ECHO GLOBAL LOGISTICS, INC. 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 could have on the Company's business and financial results, 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 endedDecember 31, 2020 . 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. In addition, the risk relating to the Company's Agreement and Plan of Merger (the "Merger Agreement") entered into onSeptember 9, 2021 by and amongEinstein Midco, LLC , aDelaware limited liability company ("Parent"),Einstein Merger Sub, Inc. , aDelaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and the Company, providing for the merger of Merger Sub with and into the Company (the "Merger") with the Company surviving the Merger as a wholly owned subsidiary of Parent, including among others, our ability to consummate the transaction, including on the terms of the Merger Agreement, on the anticipated timeline, and/or with the required stockholder and regulatory approvals should be considered. 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. During 2020, due to the ongoing COVID-19 pandemic, we introduced a number of special initiatives to safeguard the health and safety of our employees, including a remote work plan. Most of our employees have been working remotely sinceMarch 2020 . We continue to evaluate our return to office plans, with the health and safety of our employees being our top priority. Management continues to evaluate the impact of the ongoing COVID-19 pandemic. While these disruptions did not have a significant impact on our results as ofSeptember 30, 2021 , we are closely monitoring the impact of the COVID-19 global outbreak, and there remains significant uncertainty related to the public health situation globally. Proposed Merger Agreement OnSeptember 9, 2021 , the Company entered into a definitive agreement to be acquired by funds managed byThe Jordan Company, L.P. ("TJC"), a global private equity firm. The Merger Agreement by and among Parent, Merger Sub and the Company, provides for the Merger with the Company surviving the Merger as a wholly owned subsidiary of Parent. Under the terms of the Merger Agreement, each Echo stockholders' share will be converted into the right to receive cash in an amount equal to$48.25 without interest thereon. The transaction is subject to the approval of the Company's stockholders, as well as other customary closing conditions, including required regulatory approvals. The parties expect to close the transaction during the fourth quarter of 2021. 17
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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) 2021 2020 2021 2020
Consolidated statements of operations data:
Revenue $ 985,590
591,048 2,325,553 1,478,864
Operating expenses:
Commissions 40,507 29,789 117,596 83,628
Selling, general and administrative expenses 63,663 51,022 185,523 152,364
Contingent consideration expense (income) - (279) 647 (325)
Depreciation and amortization 8,892 9,655 26,277 29,251
Total operating expenses 113,061 90,188 330,043 264,918
Income from operations 26,223 10,259 65,321 13,480
Interest expense (638) (1,014) (2,070) (5,200)
Income before provision for income taxes 25,585 9,245 63,250 8,280
Income tax expense (6,659) (2,427) (15,761) (3,444)
Net income $ 18,925 Basic$ 0.72 $ 0.26 $ 1.82$ 0.19 Diluted$ 0.70 $ 0.26 $ 1.77$ 0.18
Shares used in per share calculations (in thousands):
Basic 26,186 25,945 26,136 25,964 Diluted 27,001 26,454 26,767 26,285 Note: Amounts may not foot due to rounding. (1) Transportation costs excludes internal use software depreciation of$4.1 million and$5.0 million for three months endedSeptember 30, 2021 and 2020, respectively; and$11.8 million and$14.7 million for nine months endedSeptember 30, 2021 and 2020, respectively. Internal use depreciation is included in depreciation expense. Non-GAAP Financial Measures Adjusted gross profit and adjusted gross profit margin are non-GAAP measures used by management in its financial and operational decision-making and evaluation of overall operating performance. Adjusted gross profit is calculated as gross profit adjusted to exclude internal use software depreciation. It also represents revenue minus transportation costs. Adjusted gross profit margin is adjusted gross profit divided by revenue. Adjusted gross profit and adjusted gross profit margin are non-GAAP measures of profitability and are useful measures of the Company's ability to profitably source and sell transportation services for which the freight is transported by third-party carriers. Management considers these measures to be important performance measurements of our success in the marketplace. Adjusted gross profit and adjusted gross profit margin may be different from similar measures used by other companies. Adjusted gross profit and adjusted gross profit margin should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. Below are reconciliations of adjusted gross profit to gross profit, the most directly comparable GAAP measure, and adjusted gross profit margin to gross profit margin, the most directly comparable GAAP measure: 18
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Three Months Ended September 30, Nine Months Ended September 30,
(Unaudited, in thousands) 2021 2020 2021 2020
Revenue $ 985,590 $ 691,495 $ 2,720,916 $ 1,757,262
Transportation costs 846,306 591,048 2,325,553 1,478,864
Internal use software depreciation 4,105 4,958 11,844 14,653
Gross profit 135,179 95,488 383,519 263,746
Gross profit margin 13.7 % 13.8 % 14.1 % 15.0 %
Add: Internal use software depreciation 4,105 4,958 11,844 14,653
Adjusted gross profit $ 139,284 $ 100,446 $ 395,364 $ 278,399
Adjusted gross profit margin 14.1 % 14.5 % 14.5 % 15.8 %
Note: Amounts may not foot due to rounding.
