Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________
FORM 10-Q
____________________________________________

x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the quarterly period ended September 30, 2018
 
 
o
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the transition period from _________ to _________
 
 
 
Commission File Number 001-34470
____________________________________________
 
ECHO GLOBAL LOGISTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
____________________________________________
Delaware
 
20-5001120
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
600 West Chicago Avenue
Suite 725
Chicago, Illinois 60654
Phone: (800) 354-7993
(Address (including zip code) and telephone number (including area code)
of registrant's principal executive offices)
____________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: x    No: o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes: x    No: o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting 
company o
 
Emerging growth company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
 
        
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o     No: x

As of October 24, 2018, the registrant had 28,547,265 shares of Common Stock, par value $0.0001 per share, outstanding.


 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
 


2
Table of Contents

PART I. FINANCIAL INFORMATION


Item 1.    Consolidated Financial Statements


Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands, except per share data)
2018
 
2017
 
2018
 
2017
Revenue
$
644,821

 
$
509,531

 
$
1,856,723

 
$
1,395,368

Costs and expenses:
 
 
 
 
 
 
 
Transportation costs
533,601

 
422,830

 
1,538,791

 
1,152,556

Selling, general and administrative expenses
85,709

 
72,284

 
250,871

 
209,720

Depreciation and amortization
9,230

 
8,124

 
27,168

 
24,139

Income from operations
16,281

 
6,293

 
39,893

 
8,954

Interest income
—

 
21

 
—

 
21

Interest expense
(3,780
)
 
(3,696
)
 
(11,284
)
 
(10,997
)
Interest expense, net
(3,780
)
 
(3,675
)
 
(11,284
)
 
(10,976
)
Income (Loss) before provision for income taxes
12,501

 
2,618

 
28,609

 
(2,022
)
Income tax (expense) benefit
(3,118
)
 
(226
)
 
(6,821
)
 
1,297

Net income (loss)
$
9,383

 
$
2,392

 
$
21,788

 
$
(726
)
 
 
 
 
 
 
 
 
Earnings (Loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.34

 
$
0.09

 
$
0.79

 
$
(0.03
)
Diluted
$
0.33

 
$
0.09

 
$
0.78

 
$
(0.03
)
Note: Amounts may not foot due to rounding.
 
 
 
 
 
 
 
See accompanying notes.


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Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Balance Sheets
 
September 30,
2018
 
December 31,
2017
(In thousands, except share data)
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
60,542

 
$
23,515

Accounts receivable, net of allowance for doubtful accounts of $6,178 and $3,745 at September 30, 2018 and December 31, 2017, respectively
385,059

 
309,733

Income taxes receivable
836

 
5,101

Prepaid expenses
7,506

 
6,191

Other current assets
5,112

 
3,760

Total current assets
459,055

 
348,301

Noncurrent assets:
 
 
 
Property and equipment, net of accumulated depreciation of $103,809 and $86,549 at September 30, 2018 and December 31, 2017, respectively
63,072

 
63,062

Goodwill
309,589

 
307,314

Intangible assets, net of accumulated amortization of $66,586 and $56,834 at September 30, 2018 and December 31, 2017, respectively
112,832

 
117,484

Other noncurrent assets
2,851

 
1,918

Total noncurrent assets
488,345

 
489,778

Total assets
$
947,400

 
$
838,079

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
252,483

 
$
193,749

Due to seller, current
1,933

 
919

Accrued expenses
50,306

 
39,660

Total current liabilities
304,722

 
234,328

Noncurrent liabilities:
 
 
 
Convertible notes, net
216,748

 
210,919

Due to seller, noncurrent
767

 
1,156

Other noncurrent liabilities
18,745

 
20,301

Deferred income taxes
15,404

 
12,503

Total noncurrent liabilities
251,664

 
244,879

Total liabilities
556,387

 
479,207

Stockholders' equity:
 
 
 

Common stock, par value $0.0001 per share, 100,000,000 shares authorized, 31,328,469 shares issued and 27,801,599 shares outstanding at September 30, 2018; 30,768,050 shares issued and 27,241,180 shares outstanding at December 31, 2017
3

 
3

Treasury stock, 3,526,870 shares at September 30, 2018 and December 31, 2017, respectively
(69,818
)
 
(69,818
)
Additional paid-in capital
346,662

 
337,445

Retained earnings
114,167

 
91,242

Total stockholders' equity
391,014

 
358,872

Total liabilities and stockholders' equity
$
947,400

 
$
838,079

Note: Amounts may not foot due to rounding.
 
 
 
See accompanying notes.

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Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
September 30,
(In thousands)
2018
 
2017
Operating activities
 
 
 
Net income (loss)
$
21,788

 
$
(726
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Deferred income taxes
2,532

 
1,517

Noncash stock compensation expense
7,091

 
7,113

Noncash interest expense
6,362

 
6,005

Change in contingent consideration due to seller
150

 
669

Change in contingent consideration due from seller
—

 
(79
)
Gain on disposal of assets
—

 
13

Depreciation and amortization
27,168

 
24,139

Change in assets:
 
 
 
Accounts receivable
(60,333
)
 
(64,343
)
Income taxes receivable
4,274

 
(2,871
)
Prepaid expenses and other assets
(3,132
)
 
(3,742
)
Change in liabilities:
 
 
 
Accounts payable
47,517

 
62,801

Accrued expenses and other liabilities
9,967

 
10,718

Payments of contingent consideration in excess of costs over estimated earnings
(375
)
 
—

Net cash provided by operating activities
63,009

 
41,215

Investing activities
 
 
 
Purchases of property and equipment
(19,500
)
 
(14,745
)
Investments in business entities
(1,000
)
 
—

Payments for acquisitions, net of cash acquired
(6,720
)
 
—

Net cash used in investing activities
(27,220
)
 
(14,745
)
Financing activities
 
 
 
Receipt of contingent consideration due from seller
—

 
500

Payments of contingent consideration due to seller
(550
)
 
(695
)
Proceeds from exercise of stock options
4,189

 
512

Employee tax withholdings related to net share settlements of equity-based awards
(2,400
)
 
(1,552
)
Purchases of treasury stock
—

 
(20,669
)
Proceeds from borrowing on ABL facility
12,000

 
56,000

Repayments of amounts borrowed on ABL facility
(12,000
)
 
(56,000
)
Net cash provided by (used in) financing activities
1,239

 
(21,904
)
Increase in cash and cash equivalents
37,028

 
4,566

Cash and cash equivalents, beginning of period
23,515

 
16,646

Cash and cash equivalents, end of period
$
60,542

 
$
21,213

Note: Amounts may not foot due to rounding.
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
3,473

 
$
3,569

Cash paid during the period for income taxes
144

 
259

Cash received during the period for income taxes refunded
129

 
—

See accompanying notes.

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Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2018
(Unaudited)

 
Common Stock
 
Treasury Stock
 
Additional
Paid-In
Capital
 
 
 
 
(In thousands, except share data)
Shares
 
Amount
 
Shares
 
Amount
 
 
Retained
Earnings
 
Total
Balance at December 31, 2017
30,768,050

 
$
3

 
(3,526,870
)
 
$
(69,818
)
 
$
337,445

 
$
91,242

 
$
358,872

Share compensation expense
—

 
—

 
—

 
—

 
6,735

 
—

 
6,735

Exercise of stock options
380,042

 
0

 
—

 
—

 
4,188

 
—

 
4,189

Common stock issued for vested restricted stock
213,237

 
0

 
—

 
—

 
(0
)
 
—

 
—

Common stock issued for vested performance shares
26,567

 
0

 
—

 
—

 
(0
)
 
—

 
—

Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of share-based awards
(84,650
)
 
(0
)
 
—

 
—

 
(2,400
)
 
—

 
(2,400
)
Common shares issued for acquisition
25,223

 
0

 
—

 
—

 
693

 
—

 
693

Cumulative effect of accounting change
—

 
—

 
—

 
—

 
—

 
1,136

 
1,136

Net income
—

 
—

 
—

 
—

 
—

 
21,788

 
21,788

Balance at September 30, 2018
31,328,469

 
$
3

 
(3,526,870
)
 
$
(69,818
)
 
$
346,662

 
$
114,167

 
$
391,014

Note: Amounts may not foot due to rounding.
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes.

