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ECHO GLOBAL LOGISTICS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Certain statements in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements involve a number of risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors which could materially affect such forward-looking statements can be found in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 and elsewhere in this Quarterly Report. Investors are urged to consider these factors carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date hereof and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Overview We are a leading provider of technology-enabled transportation and supply chain management solutions. We utilize a proprietary technology platform to compile and analyze data from our multi-modal network of transportation providers to satisfy the transportation and logistics needs of our clients. This model enables us to quickly adapt to and offer efficient and cost-effective solutions for our clients' shipping needs. We focus primarily on arranging transportation by truckload ("TL") and less than truckload ("LTL") carriers. We also offer intermodal (which involves moving a shipment by rail and truck), small parcel, domestic air, expedited and international transportation services. Our core logistics services include rate negotiation, shipment execution and tracking, carrier management, routing compliance and performance management reporting. We procure transportation and provide logistics services for clients across a wide range of industries, such as manufacturing, construction, consumer products and retail. Our clients fall into two categories, Enterprise and Transactional. We typically enter into multi-year contracts with our Enterprise clients, which are often on an exclusive basis for a specific transportation mode or point of origin. As part of our value proposition, we also provide core logistics services to these clients. We provide transportation and logistics services to our Transactional clients on a shipment-by-shipment basis, typically with individual, or spot market, pricing. 16 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table represents certain statement of operations data: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (Unaudited) (in thousands, except per share data) Consolidated statements of income data: Revenue $ 320,566 $ 234,843 $ 873,356 $ 662,871 Transportation costs 262,136 194,259 719,378 544,176 Net revenue 58,430 40,584 153,978 118,695 Operating expenses: Commissions 16,916 10,188 42,886 30,122 Selling, general and administrative expenses 28,045 20,592 79,043 61,531 Contingent consideration expense 800 31 2,105 445 Depreciation and amortization 3,694 2,661 10,060 7,869 Total operating expenses 49,455 33,472 134,094 99,967 Income from operations 8,975 7,112 19,884 18,728 Other expense (115 ) (75 ) (232 ) (276 ) Income before provision for income taxes 8,860 7,037 19,652 18,452 Income tax expense (3,402 ) (2,675 ) (7,520 ) (6,990 ) Net income $ 5,458 $ 4,362 $ 12,132 $ 11,462 Net income per share of common stock: Basic $ 0.24 $ 0.19 $ 0.53 $ 0.50 Diluted $ 0.23 $ 0.19 $ 0.51 $ 0.49 Shares used in per share calculations: Basic 23,042 22,889 23,009 22,848 Diluted 23,725 23,461 23,560 23,352 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 $873.4 million and $662.9 million for the nine month periods ended September 30, 2014 and 2013, respectively, representing a period-over-period increase of 31.8%. Our revenue is generated from two different types of clients: Enterprise and Transactional. Our Enterprise accounts typically generate higher dollar amounts and volume than our Transactional relationships. We categorize a client as an Enterprise client if we have a contract with the client for the provision of services on a recurring basis. Our contracts with Enterprise clients typically have a multi-year term and are often on an exclusive basis for a specific transportation mode or point of origin. In several cases, we provide substantially all of a client's transportation and logistics requirements. We categorize all other clients as Transactional clients. We provide services to our Transactional clients on a shipment-by-shipment basis. For the nine month periods ended September 30, 2014 and 2013, Enterprise clients accounted for 26% and 30%, respectively, of our revenue and Transactional clients accounted for 74% and 70%, respectively, of our revenue. We expect to continue to grow both our Enterprise and Transactional client base in the future, although the rate of growth for each type of client will vary depending on opportunities in the marketplace. Revenue 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, intermodal and small parcel. Other transportation modes include domestic air, expedited services and international. Material shifts in the percentage of our revenue by transportation mode could have a significant impact on our revenue growth. For the nine month period ended September 30, 2014, TL accounted for 53% of our revenue, LTL accounted for 37% of our revenue, intermodal 17 -------------------------------------------------------------------------------- Table of Contents accounted for 6% of our revenue, small parcel accounted for 3% of our revenue and other transportation modes accounted for 1% of our revenue. For the nine month period ended September 30, 2013, TL accounted for 45% of our revenue, LTL accounted for 42% of our revenue, intermodal accounted for 7% of our revenue, small parcel accounted for 5% of our revenue and other transportation modes accounted for 1% 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 equals revenue minus transportation costs. Our transportation costs consist primarily of the direct cost of transportation paid to the carrier. Net revenue is the primary indicator of our ability to add value to our clients and 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. Our net revenue margin is typically higher for an LTL shipment than for a TL shipment. Material shifts in the percentage of our revenue by transportation mode could have a significant impact on our net revenue. The discussion of results of operations below focuses on changes in our net revenue and expenses as a percentage of net revenue margin. For the nine month periods ended September 30, 2014 and 2013, our net revenue was $154.0 million and $118.7 million, respectively, reflecting an increase of 29.7%. 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 related to contingent consideration, and depreciation and amortization. Commissions paid to our sales personnel, including employees and agents, are a significant component of our operating expenses. These commissions are based on the net revenue we collect from the clients for which such sales personnel have primary responsibility. For the nine month periods ended September 30, 2014 and 2013, commission expense was 27.9% and 25.4%, respectively, of our net revenue. The increase is due to the fluctuation of the composition of our net revenue by mode, as TL shipments typically have higher commission percentages than other modes. The percentage of net revenue paid as commissions will vary depending on the type of client, composition of the sales team and mode of transportation. Commission expense, stated as a percentage of net revenue, could increase or decrease in the future depending on the composition and sources of our revenue growth. 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. Prepaid commissions and accrued commissions are presented on a net basis on our balance sheet. 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 and other general and administrative expenses. For the nine month periods ended September 30, 2014 and 2013, our selling, general and administrative expenses were $79.0 million and $61.5 million, respectively. For the nine month periods ended September 30, 2014 and 2013, selling, general and administrative expenses as a percentage of net revenue were 51.3% and 51.8%, respectively. Our contingent consideration expenses consist of the change in the fair value of the contingent liabilities payable to the sellers of our acquired businesses. The contingent liabilities relate to expected earn-out payments that will be paid upon the achievement of certain performance measures by our acquired businesses. These liabilities are evaluated on a quarterly basis and the change in the contingent consideration is included in the selling, general and administrative expenses in our consolidated statement of income. For the nine month periods ended September 30, 2014 and 2013, we recorded charges of $2.1 million and $0.4 million, respectively, related to fair value adjustments to the contingent consideration obligation. The 18 -------------------------------------------------------------------------------- Table of Contents increase is primarily due to improved performance of several acquired businesses, which has increased the probability of these acquired businesses achieving their earnout targets. Our depreciation expense is primarily attributable to our depreciation of computer hardware and software, equipment, furniture and fixtures and internally developed software. For the nine month periods ended September 30, 2014 and 2013, depreciation expense was $7.3 million and $6.1 million, respectively. The increase is primarily due to the depreciation of property and equipment related to the expansion of our Chicago headquarters. Our amortization expense is attributable to our amortization of intangible assets acquired from business combinations, including customer relationships, trade names and non-compete agreements. For the nine month periods ended September 30, 2014 and 2013, amortization expense was $2.8 million and $1.8 million, respectively. The increase is due to the amortization of intangible assets associated with the acquisitions of Online Freight Services, Inc. ("OFS"), Comcar Logistics, LLC ("Comcar") and One Stop Logistics, Inc. ("One Stop"). Comparison of the nine months ended September 30, 2014 and 2013 Revenue Our revenue increased by $210.5 million, or 31.8%, to $873.4 million for the nine month period ended September 30, 2014, from $662.9 million for the nine