Echo Global Logistics
Echo Global Logistics, Inc. (Form: 10-K, Received: 02/24/2017 16:53:05)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________________________
FORM 10-K
_______________________________________
(Mark one)
 
x
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2016 or
 
 
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
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 354-7993
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
 
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o     No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  o     No  x
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 Website, if any, 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 and post such files). Yes  x     No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
(Do not check if a smaller
reporting company)
Smaller reporting company  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
The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2016 , the last business day of the registrant's most recent completed second quarter, was $601,690,203 (based upon closing price of these shares on the Nasdaq Global Select Market).
The number of shares of the registrant's common stock outstanding as of the close of business on February 23, 2017 was 29,076,101 .



Documents incorporated by reference:
Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K, provided that if such Proxy Statement is not filed with the Securities and Exchange Commission (the "SEC") within 120 days after the end of the fiscal year covered by this Form 10-K, an amendment to this Form 10-K shall be filed no later than the end of such 120-day period.





 
 
TABLE OF CONTENTS
 
 
 
 
 
Part I.
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part III.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part IV.
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Part I



Item 1.     Business
Unless otherwise indicated or the context otherwise requires, references in this Annual Report on Form 10-K to "Echo Global Logistics," "Echo," the "Company," "we," "us" or "our" are to Echo Global Logistics, Inc., a Delaware corporation, and subsidiaries.
Certain statements in this Annual Report on Form 10-K 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 Part I, Item 1 "Business," Part I, Item 1A "Risk Factors" and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K. 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.

Our Company

Echo Global Logistics is 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 with truckload ("TL") and less than truckload ("LTL") carriers. We also offer intermodal (which involves moving a shipment by rail and truck), small parcel, domestic air, expedited and international transportation services. Our core logistics services include rate negotiation, shipment execution and tracking, carrier selection and management, routing compliance, freight bill payment and audit, payment and performance management and reporting functions, including executive dashboard tools.

The success of our model and its ability to deliver a competitive value proposition to shippers (our clients) has been the main driver behind our historical growth and we believe will serve as the basis for our continued expansion. Our market share has grown within this market segment in recent years, primarily through organic growth with the addition of new customers, the expansion of relationships with existing customers, the addition of new services and the development of a training program that enables better client service and the hiring of additional salespeople. We also have supplemented our organic growth through selective acquisitions.

On June 1, 2015, we acquired Command Transportation, LLC ("Command"), one of the largest privately held TL brokers and non-asset based transportation providers in the United States, for $407.7 million in cash and shares of Echo's common stock. In October 2016, we integrated the technology platforms between Echo and Command, enabling us to better serve our clients' multi-modal transportation needs. We believe that the integration of the Command acquisition has made us a leading provider of technology-enabled transportation management solutions with enhanced scale in the TL market, and has allowed us to offer greater capacity and a broader network to our clients.

We were formed as a Delaware limited liability company in January 2005 and converted our legal form to a Delaware corporation in June 2006. In October 2009, we completed an initial public offering of our shares of common stock. Our common stock is listed on the Nasdaq Global Select Market under the symbol “ECHO.”

Our Clients

We procure transportation and provide logistics services for clients across a wide range of industries, including manufacturing, construction, food and beverage, consumer products and retail. Our clients fall into two categories: Transactional and Managed Transportation.




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Transactional Clients

We service Transactional clients on a shipment-by-shipment basis. Pricing is often quoted according to pre-existing price agreements maintained with our LTL carriers or pricing procured in the spot market for TL carriers. It is the objective of our sales representatives to expand client relationships by increasing the shipper's percentage of total freight spend directed to Echo. Transactional clients benefit from their access to our advanced technology, service quality and competitive pricing.

Our revenue from Transactional clients was $1,395.9 million in 2016 , $1,225.3 million in 2015 and $871.3 million in 2014 . Revenue from Transactional clients as a percentage of total revenue was 81.3% , 81.0% and 74.3% , in 2016 , 2015 and 2014 , respectively.

Managed Transportation Clients

We typically enter into multi-year contracts with our Managed Transportation clients, generally with terms of one to three years, to satisfy some, or substantially all, of their transportation management needs. Each Managed Transportation client is assigned one or more dedicated account executives. In limited instances, a Managed Transportation client will request that its account executives work on-site at the client's location.
Dedicated account executives, together with account management and technology staff, form our Solutions and Integration team that initiates the on-boarding process for each new Managed Transportation client. This team reviews the client's existing business processes, develops a preliminary freight management plan and targets a percentage cost savings achievable for the client over the life of the contract. The team then develops an integration plan that links the client's back office processes to our proprietary technology platform.
The Managed Transportation relationship is initially predicated on a high level of personalized service, cost savings and the improved efficiency, transparency and reporting achieved through reliance on our systems. Each client's dedicated account team seeks to become more knowledgeable about the client's supply chain operations through an ongoing series of quarterly business reviews. Through this process, additional opportunities for efficiency gains, operating improvements and cost savings are identified and recommended by account managers who generally have significant industry experience.
Managed Transportation contracts often are on an exclusive basis for a certain transportation mode or point of origin and may apply to one or many modes used by the client. These contractual exclusivity provisions help ensure, but do not guarantee, that we receive a significant portion of a Managed Transportation client's transportation spend. In our experience, compliance with such provisions varies from client to client and over time. We work with our Managed Transportation clients and expect them to maintain and improve compliance with any applicable exclusivity provisions.
We also provide freight bill payment and audit services, claims processing and small parcel consulting services to a limited number of our Managed Transportation clients. Under these arrangements, we review the client's small parcel shipping contracts and shipment data analyzing their volumes, distribution, rates and savings opportunities, prepare negotiation strategies and directly or indirectly participate in negotiations with carriers to improve the client's rates, charges, services and commitments.
Our revenue from Managed Transportation clients was $320.3 million in 2016 , $287.0 million in 2015 and $302.1 million in 2014 . Revenue from Managed Transportation clients as a percentage of total revenue was 18.7% , 19.0% and 25.7% in 2016 , 2015 and 2014 , respectively.
Our Proprietary Technology
Our proprietary technology platform ("Optimizer") is fundamental to our operating system and solutions offering. We run our business on a technology platform engineered and built from the ground up and believe its proprietary nature differentiates us from our competition in a number of critical ways. All parties to each transaction (clients, carriers and Echo employees) are unified on a single platform through access portals customized to each party's needs. We believe such integration yields critical synergies throughout our organization as well as with our clients and carriers. Equally important, internal integration ensures speed and accuracy of data capture, information exchange, shipment execution and back-end reporting capabilities.
When communicating their transportation needs to us, clients have the flexibility to do so electronically through our web portal ("EchoTrak"), by other computer protocols or by phone. Our system generates price and carrier options for our clients based on either rates pre-negotiated with preferred carriers or historical price and capacity data stored in our system. If a client enters its own shipment, EchoTrak automatically alerts the appropriate account executive. Once the carrier is selected, the client's account executive uses our system to manage all aspects of the shipping process through the life-cycle of the shipment. Our clients use Optimizer's "track and trace" tools to monitor shipment status through EchoTrak.

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As our business has grown, our technology platform has continued to evolve in order to incorporate new multi-modal capabilities. In October 2016, we integrated the Command technology platform into our Optimizer system to capitalize on the synergies offered by the Command acquisition. We believe the agility of Optimizer is essential to keep pace with the changing needs of our business and offers us a critical advantage in the competitive transportation marketplace. Each mode involves different vendors exchanging unique order and price data that must be shared with multiple parties to any given transaction. Our technology engineers build mode-specific requirements into our system that support our ability to sell and service that mode on an enterprise-wide basis. In 2016 , 2015 and 2014 , we spent approximately $14.6 million, $8.2 million and $9.6 million, respectively, on the development of Optimizer and related technologies.
We believe our web-based suite of applications connects clients with every function required to run an efficient transportation and logistics program. Transportation solutions developed for Managed Transportation clients often involve back-end systems integration, and both the solution and the specific integration requirements vary by client. Optimizer affords us the flexibility to support the supply chain needs of each client, regardless of specifications of the client's own system.
We rely primarily on a combination of copyright, trademark and trade secret laws, license agreements and other contractual provisions to protect our intellectual property and other proprietary rights. Some of our intellectual property rights relate to proprietary business process enhancements. It is our practice to enter into confidentiality and invention assignment agreements with all of our employees and independent contractors. Such agreements include a confidentiality undertaking by the employee or independent contractor; ensure that all new intellectual property developed in the course of our relationship with employees or independent contractors is assigned to us; and require the employee or independent contractor to cooperate with us to protect our intellectual property during and after his or her relationship with us.
Our Transportation Solutions
We satisfy the market demand for freight transportation solutions by delivering a competitive value proposition that combines advanced technology, excellent client service, competitive pricing and highly customized transportation solutions to businesses seeking external transportation management expertise. As a non-asset based provider of technology-enabled transportation and logistics services, our solutions offerings take many forms, including multi-modal transportation brokerage and logistics services.
Mode-Specific Offerings
For our Transactional clients, Echo offers a wide array of shipping options from which to choose:
Truckload.     We provide TL service across all TL segments, including dry van, temperature-controlled and flatbed trucks. Our Truckload Quoting Tool technology uses our predictive pricing algorithms, industry relationships and historical lane-specific price and capacity data to quickly satisfy our clients' TL needs.
Less than Truckload.      We maintain relationships with, and utilize the vast majority of, LTL carriers in the market. Using our innovative RateIQ 2.0 technology, we obtain real-time price and transit time information for every LTL shipment we broker.
Small Parcel.     We provide small parcel services for packages of all sizes. Using our EchoPak technology, we often are able to deliver cost saving opportunities to those clients with significant small parcel freight spend.
Intermodal.     Intermodal transportation is the shipping of freight by multiple modes. We offer intermodal transportation services for our clients that utilize a combination of truck and rail. Our dedicated intermodal team can select the combination of truck and rail service that best satisfies each client's individual price and shipment criteria.
Domestic Air and Expedited Services.     We provide domestic air and expedited shipment services for our clients whose delivery requirements cannot be satisfied by traditional over the road service.
International.     For clients seeking the ease of a comprehensive international delivery option, we provide air and ocean transportation services. Dedicated account teams are able to consolidate shipments, coordinate routing, prearrange custom clearance and organize local pick-up and delivery, all in an effort to minimize the time and economic burdens associated with international shipping.
Logistics Services Offering
Many clients prefer a comprehensive and customized freight management solution that maximizes system-wide efficiencies as well as cost savings. In these instances, the shippers outsource their freight management needs to us. For these shippers, often part of our Managed Transportation group, we develop a plan involving a wide range of multi-modal freight