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Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017

1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Echo Global Logistics, Inc. and its subsidiaries (the "Company" or "Echo"). All significant intercompany accounts and transactions have been eliminated in the consolidation. The consolidated statements of operations include the results of entities or assets acquired from the effective date of the acquisition for accounting purposes.

The preparation of the consolidated financial statements is in conformity with the rules and regulations of the Securities and Exchange Commission ("SEC") and accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules or regulations. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments considered necessary for a fair presentation of the results for the period and those adjustments are of a normal recurring nature. The operating results for the nine months ended September 30, 2018 are not necessarily indicative of the results expected for the full year 2018. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's audited financial statements for the year ended December 31, 2017.

Preparation of Financial Statements and Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results can differ from those estimates.

Fair Value of Financial Instruments

The carrying values of the Company's financial instruments, which consist of cash and cash equivalents, accounts receivable and accounts payable, approximate their fair values due to their short-term nature. The fair value of the acquired intangible assets was determined using a discounted cash flow analysis as further described in Note 3. The fair value of the due to seller liabilities are determined based on the likelihood of the Company making contingent earn-out payments (see Note 5). The fair value of the liability component of the Notes (as defined in Note 12) was determined using the discounted cash flow analysis discussed in Note 12.

2. Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. This new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled for those goods or services. In addition, the new standard requires enhanced qualitative and quantitative disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The Company adopted this standard on January 1, 2018 using the modified retrospective approach. As a result of using this approach, the Company recognized the cumulative effect adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The adoption of this new standard adjusted the revenue recognition timing of the Company's brokerage and transportation management services performance obligation from point in time to over time on a relative transit time basis, which resulted in a cumulative transition adjustment to the opening balance of retained earnings, on January 1, 2018, of $1.1 million, net of tax, and an increase of $6.6 million to revenue for the nine months ended September 30, 2018. While adoption

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Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017

of this standard also effects the corresponding direct costs of revenue, including commission expense, this change did not have a material impact on the Company's consolidated financial statements due to the short term nature of its performance obligations. The Company fully describes the adoption and impact of this standard in Note 4 to the consolidated financial statements. As part of the adoption of this standard, the Company implemented changes to its accounting policies, practices and internal controls over financial reporting.
In March 2018, the FASB issued ASU 2018-05, Income Taxes, to clarify the accounting implications of Staff Accounting Bulletin No. 118 ("SAB 118"). SAB 118 provides a measurement period that should not extend beyond one year from December 22, 2017, the date of the enactment of the Tax Cuts and Jobs Act (the "Act"), to complete the accounting under Accounting Standards Codification ("ASC") 740, Income Taxes. As of September 30, 2018, the Company has not adjusted the provisional estimate of $8.9 million recorded as a decrease to the net deferred tax liability at December 31, 2017. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation, to provide guidance regarding which changes to a share-based payment award require modification accounting in Topic 718. The Company adopted this standard prospectively on January 1, 2018. The impact of this new standard is dependent on future modifications, if any, to the Company's share-based payment awards. For the nine months ended September 30, 2018, the adoption of this standard did not have an impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, to clarify the definition of a business to assist entities when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted this standard prospectively on January 1, 2018. During the nine months ended September 30, 2018, the Company acquired Freight Management Plus, Inc. ("Freight Management," or "FMP") as a business combination in accordance with this updated guidance as further discussed in Note 3 to the consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, to clarify the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs and settlement of contingent consideration arising from an acquisition. The Company adopted this standard retrospectively, and the adoption did not have a material impact on the consolidated financial statements.

Recently issued accounting pronouncements not yet adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This new accounting standard will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its disclosures.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this update will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This new accounting standard will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, requiring a lessee to record, on the balance sheet, the assets and liabilities for the right-of-use assets and lease obligations created by leases with lease terms of more than 12 months. This new accounting standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, which added amendments to create an optional transition method that will provide an option to use the effective date of ASC 842, Leases, as the date of initial application of the transition. The Company plans to adopt this optional transition method on January 1, 2019. Upon adoption, the Company plans to use the package of practical expedients that allows it to (i) not reassess whether

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Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017

an arrangement contains a lease, (ii) carry forward its lease classification as operating or capital leases and (iii) not reassess its previously recorded initial direct costs. In addition, the Company plans to elect the practical expedient to not separate lease and non-lease components whereby both components are accounted for and recognized as lease components. Adoption will also require enhanced qualitative and quantitative disclosures. The Company anticipates that the adoption of this standard will materially affect its consolidated balance sheets.

3. Acquisitions

On July 6, 2018, the Company purchased substantially all of the assets of Freight Management, a Pennsylvania corporation, for an aggregate purchase price of up to $10.2 million, of which (i) $6.6 million was paid at closing, subject to post-closing adjustments for working capital, (ii) $0.7 million was paid in the form of common stock, par value $0.0001 per share, of the Company at closing and (iii) up to $2.9 million will be paid in the three years following the closing, subject to the achievement of certain financial objectives set forth in the Asset Purchase Agreement by and between Echo/FMP Holdings, LLC, a wholly-owned subsidiary of the Company, and Freight Management. As a result of the preliminary purchase accounting for the acquisition, the Company recorded $2.3 million of goodwill, $1.4 million as the estimated opening balance sheet fair value of the contingent consideration obligation, and $5.1 million of customer relationship intangible assets. The fair values of the contingent consideration obligation and the customer relationship intangible assets are considered Level 3 fair value estimates. The fair value of the contingent consideration obligation was based on the probability of reaching the financial forecasts of future operating results, an appropriate discount rate, and the Company's historical experience with similar arrangements as further described in Note 5 to the consolidated financial statements. The fair value of the customer relationship intangible assets was determined using a discounted cash flow analysis based on the current customers of FMP at the time of the acquisition. This allocation is subject to change as the Company finalizes the purchase accounting. The Company is in the process of finalizing the valuation of certain acquired accounts receivable, accounts payable and intangible assets, along with the acquisition date fair value of the contingent consideration obligation. The amount of goodwill deductible for U.S. income tax purposes is $0.8 million, which excludes the opening balance sheet fair value of the contingent consideration obligation and provisional working capital adjustments.

As of September 30, 2018, the fair value of the contingent consideration has not changed from its opening balance sheet fair value of $1.4 million. The Company will continue to reassess the fair value of the contingent consideration obligation each quarter.

The amounts of revenue and net income of FMP included in the Company's consolidated statement of income from the acquisition date for the three months ended September 30, 2018 are $4.6 million and $0.2 million, respectively. During the nine months ended September 30, 2018, the Company incurred $0.3 million of acquisition-related costs associated with the acquisition, which were recorded in selling, general and administrative expenses on the consolidated statement of income.


4. Revenue

Adoption of ASC Topic 606, "Revenue from Contracts with Customers"

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers ("ASC Topic 606"), using the modified retrospective method. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC Topic 606; however, prior period amounts are not adjusted and continue to be reported in accordance with the accounting standards in effect for those periods.

The Company recorded an increase to the opening balance of retained earnings of $1.1 million, net of tax, as of January 1, 2018 due to the cumulative impact of adoption of ASC Topic 606. The impact to revenue for the nine months ended September 30, 2018 was an increase of $6.6 million, as a result of applying ASC Topic 606.

Revenue Recognition

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration the Company expects to receive in exchange for its services. The Company generates revenue from two different client types: Transactional and Managed Transportation. Most clients are categorized as Transactional clients. For its Transactional business, the Company provides brokerage and transportation management services on a shipment-by-

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Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017

shipment basis. Carrier selection, dispatch, load management and tracking are integrated services that occur within the brokerage and transportation management performance obligation. For the brokerage and transportation management performance obligation, revenue is recognized as the client's shipment travels from origin to destination by a third-party carrier. The Company is the principal in these transactions and recognizes revenue on a gross and relative transit time basis. The Company categorizes a client as a Managed Transportation client if there is an agreement with the client for the provision of services, typically for a multi-year term. Brokerage and transportation management services is typically the performance obligation for the Company's Managed Transportation clients. Other performance obligations for Managed Transportation clients may include transportation management services, which includes the integrated services of dispatch, tracking and carrier payment. For these types of transactions, revenue is recorded on a net basis as the Company does not have latitude in carrier selection or establish rates with the carrier. The Company also performs project-based services, such as compliance management, customized re-billing services and freight studies for certain Managed Transportation clients.

