22.1% for the nine months ended September 30, 2008 and 2009, respectively.
Other expense and income tax
Other expense increased to $822,903 during the nine months ended September 30, 2009 from $69,355 during the nine months ended September 30, 2008. The increase is due to interest expense on the additional borrowings on our line of credit during and the subordinated debt agreement entered into during the nine months ended September 30, 2009.
Income tax expense decreased $0.5 million to $0.9 million during the nine months ended September 30, 2009 from $1.4 million during the nine months ended September 30, 2008. Our effective tax rate decreased from approximately 41% for the nine months ended September 30, 2008 to approximately 32% for the nine months ended September 30, 2009. The decrease in the effective tax rate was the result of an adjustment to reflect the Company's expectation of an effective tax rate of 34.0% for full year 2009, and is the result of the estimated impact of elections regarding research and development tax credits.
Net Income
Net income decreased by $0.1 million to $2.0 million during the nine months ended September 30, 2009 from $2.1 million during the nine months ended September 30, 2008.
Comparison of three months ended September 30, 2009 and 2008
Our revenue increased by $11.9 million, or 20.3%, to $70.2 million during the three months ended September 30, 2009 from $58.3 million during the three months ended September 30, 2008. The increase was attributable to the $6.4 million generated from the RayTrans Distribution Services acquisition, the increase in the number of our clients, and the total number of shipments executed on behalf of, and services provided to, these clients, and was partially offset by a decrease in the transportation rates due to pricing declines caused by a weaker economy.
Our revenue from enterprise clients increased by $4.3 million, or 17.8%, to $28.3 million during the three months ended September 30, 2009 from $24.0 million during the three months ended September 30, 2008, resulting from an increase in the number of enterprise clients and shipments executed and services provided. As we increased our number of transactional clients, our percentage of revenue from enterprise clients decreased to 40% of our revenue during the three months ended September 30, 2009 from 41% of our revenue during the three months ended September 30, 2008. As of September 30, 2009, we had 114 enterprise clients under contract, which was an increase of 27, compared to 87 enterprise clients under contract as of September 30, 2008. Our shipment volume and revenue per enterprise client decreased for the three months ended September 30, 2009 due to the overall domestic economic climate.
Our revenue from transactional clients increased by $7.6 million, or 22.0%, to $41.9 million during the three months ended September 30, 2009 from $34.3 million during the three months ended September 30, 2008. The growth in revenue from transactional clients during this period was driven by the increase in the number of our transactional clients due to the addition of transactional sales representatives and sales agents, including those acquired in connection with the acquisition of RayTrans Distribution Services. Our percentage of revenue from transactional clients increased to 60% of our revenue during the three months ended September 30, 2009 from 59% of our revenue during the three months ended September 30, 2008. We served over 9,000 transactional clients during the three months ended September 30, 2009, an increase of 2,800 compared to 6,200 transactional clients served during the three months ended September 30, 2008.
Transportation costs
Our transportation costs increased by $8.7 million, or 18.9%, to $54.7 million during the three months ended September 30, 2009 from $46.0 million during the three months ended September 30, 2008. 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 decreased to 78.0% during the three months ended September 30, 2009 from 78.9% during the three months ended September 30, 2008. The improvement as a percentage of revenue is primarily due to a higher percentage of shipments from our transactional clients. Our transactional clients have typically given us more LTL volume than TL volume, and typically the transportation costs per shipment are lower for LTL than TL.
Net revenue
Net revenue increased by $3.1 million, or 25.5%, to $15.4 million during the three months ended September 30, 2009 from $12.3 million during the three months ended September 30, 2008. 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 increased to 22.0% during the three months ended September 30, 2009 from 21.1% during the three months ended September 30, 2008. The increase in net revenue margins was the result of our ability to negotiate more favorable terms on our shipments and an increase in our transactional sales, which typically have higher net revenue margins.
Operating expenses
Commission expense increased by $0.2 million, or 5.3%, to $4.3 million during the three months ended September 30, 2009 from $4.1 million during the three months ended September 30, 2008. As a percentage of net revenue, commission expense decreased to 27.6% during the three months ended September 30, 2009 from 33.0% during the three months ended September 30, 2008. The decrease in commission expense as a percentage of net revenue during the three months ended September 30, 2009 is attributable to a higher level of prepaid commissions writeoffs as a percentage of net revenue in 2008.
General and administrative expenses increased by $1.2 million, or 18.4%, to $7.6 million during the three months ended September 30, 2009 from $6.4 million during the three months ended September 30, 2008. The increase is primarily the result of hiring personnel to support our growth. As a percentage of net revenue, general and administrative expenses decreased to 49.1% during the three months ended September 30, 2009 from 52.1% during the three months ended September 30, 2008. The decrease, as a percentage of net revenue, was largely due to improvements in productivity and increased leverage over certain fixed costs.
Stock-based compensation increased by $94,920, or 84.1%, to $207,846 during the three months ended September 30, 2009 from $112,926 during the three months ended September 30, 2008 due to additional stock options granted between September 30, 2008 and September 30, 2009.
Depreciation and amortization
Depreciation expense increased by $0.5 million, or 46.9%, to $1.1 million during the three months ended September 30, 2009 from $0.6 million during the three months ended September 30, 2008. 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 from intangible assets remained unchanged at $0.2 million during the three months ended September 30, 2009.
Income from operations
Income from operations increased by $1.3 million to $2.3 million during the three months ended September 30, 2009 from $1.0 million during the three months ended September 30, 2008. The increase in income from operations is primarily attributable to an increase in net revenue margin from 21.1% to 22.0% for the three months ended September 30, 2008 and 2009, respectively.
Other expense and income tax
Other expense increased to $0.6 million during the three months ended September 30, 2009 from $55,323 during the three months ended September 30, 2008. The increase is due to interest expense on the additional borrowings on our line of credit and the subordinated debt agreement entered into during the three months ended September 30, 2009.
Income tax expense increased $0.1 million to $0.5 million during the three months ended September 30, 2009 from $0.4 million during the three months ended September 30, 2008. Our
effective tax rate decreased from approximately 41% for the three months ended September 30, 2008 to approximately 27% for the three months ended September 30, 2009. The decrease in the effective tax rate was the result of an adjustment to reflect the Company's expectation of an effective tax rate of 34.0% for full year 2009, and is the result of the estimated impact of elections regarding research and development tax credits.
Net income increased by $0.7 million to $1.3 million during the three months ended September 30, 2009 from $0.6 million during the three months ended September 30, 2008.
Liquidity and Capital Resources
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