Item 1. Business
This Annual Report contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, cash flows, dividends, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed acquisition plans, new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. In this Annual Report, statements relating to the ability of our infrastructure to support future growth, our ability to recruit and retain qualified drivers, our ability to react to market conditions, our ability to gain market share, future tractor prices, potential acquisitions, our equipment purchasing plans and equipment turnover, our ability to obtain favorable pricing terms from vendors and suppliers, expected liquidity and methods for achieving sufficient liquidity, future fuel prices, future third-party service provider relationships and availability, future compensation arrangements with independent contractors and drivers, our expected need or desire to incur indebtedness, expected sources of liquidity for capital expenditures, expected tractor trade-ins, expected sources of working capital and funds for acquiring revenue equipment, expected capital expenditures, future asset utilization, future capital requirements, future trucking capacity, future consumer spending, expected freight demand and volumes, future rates, future depreciation and amortization, expected tractor and trailer fleet age, and future purchased transportation expense, among others, are forward-looking statements. Such statements may be identified by their use of terms or phrases such as "believe," "may," "could," "expects," "estimates," "projects," "anticipates," "plans," "intends," "hope," and similar terms and phrases. Forward-looking statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1A.
Item 1A. Risk Factors
Our future results may be affected by a number of factors over which we have little or no control. The following discussion of risk factors contains forward-looking statements as discussed in Item 1 above and the Cautionary Note Regarding Forward-Looking Statements in Item 7 of Part II of this Annual Report. The following issues, uncertainties, and risks, among others, should be considered in evaluating our business and growth outlook.
Our business is subject to general economic and business factors affecting the transportation industry that are largely out of our control, any of which could have a materially adverse effect on our operating results.
Our business is dependent on a number of factors that may have a materially adverse effect on our results of operations, many of which are beyond our control. Some of the most significant of these factors are recessionary economic cycles, changes in customers' inventory levels and in the availability of funding for their working capital, excess tractor or trailer capacity compared to shipping volumes, and downturns in customers' business cycles.
Economic conditions that decrease shipping demand or increase the supply of available tractors and trailers can exert downward pressure on rates and equipment utilization, thereby decreasing asset productivity. The risks associated with these factors are heightened when the U.S. economy is weakened, such as the period from 2007 through 2009. Some of the principal risks during such times, which risks we experienced during prior recessionary times, include a reduction in overall freight levels, which may impair our asset utilization; the change of freight patterns as supply chains are redesigned, resulting in an imbalance between our capacity and our customers’ freight demand; and an increase in competition as customers bid out freight or select competitors that offer lower rates, and we might be forced to lower our rates or lose freight.
We also are subject to potential increases in various costs and other events that are outside of our control that could materially reduce our profitability if we are unable to increase our rates sufficiently. Such cost increases include, but are not limited to, fuel and energy prices, taxes and interest rates, tolls, license and registration fees, insurance premiums, revenue equipment and related maintenance costs, and healthcare and other benefits for our employees. We could be affected by strikes or other work stoppages or at customer, port, border, or other shipping locations. Changing impacts of regulatory measures could impair our operating efficiency and productivity, decrease our revenues and profitability, and result in higher operating costs. In addition, declines in the resale value of revenue equipment can also affect our profitability and cash flows. From time-to-time, various federal, state, or local taxes are also increased, including taxes on fuels. We cannot predict whether, or in what form, any such increase applicable to us will be enacted, but such an increase could adversely affect our profitability.
In addition, we cannot predict future economic conditions, fuel price fluctuations, or how consumer confidence could be affected by actual or threatened armed conflicts or terrorist attacks, government efforts to combat terrorism, military action against a foreign state or group located in a foreign state, or heightened security requirements. Enhanced security measures could impair our operating efficiency and productivity and result in higher operating costs.
Our growth may not continue at historical rates.
We have historically experienced significant growth in revenue and profits since the inception of our business in 1990. In recent years, our Logistics segment has experienced considerable growth and accounted for 19.5% of our total revenue in 2015, whereas our Trucking segment growth has slowed. There can be no assurance that in the future, our business will grow substantially or without volatility, nor can we assure that we will be able to effectively adapt our management, administrative, and operational systems to respond to any future growth. Furthermore, there can be no assurance that our operating margins will not be adversely affected by future changes in and expansion of our business or by changes in economic conditions.
In addition to our service centers in Phoenix, Arizona, we have established service centers throughout the United States in order to serve markets in various regions. These regional operations require the commitment of additional personnel and revenue equipment, as well as management resources, for future development. Should the growth in our regional operations stagnate or decline, the results of our operations could be adversely affected. As we continue to expand, it may become more difficult to identify large cities that can support a service center, and we may expand into smaller cities where there is insufficient economic activity, fewer opportunities for growth, and fewer drivers and non-driver personnel to support the service center. We may encounter operating conditions in these new markets, as well as our current markets, that differ substantially from our current operations, and customer relationships and appropriate freight rates in new markets could be challenging to attain. We may not be able to duplicate our regional operating strategy successfully throughout, or possibly outside of, the United States, and establishing service centers and operations in new markets could require more time, resources, or a more substantial financial commitment than anticipated.
Furthermore, the continued progression and development of our Logistics business are subject to the risks inherent in entering and cultivating new lines of business, including, but not limited to, (i) initial unfamiliarity with pricing, service, operational, and liability issues; (ii) customer relationships may be difficult to obtain or we may have to reduce rates to gain and develop customer relationships; (iii) specialized equipment and information and management systems technology may not be adequately utilized; (iv) insurance and claims may exceed our past experience or estimations; and (v) recruiting and retaining qualified personnel and management with requisite experience or knowledge of our Logistics services.
Insurance and claims expenses could significantly reduce our earnings.
Our future insurance and claims expense might exceed historical levels, which could reduce our earnings. We self-insure for a portion of our claims exposure resulting from workers' compensation, auto liability, general liability, cargo and property damage claims, as well as employee health insurance. We are also responsible for our legal expenses relating to such claims. We reserve for anticipated losses and expenses and periodically evaluate and adjust our claims reserves to reflect our experience. However, ultimate results may differ from our estimates, which could result in losses over our reserved amounts.
We maintain insurance with licensed insurance carriers above the amounts in which we self-insure. Although we believe our aggregate insurance limits should be sufficient to cover reasonably expected claims, it is possible that the amount of one or more claims could exceed our aggregate coverage limits. If any claim were to exceed our coverage, we would bear the excess, in addition to our other self-insured amounts. Insurance carriers have raised premiums for many businesses, including transportation companies. As a result, our insurance and claims expense could increase, or we could raise our self-insured retention when our policies are renewed or replaced. Our results of operations and financial condition could be materially and adversely affected if (i) cost per claim, premiums, or the number of claims significantly exceeds our coverage limits or retention amounts, (ii) we experience a claim in excess of our coverage limits, (iii) our insurance carriers fail to pay on our insurance claims, or (iv) we experience a claim for which coverage is not provided. Healthcare legislation and inflationary cost increases could also negatively affect our financial results.
We have significant ongoing capital requirements that could affect our profitability if we are unable to generate sufficient cash from operations and obtain financing on favorable terms.
The truckload industry and our Trucking segment are capital intensive, and our policy of operating newer equipment requires us to expend significant amounts annually. We expect to pay for projected capital expenditures with cash flows from operations or financing available under our existing line of credit. If we were unable to generate sufficient cash from operations, we would need to seek alternative sources of capital, including financing, to meet our capital requirements. In the event that we are unable to generate sufficient cash from operations or obtain financing on favorable terms in the future, we may have to limit our fleet size, enter into less favorable financing arrangements, or operate our revenue equipment for longer periods, any of which could have a materially adverse effect on our profitability.
Increased prices and reduced efficiency relating to new revenue equipment may adversely affect our earnings and cash flows.
We are subject to risk with respect to higher prices for new tractors for our Trucking operations. Prices may increase due to, among other reasons, (i) increases in commodity prices, (ii) government regulations applicable to newly manufactured tractors, trailers, and diesel engines and (iii) the pricing discretion of equipment manufacturers. In addition, the engines installed in our newer tractors are subject to emissions control regulations issued by the EPA. The regulations require reductions in exhaust emissions from diesel engines manufactured in or after 2010. Compliance with such regulations has increased the cost of our new tractors and could impair equipment productivity, lower fuel mileage, and increase our operating expenses. Newer regulations with stricter emissions and efficiency requirements have been proposed that would further increase our costs and impair productivity. These adverse effects, combined with the uncertainty as to the reliability of the vehicles equipped with the newly designed diesel engines and the residual values realized from the disposition of these vehicles, could increase our costs or otherwise adversely affect our business or operations as the regulations become effective. Over the past several years, some manufacturers have significantly increased new equipment prices, in part to meet new engine design and operation requirements.
We have trade-in and repurchase commitments that specify, among other things, what our primary equipment vendors will pay us for disposal of a substantial portion of our revenue equipment. The prices we expect to receive under these arrangements may be higher than the prices we would receive in the open market. We may suffer a financial loss upon disposition of our equipment if these vendors refuse or are unable to meet their financial obligations under these agreements, we do not enter into definitive agreements that reflect favorable equipment replacement or trade-in terms, we fail to or are unable to enter into similar arrangements in the future, or we do not purchase the number of new replacement units from the vendors required for such trade-ins.
If fuel prices increase significantly, our results of operations could be adversely affected.
Our Trucking operations are dependent upon diesel fuel. Prices and availability of petroleum products are subject to political, economic, weather-related, and market factors that are generally outside our control and each of which may lead to fluctuations in the cost of fuel. Because our Trucking operations are dependent upon diesel fuel, significant increases in diesel fuel costs could materially and adversely affect our results of operations and financial condition if we are unable to pass increased costs on to customers through rate increases or fuel surcharges. We use a number of strategies to mitigate fuel expense. We purchase bulk fuel at many of our service centers and utilize a fuel optimizer to identify the most cost effective fuel centers to purchase fuel over-the-road. We manage our fuel miles per gallon with a focus on reducing idle time, managing out-of-route miles, and improving the driving habits of our driving associates. We also continue to update our fleet with more fuel efficient, EPA emission-compliant post-2014 model engines and to install aerodynamic devices on our tractors and trailers, which lead to fuel efficiency improvements. Fuel also is subject to regional pricing differences and often costs more on the West Coast, where we have significant operations. We use a fuel surcharge program to recapture a portion, but not all, of the increases in fuel prices over a base rate negotiated with our customers. Our fuel surcharge program does not protect us against the full effect of increases in fuel prices. The terms of each customer's fuel surcharge agreements vary and customers may seek to modify the terms of their fuel surcharge agreements to minimize recoverability for fuel price increases. Our results of operations would be negatively affected to the extent we cannot recover higher fuel costs or fail to improve our fuel price protection through our fuel surcharge program. Increases in fuel prices, or a shortage or rationing of diesel fuel, could also materially and adversely affect our results of operations. As of December 31, 2015, we did not have any derivative financial instruments to reduce our exposure to fuel price fluctuations.