The following table presents the Company's revenue disaggregated by client type (in thousands, unaudited):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Client Type
2018
 
2017(1)
 
2018
 
2017(1)
Transactional
$
510,344

 
$
401,179

 
$
1,466,241

 
$
1,105,533

Managed Transportation
134,478

 
108,352

 
390,482

 
289,835

Revenue
$
644,821

 
$
509,531

 
$
1,856,723

 
$
1,395,368

Note: Amounts may not foot due to rounding.
(1) Prior period amounts have not been adjusted under the modified retrospective method.

Revenue recognized per shipment varies depending on the transportation mode. The primary modes of shipment in which the Company transacts are truckload and less than truckload. Other transportation modes include intermodal, small parcel, domestic air, expedited and international.

The following table presents the Company's revenue disaggregated by mode (in thousands, unaudited):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Mode
2018
 
2017(1)
 
2018
 
2017(1)
Truckload
$
445,827

 
$
347,453

 
$
1,290,013

 
$
942,464

Less than truckload
166,244

 
135,599

 
474,062

 
379,387

Other revenue
32,749

 
26,479

 
92,648

 
73,518

Revenue
$
644,821

 
$
509,531

 
$
1,856,723

 
$
1,395,368

Note: Amounts may not foot due to rounding.
(1) Prior period amounts have not been adjusted under the modified retrospective method.

Variable Consideration

Certain customers may receive rebates based on the terms of their agreement with the Company, which are accounted for as variable consideration. Rebates are estimated based on the expected amount to be provided to customers and reduce revenue recognized. The Company also estimates for possible additional fees based on a portfolio approach.

Practical Expedients

The Company adopted the practical expedient to recognize commission expense when incurred because the amortization period is less than one year. Commission expense recognition aligns with the Company's revenue recognition policy under ASC Topic 606, as commission expense is recognized on a relative transit time basis.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.


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Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017

5. Fair Value Measurement

The Company applies ASC Topic 820, Fair Value Measurements and Disclosures ("ASC Topic 820"), for its financial assets and financial liabilities. The guidance requires disclosures about assets and liabilities measured at fair value. The Company's financial liabilities primarily relate to contingent earn-out payments due to sellers in connection with various acquisitions. The fair value of the due to seller liabilities at September 30, 2018 was $2.7 million. The potential earn-out payments and performance periods are defined in the individual purchase agreements for each acquisition. Earnings before interest, taxes, depreciation and amortization ("EBITDA") is the performance target defined and measured to determine the earn-out payment due, if any, after each defined measurement period.

The Company's financial assets related to contingent payments that were due from the seller of Command Transportation, LLC ("Command") based upon certain employee retention criteria. As of September 30, 2018, there was no remaining balance of the due from seller asset as the criteria were met.

ASC Topic 820 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:

•
Level 1: Inputs are quoted prices in active markets for identical assets or liabilities.
•
Level 2: Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.
•
Level 3: Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The significant inputs used to derive the fair value of the amounts due to seller include financial forecasts of future operating results, the probability of reaching the forecast and an appropriate discount rate for each contingent liability. Probabilities are estimated by reviewing financial forecasts and assessing the likelihood of reaching the required performance measures based on factors specific to each acquisition as well as the Company’s historical experience with similar arrangements. If an acquisition reaches the required performance measure, the estimated probability would be increased to 100% and would still be classified as a contingent liability on the balance sheet. If the measure is not reached, the probability would be reduced to reflect the amount earned, if any, depending on the terms of the agreement. Discount rates used in determining the fair value of the contingent consideration due to seller ranged from 5% to 6%. Historical results of the respective acquisitions serve as the basis for the financial forecasts used in the valuation.

Quantitative factors are also considered in these forecasts, including acquisition synergies, growth and sales potential and potential operational efficiencies gained. Changes to the significant inputs used in determining the fair value of the contingent consideration due to seller could result in a change in the fair value of the contingent consideration. However, the correlation and inverse relationship between higher projected financial results to the discount rate applied and probability of meeting the financial targets mitigates the effect of any changes to the unobservable inputs.

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Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017


The following tables set forth the Company's financial liabilities measured at fair value on a recurring basis and the basis of measurement at September 30, 2018 and December 31, 2017 (in thousands):
 
Fair Value Measurements as of September 30, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Contingent consideration due to seller
$
(2,700
)
 
—

 
—

 
$
(2,700
)

 
Fair Value Measurements as of December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Contingent consideration due to seller
$
(2,075
)
 
—

 
—

 
$
(2,075
)

The following table provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3) (in thousands):
 
Due to Seller Liability
Balance at December 31, 2017
$
(2,075
)
FMP acquisition, acquisition date fair value
(1,400
)
Change in fair value of contingent consideration due to seller
(150
)
Payment of contingent consideration due to seller
925

Balance at September 30, 2018
$
(2,700
)

For the three months ended September 30, 2018 and 2017, the Company recognized expense of $50 thousand and $304 thousand, respectively, in selling, general and administrative expenses due to the change in fair value determined by a Level 3 valuation technique. For the nine months ended September 30, 2018 and 2017, the Company recognized net expense of $150 thousand and $590 thousand, respectively. These changes in fair value resulted from using revised forecasts that took into account the most recent performance at each acquired business, the effect of the time value of money and the satisfaction of the employee retention criteria.

During the nine months ended September 30, 2018 and 2017, the Company made contingent earn-out payments of $925 thousand and $695 thousand, respectively, to the sellers of businesses acquired by the Company. The Company did not receive any contingent payments from the seller of Command during the nine months ended September 30, 2018. The Company received $500 thousand of contingent payments from the seller of Command during the nine months ended September 30, 2017.

6. Intangibles and Goodwill

The following is a roll-forward of goodwill from December 31, 2017 to September 30, 2018:

Balance as of December 31, 2017
$
307,314

FMP acquisition, goodwill acquired
2,275

Balance as of September 30, 2018
$
309,589


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Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017


The following is a summary of amortizable intangible assets as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Cost
 
Accumulated Amortization
 
Net
 
Cost
 
Accumulated Amortization
 
Net
Customer relationships
$
150,239

 
$
(55,408
)
 
$
94,831

 
$
145,139

 
$
(48,058
)
 
$
97,081

Carrier relationships
18,300

 
(3,588
)
 
14,712

 
18,300

 
(2,781
)
 
15,519

Non-compete agreements
5,239

 
(2,806
)
 
2,433

 
5,239

 
(2,216
)
 
3,023

Trade names
5,640

 
(4,784
)
 
856

 
5,640

 
(3,779
)
 
1,861

 
$
179,418

 
$
(66,586
)
 
$
112,832

 
$
174,318

 
$
(56,834
)
 
$
117,484


The customer relationships are being amortized using an accelerated method over their estimated weighted-average useful life of 14.8 years, as an accelerated method best approximates the distribution of cash flows generated by the acquired customer relationships. The carrier relationships, non-compete agreements and trade names are being amortized using the straight-line method over their estimated weighted-average useful lives of 17.0 years, 6.7 years and 4.0 years, respectively. Amortization expense related to intangible assets was $3.3 million and $3.6 million for the three months ended September 30, 2018 and 2017, respectively, and $9.8 million and $10.7 million for the nine months ended September 30, 2018 and 2017, respectively.

The estimated amortization expense for the next five years and thereafter is as follows (in thousands):
Remainder of 2018
$
3,268

2019
11,802

2020
10,973

2021
10,362

2022
10,005

Thereafter
66,421

Total
$
112,832

Note: Amounts may not foot due to rounding.