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brokerage services that often includes the redesign and reengineering of distribution networks that connect a client to its suppliers and customers.
Transportation management and logistics services that we provide to such clients can include:
Rate negotiation;
Procurement of transportation, both contractually and in the spot market;
Shipment execution and tracking;
Carrier management, selection, reporting and compliance;
Executive dashboard presentations and detailed shipment reports;
Freight bill payment and audit;
Claims processing and service refund management;
Design and management of inbound client freight programs;
Individually configured web portals and self-service data warehouses;
Enterprise resource planning ("ERP") integration with transactional shipment data;
Integration of shipping applications into client e-commerce sites; and
Back-end reports customized to the internal reporting needs of the business
Our Employees
As of December 31, 2016 , Echo had 2,350 employees, of which 1,611 were sales representatives and agents.
Our sales representatives and agents are located in more than thirty offices throughout the United States. Sales representatives are employees focused on identifying and growing relationships with shippers (our clients) and carriers. Sales agents work independently or in station offices and tend to be experienced industry sales professionals managing their own client relationships. Both sales representatives and agents are primarily responsible for managing and servicing the client and carrier relationships whose business they secure.
Candidates for employment are identified and screened through traditional means, such as career fairs, search firms, job postings, advertisements in industry publications and referrals. The majority of hires within our sales and service organization are recent college graduates. We invest extensively in their training and ongoing development to ensure their long-term success as a part of our organization. Employees who join Echo as a result of an acquisition also participate in training tailored to their needs. We are confident that our employee training and development efforts contribute to longer tenure, increased productivity and a greater commitment to client satisfaction. None of our employees are subject to collective bargaining agreements. We consider our employee relations to be good.
Our Carrier Network
In 2016 , we continued to enhance our vast carrier network of motor, rail, air and ocean freight transportation providers. We select our carriers on the basis of their capabilities, geographic coverage, quality of service and price. Carriers selected to join our network provide physical transportation services to our clients. In our capacity as intermediary, we track our clients' shipments from origin to destination. Since we do not own any transportation equipment and do not employ those directly involved in the delivery of our clients' shipments, the nature of our carrier relationships is essential to our success.
We believe we provide value to our carriers through our proprietary technology, which gives our carriers the flexibility to adjust pricing and freight by lane or season. Our carriers benefit by gaining access to our clients and our carrier communication tools, which allow us to match our clients’ freight with our carriers' excess capacity.
We maintain the quality of our carrier network by obtaining documentation from each carrier that ensures the carrier is properly licensed and insured and satisfies our safety requirements. Additionally, we continuously monitor data from our network on capacity, price trends, reliability, quality control standards and overall client service. We believe this quality control program helps to ensure shippers are provided the highest quality service, regardless of the specific carrier selected for an individual shipment.

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The carriers in our network range in size from large national trucking companies to owner-operators of single trucks. We are not dependent on any one carrier. Our largest carrier accounted for less than 5% of our total 2016 transportation costs.
Competition
We operate in the highly competitive and fragmented market for commercial freight transportation and third-party logistics services. Primary competitors to our services include other national non-asset based third-party logistics companies, as well as regional or niche freight brokerages, asset-based carriers offering brokerage and/or logistics services, wholesale intermodal transportation service providers and rail carriers. In addition, we may from time to time compete against carriers' internal sales forces or shippers' internal transportation departments. We also buy transportation services from, and sell to, some of the companies with which we compete.
We believe we compete for business on the basis of service, reliability and price. Some of our competitors may have more clients, larger clients, more resources, and possibly greater expertise in a single transportation mode. We compete successfully with these companies by delivering a multi-modal solution using advanced technology combined with excellent client service, competitive pricing and highly customized transportation solutions.
Our clients may choose not to outsource their transportation business to us in the future by performing formerly outsourced services for themselves, either in-house or through external partnerships or other arrangements. We believe our key advantage over in-house operations is our ability to simplify the transportation process for our clients by delivering volume-based pricing and service superior to what our clients can secure independent of Echo. In short, we provide companies the opportunity to focus on their core operations by providing our transportation buying power and expertise.
Government Regulation
We are licensed by the U.S. Department of Transportation as a broker authorized to arrange for the transportation of general commodities by motor vehicle. Subject to applicable federal and state regulation, we arrange for the transportation of most types of freight to and from any point in the United States. We arrange transportation for United States domestic shipments by land that are mostly governed by federal regulation, such as the Federal Motor Carrier Safety Administration (the “FMCSA”), which is an agency of the Department of Transportation; some shipments are also regulated by various state agencies. The FMCSA has broad regulatory powers in areas such as safety and insurance relating to interstate motor-carrier and property broker operations. The transportation industry is subject to possible changes in the governing law (such as the possibility of more stringent environmental, safety regulations or limits on vehicle weight and size) that could impact the economics of the industry.
Our international operations are impacted by a wide variety of United States regulations from various government departments, such as the State Department, Department of Commerce and Treasury Department. Regulations set by these departments may cover matters such as the type of commodities that may be shipped and how certain commodities may be shipped. These departments also issue regulations regarding unfair international trade practices and limitations on entities with which we may engage in business.
We contract with indirect air carriers who have been approved by the Transportation Security Administration (the “TSA”) and the Department of Transportation to arrange for transportation by air for our customers. The air freight industry is subject to regulatory and legislative changes that could affect the economics of the industry by requiring changes in operating practices or influencing the demand for, and the costs of providing, services to clients.
Our ocean transportation business in the United States is subject to regulation by the Federal Maritime Commission (the “FMC”). We are not licensed as an ocean freight forwarder or a non-vessel operating common carrier operator. However, we do engage in business with entities who are licensed in ocean transportation so that we may arrange for transportation by sea for our customers.
Although Congress enacted legislation in 1994 that substantially preempts the authority of states to exercise economic regulation of motor-carriers and property brokers, some intrastate shipments for which we arrange transportation may be subject to additional licensing registration or permit requirements. Generally, we contractually require the carrier transporting the shipment to ensure compliance with these types of requirements. Although compliance with the regulations governing licenses in these areas has not had a material adverse effect on our operations or financial condition in the past, there can be no assurance that such regulations or changes will not adversely impact our operations in the future. Violation of these regulations could also subject us to fines as well as increased claims liability.



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Risk Management and Insurance

If a shipment is damaged during the delivery process, our customer may file a claim for the damaged shipment with us, which we will pursue directly with the carrier on our client's behalf. In the cases where we have agreed (either contractually or otherwise) to pay for claims for damage to freight while in transit, we may pay the claim to our client while we independently pursue reimbursement from the carrier. If we are unable to recover all or any portion of the claim amount from our carrier, or our carrier's insurance, we may bear the financial loss of such claim. We mitigate this risk by using our quality control program to carefully select carriers with adequate insurance, quality control procedures and safety ratings. We also take steps to ensure that the coverage we provide to our clients for damaged shipments is substantially similar to the coverage that our carriers provide.

 We require all motor carriers we work with to carry at least $1 million in auto liability insurance and $0.1 million in cargo insurance. We also maintain a broad cargo liability insurance policy to protect us against cargo damages that may not be recovered from the responsible motor-carrier. We carry various liability insurance policies, including automobile and general liability. Our contingent automobile liability coverage has a retention of $5 million per incident.

We extend credit to certain clients as part of our business model. These clients are subject to an approval process prior to any extension of credit or increase in their current credit limit. Our accounting department reviews each credit request and considers, among other factors, payment history, current billing status, recommendations by various rating agencies and capitalization. Clients that pass our credit review may receive a line of credit or an increase in their existing credit amount. We believe this review and approval process helps mitigate the risk of client defaults on extensions of credit and any related bad debt expense. Additionally, the Company maintains a credit insurance policy for certain accounts.

Our Website

Our website is http://www.echo.com. We make available, free of charge through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, including exhibits and any amendments to those reports, filed with or furnished to the SEC. We make these reports available through our website as soon as reasonably practical after our electronic filing of such materials with, or the furnishing of them to, the SEC. The information contained on our website is not a part of this Annual Report on Form 10-K and shall not be deemed incorporated by reference into this Annual Report on Form 10-K or any other public filing made by us with the SEC.

Item 1A.     Risk Factors
Set forth below are certain risk factors that could harm our business, results of operations and financial condition. You should carefully read the following risk factors, together with the financial statements, related notes and other information contained in this Annual Report on Form 10-K. Our business, financial condition and operating results may suffer if any of the following risks are realized. If any of these risks or uncertainties occur, the trading price of our common stock could decline and you might lose all or part of your investment. This Annual Report on Form 10-K contains forward-looking statements that contain risks and uncertainties. Please refer to the discussion of "Forward-Looking Statements" on page three of this Annual Report on Form 10-K in connection with your consideration of the risk factors and other important factors that may affect future results described below.
Risks Related to Our Business
If our carriers do not meet our needs or expectations, or those of our clients, our business could suffer.
The success of our business depends to a large extent on our relationships with our clients and our reputation for providing high-quality technology-enabled transportation and logistics services. We do not own or control the transportation assets that deliver our clients' freight, and we do not employ the people directly involved in delivering the freight. We rely on independent third parties to provide TL, LTL, small parcel, intermodal, domestic air, expedited and international carrier services and to report certain information to us, including information relating to delivery status and freight claims. This reliance could cause delays in providing our clients with important service data and in the financial reporting of certain events, including recognizing revenue and recording claims. If we are unable to secure sufficient transportation services to meet our commitments to our clients, our operating results could be adversely affected, and our clients could utilize the services of our competitors temporarily or permanently. Many of these risks are beyond our control and difficult to anticipate, including:
changes in rates charged by transportation providers;
supply shortages in the transportation industry, particularly among TL carriers;

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interruptions in service or stoppages in transportation as a result of labor disputes; and
changes in regulations impacting transportation.
If any of the third parties we rely on do not meet our needs or expectations, or those of our clients, our professional reputation may be damaged and our business could suffer.
Higher carrier prices may result in decreased net revenue margin.
Carriers may charge higher prices if market conditions warrant, or to cover higher operating expenses. Our net revenues and income from operations may decrease if we are unable to correspondingly increase our pricing to our customers. Increased demand for TL services and pending changes in regulations may reduce available capacity and increase carrier pricing. Net revenue is a non-GAAP measure calculated as revenue minus transportation costs.
Competition could substantially impair our business and our operating results.
The transportation services industry is highly competitive. We compete against other national non-asset based third-party logistics companies, as well as regional or niche freight brokerages, asset-based carriers offering brokerage and/or logistics services, wholesale intermodal transportation service providers and rail carriers. In addition, we may from time to time compete against carriers' internal sales forces or shippers' internal transportation departments. At times, we buy transportation services from, and sell to, our competitors. Historically, competition has created a downward pressure on freight rates and continuation of this rate pressure may adversely affect our revenue and income from operations.
In addition, a software platform and database similar to Optimizer could be created over time by a competitor with sufficient financial resources and comparable experience in the transportation services industry. If our competitors are able to offer comparable services, we could lose clients, and our market share and profit margin could decline. Our competitors may also establish cooperative relationships to increase their ability to address client needs. Increased competition may lead to revenue reductions, reduced profit margins or loss of market share, any one of which could harm our business.
We are reliant on technology to operate our business and our continued success is dependent on our systems continuing to provide the necessary support to service our customers effectively.
We rely heavily on Optimizer to track and store externally and internally generated market data, analyze the capabilities of our carrier network and recommend cost-effective carriers in the appropriate transportation mode. To keep pace with changing technologies and client demands, we must correctly interpret and address market trends and enhance the features and functionality of our Optimizer platform in response to these trends, which may lead to significant ongoing research and development costs. We may be unable to accurately determine the needs of our clients and the trends in the transportation services industry or to design and implement the appropriate features and functionality of our Optimizer platform in a timely and cost-effective manner, which could result in decreased demand for our services and a corresponding decrease in our revenue. Despite testing, we may be unable to detect defects in existing or new versions of our proprietary software, or errors may arise in our software. Any failure to identify and address such defects or errors could result in loss of revenue or market share, liability to clients or others, diversion of resources, injury to our reputation, and increased service and maintenance costs. Correction of such errors could prove to be impossible or very costly, and responding to resulting claims or liability could similarly involve substantial cost.
The success of our business depends upon our ability to deliver time-sensitive, up-to-date data and information. We rely on our Internet access, computer equipment, software applications, database storage facilities and other office equipment, which are mainly located in our Chicago headquarters. Our operations and those of our carriers and clients are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, wars, computer viruses, hacker attacks, equipment failure, physical break-ins and other events beyond our control, including disasters affecting Chicago. We attempt to mitigate these risks through various means, including system backup and security measures, but our precautions will not protect against all potential problems. We maintain fully redundant off-site backup facilities for our Internet access, computer equipment, software applications, database storage and network equipment, but these facilities could be subject to the same interruptions that could affect our headquarters. If we suffer a database or network facility outage, our business could experience disruption, possibly resulting in reduced revenue and the loss of clients.
Our ability to deliver our services depends upon the capacity, reliability and security of services provided to us by our telecommunication service providers, our electronic delivery systems and the Internet. We have no control over the operation, quality or maintenance of these services or whether the vendors will improve their services or continue to provide services that are essential to our business. In addition, our telecommunication service providers may increase their prices at which they provide services, which would increase our costs. If our telecommunication service providers were to cease to provide essential