Difficulty in truckload driver, independent contractor, and third-party carrier recruitment and retention may have a materially adverse effect on our business.
With respect to our trucking services, difficulty in attracting or retaining qualified drivers and independent contractors in our Trucking segment, and third-party truckload carriers in our Logistics segment, could have a materially adverse effect on our growth and profitability. The truckload transportation industry periodically experiences a shortage of qualified drivers, particularly during periods of economic expansion, in which alternative employment opportunities are more plentiful and freight demand increases, or during periods of economic downturns, in which unemployment benefits might be extended and financing is limited for independent contractors who seek to purchase equipment or for students who seek financial aid for driving school. In addition, CSA and stricter hours-of-service regulations may reduce the number of available qualified drivers in our industry. Our independent contractors and third-party truckload carriers are responsible for paying for their own equipment, fuel, and other operating costs, and significant increases in these costs could cause them to seek higher compensation from us or seek other opportunities within or outside the trucking industry. Our industry suffers from a high driver turnover rate, which requires us to continually recruit a substantial number of drivers to operate our revenue equipment. If we were unable to attract and contract with independent contractors and third-party truckload carriers, we could be forced to, among other things, limit our growth, decrease the number of our tractors in service, adjust our driver compensation package or independent contractor compensation, or pay higher rates to third-party truckload carriers, which could adversely affect our profitability and results of operations if not offset by a corresponding increase in customer rates.
We operate in a highly regulated industry, and changes in existing regulations or violations of existing or future regulations could have a materially adverse effect on our operations and profitability.
We operate in the United States pursuant to operating and brokerage authority granted by the DOT, and we are also regulated by the EPA, DHS, and other agencies in states in which we operate. Our company drivers, independent contractors, and third-party capacity providers also must comply with the applicable safety and fitness regulations of the DOT, including those relating to drug and alcohol testing and driver hours-of-service. Weight and equipment dimensions also are subject to government regulations. We also may become subject to new or more restrictive regulations relating to exhaust emissions, driver hours-of-service, ergonomics, on-board reporting of operations, collective bargaining, and security of transported shipments, and other matters affecting safety or operating methods. Future laws and regulations may be more stringent, require changes in our operating practices, influence the demand for transportation services, or require us to incur significant additional costs. Higher costs incurred by us, or by our suppliers who pass the costs onto us through higher supplies and materials pricing, could adversely affect our results of operations. The "Regulation" section in Item 1 of Part I of this Annual Report discusses in detail several proposed, pending, and final regulations that could significantly affect our business and operations.
CSA could adversely affect our profitability and operations, our ability to maintain or grow our fleet, and our customer relationships.
Under CSA, drivers and fleets are evaluated and ranked against their peers based on certain safety-related standards. As a result, certain current and potential drivers may not be hired to drive for us and our fleet could be ranked poorly as compared to our peer carriers. We recruit and retain first-time drivers to be part of our fleet, and these drivers may have a higher likelihood of creating adverse safety events under CSA. The occurrence of future deficiencies could affect driver recruitment by causing high-quality drivers to seek employment with other carriers or could cause our customers to direct their business away from us and to carriers with higher fleet safety rankings, either of which would adversely affect our results of operations. Additionally, competition for drivers with favorable safety ratings may increase and thus could necessitate increases in driver-related compensation costs. Further, we may incur greater than expected expenses in our attempts to improve our scores or as a result of those scores.
Receipt of an unfavorable DOT safety rating could have a material adverse effect on our operations and profitability.
If we were to receive a conditional or unsatisfactory DOT safety rating, it could adversely affect our business as customer contracts may require a satisfactory DOT safety rating, and a conditional or unsatisfactory rating could negatively impact or restrict our operations.
The FMCSA also has proposed regulations that would modify the existing rating system and the safety labels assigned to motor carriers evaluated by the DOT. Under the proposed regulations, the methodology for determining a carrier’s DOT safety rating would be expanded to include the on-road safety performance of the carrier’s drivers and equipment, as well as results obtained from investigations. Exceeding certain thresholds based on such performance or results would cause a carrier to receive an unfit safety rating. If these proposed regulations are enacted and we were to receive an unfit safety rating, our business would be adversely affected in the same manner as if we received a conditional or unsatisfactory safety rating under the current regulations.
If our independent contractor drivers are deemed by regulators or judicial process to be employees, our business and results of operations could be adversely affected.
Tax and other regulatory authorities have in the past sought to assert that independent contractor drivers in the trucking industry are employees rather than independent contractors. Federal legislators have introduced legislation in the past to make it easier for tax and other authorities to reclassify independent contractor drivers as employees, including legislation to increase the recordkeeping requirements for employers of independent contractor drivers and to heighten the penalties of employers who misclassify their employees and are found to have violated employees' overtime and/or wage requirements. Additionally, federal legislators have sought to abolish the current safe harbor allowing taxpayers meeting certain criteria to treat individuals as independent contractors if they are following a long-standing, recognized practice, extend the Fair Labor Standards Act to independent contractors, and impose notice requirements based upon employment or independent contractor status and fines for failure to comply. Some states have put initiatives in place to increase their revenues from items such as unemployment, workers' compensation, and income taxes, and a reclassification of independent contractor drivers as employees would help states with this initiative. We are party to class actions from time to time alleging violations of the Fair Labor Standards Act and other labor laws. Taxing and other regulatory authorities and courts apply a variety of standards in their determination of independent contractor status. If our independent contractor drivers were determined to be our employees, we would incur additional exposure under federal and state tax, workers' compensation, unemployment benefits, labor, employment, and tort laws, including for prior periods, as well as potential liability for employee benefits and tax withholdings.
Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.
Our operations are subject to various federal, state, and local environmental laws and regulations dealing with the transportation, storage, discharge, presence, use, disposal, and handling of hazardous materials, wastewater, storm water, waste oil, and fuel storage tanks. We are also subject to various environmental laws and regulations involving emissions from our equipment. Our truck terminals often are located in industrial areas where groundwater or other forms of environmental contamination have occurred and could in the future occur. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. Certain of our facilities have waste oil or fuel storage tanks and fueling islands. A small percentage of our freight consists of low-grade hazardous substances, which subjects us to various regulations. We have instituted programs to monitor and control environmental risks and promote compliance with applicable environmental laws and regulations; however, if (i) we are involved in a spill or other accident involving hazardous substances, (ii) there are releases of hazardous substances we transport, (iii) soil or groundwater contamination is found at our facilities or results from our operations, or (iv) we are found to be in violation of or fail to comply with applicable environmental laws or regulations, then we could be subject to clean-up costs and liabilities, including substantial fines or penalties or civil and criminal liability, any of which could have a materially adverse effect on our business and operating results.
Two of our service centers are located adjacent to environmental Superfund sites designated by the EPA. Although we have not been named as a potentially responsible party in either case, we are potentially exposed to claims that we may have contributed to environmental contamination in the areas in which we operate.
Our Phoenix service center is located on land identified as potentially having groundwater contamination resulting from the release of hazardous substances by persons who have operated in the general vicinity. The area has been classified as a state Superfund site. We have been located at our Phoenix facility since 1990 and, during such time, have not been identified as a potentially responsible party with regard to the groundwater contamination, and we do not believe that our operations have been a source of groundwater contamination.
Our Indianapolis service center is located approximately one-tenth of a mile east of Reilly Tar and Chemical Corporation, a federal Superfund site designated and listed by the EPA on the National Priorities List for clean-up. The Reilly site has known soil and groundwater contamination. There also are other sites in the general vicinity of our Indianapolis property that have known contamination. Environmental reports obtained by us have disclosed no evidence that activities on our Indianapolis property have caused or contributed to the area's contamination, but we could possibly be deemed responsible for clean-up costs regardless.
In addition, tractors and trailers used in our Trucking operations have been and are affected by applicable federal, state, and local statutory and regulatory requirements related to air emissions and fuel efficiency. In order to reduce exhaust emissions and traffic congestion, some states and municipalities have restricted the locations and amount of time where diesel-powered tractors, such as ours, may idle or travel. These and other similar restrictions could cause us to alter our drivers' behavior and routes, purchase additional auxiliary or other on-board power units to replace or minimize engine power and idling, or experience decreases in productivity. Our tractors and trailers could also be adversely affected by related or similar legislative or regulatory actions in the future.
We may not make acquisitions in the future, or if we do, we may not be successful in integrating the acquired company, either of which could have a materially adverse effect on our business.
Historically, acquisitions have been a part of our Trucking growth. There is no assurance that we will be successful in identifying, negotiating, or consummating any future acquisitions for either our Trucking or Logistics segments. If we do not make any future acquisitions, our growth rate could be materially and adversely affected. Any future acquisitions we undertake could involve the dilutive issuance of equity securities or incurring indebtedness. In addition, acquisitions involve numerous risks, including difficulties in assimilating the acquired company's operations, the diversion of our management's attention from other business concerns, risks of entering into markets in which we have had no or only limited direct experience, and the potential loss of customers, key employees, and drivers of the acquired company, all of which could have a materially adverse effect on our business and operating results. If we make acquisitions in the future, we cannot guarantee that we will be able to successfully integrate the acquired companies or assets into our business.
If we are unable to recruit, develop, and retain our key employees, our business, financial condition, and results of operations could be adversely affected.
We are highly dependent upon the services of certain key employees, including, but not limited to, our team of executive officers and service center managers. We currently do not have employment agreements with any of our key employees or executive officers, and the loss of any of their services could negatively impact our operations and future profitability. Additionally, because of our regional operating strategy, we must continue to recruit, develop, and retain skilled and experienced service center managers if we are to realize our goal of expanding our operations and continuing our growth. Failure to recruit, develop, and retain a core group of service center managers could have a materially adverse effect on our business.
We operate in a highly competitive industry, which could limit growth opportunities and adversely affect our profitability.
We operate in a highly competitive transportation industry, which includes thousands of trucking and logistics companies. In our Trucking segment, we primarily compete with other truckload carriers that provide dry van, temperature-controlled, and drayage services similar to those provided by our Dry Van, Refrigerated, and Drayage operating units. Less-than-truckload carriers, private carriers, intermodal companies, railroads, and logistics companies compete to a lesser extent with our Trucking segment but are direct competitors of the Brokerage and Intermodal operating units in our Logistics segment. We transport or arrange for the transportation of various types of freight, and competition for such freight is based mainly on customer service, efficiency, available capacity and shipment modes, and rates that can be obtained from customers. Such competition in the transportation industry could adversely affect our freight volumes, the freight rates we charge our customers, or profitability and thereby limit our growth opportunities.