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 for nine months ended
September 30, 2021 was $2.7 billion , an increase of 54.8%, from $1.8 billion in
the comparable period of 2020.
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 and may apply to one or more modes used by the client. In several
cases, we provide substantially all of a Managed Transportation client's
transportation and logistics requirements. On a per client basis, our Managed
Transportation relationships typically generate higher dollar amounts and volume
than our Transactional relationships. For the nine months ended September 30,
2021 and 2020, Transactional clients accounted for 77.0% and 77.3% of our
revenue, respectively, and Managed Transportation clients accounted for 23.0%
and 22.7% 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 also 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, 2021 , TL accounted for 73.5% of our
revenue, LTL accounted for 23.1% of our revenue and other transportation modes
accounted for 3.4% of our revenue. For the nine months ended September 30, 2020 ,
TL accounted for 68.8% of our revenue, LTL accounted for 27.0% of our revenue
and other transportation modes accounted for 4.2% of our revenue.
The transportation industry has historically been subject to seasonal sales
fluctuations as shipments generally are lower during and after the winter
holiday season because many companies ship goods and stock inventories prior to
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
We act primarily as a service provider to add value and expertise in the
procurement and execution of brokerage and transportation management 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. Our transportation costs consist primarily
of the direct cost of transportation paid to the carrier.
Gross profit and Adjusted gross profit
For the nine months ended September 30, 2021 , gross profit was $383.5 million ,
an increase of 45.4% from $263.7 million in 2020 as the impact of higher revenue
was largely offset by an increase in transportation costs. Adjusted gross profit
for the nine months ended September 30, 2021 and 2020 was $395.4 million and
$278.4 million , respectively, reflecting an increase of 42.0% in 2021. Adjusted
gross profit is a non-GAAP measure of profitability equal to gross profit
adjusted to exclude internal
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use software depreciation. It also represents revenue minus transportation
costs. Adjusted gross profit margin is calculated as adjusted gross profit (as
previously defined) divided by revenue.
Adjusted gross profit is a non-GAAP measure and is a useful measure of the
Company's ability to profitably source and sell transportation services for
which the freight is transported by third-party carriers. As such, discussion of
the Company's results and its profitability of operations often center on
changes in its adjusted gross profit. Management considers this measure to be an
important performance measurement of our success in the marketplace. Our
transportation costs are typically lower for an LTL shipment than for a TL
shipment, while our adjusted gross profit 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 adjusted
gross profit. The discussion of our results of operations below focuses on
changes in our expenses as a percentage of adjusted gross profit. See the
"Non-GAAP financial measures" in Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
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 adjusted gross profit we collect from the clients for which such sales
personnel have primary responsibility. For the nine months ended September 30,
2021 and 2020, our commission expense was $117.6 million and $83.6 million ,
respectively. Commission expense decreased to 29.7% of our adjusted gross profit
as of September 30, 2021 , as compared to 30.0% in the prior year. The percentage
of adjusted gross profit paid as commissions will vary depending on the type of
client, composition of the sales team and mode of transportation. TL shipments
typically have higher commission percentages than other modes. Commission
expense, stated as a percentage of adjusted gross profit, could increase or
decrease in the future depending on the composition and sources of our revenue
growth and continued automation initiatives.