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services or to significantly increase their prices, we could be required to find alternative vendors for these services. With a limited number of vendors, we could experience significant delays in obtaining new or replacement services, which could significantly harm our reputation and could cause us to lose clients and revenue. Moreover, our ability to deliver information using the Internet may be impaired because of infrastructure failures, service outages at third-party Internet providers or increased government regulation. If disruptions, failures or slowdowns of our electronic delivery systems or the Internet occur, our ability to effectively provide technology-enabled transportation and supply chain management services and to serve our clients may be impaired.
We have not registered any patents or trademarks on our proprietary technology to date, and our inability to protect our intellectual property rights may impair our competitive position.
Our failure to adequately protect our intellectual property and other proprietary rights could harm our competitive position. We rely on a combination of copyright, trademark and trade secret laws, as well as license agreements and other contractual provisions to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring all of our employees and independent contractors to enter into confidentiality and invention assignment agreements. To date, we have not pursued patent protection for our technology. We currently have six registered trademarks to protect our brands. We cannot be certain that the steps we have taken to protect our intellectual property rights will be adequate or will prevent third parties from infringing or misappropriating our rights, imitating or duplicating our technology, services or methodologies, including Optimizer, or using trademarks similar to ours. Should we need to resort to litigation to enforce our intellectual property rights or to determine the validity and scope of the rights of others, such litigation could be time-consuming and costly, and the result of any litigation is subject to uncertainty. In addition, Optimizer incorporates open source software components that are licensed to us under various public domain licenses. Although we believe that we have complied with our obligations under the various applicable licenses for the open source software that we use, there is little or no legal precedent governing the interpretation of many of the terms of these licenses, and the potential impact of such terms on our business is, therefore, difficult to predict.
We have extensive selling and implementation cycles to secure a new Managed Transportation contract, which require significant investments of resources.
In the course of acquiring a Managed Transportation customer, we typically face extensive selling and implementation cycles to secure a new Managed Transportation contract, which requires significant investment of resources and time by both our clients and us. Before committing to use our services, potential Managed Transportation clients require us to spend time and resources educating them on the value of our services and assessing the feasibility of integrating our systems and processes with theirs. Our clients then evaluate our services before deciding whether to use them. Therefore, our Managed Transportation selling cycle is subject to many risks and delays over which we have little control, including our clients' decisions to choose alternatives to our services and the timing of our clients' budget cycles and approval processes.
Implementing our Managed Transportation services, which can take from one to six months, involves a significant commitment of resources over an extended period of time from both our clients and us. Depending on the scope and complexity of the processes being implemented, these time periods may be significantly longer. Our current and future clients may not be willing or able to invest the time and resources necessary to implement our services, and we may fail to close sales with potential clients to which we have devoted significant time and resources. This could have a material adverse effect on our business, results of operations, financial condition and cash flows, as we do not recognize significant revenue until after we have completed the implementation phase.
Our clients may terminate their relationships with us on short notice with limited or no penalties, and our clients are not obligated to spend a minimum amount with us.
Our Transactional clients, which accounted for 81.3% and 81.0% of our revenue in 2016 and 2015 , respectively, use our services on a shipment-by-shipment basis rather than under long-term contracts. These clients have no obligation to continue using our services and may stop using them at any time without penalty or with only limited penalties. Our contracts with Managed Transportation clients typically have terms of one to three years and are subject to termination provisions negotiated on a contract-by-contract basis. If we fail to adhere to the terms of the contract, the client can terminate the relationship. Managed Transportation contracts accounting for 6.6% and 5.2% of our total 2016 revenue are scheduled to expire (subject to possible renewal) in 2017 and 2018, respectively.
The volume and type of services we provide each client may vary from year to year and could be reduced if the client were to change its outsourcing or shipping strategy. Our Managed Transportation clients generally are not obligated to spend any particular amount with us, although our Managed Transportation contracts are typically exclusive with respect to point of origin or one or more modes of transportation, meaning that the client is obligated to use us if it ships from the point of origin or uses those modes. These contractual exclusivity provisions help ensure, but do not guarantee, we receive a significant portion of the

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amount that our Managed Transportation clients spend on transportation in the applicable mode or modes or from the applicable point of origin. In our experience, compliance with such provisions varies from client to client and over time. Our clients' failure to comply with these exclusivity provisions may adversely affect our revenue.
If a significant number of our Transactional or Managed Transportation clients elect to terminate or not renew their engagements with us, or if the shipping volume of a significant number of our clients decreases, our business, operating results and financial condition could suffer. If we are unable to renew our Managed Transportation contracts at favorable rates, our revenue may decline.

We may not be able to successfully manage, monitor and update our newly integrated platform and operations with Command.
On June 1, 2015, we acquired Command and increased the size of our business significantly beyond our historical Echo business. Our future success depends, in part, upon our ability to manage this expanded business. This will pose substantial challenges for our management, including challenges related to the management and monitoring of additional operations and associated increased costs and complexity. In October 2016, we integrated the Command proprietary technology platform into our Optimizer system. Our continued growth as an integrated company relies both on our ability to successfully update and manage the new integrated system, and our successful management of the new business processes. If we are unable to achieve these objectives, the anticipated benefits and potential synergies of the Command acquisition may not be realized fully, or may take longer to realize than expected. Any failure to manage our expanded business or to realize anticipated benefits of the Command acquisition would have a material adverse effect on our business, operating results and financial condition.
We may not be able to identify suitable acquisition candidates, effectively integrate newly acquired businesses or achieve expected profitability from acquisitions.
Part of our growth strategy is to increase our revenue and the market regions that we serve through the acquisition of complementary businesses. There can be no assurance that suitable candidates for acquisitions can be identified or, if suitable candidates are identified, that acquisitions can be completed on acceptable terms, if at all. Even if suitable candidates are identified, any future acquisitions may entail a number of risks that could adversely affect our business and the market price of our common stock, including the integration of the acquired operations, diversion of management's attention, risks of entering new market regions in which we have limited experience, adverse short-term effects on our reported operating results, the potential loss of key employees of acquired businesses and risks associated with unanticipated liabilities.
We may use our common stock to pay for acquisitions. If the owners of potential acquisition candidates are not willing to receive our common stock in exchange for their businesses, our acquisition prospects could be limited. Future acquisitions could also result in accounting charges, potentially dilutive issuances of equity securities and increased debt and contingent liabilities, including liabilities related to unknown or undisclosed circumstances, any of which could have a material adverse effect on our business and the market price of our common stock.
Changes in fuel prices may change carrier prices, and volatility in fuel prices may make it more difficult to pass through this cost to our clients, which may impair our operating results.
Fuel prices can be volatile and difficult to predict. Fuel prices have fluctuated over the last three years. Our clients expect fuel savings to be passed along through lower prices. If carriers do not lower their prices to reflect declines in fuel costs, this could negatively impact our shipment volume, as our clients would seek other shipping options. This decrease in volume would negatively impact our gross profits and income from operations.
In the event of rising fuel prices, carriers can be expected to charge higher prices to cover higher operating expenses, and our gross profits and income from operations may decrease if we are unable to continue to pass through to our clients the full amount of these increased costs. Higher fuel costs could also cause material shifts in the percentage of our revenue by transportation mode, as our clients may elect to utilize alternative transportation modes. Any material shifts to transportation modes with respect to which we realize lower gross profit margins could impair our operating results.
A decrease in levels of excess capacity in the U.S. transportation services industry could have an adverse impact on our business.
We believe that, historically, the U.S. transportation services industry has experienced significant levels of excess capacity. Our business seeks to capitalize on imbalances between supply and demand in the transportation services industry by obtaining favorable pricing terms from carriers in our network through a competitive bid process. Reduced excess capacity in the transportation services industry generally, and in our carrier network specifically, could have an adverse impact on our ability to execute our business strategy and on our business results and growth prospects.

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A decrease in the number of carriers participating in our network could adversely affect our business.
In 2016 , we continued to enhance our sizable carrier network of motor, rail, air and ocean freight transportation providers. We expect to continue to rely on these carriers to fulfill our shipping orders in the future. However, these carriers are not contractually required to continue to accept orders from us. If shipping capacity tightens or the transportation industry experiences further consolidation among carriers, our ability to to serve our clients on competitive terms could be significantly limited. In addition, we rely on price bids provided by our carriers to populate our database. If the number of our carriers decreases significantly, we may be unable to obtain sufficient pricing information for Optimizer, which could affect our ability to obtain favorable pricing for our clients.
Our obligation to pay our carriers is not contingent upon receipt of payment from our clients, and we extend credit to certain clients as part of our business model.
In most cases, we take full risk of credit loss for the transportation services we procure from carriers. Our obligation to pay our carriers is not contingent upon receipt of payment from our clients. If any of our key clients fail to pay for our services, our profitability would be negatively impacted.
We extend credit to certain clients in the ordinary course of business as part of our business model. By extending credit, we increase our exposure to uncollected receivables. A deterioration in the global or domestic economy could drive an increase in business failures, downsizing and delinquencies, which could cause an increase in our credit risk. If we fail to monitor and manage effectively any increased credit risk, our immediate and long-term liquidity may be adversely affected.
We are subject to claims arising from our transportation operations.
We use the services of thousands of transportation companies and their drivers in connection with our transportation operations. From time to time, these drivers are involved in accidents, or goods carried by these drivers are lost or damaged and the carriers may not have adequate insurance coverage. Although these drivers are not our employees and all of these drivers are employees, or independent contractors, working for carriers, or are owner-operators, claims may be asserted against us for their actions or for our actions in retaining them. Claims against us may exceed the amount of our insurance coverage, or may not be covered by insurance at all. If a shipment is lost or damaged during the delivery process, a client may file a claim for the damaged shipment with us and we may bear the risk of recovering the claim amount from the carrier. If we are unable to recover all or any portion of the claim amount from the carrier, or the carrier's insurance, and to the extent each claim exceeds the amount which may be recovered from our own insurance, we will bear the financial loss. A material increase in the frequency or severity of accidents, claims for lost or damaged goods, liability claims or workers' compensation claims, or unfavorable resolutions of claims, could adversely affect our operating results. Significant increases in insurance costs or the inability to purchase insurance as a result of these claims could also reduce our profitability.
Our industry is subject to seasonal sales fluctuations. If our business experiences seasonality, it could have an adverse effect on our operating results and financial condition.
Our industry is subject to some degree of seasonal sales fluctuations as shipments generally are lower during and after the winter holiday season because many of our retail clients ship goods and stock inventories prior to the winter holiday season. If we were to experience lower than expected revenue during any such period, whether from a general decline in economic conditions or other factors beyond our control, our expenses may not be offset, which would have a disproportionately adverse impact on our operating results and financial condition for that period.
Our ability to appropriately staff and retain sales representatives and agents is important to our business.
Our ability to expand our business will depend, in part, on our ability to attract additional sales representatives and agents with established client relationships. Competition for qualified sales representatives and agents can be intense, and we may be unable to hire such persons. Any difficulties we experience in expanding the number of our sales representatives and agents could have a negative impact on our ability to expand our client base, increase our revenue and continue our growth.
In addition, we must retain our current sales representatives and agents and properly incentivize them to obtain new clients and maintain existing client relationships. If a significant number of our sales representatives and agents leave us, our revenue could be negatively impacted. We have entered into agreements with our sales representatives and agents that contain non-compete provisions to mitigate this risk, but we may need to litigate to enforce our rights under these agreements, which could be time-consuming, expensive and ineffective. A significant increase in the turnover rate among our current sales representatives and agents could also increase our recruiting costs and lead to a decline in the demand for our services.