We have several major customers, the loss of one or more of which could have a materially adverse effect on our business.
We strive to maintain a diverse customer base; however, a significant portion of our revenue is generated from a number of major customers, the loss of one or more of which could have a materially adverse effect on our business. For the year ended December 31, 2015, our top 25 customers, based on revenue, accounted for approximately 42.9% of our revenue; our top 10 customers accounted for approximately 28.0% of our revenue; and our top 5 customers accounted for approximately 17.8% of our revenue. We generally do not have long-term contractual relationships or long-term rate agreements with our customers. Accordingly, we cannot assure you that our customer relationships will continue as presently in effect or that we will receive our current customer rate levels in the future. A reduction in freight volumes or our services, or termination of our services, by one or more of our major customers could have a materially adverse effect on our business and operating results. We also review and monitor the financial conditions of our customers on an ongoing basis to determine whether to grant credit, customer creditworthiness, forgiveness or acceleration of past due balances or collection concerns, or credit insurance is warranted. However, a major customer's financial hardship could negatively affect our operating results.
We depend on third-party capacity providers, and service instability from these transportation providers could increase our operating costs, reduce our ability to offer Intermodal and Brokerage services, and limit Logistics segment growth, which could adversely affect our revenue, results of operations, and customer relationships.
Our Intermodal business utilizes railroads and some third-party drayage carriers to transport freight for our customers, and Intermodal dependence on railroads could increase as Intermodal services expand. In certain markets, rail service is limited to a few railroads or even a single railroad. Recently, many Intermodal providers experienced poor service from providers of rail-based services. Railroads with which we have, or in the future may have, contractual relationships could reduce their services in the future, which could increase the cost of the rail-based services we provide and could reduce the reliability, timeliness, efficiency, and overall attractiveness of our rail-based Intermodal services. Furthermore, railroads increase shipping rates as market conditions permit. Price increases could result in higher costs to our customers and reduce or eliminate our ability to offer Intermodal services. In addition, we may not be able to negotiate additional contracts with railroads to expand our capacity, add additional routes, obtain multiple providers, or obtain railroad services at current cost levels, any of which could limit our ability to provide this service. Our Brokerage business is dependent upon the services of third-party capacity providers, including other truckload carriers. These third-party providers seek other freight opportunities and may require increased compensation in times of improved freight demand or tight trucking capacity. Our third-party truckload carriers may also be affected by certain factors to which our drivers and independent contractors are subject, including, but not limited to, changing workforce demographics, alternative employment opportunities, varying freight market conditions, trucking industry regulations, and limited availability of equipment financing. Most of our third-party capacity provider transportation services contracts are cancelable on 30 days' notice or less. Our inability to secure the services of these third-parties, or increases in the prices we must pay to secure such services, could have an adverse effect on our operations and profitability to the extent we are not able to obtain corresponding customer rate increases.
If our investments in entities are not successful or decrease in market value, we may have to write off or lose the value of a portion or all of our investments, which could have a materially adverse effect on our operating results.
We have invested, either directly or indirectly through one of our wholly owned subsidiaries, in TRP, TRP III, and each entity's respective related funds, which are companies that make privately negotiated equity investments. Due to portfolio losses in the past, we have recorded impairment charges in prior periods to reflect the other-than-temporary decrease in fair value of the portfolio. If TRP's or TRP III's financial position declines, we could be required to write down all or part of our investment in such entity, which could have a materially adverse effect on our operating results.
We are dependent on management information and communications systems, and significant systems disruptions could adversely affect our business.
Our business depends on the efficient, stable, and uninterrupted operation of our management information and communications systems. Some of our key software, hardware systems, and infrastructure were developed internally or by adapting purchased software applications and hardware to suit the needs of both our Trucking and Logistics segments. Our management information and communication systems are used in various aspects of our business, including but not limited to load planning and receiving, dispatch of drivers and third-party capacity providers, customer billing, producing productivity, financial and other reports, and other general functions and purposes. If any of our critical information or communications systems fail or become unavailable, we could have to perform certain functions manually, which could temporarily affect the efficiency and effectiveness of our operations. Our operations and those of our technology and communications service providers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, internet failures, computer viruses, malware, hacking, and other events beyond our control. More sophisticated and frequent cyber-attacks in recent years have also increased security risks associated with information technology systems. We maintain information security policies to protect our information, computer systems, and data from cyber security threats, breaches, and other such events. We currently maintain our primary computer hardware system at our Phoenix, Arizona headquarters, along with computer equipment at each of our service centers. In an attempt to reduce the risk of disruption to our business operations should a disaster occur, we have redundant computer systems and networks and the capability to deploy these back-up systems from an off-site alternate location. We believe that any such disruption would be minimal, moderate, or temporary. However, we cannot predict the likelihood or extent to which such alternate location or our information and communication systems would be affected. Our business and operations could be adversely affected in the event of a system failure, disruption, or security breach that causes a delay, interruption, or impairment of our services and operations.
Difficulty in obtaining goods and services from our vendors and suppliers could adversely affect our business.
We are dependent upon our vendors and suppliers for certain products and materials. We believe that we have positive vendor and supplier relationships and are generally able to obtain favorable pricing and other terms from such parties. If we fail to maintain amenable relationships with our vendors and suppliers, or if our vendors and suppliers are unable to provide the products and materials we need or undergo financial hardship, we could experience difficulty in obtaining needed goods and services because of production interruptions, limited material availability, or other reasons. Subsequently, our business and operations could be adversely affected.
Declines in demand for our used revenue equipment could result in decreased equipment sales, resale values, and gains on sales of assets.
We are sensitive to the used equipment market and fluctuations in prices and demand for tractors and trailers. Through our wholly owned subsidiary, Knight Truck & Trailer Sales, LLC, we sell our used company-owned tractors and trailers that we do not trade-in to manufacturers or other parties. Declines in demand for the used equipment we sell could result in diminished sale volumes or lower used equipment sales prices, either of which could negatively affect our gains on sales of assets.
Efforts by labor unions could divert management's attention and could have a materially adverse effect on our operating results.
We face the risk that Congress or one or more states will approve legislation significantly affecting our business and our relationship with our employees, such as the previously proposed federal legislation referred to as the Employee Free Choice Act, which would substantially liberalize the procedures for union organization. Any attempt to organize by our employees could result in increased legal and other associated costs. In addition, if we were to enter into a collective bargaining agreement, the terms could negatively affect our costs, efficiency, and ability to generate acceptable returns on the affected operations
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Our current headquarters and principal place of business is located at 20002 North 19th Avenue in Phoenix, Arizona 85027. This facility includes office buildings of approximately 116,000 square feet. We also retained and repurposed our former headquarters property (located at 5601 West Buckeye Road in Phoenix, Arizona) as a regional operations facility consisting of approximately 75 acres. This facility includes office buildings of approximately 53,000 square feet, maintenance facilities of approximately 32,000 square feet, a body shop of 9,000 square feet, and a truck wash and fueling facility of approximately 7,000 square feet. All of our properties are utilized by both our Trucking and Logistics segments. The following table provides information regarding the locations of our service centers and/or offices (other than our current headquarters and principal place of business) as of December 31, 2015:
We also own and lease space in various locations for temporary trailer storage. Management believes that replacement space comparable to these trailer storage facilities is readily obtainable, if necessary. We lease excess trailer drop space at several of our facilities to other carriers.
We believe that our service centers are suitable and adequate for our present needs. We periodically seek to improve our service centers or identify other favorable locations.
Item 3.
Item 3. Legal Proceedings
We are a party to certain claims and pending litigation arising in the normal course of business. These proceedings primarily involve claims for personal injury or property damage incurred in the transportation of freight or for workers' compensation. We maintain insurance at coverage levels that management considers adequate to cover liabilities arising from the transportation of freight in amounts in excess of our self-insurance retentions. Based on its present knowledge of the facts and, in certain cases, advice of outside counsel, management does not believe the resolution of claims and pending litigation, taking into account existing accrued amounts, is likely to have a materially adverse effect on us.
Item 4.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5.
Item 5.
Market for Company's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
Our common stock is traded under the symbol KNX on the New York Stock Exchange ("NYSE"). The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported by the NYSE.
As of February 25, 2016, we had 49 shareholders of record. However, we believe that many additional holders of our common stock are unidentified because a substantial number of shares are held by brokers or dealers for their customers in street names.
On February 25, 2016, the closing market price of our common stock on the NYSE was $25.00 per share.
Starting in December 2004, and in each consecutive quarter since, we have paid a quarterly cash dividend. Listed below are the dividends declared and paid for the two most recent fiscal years:
Our most recent dividend, which was declared in February of 2016 for $0.06 per share of common stock, is scheduled to be paid in March of 2016.
We currently expect to continue to pay comparable quarterly cash dividends in the future. Future payment of cash dividends, and the amount of any such dividends, will depend upon our financial condition, results of operations, cash requirements, tax treatment, and certain corporate law requirements, as well as other factors deemed relevant by our Board of Directors.
On May 19, 2011, our Board of Directors unanimously authorized the repurchase of 10.0 million shares of our common stock. Under our share repurchase program, repurchased shares are constructively retired and returned to unissued status. During the year ended December 31, 2015, we repurchased 1,606,790 shares of our common stock in the open market that were retired and made available for future issuance. We did not repurchase any shares during the fourth quarter of 2015. No shares were repurchased during the years ended December 31, 2014, or 2013. As of December 31, 2015, there were 5,831,766 shares remaining for future purchases under our current repurchase program.
The table below sets forth the information with respect to purchases of our common stock made by or on behalf of us during the quarter ended December 31, 2015.
(1)
Other Transactions include restricted shares of our common stock withheld and used to offset tax withholding obligations that occurred upon vesting and release of restricted shares. The withholding of shares was permitted under the applicable award agreement and was not part of any stock repurchase program.
See "Securities Authorized for Issuance Under Equity Compensation Plans" under Item 12 in Part III of this Annual Report for certain information concerning shares of our common stock authorized for issuance under our equity compensation plans.
Item 6.
Item 6. Selected Financial Data
The selected consolidated financial data presented below as of the end of the period ended December 31, 2015, and for each of the years in the preceding five-year period ended December 31, 2015, are derived from our consolidated financial statements. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," below, and the Consolidated Financial Statements and Notes thereto included in Item 8 of this Form 10-K.
(1)
Includes amounts outstanding that were borrowed under our existing line of credit, which is classified as a long-term liability under this line item.
(2)
In addition to the quarterly dividend paid in each year, we declared and paid a special dividend of $0.50 in the fourth quarter of 2012.
(3)
Operating expenses expressed as a percentage of total revenue.