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 and
other general and administrative expenses. For the nine months ended
September 30, 2021 and 2020, our selling, general and administrative expenses
were $185.5 million and $152.4 million , respectively. The expenses include $2.5
million transaction costs related to our proposed merger for the nine months
ended September 30, 2021 .
Our contingent consideration expense (income) is the change in the fair value of
our contingent consideration liabilities. The contingent consideration
liabilities presented on our consolidated balance sheets reflect the fair value
of expected earn-out payments that may be paid to the sellers of certain
acquired businesses upon the achievement of certain performance measures. The
fair values of the contingent consideration 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, 2021 , we recorded an expense of $0.6
million , and for nine months ended September 30, 2020 we recorded an income of
$324.6 thousand , due to fair value adjustments to our contingent consideration
liabilities.
Our depreciation expense is primarily attributable to depreciation of computer
hardware and software, equipment, leasehold improvements, furniture and fixtures
and internal use software. For the nine months ended September 30, 2021 and
2020, depreciation expense was $18.5 million and $21.0 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, 2021 and 2020, amortization expense was $7.8 million and $8.3
million , respectively.
Interest expense
For nine months ended September 30, 2021 , the interest expense included in our
consolidated statements of operations consists of the interest expense related
to our ABL Facility. For nine months ended September 30, 2020 , the interest
expense included in our consolidated statements of operations consists of the
interest expense related to our 2.50% convertible senior notes due 2020 issued
in May 2015 (the "Notes"), the interest expense related to our ABL Facility and
the recognized loss on extinguishment of debt upon our repurchase of the Notes.
On May 1, 2020 , the Company paid the remaining outstanding
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principal balance of the Notes and accrued interest. In October 2018 , we entered
into Amendment No. 2 to the ABL Facility (the "Amended ABL Facility") which
provides for a senior secured revolving credit facility in an initial aggregate
principal amount of up to $350 million . We amortized the debt discount and
issuance costs related to the Notes over the 5-year life of the Notes using the
effective interest method. We amortize the issuance costs related to our ABL
Facility and the Amended ABL Facility over the remaining 5-year life of the
Amended ABL 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 $2.1 million and $5.2
million for the nine months ended September 30, 2021 and 2020, respectively.
Comparison of the three months ended September 30, 2021 and 2020
Revenue
Revenue for the three months ended September 30, 2021 was $985.6 million , an
increase of 42.5% from $691.5 million in the comparable period of 2020. The
increase in revenue was primarily attributable to an increase of 33.4% in
revenue per shipment, along with an increase of 6.9% in volume.
Revenue from Transactional clients for the three months ended September 30, 2021
was $761.0 million , an increase of 42.5% from $533.9 million in the comparable
period of 2020. The increase in Transactional revenue was primarily driven by an
increase in both TL and LTL revenue per shipment and TL volume. Revenue from
Transactional clients was 77.2% of our revenue for the three months ended
September 30, 2021 and 2020.
Revenue from Managed Transportation clients for the three months ended
September 30, 2021 was $224.6 million , an increase of 42.5% from $157.6 million
in the comparable period of 2020. The increase in Managed Transportation revenue
was driven by an increase in both TL and LTL revenue per shipment and volume.
Revenue from Managed Transportation clients was 22.8% of our revenue for the
three months ended September 30, 2021 and 2020.
Transportation costs
Transportation costs for the three months ended September 30, 2021 was
$846.3 million , an increase of 43.2% from $591.0 million in the comparable
period of 2020. Our transportation costs as a percentage of revenue increased to
85.9% for the three months ended September 30, 2021 from 85.5% in the comparable
period of 2020. The increase in transportation costs was driven by a 34.0%
increase in carrier rates per shipment and a 6.9% increase in total number of
shipments.
