Echo Global Logistics Earnings 2020-09-30

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

echo-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________

FORM 10-Q

____________________________________________


☒			Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2020


☐			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)


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common stock, par value $0.0001 per share	ECHO	NASDAQ Global Select Market

____________________________________________

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: ☒ No: ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: ☒ No: ☐

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

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth 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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ☐ No: ☒

As of October 28, 2020, the registrant had 26,607,989 shares of Common Stock, par value $0.0001 per share, outstanding.


		Page

	PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	3

	Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (Unaudited)	3

	Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019	4

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (Unaudited)	5

	Consolidated Statement of Stockholders' Equity for the three and nine months ended September 30, 2020 and 2019 (Unaudited)	6

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26

Item 4.	Controls and Procedures	27

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 6.	Exhibits	29

EXHIBIT INDEX		30

SIGNATURES		31

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)	2020		2019		2020		2019
Revenue	$	691,495	$	561,441	$	1,757,262	$	1,653,300
Costs and expenses:
Transportation costs	591,048		464,460		1,478,864		1,356,949
Selling, general and administrative expenses	80,533		77,722		235,667		238,055
Depreciation and amortization	9,655		9,594		29,251		28,855
Income from operations	10,259		9,665		13,480		29,441



Interest expense	(1,014)		(2,821)		(5,200)		(9,789)
Income before provision for income taxes	9,245		6,844		8,280		19,652
Income tax expense	(2,427)		(2,001)		(3,444)		(6,245)
Net income	$	6,818	$	4,843	$	4,836	$	13,407

Earnings per common share:
Basic	$	0.26	$	0.18	$	0.19	$	0.50
Diluted	$	0.26	$	0.18	$	0.18	$	0.50
Note: Amounts may not foot due to rounding.

See accompanying notes.

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Echo Global Logistics, Inc. and Subsidiaries

Consolidated Balance Sheets


	September 30, 2020		December 31, 2019
(In thousands, except share data)	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	47,579	$	34,626
Accounts receivable, net of allowance for doubtful accounts of $5,271 and $4,255 at September 30, 2020 and December 31, 2019, respectively	432,525		286,989
Income taxes receivable	—		2,473
Prepaid expenses	8,607		8,999
Other current assets	3,026		3,106
Total current assets	491,736		336,193
Noncurrent assets:
Property and equipment, net of accumulated depreciation of $149,759 and $130,320 at September 30, 2020 and December 31, 2019, respectively	52,689		58,620
Goodwill	309,589		309,589
Intangible assets, net of accumulated amortization of $89,939 and $81,656 at September 30, 2020 and December 31, 2019, respectively	89,479		97,762
Operating lease assets	17,315		19,638
Other noncurrent assets	3,653		4,863
Total noncurrent assets	472,724		490,473
Total assets	$	964,460	$	826,666

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	330,365	$	187,524
Due to seller, current	429		937
Accrued expenses	45,524		35,229
Other current liabilities	4,125		6,719
Taxes payable	1,171		—

Total current liabilities	381,614		230,409
Noncurrent liabilities:
Long-term debt, net	143,934		—
Convertible notes, net	—		156,298
Due to seller, noncurrent	—		770
Other noncurrent liabilities	650		641
Deferred income taxes	23,132		23,761
Noncurrent operating lease liabilities	28,657		31,475
Total noncurrent liabilities	196,373		212,945
Total liabilities	577,987		443,353
Stockholders' equity:
Common stock, par value $0.0001 per share, 100,000,000 shares authorized, 31,718,589 shares issued and 25,951,489 shares outstanding at September 30, 2020; 31,507,247 shares issued and 26,229,809 shares outstanding at December 31, 2019	3		3
Treasury stock, 5,767,100 and 5,277,438 shares at September 30, 2020 and December 31, 2019, respectively	(118,679)		(109,239)
Additional paid-in capital	364,364		356,600
Retained earnings	140,784		135,948
Total stockholders' equity	386,473		383,312
Total liabilities and stockholders' equity	$	964,460	$	826,666
Note: Amounts may not foot due to rounding.

See accompanying notes.