(4)
Also referred to as Adjusted Operating Ratio herein. Operating expenses, less fuel surcharge revenue, expressed as a percentage of total revenue, excluding fuel surcharge revenue. Management believes that omitting this potentially volatile source of revenue affords a more consistent basis for comparing our results of operations from period to period. This calculation of operating ratio is a non-GAAP financial measure, is not an alternative for, and should be considered in addition to, the calculation of operating ratio (operating expenses expressed as a percentage of total revenue). See non-GAAP reconciliation on page 25.
(5)
Average revenue per tractor includes revenue for our Trucking operation only. It does not include fuel surcharge revenue, other revenue, or revenue from our Logistics operations.
(6)
Average tractors operated includes both company tractors and tractors operated by independent contractors
(7)
The Company acquired 100% of the outstanding stock of Barr-Nunn on October 1, 2014 and therefore, the operating results of the Company include the operating results of Barr-Nunn for periods after October 1, 2014.
The following table reconciles consolidated operating ratio (GAAP) to adjusted operating ratio (Non-GAAP):
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
Item 7, as well as other items of this Annual Report, contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, cash flows, dividends, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed acquisition plans, new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. In this Item 7, statements relating to the ability of our infrastructure to support future growth, our ability to recruit and retain qualified drivers, our ability to react to market conditions, our ability to gain market share, future tractor prices, potential acquisitions, our equipment purchasing plans and equipment turnover, our ability to obtain favorable pricing terms from vendors and suppliers, expected liquidity and methods for achieving sufficient liquidity, future fuel prices, future third-party service provider relationships and availability, future compensation arrangements with independent contractors and drivers, our expected need or desire to incur indebtedness, expected sources of liquidity for capital expenditures, expected tractor trade-ins, expected sources of working capital and funds for acquiring revenue equipment, expected capital expenditures, future asset utilization, future capital requirements, future trucking capacity, future consumer spending, expected freight demand and volumes, future rates, future depreciation and amortization, expected tractor and trailer fleet age, and future purchased transportation expense, among others, are forward-looking statements. Such statements may be identified by their use of terms or phrases such as "believe," "may," "could," "expects," "estimates," "projects," "anticipates," "plans," "intends," "hope," and similar terms and phrases. Forward-looking statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1A. Risk Factors," set forth above. Readers should review and consider the factors discussed in "Item 1A. Risk Factors," along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission.
All such forward-looking statements speak only as of the date of this Annual Report. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.
Introduction
Business Overview
We offer a broad range of truckload transportation and logistics services with one of North America's largest tractor fleets, operated through a nationwide network of service centers, and contractual access to thousands of third-party capacity providers. We have grown substantially by increasing the geographic reach of our service center network and by expanding the breadth of our services. Our Trucking segment provides truckload transportation, including dedicated services of various products, goods, and materials for our diverse customer base through our Dry Van, Refrigerated, and Drayage operating units. The Brokerage and Intermodal operating units of our Logistics segment provide a multitude of shipment solutions, including additional sources of truckload capacity and alternative transportation modes, by utilizing our vast network of third-party capacity providers and rail providers, as well as certain logistics, freight management, and other non-trucking services. Our objective is to operate our Trucking and Logistics businesses with industry-leading margins and growth, while providing safe, high-quality, cost-effective solutions for our customers.
Our results of operations are affected by industry-wide economic factors and by our capital allocation, sales and marketing, operating, and spending decisions. Industry-wide economic factors, such as freight demand, truckload and rail intermodal capacity, fuel prices, inventory levels, industrial production, government regulation, and unemployment rates, create an environment against which must make decisions. Our decisions in areas such as allocating capital to Trucking or Logistics, driver wages, customer acquisition or retention and freight rates, investments in technology, hiring and compensation of non-driving associates, and age of fleet are made against this background. We measure the results through key metrics, such as the number of tractors we operate, our revenue per tractor (which includes primarily our revenue per total mile and our number of miles per tractor), freight volumes brokered to third-party capacity providers (including our rail partners), driver and independent contractor recruitment and retention, and our ability to control costs on a company-wide basis, as measured by cost per mile in our Trucking segment and Adjusted Operating Ratio in both segments. Our success depends on our ability to efficiently and effectively manage our resources in providing transportation and logistics solutions to our customers in light of such factors. We evaluate the growth opportunities for each of our Trucking and Logistics businesses based on customer demand and supply chain trends, availability of drivers and third-party capacity providers, expected returns on invested capital, expected net cash flows, and our company-specific capabilities.
Recent Consolidated Results of Operations and Year-End Financial Condition
Our consolidated results of operations for the year ended December 31, 2015, compared to the year ended December 31, 2014, were as follows:
●
Total revenue increased 7.3%, to $1.2 billion from $1.1 billion;
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Net income attributable to Knight increased 13.5%, to $116.7 million from $102.9 million; and
●
Net income attributable to Knight per diluted share increased 12.9%, to $1.42 from $1.25.
In 2015, our Trucking segment operated an average of 4,793 tractors, an increase of 620 tractors from a year ago. Productivity, as measured by average annual revenue per tractor, before fuel surcharge, increased 1.1% in 2015. This improvement was attributable to a combination of a favorable pricing environment during the first half of 2015, expansion of our freight mix, and having available capacity to meet the demands of our customers. Shipments serviced by our Logistics segment increased as we continued to increase the number of customers utilizing our Logistics services and to expand our third party carrier network. Revenues in our Logistics segment increased 9.9% in 2015 compared to 2014.
Total revenue and net income improved in 2015, as compared to 2014. Our results were positively affected by the full-year impact of our acquisition of Barr-Nunn in October 2014, a favorable pricing environment, during the first half of 2015, improved asset productivity, and declining fuel prices. We continued to intensify our cost control efforts and seek operational efficiencies while providing industry-leading service. Significant revenue growth in our Logistics businesses and a solid used equipment market for most of the year further contributed to the increased revenue and net income realized in 2015. These revenue and net income increases come despite a less robust freight environment in 2015 compared with 2014.
In 2015, we generated $205.8 million in cash flow from operations and used $149.4 million for capital expenditures net of equipment sales. During 2015, we returned $65.2 million to our shareholders in the form of quarterly dividends and stock repurchases. We ended the year with $8.7 million of cash, $112.0 million of long-term debt, and $738.4 million of shareholders' equity.
The following factors should be considered when comparing our results of operations in 2015 to our results of operations in 2014. Our 2015 results included a $7.2 million pretax ($4.4 million after-tax) settlement expense for two class action lawsuits, an $8.6 million pretax ($5.3 million after-tax) gain on sale of available-for-sale securities, and an effective tax rate that positively affected net income by $5.4 million. Our 2014 results included a $3.2 million pretax ($1.9 million after-tax) gain on sale of available-for-sale securities.
Our liquidity is not materially affected by off-balance sheet transactions. See the discussion under "Off-Balance Sheet Transactions" under Item 7 to Part II of this Annual Report for a description of our off-balance sheet transactions.
Consolidated Revenue and Expenses
We primarily generate revenue by transporting freight for our customers in our Trucking segment or arranging for the transportation of customer freight by third party capacity providers in our Logistics segment. Our operating revenue is reported under "Results of Operations" under Item 7 to Part II of this Annual Report and categorized as (i) Trucking revenue, net of fuel surcharge, (ii) Trucking fuel surcharge revenue, and (iii) Logistics revenue. Trucking revenue, net of fuel surcharge, and Trucking fuel surcharge revenue are largely generated by the trucking services provided by our three Trucking operating units (Dry Van, Refrigerated, and Drayage), whereas Logistics revenue is mostly generated by the logistics services provided by our two Logistics operating units (Brokerage and Intermodal). We also provide logistics, freight management and other non-trucking services, such as used equipment sales and leasing to independent contractors and third-parties through our Logistics business.
The operating revenue and operating expenses of our Trucking and Logistics segments are similarly affected by factors that generally relate to, among other things, overall economic and weather conditions in the United States, customer inventory levels, specific customer demand, the levels of truckload and rail intermodal capacity, and availability of qualified drivers, independent contractors, and third-party capacity providers.
To reduce our risk to fuel price fluctuations in our Trucking segment, we have a fuel surcharge program under which we obtain from our customers additional fuel surcharges that generally recover a majority, but not all, of the increased fuel costs; however, we cannot ensure whether current recovery levels will continue in the future. In discussing our overall and segment-based results of operations, because changes in fuel costs typically cause fuel surcharge revenue to fluctuate, we identify Trucking fuel surcharge revenue separately and omit fuel surcharge revenue from our statistical calculations. We believe that omitting this potentially volatile source of revenue provides a more meaningful comparison of our operating results from period to period.
The following table sets forth revenue and operating income between the Trucking and Logistics segments for the years ended December 31, 2015, 2014, and 2013. (Dollar amounts in thousands)
Trucking Strategy and Segment Information
Our Trucking operating strategy is to achieve a high level of asset utilization within a highly disciplined operating system while maintaining strict controls over our cost structure. To achieve these goals, we operate primarily in high-density, predictable freight lanes in select geographic regions and attempt to develop and expand our customer base around each of our service centers by providing multiple truckload services for each customer. This operating strategy allows us to take advantage of the large amount of freight transported in regional markets. Our service centers enable us to better serve our customers and work more closely with our driving associates. We operate a premium modern fleet to appeal to drivers and customers, reduce maintenance expenses and equipment downtime, and enhance our fuel and other operating efficiencies. We employ technology in a cost-effective manner to assist us in controlling operating costs and enhancing revenue.
Trucking revenue is generated by our Dry Van, Refrigerated, and Drayage operating units. Generally, we are paid a predetermined rate per mile or per load for our trucking services. Additional revenues are generated by charging for tractor and trailer detention, loading and unloading activities, dedicated services, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel. The main factors that affect our Trucking revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the number of loaded miles we generate with our equipment.
Effectively controlling our expenses is an important element of maximizing our profitability. The most significant expenses of our Trucking segment are primarily variable and include fuel and fuel taxes, driver-related expenses (such as wages, benefits, training, and recruitment) and costs associated with independent contractors (which are primarily included in purchased transportation expense recorded on the "Purchased transportation" line of our consolidated statements of income). Expenses that have both fixed and variable components include maintenance expense (which includes costs for replacement tires for our revenue equipment) and our total cost of insurance and claims. These expenses generally vary with the miles we travel but also have a controllable component based on safety, fleet age, efficiency, and other factors. The main fixed costs for our Trucking segment are the acquisition and depreciation of long-term assets (such as revenue equipment and service centers) and the compensation of non-driver personnel.