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Our business depends on compliance with many government regulations.
International and domestic transportation of goods is subject to a number of governmental regulations, including licensing and financial security requirements, import and export regulations, security requirements, packaging regulations and notification requirements. These regulations and requirements are subject to change based on new legislation and regulatory initiatives, which could affect the economics of the transportation industry by requiring changes in operating practices or influencing the demand for, and the cost of providing, transportation services.
We are licensed by the U.S. Department of Transportation as a broker authorized to arrange for the transportation of general commodities by motor vehicle. We must comply with certain insurance and surety bond requirements to act in this capacity.
We are currently providing customs broker services through contracts with licensed customs brokers. We contract with indirect air carriers that have been approved by the TSA, and are required to comply with air security regulations imposed by the TSA. In addition, our ocean transportation business is subject to regulation by the FMC.
We may experience an increase in operating costs, such as security costs, as a result of governmental regulations that have been and will be adopted in response to terrorist activities and potential terrorist activities. No assurances can be given that we will be able to pass these increased costs on to our clients in the form of rate increases or surcharges.
From time to time, we arrange for the movement of hazardous materials at the request of our clients. As a result, we are subject to various environmental laws and regulations relating to the handling, transport and disposal of hazardous materials. If our clients or carriers are involved in a spill or other accident involving hazardous materials, or if we are found to be in violation of applicable laws or regulations, we could be subject to substantial fines or penalties, response or remediation costs and civil and criminal liability, any of which could have an adverse effect on our business and results of operations. In addition, current and future national laws and multilateral agreements relating to carbon emissions and the effects of global warming could have a significant impact on the transportation sector, including the operations and profitability of our carriers, which could adversely affect our business and results of operations.
Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.
In the future, we may be required to raise capital through public, private or other financing arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Additional equity financing may dilute the interests of our common stockholders, and debt financing, if available, may involve restrictive covenants.
Our insurance coverage and self-insurance reserves may not cover future claims.

We maintain various insurance policies for employee health, worker’s compensation, general liability, property damage and auto liability. Since January 2014, we have been self-insured for our employee health plans.
    
For policies under which we are responsible for losses, we record a liability that represents our estimated cost of claims incurred and unpaid as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions, and is closely monitored and adjusted when warranted by changing circumstances. Our history of claims experience is short and our significant growth rate could affect the accuracy of estimates based on historical experience. If a greater amount of claims occurs compared to what we estimated, or if medical costs exceed what we expected, our accrued liabilities might not be sufficient and we may be required to record additional expense. In addition, unanticipated changes may produce materially different amounts of expense than reported under these programs, which could adversely impact our results of operations.
Risks Related to Ownership of Our Common Stock
The trading price of our common stock has been and may continue to be volatile.
Since our initial public offering in October 2009 through February 23, 2017 , the closing sale price of our common stock as reported by the Nasdaq Global Select Market has ranged from a low of $10.04 on November 11, 2010 to a high of $34.14 on June 23, 2015.



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Certain factors may cause the market price of our common stock to fluctuate, including:
fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
changes in market valuations of similar companies;
success of competitors' products or services;
changes in our capital structure, such as future issuances of debt or equity securities;
announcements by us, our competitors, our clients or our suppliers of significant products or services, contracts, acquisitions or strategic alliances;
regulatory developments in the United States or foreign countries;
litigation involving our company, our general industry or both;
additions or departures of key personnel;
investors' general perception of us;
changes in general economic, industry and market conditions; and
the impact of our common stock and convertible note repurchase program.
In addition, if the stock market experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and distracting to management. As a result, you could lose all or part of your investment.
Our quarterly results are difficult to predict and may vary from quarter to quarter, which may result in our failure to meet the expectations of investors and increased volatility of our stock price.
The degree to which our clients continue to use our services depends in part on the business activities of our clients and our ability to continue to meet their cost saving needs. A significant percentage of our revenue is subject to the discretion of our Transactional clients, who may stop using our services at any time. In addition, the transportation industry in which we operate is subject to some degree of seasonal sales fluctuation, as shipments generally are lower during and after the winter holiday season because many of our retail clients ship goods and stock inventories prior to the winter holiday season. Therefore, the number, size and profitability of shipments may vary significantly from quarter to quarter. As a result, our quarterly operating results are difficult to predict and may fall below the expectations of current or potential investors in future quarters, which could lead to a significant decline in the market price of our stock and volatility in our stock price.
We do not currently intend to pay dividends, which may limit the return on stockholder investment in us.
We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
If our Board of Directors authorizes the issuance of preferred stock, holders of our common stock could be diluted and harmed.
Our Board of Directors has the authority to issue up to 2,500,000 shares of preferred stock in one or more series and to establish the preferred stock's voting powers, preferences and other rights and qualifications without any further vote or action by the stockholders. The issuance of preferred stock could adversely affect the voting power and dividend liquidation rights of the holders of common stock. In addition, the issuance of preferred stock could have the effect of making it more difficult for a third-party to acquire, or discourage a third-party from acquiring, a majority of our outstanding voting stock or otherwise adversely affect the market price of our common stock. It is possible that we may need, or find it advantageous, to raise capital through the sale of preferred stock in the future.



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We may not have the ability to raise the funds necessary to settle conversions of our 2.50% convertible notes due 2020 (the "Notes") or to repurchase the Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.

Holders of our Notes have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of our Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or Notes being converted. In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the related indenture or to pay any cash payable on future conversions of the Notes as required by the related indenture would constitute a default under such indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our current and future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof.

The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.

In the event certain conversion features of the Notes are triggered, holders of the Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

The fundamental change repurchase feature of the Notes may delay or prevent an otherwise beneficial attempt to take over our company.

The terms of the Notes require us to repurchase the Notes in the event of a fundamental change. A takeover of our Company would trigger options by the respective holders of the applicable Notes to require us to repurchase such Notes. This may have the effect of delaying or preventing a takeover of our Company that would otherwise be beneficial to our stockholders.

Item 1B.     Unresolved staff comments
None.


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Item 2.     Properties

Our corporate headquarters is located in Chicago, Illinois. As of December 31, 2016 , we leased approximately 225,000 square feet for our corporate headquarters. Up until December 2016, we also leased space in Skokie, Illinois, the former headquarters of Command, totaling approximately 25,000 square feet. The lease of the former Command headquarters in Skokie terminated on December 20, 2016.

As of December 31, 2016 , we also operated over 30 branch sales offices and two data centers located across the contiguous United States. All of these facilities are leased, and none is larger than 20,000 square feet.

We consider these properties to be in good condition. We believe that our facilities are adequate for our operations and provide sufficient capacity to meet our anticipated requirements.

Item 3.     Legal Proceedings

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

Item 4.     Mine Safety Disclosures

Not applicable.



16


Part II

Item 5.     Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol "ECHO." The following table sets forth the high and low sales price for our common stock as reported by the Nasdaq Global Select Market for each of the periods listed.
2016
High
 
Low
First Quarter
$
28.49

 
$
18.65

Second Quarter
$
27.17

 
$
20.52

Third Quarter
$
26.70

 
$
21.23

Fourth Quarter
$
28.90

 
$
20.25

2015
High
 
Low
First Quarter
$
29.94

 
$
24.11

Second Quarter
$
34.35

 
$
24.07

Third Quarter
$
33.56

 
$
19.43

Fourth Quarter
$
24.85

 
$
16.56

Holders
As of February 23, 2017 , there were eight individual holders of record of our common stock. Holders of our common stock are entitled to one vote per share.
Dividends
We currently do not intend to pay any dividends on our common stock in the foreseeable future. We intend to retain all available funds and any future earnings for use in the operation and the expansion of our business. Any determination in the future to pay dividends will depend on our financial condition, capital requirements, operating results and other factors deemed relevant by our Board of Directors, including any contractual or statutory restrictions on our ability to pay dividends.
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 fourth quarter of 2016.
Period
 
Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
10/1/16-10/31/16
 
409,545

 
$
22.28

 
401,429
 
$
4,578,832

11/1/16-11/30/16
 
172,083

 
$
21.64

 
172,083
 
$
851,088

12/1/16-12/31/16
 
208

 
$
27.05

 

 
$
851,088

Total
 
581,836

 
$
22.10

 
573,512

 


(1)  
On December 29, 2015, the Board of Directors authorized a repurchase program for up to an aggregate of $50.0 million of the Company's outstanding common stock and 2.50% convertible senior notes due 2020 prior to its expiration on December 31, 2017. 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.



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Securities Authorized For Issuance Under Equity Compensation Plan
Plan Category
(a) Number of Securities to be Issued Upon Exercise
of Outstanding Options
 
Weighted Average
Exercise Price of
Outstanding Options
 
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding
Securities Reflected
in Column (a))
 
Equity compensation plans approved by security holders (1)
578,291

 
$
10.99

 
706,093

(2)  
Equity compensation plans not approved by security holders (3)

 

 

 
Total
578,291

 
$
10.99

 
706,093

 
____________________
(1)  
Includes our 2005 Stock Option Plan, which was merged with our 2008 Stock Incentive Plan.
(2)  
Includes shares remaining available for future issuance under our 2008 Stock Incentive Plan.
(3)  
In connection with the Command acquisition, on June 1, 2015, the Company adopted the 2015 Inducement and Retention Stock Plan for Command Employees pursuant to NASDAQ Stock Market Listing Rule 5635(c)(4), which provides an exception to the NASDAQ shareholder approval requirements for the issuance of securities with regard to grants to prospective employees of the Company, including without limitation grants to prospective employees in connection with a merger or other acquisition (the "Inducement Plan"). As of December 31, 2016 , there were no securities available for future issuance under the Inducement Plan.


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Item 6.     Selected Financial Data
The following tables present selected consolidated financial and other data as of and for the periods indicated. You should read the following information together with the more detailed information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.
 