7. Accrued Expenses and Other Noncurrent Liabilities

The components of accrued expenses at September 30, 2018 and December 31, 2017 were as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Accrued compensation
$
31,963

 
$
24,206

Accrued rebates
2,737

 
2,038

Accrued employee benefits
2,755

 
2,480

Accrued professional service fees
2,891

 
698

Accrued interest
2,592

 
1,139

Deferred rent
2,485

 
2,641

Other
4,884

 
6,459

Total accrued expenses
$
50,306

 
$
39,660

Note: Amounts may not foot due to rounding.

The other noncurrent liabilities of $18.7 million and $20.3 million at September 30, 2018 and December 31, 2017, respectively, consist primarily of the portion of deferred rent in excess of twelve months.


13
Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017

8. Income Taxes     

On December 22, 2017, the Act was signed into legislation. The Act became effective January 1, 2018 and reduced the federal corporate tax rate from 35% to 21%.

In March 2018, the FASB issued ASU 2018-05, Income Taxes, which provides guidance on accounting for the tax effects of SAB 118, as discussed in Note 2. SAB 118 provides a measurement period that should not extend beyond one year from December 22, 2017 to complete the accounting under the Act. As of September 30, 2018, the Company has not adjusted the provisional estimate of $8.9 million recorded as a decrease to the net deferred tax liability at December 31, 2017. The Company considers the deferred tax re-measurements, and other items to be reasonable estimates, but provisional, due to the forthcoming guidance and its ongoing analysis of final year-end data and tax provisions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.

The following table shows the Company's effective income tax rate for the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Income (Loss) before provision for income taxes
$
12,501

 
$
2,618

 
$
28,609

 
$
(2,022
)
Income tax (expense) benefit
$
(3,118
)
 
$
(226
)
 
$
(6,821
)
 
$
1,297

Effective tax rate
24.9
%
 
8.6
%
 
23.8
%
 
(64.1
)%

The difference in the Company's effective tax rate for the three and nine months ended September 30, 2018 from the Company's statutory federal tax rate of 21% was primarily due to state taxes; an increase in non-deductible expenses, primarily executive stock-based compensation; offset in part by the impact of certain tax credits.

The difference in the Company's effective tax rate for the three months ended September 30, 2017 from the company's federal tax rate of 35% was primarily due to a domestic production tax deduction for the 2013 tax year recorded in the third quarter of 2017, the net tax deficiencies related to share-based payment awards recognized as income tax expense in accordance with ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting and lower income before taxes during the quarter, while the difference in the Company's effective tax rate for the nine months ended September 30, 2017 was primarily due to a domestic production tax deduction for the 2013 tax year recorded in the third quarter of 2017, the net tax deficiencies related to share-based payment awards and the effect of the 2017 year to date pre-tax loss.


14
Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017

9. Earnings (Loss) Per Share

Basic earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share is calculated by dividing net income (loss) by the weighted average shares outstanding plus share equivalents that would arise from the exercise of share options and the vesting of restricted stock and performance shares. The computation of basic and diluted earnings (loss) per common share for the three and nine months ended September 30, 2018 and 2017 is as follows (in thousands, except share and per share data):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
9,383

 
$
2,392

 
$
21,788

 
$
(726
)
Denominator:
 

 
 
 
 
 
 
Denominator for basic earnings (loss) per common share - weighted-average shares
27,779,990

 
27,486,098

 
27,571,122

 
27,885,839

Effect of dilutive securities:
 

 
 
 
 
 
 
Employee stock awards
428,977

 
135,806

 
364,492

 
—

Denominator for dilutive earnings (loss) per common share
28,208,967

 
27,621,904

 
27,935,614

 
27,885,839

Basic earnings (loss) per common share
$
0.34

 
$
0.09

 
$
0.79

 
$
(0.03
)
Diluted earnings (loss) per common share
$
0.33

 
$
0.09

 
$
0.78

 
$
(0.03
)

For the three months ended September 30, 2018 and 2017, and the nine months ended September 30, 2018, there were no employee stock options and no unvested restricted stock and performance and market-based shares excluded from the calculation of diluted earnings per common share. For the nine months ended September 30, 2017, 266,347 incremental shares related to stock-based awards were not included in the computation of diluted loss per common share because of the net loss during the period.

As of September 30, 2018, none of the conditions allowing holders of the Notes to convert have been met and no conversion spread exists. As such, the Notes did not have a dilutive impact on diluted earnings (loss) per common share for the three and nine months ended September 30, 2018 and 2017.

10. Stock-Based Compensation Plans

The Company recorded $2.4 million and $7.1 million in total stock-based compensation expense with corresponding income tax benefits of $0.6 million and $1.7 million for the three and nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2017, the Company recorded $2.0 million and $7.1 million in total stock-based compensation expense with corresponding income tax benefits of $0.8 million and $2.7 million, respectively.

During each of the nine months ended September 30, 2018 and 2017, the Company did not grant any stock options.

The Company granted 247,612 and 294,820 shares of restricted stock to various employees during the nine months ended September 30, 2018 and 2017, respectively.

In 2014, the Company initiated a performance and market-based stock incentive plan for certain executives that provides vesting based on specific financial and market-based performance measurements. The Company granted 97,966 and 99,933 shares of performance and market-based stock during the nine months ended September 30, 2018 and 2017, respectively.

11. Contingencies

In the normal course of business, the Company is subject to potential claims and disputes related to its business, including claims for freight lost or damaged in transit. Some of these matters may be covered by the Company's insurance and risk management programs or may result in claims or adjustments with the Company's carriers. No such matters are currently expected to have a material adverse effect on the Company's financial position, results of operations or cash flows.

15
Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017


In July 2016, the Company received an unfavorable appeals assessment regarding a state activity-based tax matter of $1.3 million, including penalties and interest, for the state tax audit period from January 1, 2010 to June 30, 2014. The Company believes the assessment is without merit and is currently defending the Company's position through a formal appeals process. The Company has not recorded any potential loss related to this matter as of September 30, 2018.

12. Long-Term Debt

ABL Facility

On June 1, 2015, the Company and Command, as co-borrowers, entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank. The Credit Agreement provides for a senior secured revolving credit facility in an initial aggregate principal amount of up to $200 million (the “ABL Facility”). The Company's obligations under the ABL facility are secured, on a first lien priority basis, by certain working capital assets. The initial aggregate principal amount under the ABL Facility may be increased from time to time by an additional $100 million to a maximum aggregate principal amount of $300 million.

Interest is payable at a rate per annum equal to, at the option of the Company, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate, plus 0.50%, (2) the base commercial lending rate of PNC Bank, National Association and (3) a daily LIBOR rate, plus 1.00%; or (b) a LIBOR rate determined by reference to the costs of funds for deposits in the relevant currency for the interest period relevant to such borrowing adjusted for certain additional costs. The applicable margin is 0.25% to 0.75% for borrowings at the base rate and 1.25% to 1.75% for borrowings at the LIBOR rate, in each case, based on the excess availability under the ABL Facility.

The Company is required to pay a commitment fee in respect to the unutilized commitments under the revolving credit facility. At September 30, 2018, the Company's commitment fee was calculated at a rate of 0.375%. The Company recognized interest expense related to the commitment fee and borrowings on the ABL Facility of $0.2 million for each of the three months ended September 30, 2018 and 2017, and $0.6 million and $0.7 million for the nine months ended September 30, 2018 and 2017, respectively.

The Company drew $12.0 million and $56.0 million on the ABL Facility during the nine months ended September 30, 2018 and 2017, respectively, all of which was repaid as of September 30, 2018 and 2017. No amounts were outstanding on the ABL Facility as of September 30, 2018. The Company is in compliance with all covenants related to the ABL Facility.

The issuance of letters of credit under the ABL Facility reduces available borrowings. As of September 30, 2018, there were $0.7 million of letters of credit outstanding. The total draw allowed on the ABL Facility at September 30, 2018, as determined by the working capital assets pledged as collateral, was $200.0 million. After adjusting for the letters of credit, the Company's remaining availability under the ABL Facility at September 30, 2018 was $199.3 million.

The Company incurred issuance costs of $3.1 million in 2015 related to the ABL Facility. These issuance costs are being amortized to interest expense using straight-line amortization over the 5 year life of the ABL Facility. For each of the three and nine months ended September 30, 2018 and 2017, the Company recorded $0.2 million and $0.5 million of interest expense related to ABL Facility issuance costs, respectively. As there is no outstanding draw on the ABL Facility at September 30, 2018, the unamortized issuance costs are presented as a deferred asset on the consolidated balance sheet.