Table of Contents

Echo Global Logistics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended September 30,
(In thousands)	2020		2019
Operating activities
Net income	$	4,836	$	13,407
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	(513)		2,370
Noncash stock compensation expense	9,225		7,762
Noncash interest expense	1,711		5,762
Change in contingent consideration due to seller	(325)		543


Depreciation and amortization	29,251		28,855
Change in assets:
Accounts receivable	(145,536)		22,674
Income taxes receivable	3,635		3,015
Prepaid expenses and other assets	505		(386)
Change in liabilities:
Accounts payable	142,497		(5,243)
Accrued expenses and other liabilities	8,586		(9,363)
Payment of contingent consideration in excess of amounts established in purchase accounting	(507)		(1,097)
Net cash provided by operating activities	53,367		68,298
Investing activities
Purchases of property and equipment	(15,144)		(18,854)
Payments for acquisitions, net of cash acquired	—		(33)
Net cash used in investing activities	(15,144)		(18,887)
Financing activities


Payments of contingent consideration due to seller	(447)		(1,206)
Proceeds from exercise of stock options	405		37
Employee tax withholdings related to net share settlements of equity-based awards	(1,676)		(2,082)
Purchases of treasury stock	(10,349)		(26,108)
Purchases of Convertible Notes	(88,961)		(33,915)
Settlement of Convertible Notes	(69,242)		—


Proceeds from borrowing on ABL facility	170,000		25,000
Repayments of amounts borrowed on ABL facility	(25,000)		(25,000)




Net cash used in financing activities	(25,269)		(63,275)
Increase (Decrease) in cash and cash equivalents	12,953		(13,863)
Cash and cash equivalents, beginning of period	34,626		40,281
Cash and cash equivalents, end of period	$	47,579	$	26,418
Note: Amounts may not foot due to rounding.


Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	3,967	$	3,172
Cash paid during the period for income taxes	303		4,238
Cash received during the period for income taxes refunded	$	—	$	3,348

See accompanying notes.

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Echo Global Logistics, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(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, 2019	31,507,247	$	3	(5,277,438)	$	(109,239)	$	356,600	$	135,948	$	383,312
Share compensation expense	—	—		—	—		4,608		—		4,608
Exercise of stock options	32,000	0		—	—		381		—		381
Common stock issued for vested restricted stock	247,224	0		—	—		(0)		—		—



Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of restricted stock	(82,802)	(0)		—	—		(1,541)		—		(1,541)


Repurchase of convertible notes, net of deferred taxes	—	—		—	—		(190)		—		(190)
Purchases of treasury stock	—	—		(489,662)	(9,440)		—		—		(9,440)

Net loss	—	—		—	—		—		(2,933)		(2,933)
Balance at March 31, 2020	31,703,669	3		(5,767,100)	(118,679)		359,857		133,015		374,197
Share compensation expense	—	—		—	—		2,319		—		2,319
Common stock issued for vested restricted stock	8,105	0		—	—		(0)		—		—



Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of restricted stock	(2,584)	(0)		—	—		(51)		—		(51)



Net income	—	—		—	—		—		951		951
Balance at June 30, 2020	31,709,190	3		(5,767,100)	(118,679)		362,126		133,967		377,417
Share compensation expense	—	—		—	—		2,298		—		2,298
Exercise of stock options	2,000	0		—	—		24		—		24
Common stock issued for vested restricted stock	10,528	0		—	—		(0)		—		—
Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of restricted stock	(3,129)	0		—	—		(84)		—		(84)
Net income	—	—		—	—		—		6,818		6,818
Balance at September 30, 2020	31,718,589	$	3	(5,767,100)	$	(118,679)	$	364,364	$	140,784	$	386,473
Note: Amounts may not foot due to rounding.

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Echo Global Logistics, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(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, 2018	31,345,220	$	3	(3,947,460)	$	(79,571)	$	348,397	$	121,102	$	389,932
Share compensation expense	—	—		—	—		2,806		—		2,806
Exercise of stock options	3,000	0		—	—		37		—		37
Common stock issued for vested restricted stock	215,071	0		—	—		(0)		—		—
Common stock issued for vested performance shares	13,267	0		—	—		(0)		—		—


Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of restricted stock	(81,936)	(0)		—	—		(1,978)		—		(1,978)


Repurchase of convertible notes, net of deferred taxes	—	—		—	—		36		—		36
Purchases of treasury stock	—	—		(452,350)	(10,629)		—		—		(10,629)

Net income	—	—		—	—		—		3,497		3,497
Balance at March 31, 2019	31,494,622	3		(4,399,810)	(90,199)		349,298		124,599		383,700
Share compensation expense	—	—		—	—		2,425		—		2,425