Year ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(in thousands, except per share data)
Consolidated statements of operations data:
 
 
 
 
 
 
 
 
 
Revenue
$
1,716,152

 
$
1,512,299

 
$
1,173,383

 
$
884,193

 
$
757,688

Transportation costs
1,397,578

 
1,222,035

 
965,165

 
728,544

 
614,563

Net revenue (1)
318,574

 
290,264

 
208,218

 
155,649

 
143,125

Operating expenses:
 
 
 
 
 
 
 
 
 
Commissions
95,631

 
85,957

 
57,678

 
39,481

 
40,392

Selling, general and administrative expenses
175,302

 
157,056

 
106,974

 
82,298

 
70,702

Acquisition-related impairment loss

 

 

 

 
2,491

Contingent consideration (benefit) expense
(108
)
 
201

 
2,160

 
101

 
(130
)
Depreciation and amortization
32,138

 
24,143

 
13,876

 
10,565

 
9,139

Total operating expenses
302,963

 
267,357

 
180,688

 
132,445

 
122,594

Income from operations
15,611

 
22,907

 
27,530

 
23,204

 
20,531

Interest expense
(14,227
)
 
(11,276
)
 
(106
)
 
(1
)
 
(9
)
Interest income and other expense

 
(103
)
 
(144
)
 
(355
)
 
(424
)
Income before provision for income taxes
1,384

 
11,528

 
27,280

 
22,848

 
20,098

Income tax benefit (expense)
206

 
(3,682
)
 
(10,492
)
 
(8,645
)
 
(7,777
)
Net income
1,590

 
7,846

 
16,788

 
14,203

 
12,321

 


 
 
 
 
 
 
 
 
Net income applicable to common stockholders
$
1,590

 
$
7,846

 
$
16,788

 
$
14,203

 
$
12,321

Earnings per common share:
 
 
 
 
 
 
 
 
 
Basic
$
0.06

 
$
0.29

 
$
0.73

 
$
0.62

 
$
0.55

Diluted
$
0.05

 
$
0.28

 
$
0.71

 
$
0.61

 
$
0.54

Shares used in per share calculations (in thousands):
 
 
 
 
 
 
 
 
 
Basic
28,715

 
27,473

 
23,044

 
22,861

 
22,357

Diluted
29,302

 
28,110

 
23,634

 
23,404

 
22,899


(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:
 
Year ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
 (in thousands)
Revenue
$
1,716,152

 
$
1,512,299

 
$
1,173,383

 
$
884,193

 
$
757,688

Transportation costs
1,397,578

 
1,222,035

 
965,165

 
728,544

 
614,563

Net revenue
$
318,574

 
$
290,264

 
$
208,218

 
$
155,649

 
$
143,125








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Table of Contents

Employee Count

The number of employees on the last day of the applicable period were as follows:

 
Year ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Total employees
2,350

 
2,335

 
1,734

 
1,297

 
1,364



 
As of December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(in thousands)
Consolidated balance sheet data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
16,646

 
$
56,522

 
$
32,542

 
$
52,507

 
$
41,781

Working capital
100,360

 
123,432

 
58,421

 
87,674

 
71,670

Total assets
766,768

 
746,510

 
316,044

 
245,147

 
219,483

Total liabilities
408,618

 
351,260

 
134,170

 
85,917

 
78,498

Total stockholders' equity
$
358,150

 
$
395,250

 
$
181,874

 
$
159,230

 
$
140,985


20

Table of Contents


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

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 TL and LTL carriers. We also offer intermodal (which involves moving a shipment by rail and truck), small parcel, domestic air, expedited and international transportation services. Our core logistics services include rate negotiation, shipment execution and tracking, carrier selection and management, routing compliance, freight bill payment and audit, payment and performance management and reporting functions, including executive dashboard tools.

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 transportation and logistics services to our Transactional clients on a shipment-by-shipment basis, typically with individual, or spot market, pricing. We typically enter into multi-year contracts 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.



21

Table of Contents

Results of Operations

The following table represents certain results of operations data:

 
Year Ended December 31,
 
2016
 
2015
 
2014
 
(in thousands, except per share data)
Consolidated statements of operations data:
 
 
 
 
 
Revenue
$
1,716,152

 
$
1,512,299

 
$
1,173,383

Transportation costs
1,397,578

 
1,222,035

 
965,165

Net revenue (1)
318,574

 
290,264

 
208,218

Operating expenses:
 
 
 
 
 
Commissions
95,631

 
85,957

 
57,678

Selling, general and administrative expenses
175,302

 
157,056

 
106,974

Contingent consideration (benefit) expense
(108
)
 
201

 
2,160

Depreciation and amortization
32,138

 
24,143

 
13,876

Total operating expenses
302,963

 
267,357

 
180,688

Income from operations
15,611

 
22,907

 
27,530

Interest expense
(14,227
)
 
(11,276
)
 
(106
)
Interest income and other expense

 
(103
)
 
(144
)
Income before provision for income taxes
1,384

 
11,528

 
27,280

Income tax benefit (expense)
206

 
(3,682
)
 
(10,492
)
Net income
$
1,590

 
$
7,846

 
$
16,788

 
 
 
 
 
 
Stated as a percentage of net revenue:
 
 
 
 
 
Net revenue (1)
100.0
 %
 
100.0
%
 
100.0
%
Operating expenses:
 
 
 

 
 
Commissions
30.0
 %
 
29.6
%
 
27.7
%
Selling, general and administrative expenses
55.0
 %
 
54.1
%
 
51.4
%
Contingent consideration (benefit) expense
(0.0
)%
 
0.1
%
 
1.0
%
Depreciation and amortization
10.1
 %
 
8.3
%
 
6.7
%
Total operating expenses
95.1
 %
 
92.1
%
 
86.8
%
Income from operations
4.9
 %
 
7.9
%
 
13.2
%
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
      Basic
$
0.06

 
$
0.29

 
$
0.73

      Diluted
$
0.05

 
$
0.28

 
$
0.71

Shares used in per share calculations (in thousands):
 
 
 
 
 
      Basic
28,715

 
27,473

 
23,044

      Diluted
29,302

 
28,110

 
23,634


(1) Net revenue is a non-GAAP measure calculated as revenue less transportation costs. See Item 6 for a reconciliation of net revenue to revenue, the most comparable GAAP measure.



22



Revenue

We generate revenue through the sale of transportation and logistics services to our clients. Revenue is recognized when the client's product is delivered by a third-party carrier. Our revenue was $1.7 billion , $1.5 billion and $1.2 billion  for the years ended December 31, 2016 , 2015 and 2014 , respectively, reflecting growth rates of 13.5% and 28.9% in 2016 and 2015 , respectively, compared to the corresponding prior year.

Our revenue is generated from two different types of clients: Transactional and Managed Transportation. Most of our clients are categorized as Transactional clients. 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 exclusive for a certain transportation mode or point of origin. In several cases, we provide substantially all of a client's transportation and logistics requirements. Our Managed Transportation accounts typically generate higher dollar amounts and volume than our Transactional relationships. For the years ended December 31, 2016 , 2015 and 2014 , Transactional clients accounted for 81.3% , 81.0% and 74.3% of our revenue, respectively, and Managed Transportation clients accounted for 18.7% , 19.0% and 25.7% of our revenue, respectively. We expect to continue to expand 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, LTL and intermodal. Other transportation modes include domestic air, expedited services, international and small parcel. Material shifts in the percentage of our revenue by transportation mode could have a significant impact on our revenue growth. In 2016 , TL accounted for 67.6% of our revenue, LTL accounted for 26.4% of our revenue, intermodal accounted for 4.3% of our revenue and other transportation accounted for 1.7% of our revenue.

The transportation industry has historically been subject to seasonal sales fluctuations as shipments generally are lower during and after the winter holiday season because many companies ship goods and stock inventories prior to the winter holiday season. While we experience some seasonality, differences in our revenue between periods have been driven primarily by growth in our client base.

Transportation costs and net revenue

We act primarily as a service provider to add value and expertise in the procurement and execution of transportation and logistics services for our clients. Our pricing structure is primarily variable, although we have entered into a limited number of fixed-fee arrangements that represent an insignificant portion of our revenue. Net revenue is a non-GAAP measure equal to 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. In turn, our net revenue margin is typically higher for an LTL shipment than for a TL shipment. Material shifts in the percentage of our revenue by transportation mode, including small parcel, could have a significant impact on our net revenue. The discussion of our results of operations below focuses on changes in our expenses as a percentage of net revenue. In 2016 , 2015 and 2014 , our net revenue was $318.6 million , $290.3 million and $208.2 million , respectively, reflecting growth rates of 9.8% and 39.4% in 2016 and 2015 , respectively, compared to the corresponding prior year.

Operating expenses

Our costs and expenses, excluding transportation costs, consist of commissions paid to our sales personnel, general and administrative expenses to run our business, changes in our contingent consideration, acquisition-related transaction costs, 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 the sales personnel have primary responsibility. In 2016, 2015 and 2014 , commission expense was $95.6 million , $86.0 million and $57.7 million , respectively. In 2016, 2015 and 2014 , commission expense as a percentage of net revenue was 30.0% , 29.6% and 27.7% , respectively. TL shipments typically have higher commission percentages than other modes. The percentage of net revenue

23


paid as commissions varies 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.

We accrue for commission expense when we recognize the related revenue. Some of our sales personnel receive a monthly advance to provide them with a more consistent income stream. Cash paid to our sales personnel in advance of commissions earned is recorded as a prepaid expense. As our sales personnel earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any.

Our selling, general and administrative expenses, which exclude commission expense and changes to contingent consideration, consist of compensation costs for our sales, operations, information systems, finance and administrative support employees as well as occupancy costs, professional fees, acquisition-related transaction costs, and other general and administrative expenses. In 2016, 2015 and 2014 , our selling, general and administrative expenses were $175.3 million , $157.1 million and $107.0 million , respectively. In 2016, 2015 and 2014 , selling, general and administrative expenses as a percentage of net revenue were 55.0% , 54.1% and 51.4% , respectively.

Our contingent consideration expense or benefit 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 to or received from the sellers of certain acquired businesses upon the achievement of certain performance measures. The fair value 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. In 2016, we recorded a benefit of $0.1 million , compared to charges of $0.2 million and $2.2 million in 2015 and 2014, respectively, due to fair value adjustments to our contingent consideration assets and liabilities.

Our depreciation expense is primarily attributable to our depreciation of computer hardware and software, equipment, leasehold improvements, furniture and fixtures and internally developed software. In 2016, 2015 and 2014 , depreciation expense was $16.3 million , $12.4 million and $10.0 million , respectively.

Our amortization expense is attributable to our amortization of intangible assets acquired from business combinations, including customer and carrier relationships, trade names and non-compete agreements. In 2016, 2015 and 2014 , amortization expense was $15.8 million , $11.7 million and $3.9 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 5 year life of the Notes using the effective interest method. We amortize the issuance costs related to our ABL Facility over the 5 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 $14.2 million , $11.2 million and $0.1 million for 2016 , 2015 and 2014 , respectively.
Critical Accounting Policies
Revenue Recognition
In accordance with Accounting Standards Codification ("ASC") Topic 605-20 Revenue Recognition - Services , transportation revenue and related transportation costs are recognized when the shipment has been delivered by a third-party carrier. Fee for service revenue is recognized when the services have been rendered. At the time of delivery or rendering of services, as applicable, our obligation to fulfill a transaction is complete and collection of revenue is reasonably assured.
In accordance with ASC Topic 605-45 Revenue Recognition - Principal Agent Considerations , we generally recognize revenue on a gross basis, as opposed to a net basis similar to a commission arrangement, because we bear the risks and benefits associated with revenue-generated activities by, among other things: (1) acting as a principal in the transaction; (2) establishing prices; (3) managing all aspects of the shipping process, including selection of the carrier; and (4) taking the risk of loss for collection, delivery, and returns. Certain transactions to provide specific services are recorded at the net amount charged to the client due to the following key factors: (a) we do not have latitude in carrier selection; (b) we do not establish rates with the carrier; and (c) we have credit risk for only the net revenue earned from our client while the carrier has credit risk for the transportation costs. Net revenue equals revenue minus transportation costs.