Convertible Senior Notes

On May 5, 2015, the Company issued $230 million aggregate principal amount of 2.50% convertible senior notes due 2020 (the “Notes”). The Company used all of the net proceeds from the note offering (together with the proceeds from the sale of common stock and borrowings under the ABL Facility) to finance the acquisition of Command in June 2015.

The Notes bear interest at a rate of 2.50% per year payable semiannually in arrears in cash on May 1 and November 1 of each year, beginning on November 1, 2015. The Notes will mature on May 1, 2020, unless earlier converted or repurchased in accordance with the terms discussed below. The Notes are the Company's senior unsecured obligations and rank senior in right of payment to any of the Company's indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company's unsecured indebtedness that is not so subordinated; effectively junior in right of payment

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Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017

to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company's subsidiaries.

The Notes will be convertible, under certain circumstances and during certain periods, into cash, shares of the Company's common stock, or a combination of cash and shares of common stock at the Company's election, at an initial conversion rate of 25.5428 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $39.15 per share of common stock.

The Company's intent and policy will be to settle the $230 million principal amount of Notes in cash, and any excess conversion premium in shares of common stock. As such, the principal amount of the Notes will not be included in the calculation of diluted earnings (loss) per common share, but any conversion premium that exists will be included in the calculation of diluted earnings (loss) per common share using the treasury stock method. As of September 30, 2018, none of the conditions allowing holders of the Notes to convert have been met and no conversion spread exists. As such, the Notes did not have a dilutive impact on diluted earnings (loss) per common share for each of the three and nine months ended September 30, 2018 and 2017.

At issuance, the Company estimated the straight debt borrowing rates to be 5.75% for similar debt to the Notes without the conversion feature, which resulted in a fair value of the liability component of $198.5 million and a fair value of the equity component of $31.5 million. The fair value of the equity component was recorded as a debt discount, with the offset recorded as a credit to additional paid-in capital within stockholders' equity. The $31.5 million debt discount and Note issuance costs discussed below are being amortized to interest expense under the effective interest method over the 5 year life of the Notes, using an effective interest rate of 6.33%.

The Company allocated the total issuance costs related to the Notes to liability and equity components based on their relative fair values. Issuance costs attributable to the liability component were recorded on the consolidated balance sheets as a contra-liability that reduces the carrying amount of the convertible note liability. This amount is being amortized to interest expense over the term of the Notes using the effective interest method and an effective interest rate of 6.33%. Issuance costs attributable to the equity component were recorded as a charge to additional paid-in capital within stockholders' equity.

As of September 30, 2018 and December 31, 2017, the carrying amounts of the Notes on the consolidated balance sheets were calculated as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Convertible senior notes, principal amount
$
230,000

 
$
230,000

Unamortized debt discount
(11,064
)
 
(15,930
)
Unamortized debt issuance costs
(2,188
)
 
(3,151
)
Convertible senior notes, net
$
216,748

 
$
210,919


The Notes are carried on the consolidated balance sheets at their principal amount, net of the unamortized debt discount and unamortized debt issuance costs, and are not marked to market each period. The approximate fair value of the Notes as of September 30, 2018 was $239.9 million. The fair value of the Notes was estimated based on the trading price of the Notes at September 30, 2018. As trading volume is low, these are quoted prices for identical instruments in markets that are not active, and thus are Level 2 in the fair value hierarchy.

17
Table of Contents
Echo Global Logistics, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 30, 2018 and 2017


For the three and nine months ended September 30, 2018 and 2017, interest expense related to the Notes consisted of the following (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Contractual coupon interest
$
1,438

 
$
1,438

 
$
4,313

 
$
4,313

Debt discount amortization
1,648

 
1,547

 
4,867

 
4,569

Debt issuance cost amortization
326

 
306

 
963

 
904

Interest expense, Notes
$
3,411

 
$
3,291

 
$
10,142

 
$
9,785

Note: Amounts may not foot due to rounding.

The undiscounted interest and principal payments due in relation to the Notes from September 30, 2018 to the maturity of the Notes on May 1, 2020 are as follows (in thousands):
 
Total
2018
2019
2020
Senior convertible notes, including interest
$
241,500

2,875

5,750

$
232,875


13. Subsequent Events

On October 23, 2018, the Company entered into Amendment No. 2 to its Revolving Credit and Security Agreement (the "Second Amendment"), which amends the terms of its existing Revolving Credit and Security Agreement, dated as of June 1, 2015, by and among the Company, the lenders party thereto, and PNC Bank, National Association, as administrative agent (as amended, restated or otherwise modified prior to the Second Amendment, the "Existing Credit Agreement" and, as amended by the Second Amendment, the "Amended Credit Agreement"). The Amended Credit Agreement provides for a senior secured revolving credit facility in an initial aggregate principal amount of up to $350 million (the "Amended ABL Facility"), with an extended maturity date of October 23, 2023. The initial aggregate principal amount under the Amended ABL Facility may be increased from time to time by an additional $150 million to a maximum aggregate principal amount of $500 million; provided that certain requirements are satisfied. The Company's obligations under the Amended ABL Facility are secured, on a first lien priority basis, by certain working capital assets.

Interest is payable at a rate per annum equal to, at the option of the Company, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate, plus 0.50%, (2) the base commercial lending rate of PNC Bank, National Association and (3) a daily LIBOR rate, plus 1.00%; or (b) a LIBOR rate determined by reference to the costs of funds for deposits in the relevant currency for the interest period relevant to such borrowing adjusted for certain additional costs. The applicable margin is 0.25% to 0.50% for borrowings at the base rate and 1.25% to 1.50% for borrowings at the LIBOR rate, in each case, based on the excess availability under the Amended ABL Facility.

The Company will be required to pay a commitment fee in respect to the unutilized commitments under the Amended ABL Facility, calculated at a rate of 0.25%.

The terms of the Amended ABL Facility include various covenants, including a covenant that requires the Company to maintain a consolidated fixed charge coverage ratio at any time (a) a specified default occurs or (b) if excess availability falls below certain specified levels.

The issuance of letters of credit under the Amended ABL Facility reduces available borrowings.

The Company incurred issuance costs of approximately $0.7 million in 2018 related to the Amended ABL Facility. These issuance costs will be presented on the consolidated balance sheet as a reduction to the carrying amount of the debt and amortized to interest expense using straight-line amortization over the 5 year life of the Amended ABL Facility, and the unamortized issuance costs will be presented as a deferred asset on the consolidated balance sheet.

18
Table of Contents

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, 2017 and elsewhere in this Form 10-Q. 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 carrier selection, dispatch, load management and tracking.

We procure transportation and provide logistics services for clients across a wide range of industries, such as manufacturing, construction, food and beverage, consumer products and retail. Our clients fall into two categories: Transactional and Managed Transportation. We provide brokerage and transportation management services to our Transactional clients on a shipment-by-shipment basis, typically with individual or spot market pricing. We typically enter into multi-year agreements with our Managed Transportation 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.