Common stock issued for vested restricted stock	5,789	0		—	—		(0)		—		—



Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of restricted stock	(2,252)	(0)		—	—		(49)		—		(49)


Repurchase of convertible notes, net of deferred taxes	—	—		—	—		66		—		66
Purchases of treasury stock	—	—		(701,773)	(15,480)		—		—		(15,480)

Net income	—	—		—	—		—		5,067		5,067
Balance at June 30, 2019	31,498,159	3		(5,101,583)	(105,679)		351,739		129,666		375,729
Share compensation expense	—	—		—	—		2,531		—		2,531
Common stock issued for vesting of restricted stock	7,019	0		—	—		(0)		—		—
Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of share-based awards	(2,551)	0		—	—		(55)		—		(55)
Net income	—	—		—	—		—		4,843		4,843
Balance at September 30, 2019	31,502,627	$	3	(5,101,583)	$	(105,679)	$	354,216	$	134,509	$	383,049
Note: Amounts may not foot due to rounding.

See accompanying notes.

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Echo Global Logistics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

Nine Months Ended September 30, 2020 and 2019

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, 2020 are not necessarily indicative of the results expected for the full year 2020. 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, 2019.

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 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.

Adoption of ASC Topic 326, "Financial Instruments - Credit Loss"

On January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses Topic 326, using the prospective approach. Results for reporting periods beginning on or after January 1, 2020 are presented under Topic 326. Prior period amounts are not adjusted and continue to be reported in accordance with the accounting standards in effect for those periods.

The Company is exposed to potential credit losses related to its trade receivables, which the Company categorizes as either Transactional or Managed Transportation. For its Transactional trade receivables, the Company utilizes historical loss information to develop an estimate for future expected credit losses. For its Managed Transportation trade receivables, the Company estimates its potential future expected credit losses on a customer specific basis. The Company considers current economic conditions and forecasts when determining its credit loss estimate based on the aging schedule. The Company transacts with customers in a variety of industries and adjusts its estimate accordingly if it becomes aware of financial difficulties for a specific customer.

The Company extends credit to certain clients as part of its business model. These clients are subject to an approval process prior to any extension of credit or increase in their current credit limit. The Company reviews each credit request and considers, among other factors, payment history, current billing status, recommendations by various rating agencies and capitalization. Clients that satisfy the credit review may receive a line of credit or an increase in their existing credit amount. The Company believes this review and approval process helps mitigate the risk of client defaults on extensions of credit and any potential credit losses. Additionally, the Company maintains a credit insurance policy for certain accounts.

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Echo Global Logistics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

Nine Months Ended September 30, 2020 and 2019

The following table summarizes the components of the allowance as of September 30, 2020 (in thousands):


	Allowance for Doubtful Accounts
Balance at December 31, 2019	$	4,255
Provision, charged to expense	2,101
Write-offs	(2,476)
Recoveries	1,391
Balance at September 30, 2020	$	5,271

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 values due to seller liabilities are determined based on the likelihood of the Company making contingent earn-out payments (see Note 4). The fair value of the liability component of the Notes (as defined in Note 11) was determined using the discounted cash flow analysis discussed in Note 11.

2. Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which replaces the incurred loss methodology previously employed to measure credit losses for most financial assets and requires the use of a forward-looking expected loss model. This update requires financial assets to be measured at amortized costs less a reserve and equal to the net amount expected to be collected.

The Company adopted this standard on January 1, 2020 using the prospective approach. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. At September 30, 2020, the Company reported $432.5 million of accounts receivable, net of allowance of $5.3 million. Changes in the allowance were not material for three and nine months ended September 30, 2020. The Company fully describes the adoption and impact of this standard in Note 1. As part of the adoption of this standard, the Company implemented changes to its accounting policies, practices and internal controls over financial reporting.

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 was effective for annual periods beginning after December 15, 2019. The Company adopted the standard on January 1, 2020. The adoption of this new standard did not have a material impact on the Company's consolidated financial statements.

Recently issued accounting pronouncements not yet adopted

In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options, which is intended to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The guidance is effective for interim and annual periods beginning after December 15, 2021. Early adoption is permitted. The guidance is to be applied using either a full retrospective or modified retrospective method. The Company anticipates that the adoption of this guidance will not have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides companies with optional guidance, including expedients and exceptions for applying U.S. GAAP to contracts and other transactions affected by reference rate reform, such as the London Interbank Offered Rate (LIBOR). This new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company is evaluating the effects that the adoption of this guidance will have on its disclosures.