The primary measure we use to evaluate the profitability of our Trucking segment is operating ratio, measured both on a GAAP basis (operating expenses expressed as a percentage of revenue) and on a non-GAAP basis that many in our industry use (operating expenses, net of Trucking fuel surcharge revenue, expressed as a percentage of Trucking revenue, excluding Trucking fuel surcharge revenue). We believe the second method allows us to more effectively compare periods while excluding the potentially volatile effect of changes in fuel prices. Non-GAAP operating ratio is not a substitute for GAAP operating ratio.
The tables below compare our operating ratio using both methods.
The following table sets forth the Trucking segment adjusted operating ratio (non-GAAP) as if fuel surcharges are excluded from total revenue and instead reported as a reduction of operation expenses, excluding intersegment activity.
(1)
These items represent non-GAAP financial measures and are not substitutes for, and should be considered in addition to, the GAAP financial measures presented in the previous table.
When evaluating Trucking revenue, we consider the following key operating statistics for each period: (i) average revenue per tractor; (ii) average length of haul (miles with loaded trailer cargo); (iii) average percentage of empty miles (miles without trailer cargo); and (iv) average number of tractors and trailers in operation. The following table sets forth certain key operating statistics and certain other statistical data of the Trucking segment for the indicated periods.
(1)
Average revenue per tractor is based on revenue net of intersegment elimination, and does not include fuel surcharge revenue.
Our Trucking segment requires substantial capital expenditures for purchases of new revenue equipment. We fund these purchases with cash flows from operations and financing available under our existing line of credit. We operated an average of 4,793 tractors in 2015, of which 4,363 were company-owned tractors. The average age of our company-owned tractor fleet was 1.7 years at December 31, 2015, which we do not expect to change materially in 2016. We also operated an average of 11,789 trailers in 2015, with an average age of 4.4 years as of December 31, 2015. We expect the average age of our trailers to remain relatively constant or decrease slightly in 2016 as we refresh our fleet. Our net property, plant, and equipment at December 31, 2015 was $803.6 million, most of which relates to our Trucking segment.
Our capital expenditures can also affect depreciation expense. Trucking depreciation relates primarily to our owned tractors, trailers, ELDs and other communication units, and other similar assets. Changes to these fixed costs are generally attributed to increases or decreases to company-owned equipment and fluctuations in new equipment purchase prices, which have historically been precipitated in part by new or proposed federal and state regulations (such as the EPA engine emissions requirements relating to post-2014 model tractors and the California trailer efficiency requirements). Depreciation can also be affected by the cost of used equipment that we sell or trade and the replacement of older used equipment. Our management periodically reviews the condition, average age, and reasonableness of estimated useful lives and salvage values of our equipment and considers such factors in light of our experience with similar assets, used equipment market conditions, and prevailing industry practice. Total Trucking segment depreciation and amortization expense was approximately $107.0 million in 2015.
Logistics Strategy and Segment Information
Logistics revenue is generated primarily by our Brokerage and Intermodal operating units. We also provide logistics, freight management and other non-trucking services to our customers through our Logistics business. We are generally paid a predetermined rate per mile or per load for arranging freight transportation for our customers and providing other Logistics services. Additional revenue is generated by offering specialized logistics solutions (including, but not limited to, origin management, surge volumes, disaster relief, special projects, and other logistics needs). Our Logistics revenue is mainly affected by the rates we obtain from customers, the freight volumes we ship through our third-party capacity providers, and our ability to secure qualified third-party capacity providers to transport customer freight. Increases in shipments serviced by our Brokerage and Intermodal operating units and continued increases in the number of customers utilizing our Logistics services contributed to the improved productivity and revenue realized in 2015. We were able to provide Logistics services to our existing customers as well as effectively expand to new customers in 2015.
Our Logistics segment is less asset-intensive and is instead dependent upon capable non-driver personnel, modern and effective information technology, and qualified third-party capacity providers. The most significant expense of our Logistics segment, which is primarily variable, is the cost of purchased transportation that we pay to third-party capacity providers (including rail providers), which is included in the "Purchased transportation" line of our consolidated statements of income. This expense generally varies depending upon truckload and rail capacity, availability of third-party capacity providers, rates charged to customers, and current freight demand and customer shipping needs. Other Logistics operating expenses are generally fixed and primarily include the compensation and benefits of non-driver personnel (included in salaries, wages and benefits expense recorded on the "Salaries, wages and benefits" line of our consolidated statements of income) and depreciation and amortization expense.
The following table sets forth the Logistics segment revenue, other operating expenses, and operating income.
The following table sets forth the Logistics revenue, operating expenses, and operating income, excluding intersegment transactions.
We primarily measure the Logistics segment's profitability by reviewing the gross margin percentage (revenue net of intersegment elimination, less purchased transportation expense, expressed as a percentage of revenue) and the operating income percentage. The gross margin percentage can be affected by customer rates and the costs of securing third-party capacity providers. Our third-party capacity providers are generally not subject to long-term or predetermined contracted rates, and our operating results could be affected if the availability of third-party capacity providers or the rates for such providers change in the future. The following table lists the gross margin percentage for our Brokerage and Intermodal businesses.
(1)
Gross margin percentage is based on revenue net of intersegment elimination.
Our gross margin percentage improved from 2014 to 2015, but our operating margin contracted. The primary reasons for the operating margin contraction were lower revenue per load, as well as increased staffing and other costs associated with the start-up of our expanded logistics and transportation management offering. In addition, lower commodity prices negatively affected our sourcing division.
Since our Logistics segment depends on effective usage of information systems and technology that enable us to efficiently arrange for the transportation of our customers' freight and remain resourceful and responsive in meeting customer shipping needs, we may incur costs to upgrade, integrate, or expand our information systems and technology, but we do not expect that costs for such improvements will require significant capital expenditures in the future. Total Logistics segment depreciation and amortization expense was approximately $4.0 million in 2015, which is primarily attributed to equipment leased to third parties.
Trends and Outlook
We have created a service network with financial accountability, a modern tractor fleet, access to thousands of third-party capacity transportation providers, and the capability of providing multiple transportation service offerings and modes to customers in North America. We believe our operating strategies are contributing factors to our revenue and earnings growth over time.
In 2015, we continued to produce consolidated revenue growth. This growth was driven by improved asset productivity, organic tractor growth, the October 1, 2014 acquisition of Barr-Nunn, and expansion of our less capital-intensive operations such as Brokerage and Intermodal in the Logistics segment. We continue to gain market share, build out our team, source additional capacity, and strategically align our service offerings with the supply chain needs of our customers. We expect our investment in providing multiple solutions for our customers will continue to lead to additional revenue opportunities across all of our lines of business.
In 2016, although currently we are experiencing moderate improvements in miles per tractor, we expect the freight environment in the first two quarters to be more challenging than in the same periods of the prior two years. Over the past eighteen months, excess capacity has entered the market, which has led to a more competitive pricing market and fewer non-contract opportunities. We hope to see the market begin to improve in the second half of 2016 as excess capacity exits the market, as indicated by reduced new tractor orders and a weakening used equipment market. Market factors that include higher driver wages, lower gain on sale of revenue equipment, and fewer non-contract opportunities may negatively affect our margins in our Trucking and Logistics segments. In this environment, we plan to limit organic fleet expansion, focus on cost control, allocate expansion capital toward Logistics, and apply rigorous scrutiny to any acquisition opportunities.
Over the medium to long term, we believe capacity in the truckload market will be constrained by an increasingly competitive driver market, elevated regulatory costs for trucking companies and drivers, and potentially alternative employment opportunities for drivers we wish to hire. These factors are expected generally to have a positive impact on industry-wide rate structures. However, reduced hours of operation and driver shortages could negatively impact equipment utilization, even in a stronger demand environment. In such an environment, we believe carriers that are well-positioned to develop and retain drivers, withstand supply and demand fluctuations, and provide safe, dependable, and high-quality service to customers will have opportunities to increase freight rates and market share. We believe domestic and global economic and political conditions present the most direct challenges to improved freight demand. These threats include fluctuations in commodity prices, an inability of the United States government to timely and adequately address fiscal issues, currency fluctuations, or other factors outside our control that could reduce consumer spending or industrial investment, thus negatively affecting freight volumes. In addition, the competitive landscape and the supply chains of our customers are constantly shifting based on manufacturing and transportation costs, business combinations, inventory levels, and other factors.
Several issues affecting the trucking industry could also cause our costs to increase in future periods. These issues include driver and independent contractor availability, fuel price fluctuations, increases to new tractor and trailer purchase prices, and compliance with new and proposed federal and state regulations. From a cost perspective, recruiting and retaining sufficient numbers of qualified drivers, independent contractors, and third-party capacity providers may become increasingly costly; equipment prices are rising, medical, workers' compensation, and litigation expenses are increasing more rapidly than general inflation, and potentially higher fuel prices are not fully offset by fuel surcharges. In the current economic and regulatory environments, it will be important to allocate equipment to more profitable shipments, use technology to generate efficiencies, and effectively manage costs. We believe we have the service center network, modern tractor fleet, comprehensive truckload and logistics services, management team and qualified personnel, technology, intense focus on cost control, and capital resources necessary to successfully overcome these challenges and capitalize on future opportunities.
We will continue to utilize the flexibility of our model to react and adapt to market conditions. We continue to optimize our model and refine our execution in reaction to, or in anticipation of, transportation market dynamics, particularly the markets for truckload and logistics services that we offer. We will also look for additional strategic acquisitions, to supplement our growth.
Results of Operations
The following table sets forth the consolidated statements of income in dollars and as a percentage of consolidated total revenue and the percentage increase or decrease in the dollar amounts of those items compared to the prior year.
(1)
Purchased transportation expense is comprised of (a) payments to independent contractors, which is primarily attributed to our Trucking segment; (b) payments to third-party capacity providers, which is primarily attributed to our Logistics segment; and (c) payments relating to our logistics, freight management and non-trucking services. Purchased transportation expense is further discussed in the year-to-year comparison of operating results below.
Fiscal 2015 Compared to Fiscal 2014
Operating Revenue
Total revenue increased 7.3% for 2015 to $1.2 billion from $1.1 billion for 2014 generally because of higher revenues generated in both the Trucking and Logistics segments.
Total Trucking revenue was $830.7 million in 2015 and $715.7 million in 2014. Trucking fuel surcharge revenue decreased to $121.2 million in 2015 from $176.3 million in 2014, as fuel prices declined in each quarter of 2015. Tractor productivity, as measured by average annual Trucking revenue, before fuel surcharge per tractor, increased in 2015, compared to 2014. This was attributable to improved contract pricing. Average revenue per loaded mile increased 4.2%, as we improved pricing partially offset by an increase in non-paid empty mile percentage rate to 12.0% from 10.1%. If economic conditions improve and capacity tightens, we anticipate that we will be able to obtain rate increases in 2016 and beyond; however, adverse changes in either of these factors could prevent rate increases or negatively affect existing rates.