19
Table of Contents

Results of Operations

The following table represents certain results of operations data:
 
Three Months Ended
September 30,

Nine Months Ended
September 30,
(Unaudited, in thousands except per share data)
2018

2017

2018

2017
Consolidated statements of operations data:







Revenue
$
644,821


$
509,531


$
1,856,723


$
1,395,368

Transportation costs
533,601


422,830


1,538,791


1,152,556

Net revenue (1)
111,220


86,701


317,932


242,812

Operating expenses:
 
 
 
 
 
 
 
Commissions
33,162

 
26,452

 
95,730

 
73,571

Selling, general and administrative expenses
52,498

 
45,528

 
154,990

 
135,559

Contingent consideration expense
50

 
304

 
150

 
590

Depreciation and amortization
9,230

 
8,124

 
27,168

 
24,139

Total operating expenses
94,939

 
80,408

 
278,039

 
233,858

Income from operations
16,281

 
6,293

 
39,893

 
8,954

Interest income


 
21

 
—

 
21

Interest expense
(3,780
)
 
(3,696
)
 
(11,284
)
 
(10,997
)
Income (Loss) before provision for income taxes
12,501

 
2,618

 
28,609

 
(2,022
)
Income tax (expense) benefit
(3,118
)
 
(226
)
 
(6,821
)
 
1,297

Net income (loss)
$
9,383

 
$
2,392

 
$
21,788

 
$
(726
)
Earnings (Loss) per common share:
 
 
 
 
 
 
 
      Basic
$
0.34

 
$
0.09

 
$
0.79

 
$
(0.03
)
      Diluted
$
0.33

 
$
0.09

 
$
0.78

 
$
(0.03
)
Shares used in per share calculations (in thousands):
 
 
 
 
 
 
 
      Basic
27,780

 
27,486

 
27,571

 
27,886

      Diluted
28,209

 
27,622

 
27,936

 
27,886

Note: Amounts may not foot due to rounding.
(1) Net revenue is a non-GAAP measure calculated as revenue less transportation costs. Net revenue is one of the primary operational and financial measures used by management to evaluate the business. The following table presents a reconciliation of net revenue to revenue, the most comparable GAAP measure:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Unaudited, in thousands)
2018
 
2017
 
2018
 
2017
Revenue
$
644,821

 
$
509,531

 
$
1,856,723

 
$
1,395,368

Transportation costs
533,601

 
422,830

 
1,538,791

 
1,152,556

Net revenue
$
111,220

 
$
86,701

 
$
317,932

 
$
242,812



20
Table of Contents


Revenue

We generate revenue through the sale of brokerage and transportation management services to our clients. For our brokerage and transportation management services, revenue is recognized as the client's shipment travels from origin to destination by a third-party carrier. Our revenue was $1.9 billion and $1.4 billion for the nine months ended September 30, 2018 and 2017, respectively, representing a period-over-period increase of 33.1%.

Our revenue is generated from two different types of clients: Transactional and Managed Transportation. Most of our clients are categorized as Transactional. We provide services to our Transactional clients on a shipment-by-shipment basis. We categorize a client as a Managed Transportation client if we have a contract with the client for the provision of services on a recurring basis. Our contracts with Managed Transportation 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. Our Managed Transportation accounts typically generate higher dollar amounts and volume than our Transactional relationships. For the nine months ended September 30, 2018 and 2017, Transactional clients accounted for 79.0% and 79.2% of our revenue, respectively, and Managed Transportation clients accounted for 21.0% and 20.8% of our revenue, respectively. We expect to continue to grow both our Transactional and Managed Transportation 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 and LTL. Other transportation modes include intermodal, small parcel, domestic air, expedited and international. Material shifts in the percentages of our revenue by transportation mode could have a significant impact on our revenue growth. For the nine months ended September 30, 2018, TL accounted for 69.5% of our revenue, LTL accounted for 25.5% of our revenue and other transportation modes accounted for 5.0% of our revenue. For the nine months ended September 30, 2017, TL accounted for 67.5% of our revenue, LTL accounted for 27.2% of our revenue and other transportation modes accounted for 5.3% 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 this season. While we experience some seasonality, differences in our revenue between periods have been driven primarily by growth in our client base and changes in the market environment.

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 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, while 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 could have a significant impact on our net revenue. The discussion of our results of operations below focuses on changes in our net revenue and expenses as a percentage of net revenue. Net revenue for the nine months ended September 30, 2018 was $317.9 million, an increase of 30.9% from $242.8 million in the comparable period of 2017.

Operating expenses

Our costs and expenses, excluding transportation costs, consist of commissions paid to our sales personnel; selling, general and administrative expenses to run our business; changes in our 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 months ended September 30, 2018 and 2017, our commission expense was $95.7 million and $73.6 million, respectively. Commission expense decreased to 30.1% of our net revenue as of September 30, 2018, as compared to 30.3% in the prior year. 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 and sources of our revenue growth.


21
Table of Contents

We accrue for commission expense when we recognize the related revenue on a relative transit time basis. 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.

Selling, general and administrative expenses, excluding 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, stock compensation, acquisition-related transaction costs and other general and administrative expenses. For the nine months ended September 30, 2018 and 2017, our selling, general and administrative expenses were $155.0 million and $135.6 million, respectively. For the nine months ended September 30, 2018 and 2017, selling, general and administrative expenses as a percentage of net revenue were 48.7% and 55.8%, respectively.

Our contingent consideration expense is the change in the fair value of our contingent consideration assets and liabilities. The contingent consideration assets and liabilities presented on our consolidated balance sheets reflect the fair value of expected earn-out payments that may be paid or received from the sellers of certain acquired businesses upon the achievement of certain performance measures. The fair values of the contingent consideration assets and liabilities are evaluated on a quarterly basis, and the change in fair value is included in selling, general and administrative expenses in our consolidated statements of operations. For the nine months ended September 30, 2018 and 2017, we recorded a net expense of $0.2 million and $0.6 million, respectively.

Our depreciation expense is primarily attributable to depreciation of computer hardware and software, equipment, leasehold improvements, furniture and fixtures and internally developed software. For the nine months ended September 30, 2018 and 2017, depreciation expense was $17.4 million and $13.4 million, respectively.

Our amortization expense is attributable to amortization of intangible assets acquired from business combinations, including customer and carrier relationships, trade names and non-compete agreements. For the nine months ended September 30, 2018 and 2017, amortization expense was $9.8 million and $10.7 million, respectively.

Interest expense

The interest expense included in our consolidated statements of operations consists of interest expense related to our $230 million aggregate principal amount of 2.50% convertible senior notes due 2020 issued in May 2015 (the "Notes") and our senior secured revolving credit facility in an initial aggregate principal amount of up to $200 million entered into in June 2015 (the "ABL Facility"). We amortize the debt discount and issuance costs related to the Notes over the five year life of the Notes using the effective interest method. We amortize the issuance costs related to our ABL Facility over the five year life of the facility using straight-line amortization, as the amount drawn on the line (and thus the interest rate and commitment fee paid by Echo) will fluctuate from period to period. Interest expense was $11.3 million and $11.0 million for the nine months ended September 30, 2018 and 2017, respectively.

Comparison of the three months ended September 30, 2018 and 2017

Revenue

Revenue for the three months ended September 30, 2018 was $644.8 million, an increase of 26.6% from $509.5 million in the comparable period of 2017. The increase in revenue was primarily attributable to an increase of 17.6% in revenue per shipment, along with an increase of 7.6% in volume.

Revenue from Transactional clients for the three months ended September 30, 2018 was $510.3 million, an increase of 27.2% from $401.2 million in the comparable period of 2017. The increase in Transactional revenue was driven by an increase in both TL and LTL volume and revenue per shipment. Revenue from Transactional clients was 79.1% of our revenue for the three months ended September 30, 2018, an increase from 78.7% of our revenue in the comparable period of 2017.

Revenue from Managed Transportation clients for the three months ended September 30, 2018 was $134.5 million, an increase of 24.1% from $108.4 million in the comparable period of 2017. The increase in Managed Transportation revenue was driven by an increase in both volume and revenue per shipment. Revenue from Managed Transportation clients was 20.9% of our revenue for the three months ended September 30, 2018, a decrease from 21.3% of revenue in the comparable period of 2017. This decrease in Managed Transportation revenue as a percent of total revenue was driven by the increases in Transactional revenue per shipment and volume.


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Table of Contents

Transportation costs

Transportation costs for the three months ended September 30, 2018 were $533.6 million, an increase of 26.2% from $422.8 million in the comparable period of 2017. The 7.6% growth in the total number of shipments and the 17.3% increase in carrier rates per load drove the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue decreased to 82.8% for the three months ended September 30, 2018 from 83.0% in the comparable period of 2017, which is due to the increase in revenue per shipment.

Net revenue

Net revenue for the three months ended September 30, 2018 was $111.2 million, an increase of 28.3% from $86.7 million in the comparable period of 2017. The increase in net revenue was driven by the 17.6% increase in revenue per shipment and the 7.6% growth in the total number of shipments. Net revenue margins increased to 17.2% for the three months ended September 30, 2018, from 17.0% in the comparable period of 2017, due to an increase in TL margins.