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Echo Global Logistics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

Nine Months Ended September 30, 2020 and 2019

3. Revenue

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-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 services 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. For this performance obligation, revenue is recognized gross as the Company is the principal in these transactions, and is recognized as the Managed Transportation client's shipment travels from origin to destination on a relative transit time basis. 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):


	Three Months Ended September 30,				Nine Months Ended September 30,
Client Type	2020		2019		2020		2019
Transactional	$	533,853	$	433,319	$	1,359,021	$	1,273,687
Managed Transportation	157,641		128,123		398,241		379,613
Revenue	$	691,495	$	561,441	$	1,757,262	$	1,653,300

Note: Amounts may not foot due to rounding.

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):


	Three Months Ended September 30,				Nine Months Ended September 30,
Mode	2020		2019		2020		2019
Truckload	$	488,158	$	368,859	$	1,208,131	$	1,085,431
Less than truckload	175,460		167,604		474,962		487,590
Other revenue	27,876		24,978		74,170		80,279
Revenue	$	691,495	$	561,441	$	1,757,262	$	1,653,300

Note: Amounts may not foot due to rounding.

Commissions

The Company recognizes commission expense when incurred because the amortization period is less than one year. Commission expense is recognized on a relative transit time basis, which aligns with the Company's revenue recognition policy.

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Echo Global Logistics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

Nine Months Ended September 30, 2020 and 2019

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.

4. 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 due to seller liabilities at September 30, 2020 and December 31, 2019 is $0.4 million and $1.7 million, respectively. 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.

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 2% to 3%. 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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Echo Global Logistics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

Nine Months Ended September 30, 2020 and 2019

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, 2020 and December 31, 2019 (in thousands):


	Fair Value Measurements as of September 30, 2020
	Total		Level 1	Level 2	Level 3
Liabilities:
Contingent consideration due to seller	$	(429)	—	—	$	(429)


	Fair Value Measurements as of December 31, 2019
	Total		Level 1	Level 2	Level 3
Liabilities:
Contingent consideration due to seller	$	(1,707)	—	—	$	(1,707)

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, 2019	$	(1,707)

Change in fair value of contingent consideration due to seller	325
Payment of contingent consideration due to seller	953
Balance at September 30, 2020	$	(429)

For the three months ended September 30, 2020 and 2019, the Company recognized a benefit of $279 thousand and incurred expense of $53 thousand, respectively. For the nine months ended September 30, 2020 and 2019, the Company recognized a benefit of $325 thousand and incurred expense of $543 thousand, respectively. These changes in fair value resulted from using revised forecasts that took into account the most recent performance of each acquired business.

During the nine months ended September 30, 2020 and 2019, the Company made contingent earn-out payments of $1.0 million and $2.3 million, respectively, to the sellers of businesses acquired by the Company.

5. Intangibles and Goodwill

The balance of goodwill was $309.6 million as of September 30, 2020 and December 31, 2019, as no changes occurred during the period.

The following is a summary of amortizable intangible assets as of September 30, 2020 and December 31, 2019 (in thousands):


	September 30, 2020						December 31, 2019
	Cost		Accumulated Amortization		Net		Cost		Accumulated Amortization		Net
Customer relationships	$	150,239	$	(74,352)	$	75,887	$	150,239	$	(67,317)	$	82,922
Carrier relationships	18,300		(5,741)		12,559		18,300		(4,934)		13,366
Non-compete agreements	5,239		(4,206)		1,033		5,239		(3,765)		1,474
Trade names	5,640		(5,640)		—		5,640		(5,640)		—
	$	179,418	$	(89,939)	$	89,479	$	179,418	$	(81,656)	$	97,762

Note: Amounts may not foot due to rounding.

Table of Contents

Echo Global Logistics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

Nine Months Ended September 30, 2020 and 2019

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 $2.7 million and $2.8 million for the three months ended September 30, 2020 and 2019, respectively. Amortization expense was $8.3 million and $9.0 million for the nine months ended September 30, 2020 and 2019, respectively.