24


Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are uncollateralized customer obligations due under normal trade terms. We extend credit to certain clients in the ordinary course of business based on the customers' credit history. Invoices require payment within 30 to 90 days from the invoice date. Accounts receivable are stated at the amount billed to the customer. Customer account balances with invoices past due 90 days are considered delinquent. We generally do not charge interest on past due amounts.
The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts that reflects management's best estimate of amounts that will not be collected. The allowance is based on historical loss experience and any specific risks identified in client collection matters. Accounts receivable are charged off against the allowance for doubtful accounts when it is determined that the receivable is uncollectible.
Goodwill and Other Intangibles
Goodwill represents the excess of consideration transferred over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with ASC Topic 350 Intangibles - Goodwill and Other : Testing Goodwill for Impairment , goodwill is not amortized, but instead is tested for impairment annually, or more frequently if circumstances indicate a possible impairment may exist. Absent any special circumstances that could require an interim test, we have elected to test for goodwill impairment during the fourth quarter of each year.
Prior to the Command integration in October 2016, we were organized into two operating segments for purposes of goodwill impairment testing, Echo and Command, which were aggregated into one reportable segment pursuant to the provisions of ASC Topic 280 Segment Reporting , which establishes accounting standards for segment reporting. Prior to the integration of Command and as part of our annual goodwill impairment assessment, we performed a quantitative impairment assessment of both reporting units. We estimated fair value of these reporting units using the best information available. We utilized a combination of two valuation methodologies commonly referred to as the income approach and the market approach. For the income approach, we used the discounted cash flow model and for the market approach, we used the guideline public company method. The discounted cash flow method under the income approach uses the reporting unit's projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions appropriate to the reporting unit. The guideline public company method under the market approach uses pricing multiples of a peer group of publicly traded companies and applies these multiples to the operating results of each reporting unit to provide indications of value. A concluded enterprise value based on equal weighting of the two methods was reconciled to current market capitalization. Both methods use management's best estimates of economic and market conditions over the projected period, including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. As a result of our quantitative assessment of the two reporting units, we concluded that the fair value of each reporting unit exceeded its carrying amount.
Subsequent to the integration of Command, we manage the business as one operating segment and reporting unit. There have been no changes in our determination that we have one reportable segment from prior periods. In September 2011, the Financial Accounting Standards Board ("FASB") approved Accounting Standards Update ("ASU") No. 2011-08, “ Intangibles - Goodwill and Other: Testing Goodwill for Impairment ." This ASU permits an entity to first assess qualitative factors to determine whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. After assessing qualitative factors, if an entity determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, no further testing is necessary. After the integration of Command, we performed a qualitative goodwill impairment assessment of the single, combined reporting unit in accordance with ASC 350. We concluded that it was more likely than not that the fair value of the combined reporting unit exceeded its carrying amount.
ASC Topic 350 also requires that intangible assets with finite lives be amortized over their respective estimated useful lives and reviewed for impairment whenever impairment indicators exist in accordance with ASC Topic 360 Property, Plant and Equipment . Our intangible assets consist of customer relationships, carrier relationships, non-compete agreements and trade names, which are being amortized on an accelerated basis over their estimated weighted-average useful lives of 14.8 years , 17.0 years , 6.7 years and 4.0 years , respectively. Refer to Note 7.
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC Topic 718 Compensation - Stock Compensation which requires all share-based payments to employees, including grants of stock options, to be recognized in the income statement based upon their fair values. Share-based employee compensation costs are recognized as a component of selling, general and

25


administrative expense in the consolidated statements of operations. For more information about our stock-based compensation programs, see Note 14—Stock-Based Compensation Plans.
Income Taxes
We account for income taxes in accordance with ASC Topic 740 Income Taxes , under which deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases. A valuation allowance is established to reduce the carrying value of deferred tax assets if it is considered more likely than not that such assets will not be realized. Any change in the valuation allowance would be charged to income in the period such determination was made.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement.

Comparison of years ended December 31, 2016 and 2015

Revenue

Revenue was $1.7 billion in 2016 , an increase of 13.5% from $1.5 billion in 2015 . The increase in revenue was attributable to a full year of revenue from Command and an increase in shipment volume, offset by a decline in TL rates. Command contributed $477.9 million of revenue for the year ended December 31, 2016 . In the prior year, Command contributed $286.4 million of revenue from the acquisition date through December 31, 2015.

Revenue from Transactional clients was $1.4 billion in 2016 , an increase of 13.9% from $1.2 billion  in 2015 . Our percentage of revenue from Transactional clients was 81.3% in 2016 , an increase from 81.0% in 2015 . The increase in Transactional revenue was driven by the full year impact of the Command acquisition, along with increases in both the number and productivity of client sales employees, offset by a decline in TL Rates.

Revenue from Managed Transportation clients was $320.3 million in 2016 , an increase of 11.6% from $287.0 million in 2015 . This increase was driven by an increase in the number of Managed Transportation clients and overall Managed Transportation shipment volume. In 2016 , 18.7% of our revenue was generated from Managed Transportation clients, a decrease from 19.0% in 2015 . This decrease was driven by the inclusion of a full year of Transactional revenue resulting from the acquisition of Command.

Transportation costs

Transportation costs were $1.4 billion in 2016 , an increase of 14.4% from $1.2 billion in 2015 . The growth in the total number of shipments, including the shipments attributable to a full year of results from the Command acquisition, drove the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue increased to 81.4% in 2016 from 80.8% in 2015 due to a decline in TL margins.

Net revenue

Net revenue was $318.6 million in 2016 , an increase of 9.8% from $290.3 million in 2015 . The growth in the total number of shipments, including the shipments attributable to a full year of results from the Command acquisition, accounted for most of the increase in our net revenue during this period. Net revenue margins decreased to 18.6% in 2016 from 19.2% in 2015 due to a decline in TL margins.

Operating expenses

Commission expense was $95.6 million in 2016 , an increase of 11.3% from $86.0 million in 2015 . This increase was primarily attributable to the increase in net revenue, including the net revenue attributable to a full year of results from the Command acquisition. For 2016 and 2015 , commission expense was 30.0% and 29.6% , respectively, of our net revenue. The marginal increase in commission expense as a percentage of net revenue was due to the fluctuation in the composition of our net revenue by mode, as TL shipments typically have higher commission percentages than other modes. The increase in TL net revenue as a percent of total net revenue was driven by a full year of results from the Command acquisition and by organic TL growth at Echo.

26



Selling, general and administrative expenses were $175.3 million in 2016 , an increase of 11.6% from $157.1 million in 2015 . As a percentage of net revenue, selling, general and administrative expenses increased to 55.0% in 2016 from 54.1% in 2015 . These increases are primarily attributable to integration costs resulting from the Command integration and lower net revenue margins.

The contingent consideration fair-value adjustment resulted in a benefit of $0.1 million and expense of $0.2 million in 2016 and 2015 , respectively. In the current year, the benefit is the result of adjustments made to the fair value of the contingent obligation due to previous acquisition owners as a result of financial performance and the time value of money. The benefit was offset by an increase in the fair value of the receivable due from the former owner of Command, as the likelihood of employee retention was adjusted along with the time value of money. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of December 31, 2016 .
 
Depreciation expense was $16.3 million in 2016 , an increase of 31.7% from $12.4 million in 2015 . The increase in depreciation expense was primarily attributable to the leasehold improvements, addition of furniture and the addition of computer equipment for the new Chicago space, as the former Command employees located in Skokie moved to the Chicago headquarters in October 2016. The increase was also due to purchases of computer hardware and software, equipment, leasehold improvements, furniture and fixtures, and internally developed software.

Amortization expense in 2016 was $15.8 million , an increase of 34.6% from $11.7 million in 2015 . The increase in amortization expense was attributable to the amortization of intangible assets for a full year of expense related to the 2015 acquisitions of Command and Xpress Solutions, Inc. ("Xpress").

Income from operations

Income from operations was $15.6 million in 2016 , a decrease of 31.9% from $22.9 million in 2015 . The decrease in income from operations was primarily due to the increase of Command integration expenses, depreciation and amortization expenses along with the lower net revenue margins.

Interest expense

Interest expense was $14.2 million in 2016 , an increase from $11.2 million in 2015. The increase in interest expense was primarily related to a full year of interest expense on our Notes issued in May 2015 and the ABL Facility we entered into in June 2015.

Income tax benefit (expense)

An income tax benefit of $0.2 million was recognized in 2016 , compared to an expense of $3.7 million in 2015 . Our effective tax rate decreased to approximately (14.9)% in 2016 from 31.9% in 2015 . Our effective tax rate decreased due to an increase of the research and development credit, a tax credit related to a state incentive program and lower pre-tax income.

Net Income

Net income was $1.6 million in 2016 , compared to $7.8 million in 2015 as a result of the items previously discussed.

Comparison of years ended December 31, 2015 and 2014

Revenue

Revenue was $1,512.3 million in 2015, an increase of 28.9% from $1,173.4 million in 2014. The increase in revenue was attributable to an increase in shipment volume and net revenue margin. Included in this increase was $286.4 million and $11.8 million of revenue from our 2015 acquisitions Command and Xpress, respectively.

Revenue from Transactional clients was $1,225.3 million in 2015, an increase of 40.6% from $871.3 million in 2014. Our percentage of revenue from Transactional clients was 81.0% in 2015, an increase from 74.3% in 2014. The increase in Transactional revenue was driven by increases in both the number and productivity of sales employees as well as by the addition of Transactional revenue from Command and Xpress.


27


Revenue from Managed Transportation clients was $287.0 million in 2015, a decrease of 5.0% from $302.1 million in 2014. This decrease was driven by lower fuel costs and the effect of restructuring contracts with two Managed Transportation clients. In 2015, 19.0% of our revenue was generated from Managed Transportation clients, a decrease from 25.7% in 2014. This decrease was driven by the addition of Transactional revenue from Command and Xpress, as well as by the overall decrease in Managed Transportation revenue discussed above.

Transportation costs

Transportation costs were $1,222.0 million in 2015, an increase of 26.6% from $965.2 million in 2014. The growth in the total number of shipments, including the shipments attributable to our 2015 acquisitions, drove the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue decreased to 80.8% in 2015 from 82.3% in 2014, due to an increase in TL margins and a decrease in fuel prices across all modes.

Net revenue

Net revenue was $290.3 million in 2015, an increase of 39.4% from $208.2 million in 2014. The growth in the total number of shipments, including the shipments attributable to our 2015 acquisitions, accounted for most of the increase in our net revenue during this period. Net revenue margins increased to 19.2% in 2015 from 17.7% in 2014, due to an increase in TL margins and a drop in fuel prices across all modes.

Operating expenses

Commission expense was $86.0 million in 2015, an increase of 49.0% from $57.7 million in 2014. This increase was primarily attributable to the increase in net revenue, including the net revenue attributable to our 2015 acquisitions. For 2015 and 2014, commission expense was 29.6% and 27.7%, respectively, of our net revenue. The increase in commission expense as a percentage of net revenue was due to the fluctuation in the composition of our net revenue by mode, as TL shipments typically have higher commission percentages than other modes. The increase in TL net revenue as a percent of total net revenue was driven by the acquisition of Command and by organic TL growth at Echo.

Selling, general and administrative expenses were $157.1 million in 2015, an increase of 46.8% from $107.0 million in 2014. As a percentage of net revenue, selling, general and administrative expenses increased to 54.1% in 2015 from 51.4% in 2014. These increases are due primarily to acquisition-related transaction costs associated with the Command acquisition, the Command selling, general and administrative expenses included in our statements of operations since June 2015, and the hiring of additional sales and operational personnel to drive the continued growth of our business and to support the growth in customers and shipment volume.