month period ended September 30, 2013. The increase was attributable to the increase in the number of our clients and the total number of shipments executed on behalf of, and services provided to, these clients. Included in this increase was $85.7 million of additional revenue generated in 2014 from the acquisitions of OFS, Comcar and One Stop. Our revenue from Enterprise clients increased by $28.5 million, or 14.4%, to $226.7 million for the nine month period ended September 30, 2014, from $198.2 million for the nine month period ended September 30, 2013, resulting from increases in the number of Enterprise clients, shipments executed on behalf of these clients and transportation rates. Our percentage of revenue from Enterprise clients decreased to 25.9% of our revenue for the period ended September 30, 2014 from 29.9% for the period ended September 30, 2013 due to an increase in the number of Transactional shipments. Our revenue from Transactional clients increased by $182.1 million, or 39.2%, to $646.8 million for the nine month period ended September 30, 2014, from $464.7 million for the nine month period ended September 30, 2013. Our percentage of revenue from Transactional clients increased to 74.1% of our revenue for the nine month period ended September 30, 2014, from 70.1% of our revenue for the nine month period ended September 30, 2013. The increase in Transactional revenue was driven by increases in both the number and productivity of sales employees as well as by the acquisitions of OFS, Comcar and One Stop. Our revenue per Transactional client increased by approximately 6.4% for the nine month period ended September 30, 2014 compared to the same period in 2013. Transportation costs Our transportation costs increased by $175.2 million, or 32.2%, to $719.4 million for the nine month period ended September 30, 2014, from $544.2 million for the nine month period ended September 30, 2013. The growth in the total number of shipments accounted for most of the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue increased to 82.4% for the nine month period ended September 30, 2014 from 82.1% for the nine month period ended September 30, 2013 due to an increased percentage of TL shipments in the composition of our sales volume. Also included in this increase is the transportation costs associated with the revenue generated from our 2014 acquisitions. Net revenue Net revenue increased by $35.3 million, or 29.7%, to $154.0 million for the nine month period ended September 30, 2014, from $118.7 million for the nine month period ended September 30, 2013. The growth in the total number of shipments executed on behalf of our clients accounted for most of the increase in our net revenue during this period. Net revenue margins decreased to 17.6% for the nine month period ended September 30, 2014, from 17.9% for the nine month period ended September 30, 2013. The decrease in net revenue margins was primarily the result of a higher percentage of TL revenue as a percentage of total revenue in the nine month period ended September 30, 2014 when compared to the same period in 2013. 19-------------------------------------------------------------------------------- Table of Contents Operating expenses Commission expense increased by $12.8 million, or 42.4%, to $42.9 million for the nine month period ended September 30, 2014, from $30.1 million for the nine month period ended September 30, 2013. This increase was primarily attributable to the increase in net revenue. For the nine month periods ended September 30, 2014 and 2013, commission expense was 27.9% and 25.4%, respectively, of our net revenue. This increase was due to the fluctuation of the composition of our net revenue by mode, as TL shipments typically have higher commission percentages than other modes. Selling, general and administrative expenses increased by $17.5 million, or 28.5%, to $79.0 million for the nine month period ended September 30, 2014, from $61.5 million for the nine month period ended September 30, 2013. The increase was primarily the result of hiring sales personnel to drive continued growth of our business, hiring operational personnel to support our growth in customers and shipment volume, and acquisition-related transaction costs for our 2014 acquisitions. As a percentage of net revenue, selling, general and administrative expenses decreased to 51.3% for the nine month period ended September 30, 2014, from 51.8% for the nine month period ended September 30, 2013. The decrease, as a percentage of net revenue, was primarily attributable to the increased productivity of our sales representatives and to our acquisition of businesses in 2014. Contingent consideration The contingent consideration expense recognized in our consolidated statement of income was $2.1 million for the nine month period ended September 30, 2014 compared to $0.4 million for the nine month period ended September 30, 2013. For the nine month periods ended September 30, 2014 and 2013, the increases in the contingent consideration expense were due to greater probability of acquisitions achieving EBITDA earn-out targets and changes to the time value of money. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of September 30, 2014. Depreciation and amortization Depreciation expense increased by $1.2 million, or 19.4%, to $7.3 million for the nine month period ended September 30, 2014, from $6.1 million for the nine month period ended September 30, 2013. The increase in depreciation expense was primarily attributable to the depreciation of property and equipment related to the expansion of our Chicago headquarters. Amortization expense increased by $1.0 million, or 56.6%, to $2.8 million for the nine month period ended September 30, 2014, from $1.8 million for the nine month period ended September 30, 2013. The increase in amortization expense was attributable to the amortization of intangible assets related to our 2014 acquisitions. Income from operations Income from operations increased by $1.2 million, or 6.2%, to $19.9 million for the nine month period ended September 30, 2014, from $18.7 million for the nine month period ended September 30, 2013. The increase in income from operations was attributable to the increase in net revenue in excess of the increase in operating expenses. Other expense and income tax expense Other expense decreased to $0.2 million for the nine month period ended September 30, 2014 from $0.3 million for the nine month period ended September 30, 2013. Income tax expense increased to $7.5 million for the nine month period ended September 30, 2014, from $7.0 million for the nine month period ended September 30, 2013. This increase was due to the increase in income from operations discussed above. Our effective tax rate for the nine month period ended September 30, 2014 increased to 38.3%, from 37.9% for the nine month period ended September 30, 2013. The increase in our effective tax rate was primarily due to the timing and reenactment of the research and development tax credit which occurred in early 2013 for both the 2012 and 2013 tax years. Net Income Net income increased by $0.6 million, or 5.8%, to $12.1 million for the nine month period ended September 30, 2014, from $11.5 million for the nine month period ended September 30, 2013, due to the items previously discussed. 20-------------------------------------------------------------------------------- Table of Contents Comparison of the three months ended September 30, 2014 and 2013 Revenue Our revenue increased by $85.8 million, or 36.5%, to $320.6 million for the three month period ended September 30, 2014, from $234.8 million for the three month period ended September 30, 2013. The increase was attributable to the increase in the number of our clients and the total number of shipments executed on behalf of, and services provided to, these clients. Included in this increase was $38.6 million of additional revenue generated in 2014 from the acquisitions of OFS, Comcar and One Stop. Our revenue from Enterprise clients increased by $7.2 million, or 10.1%, to $78.3 million for the three month period ended September 30, 2014, from $71.1 million for the three month period ended September 30, 2013, resulting from increases in the number of Enterprise clients, shipments executed on behalf of these clients and transportation rates. Our percentage of revenue from Enterprise clients decreased to 24.4% of our revenue for the period ended September 30, 2014 from 30.3% for the period ended September 30, 2013 due to an increase in the number of Transactional shipments. Our revenue from Transactional clients increased by $78.6 million, or 48.0%, to $242.3 million for the three month period ended September 30, 2014, from $163.7 million for the three month period ended September 30, 2013. Our percentage of revenue from Transactional clients increased to 75.6% of our revenue for the three month period ended September 30, 2014, from 69.7% of our revenue for the three month period ended September 30, 2013. The increase in Transactional revenue was driven by increases in both the number and productivity of sales employees as well as by the acquisitions of OFS, Comcar and One Stop. Our revenue per Transactional client increased by approximately 13.1% for the three month period ended September 30, 2014 compared to the same period in 2013. Transportation costs Our transportation costs increased by $67.8 million, or 34.9%, to $262.1 million for the three month period ended September 30, 2014, from $194.3 million for the three month period ended September 30, 2013. The growth in the total number of shipments accounted for most of the increase in our transportation costs during this period. Also included in this increase is the transportation costs associated with the revenue generated from our 2014 acquisitions. Our transportation costs as a percentage of revenue decreased to 81.8% for the three month period ended September 30, 2014 from 82.7% for the three month period ended September 30, 2013. Net revenue Net revenue increased by $17.8 million, or 44.0%, to $58.4 million for the three month period ended September 30, 2014, from $40.6 million for the three month period ended September 30, 2013. The growth in the total number of