The estimated amortization expense for the next five years and thereafter is as follows (in thousands):


Remainder of 2020	$	2,691
2021	10,362
2022	10,005
2023	9,501
2024	8,897
Thereafter	48,023
Total	$	89,479

6. Accrued Expenses and Other Liabilities

The components of accrued expenses at September 30, 2020 and December 31, 2019 were as follows (in thousands):


	September 30, 2020		December 31, 2019
Accrued compensation	$	30,025	$	21,192
Accrued rebates	2,855		3,119
Accrued employee benefits	5,034		4,235
Accrued professional service fees	1,533		1,395
Accrued interest	177		881
Other	5,900		4,407
Total accrued expenses	$	45,524	$	35,229

Note: Amounts may not foot due to rounding.

The other current liabilities of $4.1 million and $6.7 million at September 30, 2020 and December 31, 2019, respectively, consist primarily of the current portion of the Company's operating lease liabilities. The other noncurrent liabilities of $0.7 million and $0.6 million at September 30, 2020 and December 31, 2019, respectively, consist of the long-term portion of the Company's uncertain tax liability.

7. Income Taxes

The following table shows the Company's effective income tax rate for the three and nine months ended September 30, 2020 and 2019 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Income before provision for income taxes	$	9,245		$	6,844		$	8,280		$	19,652
Income tax expense	$	(2,427)		$	(2,001)		$	(3,444)		$	(6,245)
Effective tax rate	26.3		%	29.2		%	41.6		%	31.8		%

The difference in the Company's effective tax rate for each of the three and nine months ended September 30, 2020 and 2019 from the Company's statutory federal tax rate of 21% was primarily due to state taxes; non-deductible expenses, primarily executive stock-based compensation; offset in part by the impact of certain tax credits.

Table of Contents

Echo Global Logistics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

Nine Months Ended September 30, 2020 and 2019

8. Earnings Per Share

Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share is calculated by dividing net income by the weighted average shares outstanding plus share equivalents that would arise from the exercise of share options, and the vesting of restricted stock, restricted stock units and performance shares. The computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2020 and 2019 is as follows (in thousands, except share and per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Numerator:
Net income	$	6,818	$	4,843	$	4,836	$	13,407
Denominator:
Denominator for basic earnings per common share - weighted-average shares	25,945,114		26,398,136		25,963,524		26,778,897
Effect of dilutive securities:
Employee stock awards	509,145		85,837		321,805		131,675
Denominator for dilutive earnings per common share	26,454,259		26,483,973		26,285,329		26,910,572
Basic earnings per common share	$	0.26	$	0.18	$	0.19	$	0.50
Diluted earnings per common share	$	0.26	$	0.18	$	0.18	$	0.50

For the three and nine months ended September 30, 2020, the Company excluded in the aggregate 967 and 58,070 unvested restricted stock, restricted stock units, and performance and market-based shares, respectively, from the calculation of diluted earnings per common share because the effect was anti-dilutive. There were no employee stock options excluded from calculation of diluted earnings per common share.

For the three and nine months ended September 30, 2019, there were no unvested performance and market-based shares, no employee stock options and no unvested restricted stock excluded from the calculation of diluted earnings per common share.

As of September 30, 2020, the Notes (as defined in Note 11) were fully settled and did not have a dilutive impact on diluted earnings per common share. As of September 30, 2019, none of the conditions allowing holders of the Notes to convert were met and no conversion spread existed. As such, the Notes did not have a dilutive impact on diluted earnings per common share for the three and nine months ended September 30, 2019.

9. Stock-Based Compensation Plans

The Company recorded $2.3 million and $9.2 million in total stock-based compensation expense with corresponding income tax benefits of $0.6 million and $2.3 million for the three and nine months ended September 30, 2020, respectively. For the three and nine months ended September 30, 2019, the Company recorded $2.5 million and $7.8 million in total stock-based compensation expense with corresponding income tax benefits of $0.6 million and $1.9 million, respectively.

During each of the nine months ended September 30, 2020 and 2019, the Company did not grant any stock options.

The Company granted 3,069 and 379,852 shares of restricted stock to various employees during the nine months ended September 30, 2020 and 2019, respectively.

The Company granted 381,759 restricted stock units to various employees during the nine months ended September 30, 2020. There were no restricted stock units granted during the nine months ended September 30, 2019.

