Echo Global Logistics, Inc. - 10-Q filing on 2012-11-01

Fair Value Measurement

9 Months Ended

Sep. 30, 2012

The Company applies ASC Topic 820 "Fair Value Measurements and Disclosures" ("ASC Topic 820") for its financial assets and financial liabilities. The guidance requires disclosures about assets and liabilities measured at fair value. The Company's financial assets primarily relate to money market funds and financial liabilities primarily relate to contingent earn-out payments of $10,158,175. The potential earnout payments and performance are defined in the individual purchase agreement for each acquisition. EBITDA is the performance target defined and measured to determine the earnout payment due, if any, after each defined measurement period.

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


•	Level 1: Inputs are quoted prices in active markets for identical assets or liabilities.


•	Level 2: Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.


•	Level 3: Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The significant inputs used to derive the fair value of the contingent consideration obligation include financial forecasts of future operating results, the probability of reaching the forecast and an appropriate discount rate for each contingent liability. The probability of paying the contingent consideration ranges from 5% to 55%, with discount rates used in determining the fair value of the contingent consideration ranging between 6% and 12%. Historical results of the respective acquisitions serve as the basis for the financial forecasts used in the valuation. Quantitative factors are also considered in these forecasts, including acquisition synergies, growth and sales potential and potential operational efficiencies gained. Changes to the significant inputs used in determining the fair value of the contingent consideration could result in a change in the fair value of the contingent consideration. However, the correlation and inverse relationship between higher projected financial results to the discount rate applied and probability of meeting the financial targets mitigates the effect of any changes to the unobservable inputs.

In April 2012, the Company transferred funds from a Level 1 financial asset (money market fund) to a non-interest bearing cash account included in Cash and Cash Equivalents at September 30, 2012. As such, the funds are no longer classified as Level 1 fair value financial asset. The following table sets forth the Company's financial liabilities measured at fair value on a recurring basis and the basis of measurement at September 30, 2012 and December 31, 2011:



	Fair Value Measurements as of September 30, 2012
	Total			Level 1		Level 2		Level 3
Assets:
Money market funds	$	—		$	—	$	—	$	—
Liabilities:
Contingent consideration obligation	$	(10,158,175	)	$	—	$	—	$	(10,158,175	)



	Fair Value Measurements as of December 31, 2011
	Total			Level 1		Level 2		Level 3
Assets:
Money market funds	$	5,048,029		$	5,048,029	$	—	$	—
Liabilities:
Contingent consideration obligation	$	(12,852,281	)	$	—	$	—	$	(12,852,281	)

The following table provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3):



	Due to Seller
Balance at December 31, 2011	$	(12,852,281	)
Increase related to purchase accounting for acquisitions	(631,914		)
Change in fair value	443,520
Payment of contingent consideration	2,882,500
Balance at September 30, 2012	$	(10,158,175	)

For the nine month period ended September 30, 2012, the Company recorded an adjustment to the original contingent consideration obligations recorded upon the acquisitions of Freight Management Inc. ("FMI"), Distribution Services Inc. ("DSI"), Resource Group and Associates ("RGA"), Lubenow Logistics LLC ("Lubenow"), Freight Lanes International Inc. ("FLI"), DNA Freight Inc., Nationwide, Advantage, TTS and Purple Plum. The adjustments were the result of using revised forecasts and updated fair value measurements that adjusted the Company's estimated earnout payments related to the purchases of these businesses.

For the nine month periods ended September 30, 2012 and 2011, the Company recognized a benefit of $443,520 and $246,737, respectively, in selling, general, and administrative expenses in the consolidated statement of income due to the change in fair value measurements using a level three valuation technique.

For the nine month periods ended September 30, 2012 and 2011, the Company paid $2,882,500 and $1,000,000, respectively, in contingent earn-out payments. In the nine month period ended September 30, 2012, the Company paid the former owners of RGA, DSI, Nationwide, Lubenow, FMI, and Advantage, $200,000, $520,000, $437,500, $280,000, $520,000 and $925,000, respectively, as certain EBITDA targets set forth in the purchase agreements had been met. In the nine month period ended September 30, 2011, the Company paid the former owners of RGA, Lubenow and FMI, $200,000, $280,000 and $520,000, respectively, as certain EBITDA targets set forth in the purchase agreement had been met.