Logistics revenue is primarily generated by the Brokerage and Intermodal operating units. Total Logistics revenue was $231.0 million in 2015 and $210.3 million in 2014. We achieved the increase in revenue by providing more capacity to our customers through our third-party carriers and rail providers. Shipment volume growth in our Brokerage business, which is the largest component of our Logistics segment, increased 47.9% in 2015 compared to 2014, as we continued to increase our buyer pool, which lead to increased access to third-party capacity. Although our revenue per load was negatively impacted in 2015 as a result of lower fuel surcharge, a shorter length of haul and less non-contract opportunities, we continued to expand gross margins.
Operating Expenses
Salaries, wages and benefits expense, as a percentage of total revenue, increased to 28.2% in 2015 from 24.7% in 2014. Costs associated with healthcare benefits provided to our employees and accruals for workers' compensation benefits are components of our salaries, wages and benefits in our consolidated statements of income. Factors contributing to the increase include increases in driver base pay, and a shift from purchased transportation expense to driver salaries and wages expense, as a greater percentage of our tractor fleet was comprised of company tractors rather than independent contractors. Our non-driver personnel salaries and wages increased, as did our payroll taxes and costs associated with benefits provided, as we increased our number of employees, particularly in our Logistics segment. We have improved our pay and performance bonus for our driving associates over the last several quarters in response to an increasingly challenging driver market. We believe that the driver market remains challenging and that the CSA implementation has further reduced the pool of available drivers. Having a sufficient number of qualified driving associates continues to be a major concern, however, we continue to seek ways to attract and retain qualified driving associates, including investing in technology and service centers that improve the experience of drivers.
Fuel expense decreased, as a percentage of total revenue, to 12.9% in 2015, from 18.5% in 2014, as the U.S. National Average Diesel Fuel price decreased by 29.2% in 2015. Fuel expense, net of Trucking fuel surcharge, expressed as a percentage of Trucking revenue, before Trucking fuel surcharge, remained flat year over year. Our fuel efficiency initiatives, such as trailer blades, idle-control, more fuel-efficient engines, and driver training programs, continued to be contributing factors in controlling our fuel expense on a cost per company tractor operated mile basis. However, as a percentage of revenue, net fuel expense was consistent, as lower diesel fuel prices and improved fuel efficiency were offset by a greater percentage of miles operated by company-owned tractors (for which we pay the fuel cost) instead of independent contractors (who bear their own fuel cost) in 2015 compared with 2014, as well as an increase in empty miles percentage (for which we do not receive fuel surcharges). Our fuel surcharge program helps to offset increases in fuel prices but applies only to loaded miles and typically does not offset empty miles, idle time, and out of route miles driven. Typical fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly but typically require a specified minimum change in fuel cost to prompt a change in Trucking fuel surcharge revenue. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in Trucking fuel surcharge revenue. Due to this time lag, our fuel expense, net of fuel surcharge, negatively impacts our operating income during periods of sharply rising fuel costs and positively affects our operating income during periods of falling fuel costs. Fuel prices began falling toward the end of 2014 and continued to fall each quarter in 2015, as compared to the same periods in 2014.
Operations and maintenance expense, as a percentage of total revenue, increased to 6.8% in 2015 from 6.5% in 2014. Operations and maintenance consist of direct operating expense, equipment maintenance, and tire expense. Operations and maintenance expenses as a percentage of total revenue, excluding Trucking fuel surcharge, decreased slightly to 7.6% in 2015 from 7.7% in 2014, as a result of the increased revenue generated in 2015 compared to 2014.
Insurance and claims expense, as a percentage of total revenue, increased slightly to 2.9% in 2015, from 2.8% in 2014. Insurance and claims expense as a percentage of total revenue, excluding fuel surcharge, decreased to 3.2% in 2015 from 3.4% in 2014, and decreased slightly on a per mile basis, year-over-year. Insurance and claims expense consists of premiums for liability, physical damage, and cargo, and will vary based upon the frequency and severity of claims, as well as our level of self-insurance, and premium expense.
Communications expense, as a percentage of revenue, remained flat at 0.4% for 2015, and 2014. Communications expense is comprised of our tractor and trailer tracking systems, information technology systems, and phone systems.
Depreciation and amortization expense, as a percentage of total revenue, increased to 9.4% for 2015 from 8.4% in 2014, primarily because of the decrease in fuel surcharge revenue. As a percentage of total revenue, excluding Trucking fuel surcharge, depreciation and amortization increased to 10.5% in 2015 from 10.0% in 2014, as our Trucking revenue growth outpaced revenue growth in our Logistics segment, which is less capital intensive. A greater percentage of our tractor fleet was comprised of company-owned tractors rather than tractors provided by independent contractors, and we experienced higher equipment prices. Depreciation and amortization expense for our Trucking segment as a percentage of Trucking revenue was 12.9% in 2015, and 12.3% in 2014. The increased expense is primarily related to the increased number of tractors and trailers owned during 2015. The increased expense was partially offset by higher average revenue per tractor. Absent offsetting improvements in average revenue per tractor or growth in our independent contractor fleet and Logistics operations, our expense as a percentage of revenue in this category could increase in the future, if equipment prices continue to rise. The majority of our company-owned tractor fleet is comprised of tractors with 2014 compliant engines, which are more expensive than previous tractors due to compliance with NHTSA and EPA emissions standards, and the higher cost of these newer tractors is expected to result in higher depreciation and amortization going forward. These engines provide substantial emissions reductions, and we believe this investment will contribute to our strategy of maintaining efficiency in our operations by adhering to a relatively consistent tractor trade-in schedule.
Purchased transportation expense, as a percentage of total revenue, decreased to 20.9% for the year ended 2015 from 21.6% for the same period in 2014. Purchased transportation expense is comprised of (i) payments to independent contractors for our Dry Van, Refrigerated, and Drayage operations in our Trucking segment; and (ii) payments to third-party capacity providers for our Brokerage operations and to railroads for our Intermodal operations; and (iii) payments relating to logistics freight management, and non-trucking services in our Logistics segment. The overall decrease in this category is primarily due to lower fuel surcharge equivalent payments to independent contractors and third-party capacity providers, a smaller percentage of our miles being operated by independent contractors, and the growth in our larger Trucking segment operations, which grew revenues by 16.1% in 2015. Purchased transportation expense attributed to payments to third-party capacity providers (including railroads and sourcing activities) in our Logistics segment increased 10.4% in 2015, when compared to 2014. Purchased transportation costs generally take into account changes in diesel fuel prices, resulting in lower payments during periods of declining fuel prices. We expect purchased transportation will increase as a percentage of revenue if we are successful in continuing to grow our Logistics segment.
Miscellaneous operating expenses, as a percentage of total revenue, increased to 1.9% in 2015, from 0.7% for 2014. The increase is due in part to the decrease in Trucking fuel surcharge component of total revenue, and less gain on sale of equipment to offset these costs. However, the increase in 2015 is primarily due to the non-routine expense recorded in the second quarter of 2015 for $7.2 million pretax ($4.4 million after tax) relating to expected settlement costs for two class action lawsuits involving employment-related claims in California and Oregon. Excluding this non-routine expense, and excluding the effect of the decrease in the fuel surcharge component of consolidated revenue, and lower gain on sale of equipment, miscellaneous operating expenses increased due to increased legal expense associated with the non-routine claim expense, an increase in costs associated with technology and our management information systems, and revenue equipment operating lease expense. Gains from the sale of used equipment are included in miscellaneous operating expenses and decreased to $15.3 million in 2015, from $16.8 million in 2014. We believe the used equipment market will continue to help offset other miscellaneous operating expenses, but not to the extent as in the earlier part of 2015, as the used equipment market softened beginning in the third quarter of 2015 and we expect a similar environment through the first half of 2016.
As a result of the above factors, our GAAP operating ratio (operating expenses expressed as a percentage of total revenue) was 85.0% for 2015, compared to 85.2% for 2014. The non-GAAP adjusted operating ratio (total operating expenses, net of fuel surcharge, as a percentage of total revenue before fuel surcharge), was 83.2% in 2015, compared to 82.4% in 2014. Please see the reconciliation table above for a reconciliation of GAAP operating ratio to non-GAAP operating ratio.
Net interest and other income, as a percentage of revenue, remained constant at 0.8% in 2015, and 2014. Other income includes realized gains from the sale of available-for-sale securities and unrealized gains from our investments in TRP III using the equity method of accounting. Our realized gains from the sale of available-for-sale securities was higher in 2015, compared to 2014. In the fourth quarter of 2014, we funded the acquisition of Barr-Nunn for approximately $112.4 million with borrowings from our existing line of credit. We repurchased 1.6 million shares of our stock in 2015 for $45.3 million, and interest expense increased in 2015 because of the increased average borrowing during the year. Our debt balance decreased to $112.0 million at December 31, 2015 from $134.4 million at December 31, 2014.
We provide for income taxes at the statutory federal and state rates, adjusted for certain permanent differences between financial statement income and income for tax reporting. Our effective tax rate was 36.8% for 2015 and 39.7% for 2014. The unusually low rate in 2015 was attributable to favorable tax positions taken on amended federal and state income tax returns for tax years 2010 through 2013 and other miscellaneous non-recurring decreases, which positively impacted our net income by approximately $5.4 million.
As a result of the preceding financial results, our net income attributable to Knight increased to 9.9%, compared to 9.3% in 2014.
Fiscal 2014 Compared to Fiscal 2013
Operating Revenue
Total revenue increased 13.7% for 2014 to $1.1 billion from $969.2 million for 2013 generally because of higher revenues generated in both the Trucking and Logistics segments.
Total Trucking revenue was $715.7 million in 2014 and $644.7 million in 2013. Trucking fuel surcharge revenue decreased to $176.3 million in 2014 from $177.4 million in 2013 as fuel prices declined in the latter half of 2014. Tractor productivity, as measured by average annual revenue, before fuel surcharge per tractor, increased in 2014, compared to 2013. This was attributable to increased demand for our capacity, improvements in our freight mix, and contract pricing. Average revenue per total mile increased 8.2% as we improved pricing and reduced non-paid empty mile percentage rate to 10.1% from 10.6%. Our average freight revenue per tractor improved 7.1% because of the combined increase in average revenue per total mile and a reduction of miles per tractor by 1.0%.
Logistics revenue is primarily generated by the Brokerage and Intermodal operating units. Total Logistics revenue was $210.3 million in 2014 and $147.2 million in 2013. We achieved the increase in revenue by providing more capacity to our customers through our third-party carriers and rail providers. We continued to increase our buyer pool, which lead to increased access to third-party capacity, increased shipment volume growth, and improved rates in our Brokerage and Intermodal businesses. The volume of shipments by our Brokerage and Intermodal businesses increased 19.6% in 2014 from 2013, and our revenue per shipment improved 27.5% in 2014.