shipments executed on behalf of our clients accounted for most of the increase in our net revenue during this period. Net revenue margins increased to 18.2% for the three month period ended September 30, 2014, from 17.3% for the three month period ended September 30, 2013. The increase in net revenue margins was the result of our ability to pass on increasing carrier costs to our customers at a higher rate. Operating expenses Commission expense increased by $6.7 million, or 66.0%, to $16.9 million for the three month period ended September 30, 2014, from $10.2 million for the three month period ended September 30, 2013. This increase was primarily attributable to the increase in net revenue. For the three month periods ended September 30, 2014 and 2013, commission expense was 29.0% and 25.1%, respectively, of our net revenue. This increase was due to the fluctuation of the composition of our net revenue by mode, as TL shipments typically have higher commission percentages than other modes. Selling, general and administrative expenses increased by $7.4 million, or 36.2%, to $28.0 million for the three month period ended September 30, 2014, from $20.6 million for the three month period ended September 30, 2013. The increase was primarily the result of hiring sales personnel to drive continued growth of our business and hiring operational personnel to support our growth in customers and shipment volume. As a percentage of net revenue, selling, general and administrative expenses decreased to 48.0% for the three month period ended September 30, 2014, from 50.7% for the three month period ended September 30, 2013. The decrease, as a percentage of net revenue, was primarily attributable to the increased productivity of our sales representatives and to our acquisition of businesses in 2014. Contingent consideration 21 -------------------------------------------------------------------------------- Table of Contents The contingent consideration expense recognized in our consolidated statement of income was $0.8 million for the three month period ended September 30, 2014 compared to $0.03 million for the three month period ended September 30, 2013. For the three month periods ended September 30, 2014 and 2013, the increase in the contingent consideration expense was due to greater probability of acquisitions achieving EBITDA earn-out targets and changes to the time value of money. The fair value of the contingent consideration obligation for each acquisition reflects updated probabilities as of September 30, 2014. Depreciation and amortization Depreciation expense increased by $0.5 million, or 23.3%, to $2.6 million for the three month period ended September 30, 2014, from $2.1 million for the three month period ended September 30, 2013. The increase in depreciation expense was primarily attributable to depreciation on purchases of computer hardware and software, equipment, furniture and fixtures, and depreciation on the capitalization of internally developed software. Amortization expense increased by $0.5 million, or 93.1%, to $1.1 million for the three month period ended September 30, 2014, from $0.6 million for the three month period ended September 30, 2013. The increase in amortization expense was attributable to the amortization of intangible assets related to our 2014 acquisitions. Income from operations Income from operations increased by $1.9 million, or 26.2%, to $9.0 million for the three month period ended September 30, 2014, from $7.1 million for the three month period ended September 30, 2013. The increase in income from operations was attributable to the increase in net revenue in excess of the increase in operating expenses. Other expense and income tax expense Other expense remained relatively consistent at $0.1 million for both the three month periods ended September 30, 2014 and September 30, 2013. Income tax expense increased to $3.4 million for the three month period ended September 30, 2014, from $2.7 million for the three month period ended September 30, 2013. This increase was due to the increase in income from operations discussed above. Our effective tax rate for the three month period ended September 30, 2014 increased to 38.4%, from 38.0% for the three month period ended September 30, 2013. Net Income Net income increased by $1.1 million, or 25.1%, to $5.5 million for the three month period ended September 30, 2014, from $4.4 million for the three month period ended September 30, 2013, due to the items previously discussed. Liquidity and Capital Resources As of September 30, 2014, we had $30.1 million in cash and cash equivalents, $50.5 million in working capital and $35.5 million available under our credit facility, which matures on May 2, 2017. Cash provided by operating activities For the nine month period ended September 30, 2014, $27.0 million of cash was provided by operating activities, representing an increase of $5.3 million compared to the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, we generated $27.5 million in cash from net income, adjusted for non-cash operating items, compared to $22.4 million for the nine month period