Operating expenses

Commission expense for the three months ended September 30, 2018 was $33.2 million, an increase of 25.4% from $26.5 million in the comparable period of 2017, due to higher net revenue resulting from increased volume. For the three months ended September 30, 2018, commission expense was 29.8% of net revenue, compared to 30.5% in the comparable period of 2017. The decrease in commission expense as a percentage of net revenue for the three months ended September 30, 2018 was due to the fluctuations in the composition of our net revenue by sales channel type.

Selling, general and administrative expenses for three months ended September 30, 2018 were $52.5 million, an increase of 15.3% from $45.5 million in the comparable period in 2017, due to an increased investment in technology, the growth of our sales force and operating personnel, and acquisition-related transaction costs. As a percentage of net revenue, selling, general and administrative expenses decreased to 47.2% for the three months ended September 30, 2018, from 52.5% in the comparable period of 2017. The decrease in selling, general and administrative expenses as a percent of net revenue is driven by the increase in net revenue.

The contingent consideration fair value adjustment resulted in expense of $0.1 million and $0.3 million for the three months ended September 30, 2018 and 2017, respectively. The expense for both 2018 and 2017 was the result of adjustments made to the fair value of the contingent liabilities due to financial performance of previous acquisition owners and the time value of money. The fair value of the contingent consideration liabilities reflects the updated probabilities and assumptions as of September 30, 2018.

Depreciation expense for the three months ended September 30, 2018 was $6.0 million, an increase of 30.5% from $4.6 million in the comparable period of 2017. The increase in depreciation expense is primarily due to depreciation of internally developed software and computer equipment.

Amortization expense for the three months ended September 30, 2018 was $3.3 million, a decrease of 8.0% from $3.6 million in the comparable period of 2017. The decrease in amortization expense was primarily attributable to the accelerated method of amortization of our acquired customer relationships, along with the complete amortization of previously acquired intangible assets.

Income from operations

Income from operations for the three months ended September 30, 2018 was $16.3 million, compared to $6.3 million in the comparable period of 2017. The increase in income from operations was primarily due to higher net revenue.

Interest expense

Interest expense was $3.8 million for the three months ended September 30, 2018, an increase from $3.7 million in the comparable period of 2017. The interest expense in both years primarily relates to our Notes and the ABL Facility.

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Table of Contents


Income tax expense

We recognized income tax expense of $3.1 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively. Our effective tax rate for the three months ended September 30, 2018 was 24.9%, compared to an effective tax rate of 8.6% in the comparable period of 2017. The difference in our effective tax rate for the three months ended September 30, 2018 from the statutory federal tax rate of 21% was primarily due to state taxes and non-deductible expenses, primarily stock-based compensation. The difference in our effective tax rate for the the three months ended September 30, 2017 from the Company's statutory federal tax rate of 35% was primarily due to a domestic production tax deduction for the 2013 tax year recorded in the third quarter of 2017 and net tax deficiencies related to share-based payment awards.
    
Net income

Net income for the three months ended September 30, 2018 was $9.4 million, compared to $2.4 million in the comparable period of 2017, due to the items previously discussed.

Comparison of the nine months ended September 30, 2018 and 2017

Revenue

Revenue for the nine months ended September 30, 2018 was $1.9 billion, an increase of 33.1% from $1.4 billion in the comparable period of 2017. The increase in revenue was primarily attributable to an increase of 21.8% in revenue per shipment, along with a 9.2% increase in volume.

Revenue from Transactional clients for the nine months ended September 30, 2018 was $1.5 billion, an increase of 32.6% from $1.1 billion in the comparable period of 2017. The increase in Transactional revenue was driven by an increase in both TL and LTL revenue per shipment. Revenue from Transactional clients was 79.0% of our revenue for the nine months ended September 30, 2018, a decrease from 79.2% of our revenue in the comparable period of 2017. The decrease in Transactional revenue as a percent of total revenue was driven by an increase in Managed Transportation volume.

Revenue from Managed Transportation clients for the nine months ended September 30, 2018 was $390.5 million, an increase of 34.7% from $289.8 million in the comparable period of 2017. Revenue from Managed Transportation clients was 21.0% of our revenue for the nine months ended September 30, 2018, an increase from 20.8% of revenue in the comparable period of 2017. This increase was driven by the increase in revenue from existing clients, along with the addition of new clients.

Transportation costs

Transportation costs for the nine months ended September 30, 2018 were $1.5 billion, an increase of 33.5% from $1.2 billion in the comparable period of 2017. The 9.2% growth in the total number of shipments and the 22.2% increase in carrier rates per load drove the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue increased to 82.9% for the nine months ended September 30, 2018 from 82.6% in the comparable period of 2017, primarily due to higher carrier rates.

Net revenue

Net revenue for the nine months ended September 30, 2018 was $317.9 million, an increase of 30.9% from $242.8 million in the comparable period of 2017. The increase in net revenue was driven by the 21.8% increase in revenue per shipment and the 9.2% growth in volume. Net revenue margins decreased to 17.1% for the nine months ended September 30, 2018, from 17.4% in the comparable period of 2017. The decline in margin was due to the 22.2% increase in carrier rates, along with higher growth in our Managed Transportation business.

Operating expenses

Commission expense for the nine months ended September 30, 2018 was $95.7 million, an increase of 30.1% from $73.6 million in the comparable period of 2017, due to higher volume and revenue per shipment. For the nine months ended September 30, 2018 and 2017, commission expense was 30.1% and 30.3%, respectively, of net revenue. The slight decrease in commission expense as a percentage of net revenue for the nine months ended September 30, 2018 was due to the fluctuations in the composition of our net revenue by sales channel type.

24
Table of Contents


Selling, general and administrative expenses for nine months ended September 30, 2018 were $155.0 million, an increase of 14.3% from $135.6 million in the comparable period in 2017, due to an increased investment in technology, the growth of our sales force and operating personnel, and acquisition-related transaction costs. As a percentage of net revenue, selling, general and administrative expenses decreased to 48.7% for the nine months ended September 30, 2018, from 55.8% in the comparable period of 2017. The decrease in selling, general and administrative expenses as a percent of net revenue is driven by the increase in net revenue.

The contingent consideration fair value adjustment resulted in net expense of $0.2 million and $0.6 million for nine months ended September 30, 2018 and 2017, respectively. The net expense for 2018 was the result of adjustments made to the fair value of the contingent liabilities due to financial performance of previous acquisition owners and the time value of money. The net expense for 2017 is the result of adjustments made to the fair value of the contingent assets and liabilities due to financial performance of previous acquisition owners, time value of money and the satisfaction of applicable employee retention criteria. The fair value of the contingent consideration liabilities reflects the updated probabilities and assumptions as of September 30, 2018.

Depreciation expense for the nine months ended September 30, 2018 was $17.4 million, an increase of 29.7% from $13.4 million in the comparable period of 2017. The increase in depreciation expense is primarily due to depreciation of internally developed software and computer equipment.

Amortization expense for the nine months ended September 30, 2018 was $9.8 million, a decrease of 8.9% from $10.7 million in the comparable period of 2017. The decrease in amortization expense was primarily attributable to the accelerated method of amortization of our acquired customer relationships, along with the complete amortization of previously acquired intangible assets.

Income from operations

Income from operations for the nine months ended September 30, 2018 was $39.9 million, compared to $9.0 million in the comparable period of 2017. The increase in income from operations was primarily due to higher net revenue.

Interest expense

Interest expense was $11.3 million for the nine months ended September 30, 2018, an increase from $11.0 million of interest expense in the comparable period of 2017. The interest expense in both periods primarily relates to our Notes and the ABL Facility.

Income tax (expense) benefit

We recognized income tax expense of $6.8 million and income tax benefit of $1.3 million for the nine months ended September 30, 2018 and 2017, respectively. Our effective tax rate for the nine months ended September 30, 2018 was 23.8%, compared to an effective tax rate of (64.1)% in the comparable period of 2017. The difference in our effective tax rate for the nine months ended September 30, 2018 from the statutory federal tax rate of 21% was primarily due to state taxes and an increase in non-deductible expenses, primarily stock-based compensation, offset in part by the impact of certain tax credits. The difference in our effective tax rate for the nine months ended September 30, 2017 from the Company's statutory federal tax rate of 35% was primarily due to a domestic production tax deduction for the 2013 tax year recorded in the third quarter of 2017, the net tax deficiencies related to share-based payment awards, and the effect of the 2017 year to date pre-tax loss.
    