Operating Expenses
Salaries, wages and benefits expense, as a percentage of revenue, increased to 24.7% in 2014 from 24.1% in 2013. Costs associated with healthcare benefits provided to our employees and accruals for workers' compensation benefits are components of our salaries, wages and benefits in our consolidated statements of income. Salaries, wages and benefits expense for 2014 increased primarily due to an increase in driver pay, increased workers’ compensation claims, and increased performance based bonuses. Driver pay increased $0.04 per mile in 2014. However as a percentage of consolidated revenue driver pay was comparable to 2013 due to significant revenue growth, particularly in our Logistics segment, which has lower salaries, wages, and benefits expense. We believe that the driver market remains challenging and that the CSA implementation has further reduced the pool of available drivers. We expect that driver pay will continue to increase in 2015. Having a sufficient number of qualified driving associates continues to be a major concern. We have implemented a performance related bonus plan for our drivers and could be required to create further pay incentives during 2015 given these conditions. However, we continue to seek ways to attract and retain qualified driving associates, including investing in technology and service centers that improve the experience of drivers, and we are encouraged by the favorable turnover rates experienced this year.
Fuel expense, as a percentage of revenue, decreased to 18.5% in 2014, from 22.2% in 2013 as the U.S. National Average Diesel Fuel price decreased by 2.9% in 2014. The increase in overall revenue and the significant revenue growth of our Logistics segment, where no fuel expense is incurred, also contributed to the decrease in fuel expense as a percentage of revenue. Improved effectiveness of our fuel efficiency initiatives, such as trailer blades, idle-control, more fuel-efficient engines, and driver training programs, further contributed to the reduction in fuel expense. Fuel prices fell sharply at the end of 2014. Our fuel surcharge program helps to offset increases in fuel prices but applies only to loaded miles and typically does not offset empty miles, idle time, and out of route miles driven. Typical fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly but typically require a specified minimum change in fuel cost to prompt a change in Trucking fuel surcharge revenue. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in Trucking fuel surcharge revenue. Due to this time lag, our fuel expense, net of fuel surcharge, negatively impacts our operating income during periods of sharply rising fuel costs and positively impacts our operating income during periods of falling fuel costs.
Operations and maintenance expense, as a percentage of revenue, decreased to 6.5% in 2014 from 6.7% in 2013. Operations and maintenance consist of direct operating expense, equipment maintenance, and tire expense. Equipment maintenance expenses as a percentage of revenue decreased as a result of the increased revenue generated in 2014 compared to 2013. On a per mile basis, this expense remained constant in 2014 and 2013. Tight driver market conditions continued in 2014, and contributed to increased driver development and recruiting expenses.
Insurance and claims expense, as a percentage of revenue, decreased to 2.8% for 2014 from 3.0% in 2013. The improvement is due to increased revenue primarily from our Logistics segment where related insurance and claims costs are typically lower as a percentage of revenue than our larger Trucking segment. We experienced lower auto liability frequency and severity compared to 2013.
Communications expense, as a percentage of revenue, decreased slightly to 0.4% for 2014, compared to 0.5% in 2013. Communications expense is comprised of our tractor and trailer tracking systems, information technology systems, and phone systems.
Depreciation and amortization expense, as a percentage of revenue, decreased to 8.4% for 2014 from 8.9% in 2013. This fixed cost as a percentage of total revenue was lower in 2014 due to the significant growth in our Logistics segment, which is less capital intensive. Depreciation and amortization expense for our Trucking segment as a percentage of Trucking revenue was 9.9% in 2014, and 2013. The majority of our company-owned tractor fleet is comprised of tractors with 2010 EPA compliant engines, though we have also added tractors with 2014 compliant engines beginning in 2013. These engines provide substantial emissions reductions, and we believe this investment will contribute to our strategy of maintaining efficiency in our operations by adhering to a relatively consistent tractor trade-in schedule. Other factors contributing to the increase in this fixed cost were the addition of trailer blades and other fuel efficiency enhancing equipment. These higher costs were partially offset by higher average revenue per tractor and an increase in revenue generated by independent contractors. In addition, the 2014 model year tractors are more expensive than previous model year tractors due to compliance with NHTSA and EPA emissions standards.
Purchased transportation expense, as a percentage of revenue, increased to 21.6% for the year ended 2014 from 19.6% for the same period in 2013. Purchased transportation expense is comprised of (i) payments to independent contractors for our Dry Van, Refrigerated, and Drayage operations in our Trucking segment; and (ii) payments to third-party capacity providers for our Brokerage operations and to railroads for our Intermodal operations and our sourcing activities in our Logistics segment. The overall increase in this category is primarily due to the growth in our Logistics segment operations, which grew revenues 42.9% in 2014. Purchased transportation expense attributed to payments to third-party capacity providers (including railroads and sourcing activities) in our Logistics segment increased 44.0% in 2014, when compared to 2013. Purchased transportation expense attributed to payments to independent contractors in our Trucking segment decreased by approximately 4.2% in 2014 from 2013. Purchased transportation costs generally take into account changes in diesel fuel prices, resulting in lower payments during periods of declining fuel prices.
Miscellaneous operating expenses, as a percentage of revenue, decreased to 0.7% in 2014 compared to 1.6% in 2013. Gain from sales of equipment is recorded in miscellaneous operating expense and gain from sales of equipment increased to $16.8 million in 2014, compared to $7.6 million in 2013.
As a result of the above factors, our GAAP operating ratio (operating expenses expressed as a percentage of revenue) was 85.2% for 2014, compared to 88.2% for 2013. The non-GAAP operating ratio (total operating expenses, net of fuel surcharge, as a percentage of revenue before fuel surcharge), was 82.4% in 2014, compared to 85.6% in 2013. Please see the reconciliation table above for a reconciliation of GAAP operating ratio to non-GAAP operating ratio.
Net interest and other income, as a percentage of revenue, increased in 2014 to 0.8% from 0.3% in 2013. Other income includes realized gains from the sale of available-for-sale securities and unrealized gains from our investments in TRP III using the equity method of accounting. Our realized gains from the sale of available-for-sale securities was higher in 2014, compared to 2013. During 2013, our borrowing capacity increased to $300.0 million from $150.0 million. In the fourth quarter of 2014, we funded the acquisition of Barr-Nunn for approximately $112.4 million with borrowings from our existing line of credit. Interest expense increased in 2014 because of the increased borrowing. Our debt balance increased to $134.4 million at December 31, 2014 from $38.0 million at December 31, 2013.
We provide for income taxes at the statutory federal and state rates, adjusted for certain permanent differences between financial statement income and income for tax reporting. Our effective tax rate was 39.7% for 2014 and 40% for 2013.
As a result of the preceding financial results, our net income attributable to Knight increased to 9.3%, compared to 7.1% in 2013.
Liquidity and Capital Resources
The growth of our business has required, and will continue to require, significant investments. In our Trucking business, where investments are substantial, the primary investments are in new tractors and trailers and, to a lesser extent, in technology, service centers, and working capital. In our Logistics business, where investments are modest, the primary investments are in technology and working capital. Our primary sources of liquidity have been funds provided by operations and borrowings under our line of credit.
Net cash provided by operating activities was approximately $205.8 million, $177.2 million, and $138.5 million for the years ended December 31, 2015, 2014, and 2013, respectively. The increase for 2015 is primarily due to the increases in net income and depreciation in 2015 compared to 2014.
Net cash used in investing activities was approximately $138.3 million, $266.9 million, and $85.7 million for the years ended December 31, 2015, 2014, and 2013, respectively. The higher investment total in 2014 is due to the acquisition of Barr-Nunn in the fourth quarter of 2014 for approximately $110.5 million. Excluding the Barr-Nunn acquisition, capital expenditures for the purchase of revenue equipment (net of equipment sales and trade-ins), office equipment, and land and leasehold improvements totaled $149.4 million, $178.8 million, and $85.4 million for the years ended December 31, 2015, 2014, and 2013, respectively. Excluding any acquisitions, we currently anticipate capital expenditures, net of trade-ins, of approximately $85.0 million to $100.0 million for 2016. We expect this estimate will primarily be used to acquire new revenue equipment for replacement of existing units.
Net cash from financing activities typically varies with borrowing activity on our line of credit. In both 2015 and 2013, we had net payments to our line of credit of $22.4 million, and $42.0 million, respectively, while in 2014, we had net proceeds from borrowing on our line of credit of $96.4 million to fund the purchase of Barr-Nunn. Exercises of stock options and repurchases of Company stock also contributed to the changes in cash used or provided by financing activities during the three years ended December 31, 2015. We repurchased $45.3 million of Company stock on the open market in 2015, and no Company stock purchases were made in either 2014 or 2013. Proceeds from exercises of stock options were $9.9 million, $24.4 million, and $4.3 million in 2015, 2014, and 2013, respectively. We returned $19.9 million, $19.6 million, and $19.4 million to our shareholders by way of dividends in 2015, 2014, and 2013, respectively.
We currently maintain a line of credit that permits revolving borrowings and letters of credit up to an aggregate of $300.0 million and matures on December 1, 2017. As of December 31, 2015, the aggregate amount outstanding under our line of credit was $112.0 million, which is classified as a long-term liability in the accompanying consolidated balance sheets. We also utilized a portion of our line of credit for letters of credit, which are issued to various regulatory authorities in connection with our self-insurance programs. The issued but unused letters of credit totaled $27.4 million as of December 31, 2015 and $24.3 million as of December 31, 2014. Combining the amounts borrowed and letters of credit issued, we had $160.6 million available for future borrowing under our existing line of credit as of December 31, 2015, compared with $141.3 million as of December 31, 2014. Under our current line of credit agreement, we are obligated to comply with certain financial and other covenants and were in compliance with those covenants as of December 31, 2015.
As of December 31, 2015, our cash and cash equivalents totaled approximately $8.7 million compared to $17.1 million as of December 31, 2014. During the next 12 months and beyond, we believe that we will be able to finance our short-term needs for working capital and acquisitions of revenue equipment with cash, cash flows from operations, and financing available under our existing line of credit. We expect to have significant capital requirements over the long-term, which may require us to incur increased debt or seek additional equity capital. The availability of additional capital will depend upon prevailing market conditions, the market price of our common stock, our financial condition and results of operations, and several other factors over which we have limited control. Nevertheless, based on our recent operating results, current cash position, anticipated future cash flows, and sources of available financing, we do not expect that we will experience any significant liquidity constraints in the foreseeable future.