ended September 30, 2013. For the nine month periods ended September 30, 2014 and 2013, cash flow generation was offset by $0.4 million and $0.7 million, respectively, in changes to net working capital. This change is primarily due to the growth of our business. Cash used in investing activities Cash used in investing activities was $46.2 million and $8.9 million during the nine month periods ended September 30, 2014 and 2013, respectively. For the nine month period ended September 30, 2014, the primary investing activities were the acquisition related payments to OFS, Comcar and One Stop, the procurement of computer hardware and software, and the internal development of computer software. For the nine month period ended September 30, 2013, the primary investing 22 -------------------------------------------------------------------------------- Table of Contents activities were related to the procurement of computer hardware and software, the internal development of computer software and the acquisition of Open Mile, Inc. Cash used in financing activities During the nine month period ended September 30, 2014, net cash used in financing activities was $3.3 million compared to net cash used in financing activities of $1.3 million for the nine month period ended September 30, 2013. For the nine month period ended September 30, 2014, the use of cash in financing activities was primarily attributable to contingent consideration payments of $3.3 million and the use of cash to satisfy employee tax withholdings upon the vesting of restricted stock. For the nine month period ended September 30, 2013, the net cash used in financing activities was primarily related to contingent consideration payments of $2.0 million and the use of cash to satisfy employee tax withholdings upon the vesting of restricted stock offset by the exercise of employee stock options. Revolving credit facility On May 2, 2014, we entered into a revolving credit agreement with PNC Bank. The $50 million facility expires on May 2, 2017 and allows for the issuance of up to $20 million in letters of credit. The issuance of letters of credit under the credit facility reduces available borrowings. Our ability to access the revolving credit facility is subject to our compliance with the terms and conditions of the credit facility, including customary covenants that provide limitations and conditions on our ability to enter into certain transactions. The credit agreement also contains financial covenants that require us to maintain a maximum leverage ratio and a minimum interest coverage ratio. At September 30, 2014, we were in compliance with all such covenants. We pay a commitment fee to PNC Bank to keep the revolving credit facility active. Borrowings bear interest at one of the following, plus an applicable margin: (1) the federal funds rate, (2) the prime rate, or (3) the LIBOR rate, based on our election for each tranche of borrowing. Both the commitment fee and any interest expense are recorded to the income statement as interest expense in the period incurred. During the second quarter of 2014, we drew $5 million on the revolving credit facility, all of which was repaid as of June 30, 2014. At September 30, 2014, there were no amounts drawn against the revolving credit facility and there were letters of credit outstanding in the aggregate amount of $14.5 million. The amounts available under the revolving credit facility are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facility at September 30, 2014 was $35.5 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 a material use 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. We also expect to use available cash to make approximately $2.9 million of potential earn-out payments for the remainder of 2014 in connection with our acquisitions. We currently expect to use up to $3.0 million for capital expenditures for the remainder of 2014. 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 lifecycle has been longer than our average accounts payable lifecycle, 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. 23 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements In August 2014, the FASB issued Accounting Standards Update ("ASU") 2014-15, Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern. The standard 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. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our financial statements. 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, 2016. 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. Early adoption is not permitted. We are evaluating the effects, if any, that the adoption of this guidance will have on our consolidated financial statements. In July 2013, the FASB issued authoritative guidance under ASU 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss ("NOL") carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This accounting standard update requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. The provisions of this new guidance were effective as of the beginning of our 2014 fiscal year and did not have a material impact on our financial statements. |