The contingent consideration fair-value adjustment resulted in expenses of $0.2 million and $2.2 million in 2015 and 2014, respectively. In both the current and prior year, the expense was due to the improved financial performance of certain acquired businesses, as well as the effect of the time value of money. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of December 31, 2015.
 
Depreciation expense was $12.4 million in 2015, an increase of 24.7% from $10.0 million in 2014. The increase in depreciation expense was primarily attributable to depreciation on purchases of computer hardware and software, equipment, leasehold improvements, furniture and fixtures, and internally developed software.

Amortization expense in 2015 was $11.7 million, an increase of 199.0% from $3.9 million in 2014. The increase in amortization expense was attributable to the amortization of intangible assets related to the acquisitions of Command and Xpress.

Income from operations

Income from operations was $22.9 million in 2015, a decrease of 16.8% from $27.5 million in 2014. The decrease in income from operations was primarily due to acquisition-related expenses incurred in 2015 for the Command acquisition.

Interest expense

Interest expense was $11.2 million in 2015, an increase from $0.1 million in 2014. The substantial increase in interest expense was primarily related to our Notes issued in May 2015 and the ABL Facility we entered into in June 2015. In addition,

28


we recorded $2.0 million of one-time interest expense in 2015 related to the Term Loan Facility we entered into in April 2015. The Term Loan Facility was never utilized.

Income tax expense

Income tax expense was $3.7 million in 2015, a decrease from $10.5 million in 2014. This decrease was due to the decrease in income before taxes in the current year. Our effective tax rate decreased to approximately 31.9% in 2015 from 38.5% in 2014. Our effective tax rate decreased due to the impact of the research and development credit on lower income before taxes in 2015, as well as due to changes in state apportionment percentages.

Net Income

Net income was $7.8 million in 2015, compared to $16.8 million in 2014 as a result of the items previously discussed.
Quarterly Results of Operations
The following table represents our unaudited results of operations data for our most recent eight fiscal quarters. You should read the following table in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The results of operations of any quarter are not necessarily indicative of the results that may be expected for any future period.
 
Three Months Ended
 
Dec. 31, 2016
 
Sept. 30, 2016
 
June 30, 2016
 
Mar. 31, 2016
 
Dec. 31, 2015
 
Sept. 30, 2015
 
June 30, 2015 (2)
 
Mar. 31, 2015 (3)
 
(in thousands, except per share data) (unaudited)
Revenue
$
406,853

 
$
460,192

 
$
443,830

 
$
405,278

 
$
407,171

 
$
449,993

 
$
371,642

 
$
283,492

Net revenue (1)
71,708

 
80,863

 
85,178

 
80,827

 
80,092

 
87,378

 
69,541

 
53,252

Operating (loss) income
(1,284
)
 
6,027

 
7,046

 
3,821

 
6,104

 
8,612

 
2,840

 
5,351

Net (loss) income
(2,966
)
 
2,362

 
1,931

 
263

 
1,741

 
3,459

 
(682
)
 
3,328

(Loss) earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     Basic
$
(0.10
)
 
$
0.08

 
$
0.07

 
$
0.01

 
$
0.06

 
$
0.12

 
$
(0.03
)
 
$
0.14

     Diluted
$
(0.10
)
 
$
0.08

 
$
0.07

 
$
0.01

 
$
0.06

 
$
0.11

 
$
(0.03
)
 
$
0.14

(1) Net revenue is a non-GAAP measure calculated as revenue less transportation costs. See Item 6 for a reconciliation of net revenue to revenue, the most comparable GAAP measure.
(2) The Company acquired Command in June 2015 and the financial results of this acquisition are included in the consolidated financial statements beginning June 1, 2015.
(3) The Company acquired Xpress in February 2015 and the financial results of this acquisition are included in the consolidated financial statements beginning February 1, 2015.

Liquidity and Capital Resources

As of December 31, 2016 , we had $16.6 million in cash and cash equivalents, $100.4 million in working capital and $169.3 million available under our ABL Facility.

Cash provided by operating activities

For the year ended December 31, 2016 , $59.7 million of cash was provided by operating activities. This was a decrease from $70.8 million in 2015 , but an increase from $32.4 million in 2014. In 2016 , we generated $58.9 million in cash from net income, adjusted for noncash operating items, an increase from $51.1 million in 2015 and $38.0 million in 2014 . Changes in working capital primarily relate to changes in accounts receivable, accounts payable and accrued expense balances.

Cash used in investing activities

Cash used in investing activities was $46.9 million , $405.1 million and $48.9 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. In 2016, the primary investing activities were capital expenditures. In 2015, the primary investing activities were the cash consideration transferred for the acquisitions of Command and Xpress, as well as capital

29


expenditures. In 2014, the primary investing activities were the cash consideration transferred for the acquisitions of Online Freight Services, Inc. ("OFS"), Comcar Logistics, LLC ("Comcar") and One Stop Logistics, Inc. ("One Stop"), as well as capital expenditures.

Our capital expenditures were $46.9 million , $14.7 million and $15.2 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. Our capital expenditures increased in 2016 due to the procurement of computer hardware and software, internal development of computer software, leasehold improvements and furniture and fixtures for the newly expanded office space at our Chicago headquarters. Computer hardware and software are both purchased from third party vendors.

Cash (used in) provided by financing activities

Cash used in financing activities was $52.7 million in 2016 . Cash provided by financing activities in 2015 was $358.3 million , and cash used in financing activities was $3.4 million in 2014 .

In 2016, the primary financing activities were the purchases of $49.1 million of treasury stock as part of the share repurchase program (described in Note 12), the $2.3 million payments of contingent consideration, and the $4.9 million use of cash to satisfy employee tax withholdings upon the vesting of restricted stock. We also drew $48.5 million on our ABL Facility (all of which was repaid as of December 31, 2016 ). In 2015, we generated $223.1 million in cash from the issuance of Convertible Notes (net of underwriting discounts and commissions) and $158.4 million from the issuance of our common stock (net of underwriting discounts and commissions). We also drew $40.0 million on our ABL Facility and $34.8 million on our LOC Facility (all of which was repaid as of December 31, 2015). See the "ABL Facility" section below for descriptions of our ABL Facility and LOC Facility. This cash generation was partially offset by 2015 payments of $17.5 million to the former owners of One Stop, $4.1 million of debt and equity issuance costs, $2.9 million to settle contingent consideration obligations and activities related to the exercise of employee stock options.

In 2014, the cash used in financing activities primarily related to contingent consideration payments.

ABL Facility

On June 1, 2015, we entered into a Revolving Credit and Security Agreement with PNC Bank (the "Credit Agreement"). The ABL Facility replaced our previous Credit Agreement dated May 2, 2014 with PNC Bank (the "LOC Facility"). 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.

Interest is payable at a rate per annum equal to, at our option, 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 will be 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. We will also be required to pay a commitment fee in respect of the unutilized commitments under the revolving credit facility in an amount between 0.25% and 0.375%, based on the excess availability for the prior calendar quarter under the ABL Facility.

At December 31, 2016 , there was no outstanding balance on the ABL Facility. The issuance of letters of credit under the ABL Facility also reduces available borrowings. At December 31, 2016 , there were $0.7 million of letters of credit outstanding. The total draw allowed under the ABL Facility at December 31, 2016 , as determined by the working capital assets pledged as collateral, was $170.0 million . After adjusting for the letters of credit, our remaining availability for borrowing under the ABL Facility at December 31, 2016 was $169.3 million .

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.


30


In 2017, we expect to use available cash to make approximately $0.7 million of potential contingent earn-out payments, as well as $5.8 million to satisfy the semi-annual Note coupon payments due May 1, 2017 and November 1, 2017. In addition, we currently expect to use $15-20 million for capital expenditures in 2017.

As discussed in Note 12, we may also opt to use cash to repurchase the remainder of the $50.0 million from our 2015 stock repurchase program. The timing and amount of any repurchases will be determined based on market conditions and other factors. 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.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

31


Contractual Obligations

On February 17, 2016, we signed an 11-year lease for an additional 132,000 square feet at our Chicago, Illinois headquarters, bringing our total leased square footage at our headquarters to 224,678 square feet. As of December 31, 2016, we continue to also lease over 30 branch sales offices, with average lease terms between 3-5 years.
As of December 31, 2016 , we had the following contractual obligations (in thousands):
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
Operating leases
$
65,810

 
$
6,611

 
$
14,897

 
$
12,263

 
$
32,039

Senior convertible notes, including interest
250,125

 
5,750

 
11,500

 
232,875

 

Contingent consideration obligations (1)
1,700

 
744

 
956

 

 

Total
$
317,635

 
$
13,105

 
$
27,353

 
$
245,138

 
$
32,039

____________________
(1)  
This represents the maximum undiscounted contingent consideration obligations that may become payable in each period. The actual payouts will be determined at the end of the applicable performance periods based on the acquired entities' achievement of the targets specified in the purchase agreements. See Note 5 in the notes to the consolidated financial statements for a discussion of the fair values of these contingent consideration obligations as of December 31, 2016 .

Recent Accounting Pronouncements

ASU 2014-09, Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , to clarify the principles used to recognize revenue for all entities. The guidance is effective for annual and interim periods beginning after December 15, 2017. 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. Two methods of adoption are permitted - a full retrospective method that applies the new standard to each prior reporting period presented, or a modified retrospective approach that recognizes the cumulative effect of applying the new standard at the date of initial application.

We plan to adopt this standard on January 1, 2018, using the modified retrospective approach. We will recognize the cumulative effect adjustment to retained earnings for initial application of the guidance at the date of initial adoption. We have begun evaluating whether this standard will have an impact on the gross versus net revenue recognition policies for our Transactional and Managed Transportation revenue. The new standard will also require us to evaluate whether we transfer control of our brokerage and transportation management services as of a point in time or over time. This evaluation may have an impact on the timing in which we recognize revenue under the new standard. In addition, the new standard will require enhanced disclosures. We are continuing our assessment of these matters and other aspects of the new standard.

ASU 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15") . ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. This accounting standard is effective for annual and interim periods ending after December 15, 2016.

We have adopted this standard for the fiscal year ended December 31, 2016, including the implementation of controls for our internal control framework. As a result of our assessment, we did not find any conditions or events that would raise substantial doubt about our ability to continue as a going concern.

ASU 2016-15, Statement of Cash Flows

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows ("ASU 2016-15"). ASU 2016-15 clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs and the settlement of contingent consideration arising from an acquisition. An update to this standard was issued in November 2016 ( ASU 2016-18, Statement of Cash Flows ). This update requires companies to explain a change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash

32


equivalents. This new accounting standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Full retrospective adoption is required. Early adoption is permitted. We are evaluating the effects that the adoption of this guidance will have on our cash flow presentation within our consolidated financial statements.

ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting

In March 2016, the FASB issued ASU 2016-09,  Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting  ("ASU 2016-09") as part of the FASB simplification initiative. The new standard provides for changes to accounting for stock compensation including 1) excess tax benefits and tax deficiencies related to share-based payment awards will be recognized as income tax benefit or expense in the reporting period in which they occur; 2) excess tax benefits will be classified as an operating activity in the statement of cash flows; 3) the option to elect to estimate forfeitures or account for them when they occur; and 4) an increase in the tax withholding requirements threshold to qualify for equity classification. The ASU is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, and early adoption is permitted. The adoption of ASU 2016-09 is expected to impact the recording of income taxes in our financial position and results of operations, as well as the operating and financing cash flows on the consolidated statements of cash flows. The magnitude of such impacts are dependent upon our future grants of stock-based compensation, our future stock price in relation to the fair value of awards on grant date and the exercise behavior of our option holders. We will adopt this standard as of January 1, 2017.