Gross profit and Adjusted gross profit
Gross profit for the three months ended September 30, 2021 was $135.2 million ,
an increase of 41.6% from $95.5 million in the comparable period of 2020. The
increase in gross profit was primarily due to higher revenue and a decrease in
internal use software depreciation, which was offset by an increase in
transportation costs. Adjusted gross profit for the three months ended
September 30, 2021 was $139.3 million , an increase of 38.7% from $100.4 million
in the comparable period of 2020. The increase in adjusted gross profit was
primarily driven by an increase of 29.7% in adjusted gross profit per shipment
and an increase of 6.9% in total number of shipments. Adjusted gross profit
margins decreased to 14.1% for the three months ended September 30, 2021 , from
14.5% in the comparable period of 2020, due to lower TL and LTL margins.
Operating expenses
Commission expense for the three months ended September 30, 2021 was
$40.5 million , an increase of 36.0% from $29.8 million in the comparable period
of 2020, due to higher adjusted gross profit. For the three months ended
September 30, 2021 , commission expense was 29.1% of adjusted gross profit,
compared to 29.7% in the comparable period of 2020.
Selling, general and administrative expenses for three months ended
September 30, 2021 was $63.7 million , an increase of 24.8% from $51.0 million in
the comparable period in 2020. The increase was the result of higher headcount,
incentive compensation, stock compensation expense, and $2.5 million transaction
costs related to our proposed merger.
On July 26, 2021 , the final earn-out payment was made related to the FMP
acquisition. As such, no contingent consideration fair value adjustment was
required as of September 30, 2021 . The contingent consideration fair value
adjustment resulted in an income of $0.3 million for the three months ended
September 30, 2020 .
Depreciation expense for the three months ended September 30, 2021 was
$6.3 million , a decrease of 9.2% from $7.0 million in the comparable period of
2020. The decrease in depreciation expense is primarily attributable to the
timing of assets placed into service.
Amortization expense for the three months ended September 30, 2021 was $2.6
million , a decrease of 4.5% from $2.7 million in the comparable period of 2020.
The decrease in amortization expense was primarily attributable to the complete
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amortization of a few of our previously acquired intangible assets, along with
the accelerated method of amortization of our acquired customer relationships.
Income from operations
Income from operations for the three months ended September 30, 2021 was
$26.2 million , compared to $10.3 million in the comparable period of 2020. The
increase in income from operations was primarily due to higher gross profit and
adjusted gross profit, which was offset by an increase in operating expenses.
Interest expense
Interest expense was $0.6 million for the three months ended September 30, 2021 ,
a decrease of 37.1% from $1.0 million in the comparable period of 2020. The
decrease in interest expense is primarily due to the settlement of the Notes on
May 1, 2020 and lower interest rates on the ABL Facility compared to the Notes
during three months ended September 30, 2021 .
Income tax expense
We recognized income tax expense of $6.7 million and $2.4 million for the three
months ended September 30, 2021 and 2020, respectively. Our effective tax rate
for the three months ended September 30, 2021 was 26.0%, compared to an
effective tax rate of 26.3% in the comparable period of 2020. The difference in
our effective tax rate for each of the three months ended September 30, 2021 and
2020 from the 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.
Net income
Net income for the three months ended September 30, 2021 was $18.9 million ,
compared to $6.8 million in the comparable period of 2020, due to the items
previously discussed.
Comparison of the nine months ended September 30, 2021 and 2020
Revenue
Revenue for the nine months ended September 30, 2021 was $2.7 billion , an
increase of 54.8% from $1.8 billion in the comparable period of 2020. The
increase in revenue was primarily attributable to an increase of 35.5% in
revenue per shipment, along with an increase of 14.3% in volume.
Revenue from Transactional clients for the nine months ended September 30, 2021
was $2.1 billion , an increase of 54.1% from $1.4 billion in the comparable
period of 2020. The increase in Transactional revenue was driven by an increase
in both TL and LTL revenue per shipment and volume. Revenue from Transactional
clients was 77.0% of our revenue for the nine months ended September 30, 2021 , a
decrease from 77.3% of our revenue in the comparable period of 2020.