Net income (loss)

Net income for the nine months ended September 30, 2018 was $21.8 million, compared to a net loss of $0.7 million in the comparable period of 2017, due to the items previously discussed.


25
Table of Contents

Liquidity and Capital Resources

As of September 30, 2018, we had $60.5 million in cash and cash equivalents, $154.3 million in working capital and $199.3 million available under our ABL Facility.

Cash provided by operating activities

During the nine months ended September 30, 2018 and 2017, net cash provided by operating activities was $63.0 million and $41.2 million, respectively. We generated $65.1 million and $38.7 million in cash from net income (adjusted for noncash operating items) for the nine months ended September 30, 2018 and 2017, respectively. This cash flow generation was offset by $2.1 million in the current year and increased by $2.6 million in the same period of 2017, due to changes in working capital. These fluctuations in working capital were primarily driven by the timing of payments made and received each year.

Cash used in investing activities

During the nine months ended September 30, 2018 and 2017, net cash used in investing activities was $27.2 million and $14.7 million, respectively. During the nine months ended September 30, 2018, the primary investing activities were the internal development of computer software; purchases of property and equipment, leasehold improvements, and investments; and the acquisition of Freight Management Plus, Inc. ("Freight Management," or "FMP"). During the nine months ended September 30, 2017, the primary investing activities were the purchases of property and equipment, leasehold improvements and the internal development of computer software.

Cash provided by (used in) financing activities

During the nine months ended September 30, 2018 and 2017, net cash provided by financing activities was $1.2 million, net cash used in financing activities was $21.9 million, respectively. During the nine months ended September 30, 2018, the primary financing activities were the payment of contingent consideration and the use of cash to satisfy employee tax withholdings upon the vesting of equity-based awards, offset by the proceeds from the exercise of stock options. During the nine months ended September 30, 2017, the primary financing activities were the purchases of treasury stock, payments and receipt of contingent consideration and the use of cash to satisfy employee tax withholdings upon the vesting of equity-based awards. We also drew $12.0 million and $56.0 million on our ABL Facility during the nine months ended September 30, 2018 and 2017, respectively, all of which was repaid as of September 30, 2018 and 2017.

ABL Facility

On June 1, 2015, we entered into a Revolving Credit and Security Agreement with PNC Bank (the "Credit Agreement"). The Credit Agreement provides for a senior secured revolving credit facility in an initial aggregate principal amount of up to $200 million. Our obligations under the ABL Facility are secured, on a first lien priority basis, by certain working capital assets. We are required to pay a commitment fee in respect of the unutilized commitments under the revolving credit facility.

At September 30, 2018, there was no outstanding balance on the ABL Facility. The issuance of letters of credit under the ABL Facility also reduces available borrowings. At September 30, 2018, there were $0.7 million of letters of credit outstanding. The total draw allowed under the ABL Facility at September 30, 2018, as determined by the working capital assets pledged as collateral, was $200.0 million. After adjusting for the letters of credit, our remaining availability under the ABL Facility at September 30, 2018 was $199.3 million.

On October 23, 2018, we amended the terms of the Credit Agreement with PNC Bank (the "Amended Credit Agreement"), as further described in Note 13 to the consolidated financial statements.

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 material uses 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.

In 2018, we also expect to use $2.9 million to satisfy the semi-annual Notes coupon payment due November 1, 2018, as well as $4 million to $7 million for capital expenditures for the remainder of 2018. 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.

26
Table of Contents


Historically, our average accounts receivable life-cycle has been longer than our average accounts payable life-cycle, 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 depends on the growth of our business.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

The discussion of recent accounting pronouncements in Note 2, Recent Accounting Pronouncements, to the Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q is incorporated herein by reference.

Changes in Critical Accounting Policies

We adopted Accounting Standards Codification Topic 606 Revenue from Contracts with Customers ("ASC Topic 606") on January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC Topic 606, of which prior amounts are not adjusted and continue to be reported in accordance with the accounting standards in effect for those periods. The changes to our revenue recognition policy under the new standard are discussed in Note 4, Revenue, to the Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q is incorporated herein by reference.


27
Table of Contents

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Commodity Risk

We pass through fluctuations in fuel prices to our clients. As a result, we believe that there is no material risk exposure to fluctuations in fuel prices.

Interest Rate Risk

We have exposure to changes in interest rates on our ABL Facility. Borrowings bear interest at one of the following, plus an applicable margin: (1) the federal funds rate, (2) the base commercial lending rate of PNC Bank, or (3) the LIBOR rate, based on the Company's election for each tranche of borrowing. The interest rate on our line of credit fluctuates based on the rates described above. Assuming the $200.0 million ABL Facility was fully drawn, a 1.0% increase in the interest rate selected would increase our annual interest expense by $2.0 million.

Our interest income is sensitive to changes in the general level of U.S. interest rates, in particular because all of our investments are in cash equivalents. Due to the short-term nature of our investments, we believe that there is no material risk exposure.

We do not use derivative financial instruments for speculative trading purposes.

Impact of Inflation

We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material impact on our operations for the nine months ended September 30, 2018 and 2017.


28
Table of Contents

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2018. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2018, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the Company's disclosure controls and procedures were effective at the reasonable assurance level.

Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Based on its evaluation, management concluded that our internal control over financial reporting was effective as of September 30, 2018.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarterly period ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



29
Table of Contents

PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

Management does not believe that the outcome of any of the legal proceedings to which the Company is a party will have a material adverse effect on its financial position or results of operations.

Item 1A.    Risk Factors

There have been no material changes from the risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

As partial consideration for the acquisition of FMP, on July 6, 2018, we issued 25,223 shares of common stock, valued at $29.10 per share, for an aggregate value of $0.7 million (the "Equity Consideration"). See Note 3 to the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q. The Equity Consideration was issued in a private placement subject to exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
 
During the three months ended September 30, 2018, no other unregistered securities were sold by us.

Issuer Purchases of Equity Securities

The table below gives information on a monthly basis regarding purchases made by us of our common stock and the number of shares delivered to us by employees to satisfy the mandatory tax withholding requirement upon vesting of restricted stock during the third quarter of 2018.
Date
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Program (1)
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under Program (1)
7/1/18-7/31/18
 
—

 
$
—

 
—

 
$
30,181,701

8/1/18-8/31/18
 
1,107

 
$
32.25

 
—

 
$
30,181,701

9/1/18-9/30/18
 
1,326

 
$
34.65

 
—

 
$
30,181,701

Total
 
2,433

 
$
33.56

 
—

 
 

(1) On May 1, 2017, the Board of Directors authorized a repurchase program for up to an aggregate of $50 million of the Company's outstanding common stock and Notes prior to its expiration on April 30, 2019. The timing and amount of any repurchases will be determined based on market conditions and other factors, and the program may be discontinued or suspended at any time.

Item 6.    Exhibits
A list of exhibits included as part of this Form 10-Q is set forth in an Exhibit Index.


30
Table of Contents

EXHIBIT INDEX
Number
 
Description
 
 
 
31.1

 
 
 
 
31.2

 
 
 
 
32.1

 
 
 
 
32.2

 
 
 
 
101.INS**

 
XBRL Instance Document
 
 
 
101.SCH**

 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL**

 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF**

 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB**

 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE**

 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
** Submitted electronically with this Quarterly Report on Form 10-Q

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
ECHO GLOBAL LOGISTICS, INC.
 
 
 
 
 
 
Date:
October 25, 2018
 
 
 
/s/ DOUGLAS R. WAGGONER
 
 
 
By:
 
Douglas R. Waggoner
Chairman and Chief Executive Officer
 
 
 
 
 
 
Date:
October 25, 2018
 
 
 
/s/ KYLE L. SAUERS
 
 
 
By:
 
Kyle L. Sauers
Chief Financial Officer


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