The Company has a performance and market-based stock incentive plan for certain executives with vesting requirements based on specific financial and market-based performance measurements. The Company granted 139,191 and 105,543 shares of performance and market-based stock during the nine months ended September 30, 2020 and 2019, respectively.

Table of Contents

Echo Global Logistics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

Nine Months Ended September 30, 2020 and 2019

10. 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.

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 appealed the assessment further, and on July 23, 2020, received an unfavorable decision from the state tax board. The Company continues to believe the assessment is without merit and will continue to defend its position through the judicial court system. The Company estimates that the additional potential liability related to this matter for the remaining open tax periods is between $3.5 million and $4.5 million, including potential penalties and interest. The Company has not recorded any potential loss related to this matter as of September 30, 2020.

11. Long-Term Debt

ABL Facility

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 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

Price	23.13	EPS	1
Shares	27	P/E	31
MCap	622	P/FCF	9
Net Debt	128	EBIT	27
TEV	751	TEV/EBIT	28
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-09-30	Filed 2020-10-29
10-Q	2020-06-30	Filed 2020-07-29
10-Q	2020-03-31	Filed 2020-04-23
10-K	2019-12-31	Filed 2020-02-28
10-Q	2019-09-30	Filed 2019-10-25
10-Q	2019-06-30	Filed 2019-07-25
10-Q	2019-03-31	Filed 2019-04-25
10-K	2018-12-31	Filed 2019-02-22
10-Q	2018-09-30	Filed 2018-10-25
10-Q	2018-06-30	Filed 2018-07-26
10-Q	2018-03-31	Filed 2018-04-26
10-K	2017-12-31	Filed 2018-02-27
10-Q	2017-09-30	Filed 2017-10-26
10-Q	2017-06-30	Filed 2017-07-28
10-Q	2017-03-31	Filed 2017-04-27
10-K	2016-12-31	Filed 2017-02-24
10-Q	2016-09-30	Filed 2016-10-27
10-Q	2016-06-30	Filed 2016-07-28
10-Q	2016-03-31	Filed 2016-04-29
10-K	2015-12-31	Filed 2016-02-26
10-Q	2015-09-30	Filed 2015-10-30
10-Q	2015-06-30	Filed 2015-08-07
10-Q	2015-03-31	Filed 2015-05-08
10-K	2014-12-31	Filed 2015-02-26
10-Q	2014-09-30	Filed 2014-10-30
10-Q	2014-06-30	Filed 2014-07-31
10-Q	2014-03-31	Filed 2014-05-01
10-K	2013-12-31	Filed 2014-02-28
10-Q	2013-09-30	Filed 2013-11-01
10-Q	2013-06-30	Filed 2013-08-02
10-Q	2013-03-31	Filed 2013-05-03
10-K	2012-12-31	Filed 2013-03-15
10-Q	2012-09-30	Filed 2012-11-01
10-Q	2012-06-30	Filed 2012-08-02
10-Q	2012-03-31	Filed 2012-05-03
10-K	2011-12-31	Filed 2012-03-07
10-Q	2011-09-30	Filed 2011-11-04
10-Q	2011-06-30	Filed 2011-08-02
10-Q	2011-03-31	Filed 2011-05-05
10-K	2010-12-31	Filed 2011-03-11
10-Q	2010-09-30	Filed 2010-11-08
10-Q	2010-06-30	Filed 2010-08-13
10-Q	2010-03-31	Filed 2010-05-14
10-K	2009-12-31	Filed 2010-03-17

8-K	2020-10-28
8-K	2020-10-05
8-K	2020-07-31
8-K	2020-07-22
8-K	2020-06-12
8-K	2020-04-22
8-K	2020-02-05
8-K	2020-01-24
8-K	2019-10-23
8-K	2019-07-24
8-K	2019-06-14
8-K	2019-04-30
8-K	2019-04-24
8-K	2019-02-06
8-K	2018-11-01
8-K	2018-10-24
8-K	2018-10-23
8-K	2018-09-10
8-K	2018-07-25
8-K	2018-06-15
8-K	2018-04-25
8-K	2018-02-07

EX-31.1	echo-2020930x10qxex311xu.htm
EX-31.2	echo-2020930x10qxex312xu.htm
EX-32.1	echo-2020930x10qxex321xu.htm
EX-32.2	echo-2020930x10qxex322xu.htm

ECHO 10Q Quarterly Report

Echo Global Logistics Earnings 2020-09-30