Revenue from Managed Transportation clients for the nine months ended
September 30, 2021 was $626.1 million , an increase of 57.2% from $398.2 million
in the comparable period of 2020. The increase in Managed Transportation revenue
was driven by an increase in both TL and LTL revenue per shipment and volume.
Revenue from Managed Transportation clients was 23.0% of our revenue for the
nine months ended September 30, 2021 , an increase from 22.7% of our revenue in
the comparable period of 2020.
Transportation costs
Transportation costs for the nine months ended September 30, 2021 was
$2.3 billion , an increase of 57.3% from $1.5 billion in the comparable period of
2020. Our transportation costs as a percentage of revenue increased to 85.5% for
the nine months ended September 30, 2021 from 84.2% in the comparable period of
2020. The increase in transportation costs was primarily driven by an increase
of 37.6% in carrier rates per shipment and a 14.3% increase in the total number
of shipments.
Gross profit and Adjusted gross profit
Gross profit for the nine months ended September 30, 2021 was $383.5 million , an
increase of 45.4% from $263.7 million in the comparable period of 2020. The
increase in gross profit was primarily due to higher revenue and a decrease in
internal use software depreciation, which was offset by an increase in
transportation costs. Adjusted gross profit for the nine months ended
September 30, 2021 was $395.4 million , an increase of 42.0% from $278.4 million
in the comparable period of 2020. The increase in adjusted gross profit was
primarily driven by an increase of 24.3% in adjusted gross profit per shipment
and an
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increase of 14.3% in the total number of shipments. Adjusted gross profit
margins decreased to 14.5% for the nine months ended September 30, 2021 , from
15.8% in the comparable period of 2020, due to lower TL and LTL margins.
Operating expenses
Commission expense for the nine months ended September 30, 2021 was
$117.6 million , an increase of 40.6% from $83.6 million in the comparable period
of 2020, due to higher adjusted gross profit. For the nine months ended
September 30, 2021 , commission expense was 29.7% of adjusted gross profit,
compared to 30.0% in the comparable period of 2020.
Selling, general and administrative expenses for the nine months ended
September 30, 2021 was $185.5 million , an increase of 21.8% from $152.4 million
in the comparable period in 2020. The increase in selling, general and
administrative expense was the result of higher headcount, incentive
compensation, stock compensation expense, and $2.5 million transaction costs
related to our proposed merger.
The contingent consideration fair value adjustment resulted in expense of
$0.6 million for the nine months ended September 30, 2021 , compared to income of
$0.3 million for the nine months ended September 30, 2020 . The change for both
periods 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, 2021 .
Depreciation expense for the nine months ended September 30, 2021 was
$18.5 million , a decrease of 11.8% from $21.0 million in the comparable period
of 2020. The decrease in depreciation expense is primarily attributable to the
timing of assets placed into service.
Amortization expense for the nine months ended September 30, 2021 was
$7.8 million , a decrease of 5.9% from $8.3 million in the comparable period of
2020. The decrease in amortization expense was primarily attributable to the
complete amortization of a few of our previously acquired intangible assets,
along with the accelerated method of amortization of our acquired customer
relationships.
Income from operations
Income from operations for the nine months ended September 30, 2021 was
$65.3 million , compared to $13.5 million in the comparable period of 2020. The
increase in income from operations was primarily due to higher gross profit and
adjusted gross profit, which was offset by an increase in operating expenses.
Interest expense
Interest expense was $2.1 million for the nine months ended September 30, 2021 ,
a decrease of 60.2% from $5.2 million in the comparable period of 2020. The
decrease in interest expense is primarily due to the settlement of the Notes on
May 1, 2020 and lower interest rates on the ABL Facility compared to the Notes
during the nine months ended September 30, 2021 .