ASU 2016-02, Leases

In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). This guidance requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. ASU 2016-02 will be effective beginning January 1, 2019. We are evaluating the effects that the adoption of this guidance will have on our consolidated financial statements.







33


Item 7A.     Quantitative and Qualitative Disclosures About Market Risk

Commodity Risk

We generally 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 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 in 2016 , 2015 and 2014 .


34

Table of Contents

Item 8.    Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

 



35

Table of Contents

Management’s Assessment of
Internal Control Over Financial Reporting


The Company's management is responsible for the preparation, integrity and objectivity of the financial statements and other financial information presented in this Annual Report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States and reflect the effects of certain estimates and judgments made by management.

The Company's management is also responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).

Based on the Company's evaluation under the framework in Internal Control - Integrated Framework, management concluded that internal control over financial reporting was effective as of December 31, 2016 . The effectiveness of internal control over financial reporting as of December 31, 2016 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report, which is included herein.


Echo Global Logistics, Inc.
February 24, 2017



36

Table of Contents

Report of Independent Registered Public Accounting Firm

 
The Board of Directors and Stockholders of
Echo Global Logistics, Inc. and Subsidiaries

We have audited Echo Global Logistics, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2016 , based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Echo Global Logistics, Inc. and Subsidiaries' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Echo Global Logistics, Inc. and Subsidiaries' internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Echo Global Logistics, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016 , based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Echo Global Logistics, Inc. and Subsidiaries as of December 31, 2016 and 2015 , and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016 of Echo Global Logistics, Inc. and Subsidiaries, and our report dated February 24, 2017 expressed an unqualified opinion thereon.




/ s / Ernst & Young LLP

Chicago, Illinois
February 24, 2017


37


Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders of
Echo Global Logistics, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Echo Global Logistics, Inc. and Subsidiaries as of December 31, 2016 and 2015 , and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016 . Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Echo Global Logistics, Inc. and Subsidiaries at December 31, 2016 and 2015 , and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 , in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Echo Global Logistics, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2016 , based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2017 expressed an unqualified opinion thereon.

/ s / Ernst & Young LLP

Chicago, Illinois
February 24, 2017




38


Echo Global Logistics, Inc. and Subsidiaries
Consolidated Balance Sheets
 
December 31,
 
2016
 
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
16,646,089

 
$
56,522,194

Accounts receivable, net of allowance for doubtful accounts of $3,018,995 and $1,627,315 at December 31, 2016 and 2015, respectively
231,430,645

 
196,420,614

Income taxes receivable
7,757,841

 
1,038,327

Prepaid expenses
7,856,366

 
3,605,602

Other current assets
4,609,933

 
3,237,227

Total current assets
268,300,874

 
260,823,964

Noncurrent assets:
 
 
 
Property and equipment, net
57,450,059

 
27,304,474

Goodwill
307,314,171

 
308,490,588

Intangible assets, net of accumulated amortization of $42,590,238 and $26,785,810 at December 31, 2016 and 2015, respectively
131,727,741

 
147,532,169

Other noncurrent assets
1,975,071

 
2,358,587

Total noncurrent assets
498,467,042

 
485,685,818

Total assets
$
766,767,916

 
$
746,509,782

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
135,386,424

 
$
103,985,783

Due to seller, current
743,600

 
2,338,462

Accrued expenses
31,810,671

 
30,283,062

Other current liabilities

 
784,829

Total current liabilities
167,940,695

 
137,392,136

Noncurrent liabilities:
 
 
 
Convertible notes, net
203,564,011

 
196,659,354

Due to seller, noncurrent
956,400

 
1,748,235

Other noncurrent liabilities
19,487,942

 
2,940,435

Deferred income taxes
16,669,138

 
12,520,048

Total noncurrent liabilities
240,677,491

 
213,868,072

Total liabilities
408,618,186

 
351,260,208

Stockholders' equity:
 
 
 
Common stock, par value $0.0001 per share, 100,000,000 shares authorized; 30,421,273 shares issued and 28,131,479 shares outstanding at December 31, 2016; 29,765,525 shares issued and 29,727,588 shares outstanding at December 31, 2015
3,045

 
2,979

Treasury stock, 2,289,794 and 37,937 shares at December 31, 2016 and December 31, 2015
(49,148,912
)
 
(784,829
)
Additional paid-in capital
328,676,749

 
319,002,254

Retained earnings
78,618,848

 
77,029,170

Total stockholders' equity
358,149,730

 
395,249,574

Total liabilities and stockholders' equity
$
766,767,916

 
$
746,509,782

See accompanying notes.


39

Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statements of Operations

 
Year Ended December 31,
 
2016
 
2015
 
2014
Revenue
$
1,716,152,159

 
$
1,512,298,686

 
$
1,173,382,760

Costs and expenses:
 
 
 
 
 
Transportation costs
1,397,577,664

 
1,222,035,371

 
965,165,330

Selling, general and administrative expenses
270,826,387

 
243,214,264

 
166,812,670

Depreciation and amortization
32,137,592

 
24,142,527

 
13,876,079

Income from operations
15,610,516

 
22,906,524

 
27,528,681

Interest income

 
23,909

 

Interest expense
(14,226,796
)
 
(11,276,207
)
 
(105,404
)
Other expense

 
(126,295
)
 
(144,128
)
Interest and other expense
(14,226,796
)
 
(11,378,593
)
 
(249,532
)
Income before provision for income taxes
1,383,720

 
11,527,931

 
27,279,149

Income tax benefit (expense)
205,958

 
(3,682,257
)
 
(10,491,591
)
Net income
$
1,589,678

 
$
7,845,674

 
$
16,787,558

 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic
$
0.06

 
$
0.29

 
$
0.73

Diluted
$
0.05

 
$
0.28

 
$
0.71

See accompanying notes.


40

Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2016, 2015 and 2014
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury Stock
 
Retained
Earnings
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Total
Balance at January 1, 2014
22,900,471

 
$
2,291

 
$
106,831,802

 

 
$

 
$
52,395,938

 
$
159,230,031

Share compensation expense

 

 
4,405,426

 

 

 

 
4,405,426

Exercise of stock options
173,727

 
17

 
1,077,731

 

 

 

 
1,077,748

Common stock issued for vesting of restricted stock
187,594

 
19

 
(19
)
 

 

 

 

Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of restricted stock
(54,741
)
 
(5
)
 
(1,116,853
)
 

 

 

 
(1,116,858
)
Tax benefit from exercise of stock options

 

 
1,490,273

 

 

 

 
1,490,273

Net income

 

 

 

 

 
16,787,558

 
16,787,558

Balance at December 31, 2014
23,207,051

 
2,322

 
112,688,360

 

 

 
69,183,496

 
181,874,178

Share compensation expense

 

 
14,023,751

 

 

 

 
14,023,751

Exercise of stock options
150,701

 
15

 
1,057,868

 

 

 

 
1,057,883

Common stock issued for vesting of restricted stock
209,510

 
22

 
(22
)
 

 

 

 

Common stock issued for vesting of performance shares
17,375

 
2

 
(2
)
 

 

 

 

Common stock issued from Equity Offering
5,750,000

 
575

 
157,835,675

 

 

 

 
157,836,250

Equity component of convertible debt offering, net of issuance costs and deferred taxes

 

 
18,956,232

 

 

 

 
18,956,232

Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of restricted stock
(72,941
)
 
(7
)
 
(1,922,140
)
 

 

 

 
(1,922,147
)
Common shares issued for acquisition
503,829

 
50

 
14,745,950

 

 

 

 
14,746,000

Tax benefit from exercise of stock options

 

 
1,616,582

 

 

 

 
1,616,582

Purchases of treasury stock

 

 

 
(37,937
)
 
(784,829
)
 

 
(784,829
)
Net income

 

 

 

 

 
7,845,674

 
7,845,674

Balance at December 31, 2015
29,765,525

 
2,979

 
319,002,254

 
(37,937
)
 
(784,829
)
 
77,029,170

 
395,249,574

Share compensation expense

 

 
13,134,402

 

 

 

 
13,134,402

Exercise of stock options
191,237

 
19

 
1,156,741

 

 

 

 
1,156,760

Common stock issued for vesting of restricted stock
638,003

 
64

 
(64
)
 

 

 

 

Common stock issued for vesting of performance shares
37,547

 
4

 
(4
)
 

 

 

 

Common shares withheld and retired to satisfy employee tax withholding obligations upon vesting of restricted stock
(211,039
)
 
(21
)
 
(4,868,935
)
 

 

 

 
(4,868,956
)
Tax benefit from exercise of stock options

 

 
252,355

 

 

 

 
252,355

Purchases of treasury stock

 

 

 
(2,251,857
)
 
(48,364,083
)
 

 
(48,364,083
)
Net income

 

 

 

 

 
1,589,678

 
1,589,678

Balance at December 31, 2016
30,421,273

 
$
3,045

 
$
328,676,749

 
(2,289,794
)
 
$
(49,148,912
)
 
$
78,618,848

 
$
358,149,730


See accompanying notes.

41

Table of Contents

Echo Global Logistics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
 
Year Ended December 31,
 
2016
 
2015
 
2014
Operating activities
 
 
 
 
 
Net income
$
1,589,678

 
$
7,845,674

 
$
16,787,558

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Deferred income taxes
4,149,089

 
(5,122
)
 
729,600

Noncash stock compensation expense
13,134,402

 
14,023,751

 
4,405,426

Noncash interest expense
7,614,220

 
4,867,364

 

Change in contingent consideration due to seller
(112,954
)
 
201,452

 
2,160,316

Change in contingent consideration due from seller
5,145

 

 

Loss on disposal of assets
409,020

 

 

Depreciation and amortization
32,137,592

 
24,142,527

 
13,876,079

Change in assets, net of acquisitions:
 
 
 
 
 
Accounts receivable
(35,010,031
)
 
12,508,623

 
(24,018,807
)
Income taxes receivable
(8,533,585
)
 
(1,464,187
)
 
(631,331
)
Prepaid expenses and other assets
(5,528,243
)
 
(450,824
)
 
(2,401,464
)
Change in liabilities, net of acquisitions:
 
 
 
 
 
Accounts payable
31,400,638

 
5,745,669

 
11,460,893

Accrued expenses and other liabilities
18,480,794

 
3,421,529

 
9,994,275

Net cash provided by operating activities
59,735,765

 
70,836,456

 
32,362,545

Investing activities
 
 
 

 
 
Purchases of property and equipment
(46,887,769
)
 
(14,744,850
)
 
(15,155,168
)
Payments for acquisitions, net of cash acquired

 
(390,395,041
)
 
(33,768,519
)
Net cash used in investing activities
(46,887,769
)
 
(405,139,891
)
 
(48,923,687
)
Financing activities
 

 
 

 
 
Tax benefit of stock options exercised
1,660,750

 
2,222,458

 
1,495,481

Receipt of contingent consideration due from seller
750,000

 

 

Payments of contingent consideration due to seller
(2,273,743
)
 
(2,945,833
)
 
(4,859,670
)
Proceeds from exercise of stock options
1,156,760

 
1,057,883

 
1,077,748

Employee tax withholdings related to net share settlements of equity-based awards
(4,868,956
)
 
(1,922,147
)
 
(1,116,858
)
Purchases of treasury stock
(49,148,912
)
 

 

Proceeds from borrowing on line of credit

 
34,782,500