Income tax expense
We recognized income tax expense of $15.8 million and $3.4 million for the nine
months ended September 30, 2021 and 2020, respectively. Our effective tax rate
for the nine months ended September 30, 2021 was 24.9%, compared to an effective
tax rate of 41.6% in the comparable period of 2020. The difference in our
effective tax rate for each of the nine months ended September 30, 2021 and 2020
from the statutory federal tax rate of 21% was primarily due to state taxes;
non-deductible expenses including executive stock-based compensation;
deficiencies and forfeitures related to share-based payment awards; offset in
part by the impact of certain tax credits. The difference from the statutory
federal tax rate for the nine months ended September 30, 2020 is also
attributable to relatively low pre-tax levels; therefore, the rate impact of
certain non-deductible expenses is more significant.
Net income
Net income for the nine months ended September 30, 2021 was $47.5 million ,
compared to $4.8 million in the comparable period of 2020, due to the items
previously discussed.
Liquidity and Capital Resources
As of September 30, 2021 , we had $54.0 million in cash and cash equivalents,
$147.0 million in working capital and $244.2 million available under our ABL
Facility.
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Cash provided by operating activities
During the nine months ended September 30, 2021 and 2020, net cash provided by
operating activities was $67.9 million and $53.4 million , respectively. We
generated $87.0 million and $44.2 million in cash from net income (adjusted for
noncash operating items) for the nine months ended September 30, 2021 and 2020,
respectively. For the nine months ended September 30, 2021 , the cash flow
generation from net income decreased by $19.2 million primarily due to the
timing of payments made and received during the year resulting from changes in
working capital, and final earn-out payment related to FMP acquisition. The
September 30, 2020 increase of $9.2 million was due to changes in working
capital.
Cash used in investing activities
During the nine months ended September 30, 2021 and 2020, net cash used in
investing activities was $22.1 million and $15.1 million , respectively. During
the nine months ended September 30, 2021 and 2020, the primary investing
activities were the purchases of property and equipment, including internal
development of computer software.
Cash used in financing activities
During the nine months ended September 30, 2021 , net cash used in financing
activities was $33.1 million , of which the primary financing activities were the
repayment of $30.0 million on our ABL Facility and the employee tax withholding
related to net share settlements of equity-based awards. During the nine months
ended September 30, 2020 , net cash used in financing activities was $25.3
million , of which the primary financing activities were the purchases of
treasury stock and our Notes, settlement of our Notes, and borrowings on the ABL
Facility. We drew $170.0 million on our Amended ABL Facility, primarily to
settle our Notes, and repaid $25.0 million during the nine months ended
September 30, 2020 .
ABL Facility
On October 23, 2018 , we entered into Amendment No. 2 to the Revolving Credit and
Security Agreement, which amended the terms of the Revolving Credit and Security
Agreement, dated as of June 1, 2015 , as amended, by and among the Company, the
lenders party thereto, and PNC Bank, National Association , as administrative
agent (as amended, restated or otherwise modified 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 , and a 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. Our obligations
under the Amended ABL Facility are secured, on a first lien priority basis, by
certain of our working capital assets.
At September 30, 2021 , the outstanding balance on the Amended ABL Facility was
$105.0 million . The issuance of letters of credit under the Amended ABL Facility
also reduces available borrowings. At September 30, 2021 , there were $0.8
million of letters of credit outstanding. The total draw allowed under the
Amended ABL Facility at September 30, 2021 , as determined by the working capital
assets pledged as collateral, was $350.0 million . After adjusting for the
letters of credit and the amount outstanding on the Amended ABL Facility, our
remaining availability under the ABL Facility at September 30, 2021 was $244.2
million .
Anticipated uses of cash
Our priority is to continue to grow our revenue and adjusted gross profit. 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, subject to the limitations set forth in the Merger Agreement.
In 2021, we also expect to use available cash of approximately $6 million to $8
million for capital expenditures for the remainder of 2021.
We may also opt to use cash to repurchase up to $60.2 million of our common
stock under the remaining authority under our repurchase program. The timing and
amount of any common stock repurchases will be determined based on market
conditions and other factors. In addition, we may elect to use cash to reduce
the amount outstanding on our Amended ABL Facility. We expect our use of cash
for working capital purposes and other purposes to be offset by the cash flow
generated from operating activities during the same period.
Historically, our average accounts receivable 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 depend on the growth of our business.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
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
None.
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