Off-Balance Sheet Transactions
Our liquidity is not materially affected by off-balance sheet transactions. Like many other transportation companies, we have periodically utilized operating leases to finance a portion of our revenue equipment requirements and terminal facilities requirements. We leased revenue equipment under operating leases, and we lease some of our service centers and temporary trailer storage under operating leases. Operating lease expense for such equipment, facilities and trailer storage is reflected in the "Miscellaneous operating expenses" line in our consolidated statements of income, and totaled $4.7 million, $2.8 million, and $2.2 million for the years ended December 31, 2015, 2014, and 2013, respectively.
Tabular Disclosure of Contractual Obligations
The following table sets forth, as of December 31, 2015, our contractual obligations and payments due by corresponding period for our short- and long-term operating expenses and other commitments.
(1)
Purchase obligations primarily consist of obligations to purchase revenue equipment, net of guaranteed trade-ins from contracted vendors, and a carry forward of approximately $7.1 million from 2015 contracts.
(2)
Long-term debt of $112.0 million is borrowings under our line of credit, which has a maturity date of December 2017. We expect to pay-off the debt balance prior to the final maturity date.
(3)
Investment commitments primarily consist of contractual obligations to investments in various Transportation Resource Partnerships. which are subject to capital calls. The expected timing of the capital calls are presented above.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with United States Generally Accepted Accounting Principles ("GAAP") requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, revenue, and expenses in our consolidated financial statements and accompanying notes. Management evaluates these estimates and assumptions on an ongoing basis, utilizing historical experience, consultation with experts, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates and assumptions, and it is possible that materially different amounts would be reported using differing estimates or assumptions. We consider our critical accounting policies to be those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.
A summary of the significant accounting policies followed in preparation of the financial statements is contained in Note 1 to our consolidated financial statements attached hereto. The following discussion addresses our most critical accounting policies:
Property and Equipment. Property and equipment is stated at cost less accumulated depreciation. Property and equipment is depreciated to an estimated salvage value using the straight-line method over the asset's estimated useful life, which ranges from one to thirty years. Salvage values range from zero to 25% of the capitalized cost. We periodically review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and other long-lived assets based upon, among other things, our experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice. We both routinely and periodically review and make a determination whether the salvage value of our tractors and trailers is higher or lower than originally expected. This determination is based upon (i) market conditions in equipment sales, (ii) the guaranteed repurchase price with contracted dealerships, and (iii) the average miles driven on the equipment being sold. Future changes in our useful life or salvage value estimates, or fluctuation in market value not reflected in our estimates, could have a material effect on our results of operations. We continually monitor events and changes in circumstances for indications that the carrying amounts of our property and equipment may not be recoverable. When indicators of potential impairment are present, we compare the carrying value of our assets to the fair value to determine if any impairment exists. In the event that the carrying value exceeds the fair market value, we will adjust the property and equipment to the fair value and recognize any impairment loss. Our assets classified as held for sale are carried at the lower of cost or net selling value.
Claims Accrual. Reserves are established based on estimated or expected losses for claims. The primary claims arising for us consist of cargo liability, personal injury, property damage, collision, comprehensive, workers' compensation, and employee medical expenses. We maintain self-insurance levels for these various areas of risk and have established reserves to cover these self-insured liabilities. We also maintain insurance to cover liabilities in excess of the self-insurance amounts. The reserves are analyzed quarterly and represent accruals for the estimated self-insured portion of pending claims, including adverse development of known claims, as well as incurred but not reported claims. Our estimates require judgments concerning the nature and severity of the claim, historical trends, advice from third-party administrators and insurers, the specific facts of individual cases, the jurisdictions involved, estimates of future claims development, and the legal and other costs to settle or defend the claims. We have significant exposure to fluctuations in the number and severity of claims. If there is an increase in the frequency and severity of claims, or we are required to accrue or pay additional amounts if the claims prove to be more severe than originally assessed, or any of the claims would exceed the limits of our insurance coverage, our profitability would be adversely affected.
In addition to estimates within our self-insured retention, we also must make judgments concerning our coverage limits. If any claim were to exceed our coverage limits, we would have to accrue for the excess amount. Our critical estimates include evaluating whether a claim may exceed such limits and, if so, by how much. Currently, we are not aware of any such claims. If one or more claims were to exceed our effective coverage limits, our financial condition and results of operations could be materially and adversely affected.
Accounting for Income Taxes. Income taxes are accounted for under the asset and liability method, in accordance with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Significant management judgment is required in determining our provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If it were ever estimated that it is more likely than not that all or some portion of specific deferred tax assets will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined not to be realizable. A valuation allowance for deferred tax assets has not been deemed necessary due to our profitable operations and because any deferred assets can be fully offset by deferred liabilities. Accordingly, if the facts or financial results were to change in such a way as to impact the likelihood of realizing the deferred tax assets, judgment would have to be applied to determine the amount of valuation allowance required in the appropriate period.
Management judgment is also required regarding a variety of other factors including the appropriateness of tax strategies, expected future tax consequences based on our future performance, and our likelihood of success in the event that tax strategies are challenged by taxing authorities. We utilize certain income tax planning strategies to reduce our overall cost of income taxes. It is possible that certain strategies might be disallowed, resulting in an increased liability for income taxes. Significant management judgments are involved in assessing the likelihood of sustaining the strategies and determining the likely range of defense and settlement costs. An ultimate result worse than our expectations could adversely affect our results of operations.
A tax benefit or liability from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. We have not recorded any contingent liability associated with uncertain tax positions.
Share-Based Payments. We have stock options outstanding under our stock compensation plan. Exercises are permitted in pre-determined installments based upon a vesting schedule established at the time of grant. Each stock option expires on a date determined at the time of the grant; expiration will not exceed ten years from the date of the grant. The calculation of employee compensation expense involves estimates that require management judgments. These estimates include determining the value of each of our stock options on the date of grant using a Black-Scholes option-pricing model discussed in Note 9 to the consolidated financial statements. The fair value of our stock options is expensed on a straight-line basis, which generally ranges between five to seven years. Expected volatility is based on historical volatility of our stock. The risk-free rate for periods within the contractual life of the stock option award is based on the rate of a zero-coupon Treasury bond on the date the stock option is granted with a maturity equal to the expected term of the stock option. Management judgment is required to estimate stock option exercises and forfeitures within our valuation model; management bases those decisions on historical data. The expected life of our stock option awards is derived from historical experience under our share-based payment plans and represents the period of time that we expect our stock options to be outstanding.
Beginning in 2014, we issued performance restricted stock units (“PRSUs”) to selected key employees that may be earned based on revenue growth and return on assets, and may then be modified based on our total shareholder return, as defined, over the three-year period. The applicable performance standards are reviewed, and approved each year by our Compensation Committee. The primary award adjustment may range from 0 percent to 150 percent of the initial grant, based upon performance achieved. The primary award modifier, which would multiply the adjusted primary award by 75 percent to 125 percent, is measured by determining the percentile rank of the total shareholder return of Knight common stock in relation to the total shareholder return of a peer group for the three-year period. The final award will be based on performance achieved in accordance with the scale set forth in the grant agreement. Performance restricted stock units do not earn dividend equivalents. The fair value of each PRSU grant is estimated on the date of grant using the Monte Carlo Simulation valuation model as discussed in Note 8 to the consolidated financial statements and is expensed on a straight-line basis over the requisite service period.
We have service and performance-based restricted stock awards outstanding. The compensation expense uses fair value recognition provisions of ASC 718 under which we estimate the expense.
New Accounting Pronouncements
See Note 1 to the consolidated financial statements set forth beginning at page of this report for discussion of new accounting pronouncements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including changes in interest rates on debt, changes in commodity prices, and changes in equity prices.
Under Financial Accounting Reporting Release Number 48 and SEC rules and regulations, we are required to disclose information concerning market risk with respect to foreign exchange rates, interest rates, and commodity prices. We have elected to make such disclosures, to the extent applicable, using a sensitivity analysis approach based on hypothetical changes in interest rates and commodity prices. We have not entered into derivatives or other financial instruments for hedging or speculative purposes. We are not subject to a material amount of foreign currency risk because our operations are largely confined to the United States.
Interest Rate Risk
We have interest rate risk to the extent we borrow against our line of credit or incur other debt. Our line of credit bears a variable interest rate set at either at the prime rate or LIBOR plus 0.625%. Accordingly, our earnings would be affected by changes in these short-term interest rates. Risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates. At our average level of borrowing during 2015, a 1.0% increase in our applicable interest rate would reduce pretax earnings, on an annualized basis, by approximately $0.9 million.
Historically, we have invested our excess cash primarily in highly liquid debt instruments of the United States government and its agencies, municipalities in the United States, money market funds, and equity securities (e.g., common stock). Investments in both fixed rate and floating rate interest earning securities carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. Due in part to these factors, our income from investments might decrease in the future.
Commodity Price Risk
We are subject to commodity price risk with respect to purchases of fuel. The price and availability of diesel fuel can fluctuate due to market factors that are beyond our control. Because we do not recover the full amount of fuel price increases, we believe fuel surcharges are effective at mitigating some, but not all, of the risk of high fuel prices. As of December 31, 2015, we did not have any derivative financial instruments to reduce our exposure to fuel price fluctuations, but we may use such instruments in the future. At our average level of fuel purchasing during 2015, a 10% increase in the average price per gallon, net of fuel surcharge collection, would decrease pretax earnings, on an annualized basis, by approximately $6.4 million.
Equity Price Risk
In 2013, we acquired 1,304,517 shares of the common stock of USA Truck in order to explore a business combination with USA Truck. As of December 31, 2015, we held 406,925 shares of USA Truck stock. USA Truck’s common stock is publicly traded on NASDAQ, and market prices for equity securities are subject to fluctuation and volatility. Consequently, the amount realized in the subsequent sale of our investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions. Further, our significant holdings in USA Truck common stock make it difficult to quickly liquidate shares without negatively affecting the market price. Given the $17.45 closing price on December 31, 2015, a 30% reduction in the market price of USA Truck common stock would decrease the value of our holdings by $2.1 million and reduce our Shareholders’ Equity by 0.2%.
Item 8.
Item 8. Financial Statements and Supplementary Data
The consolidated balance sheets of Knight Transportation, Inc. and subsidiaries, as of December 31, 2015 and 2014, and the related consolidated statements of income, consolidated statements of comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2015, together with the related notes and the reports of Grant Thornton LLP, our current independent registered public accounting firm, are set forth beginning at page in this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
In accordance with the requirements of the Exchange Act and SEC rules and regulations promulgated thereunder, we have established and maintained disclosure controls and procedures and internal control over financial reporting. Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures and internal control over financial reporting will prevent all errors, misstatements, or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure that material information relating to our Company, including our consolidated subsidiaries, is made known to the officers who certify our financial reports, other members of senior management, and the Board of Directors. Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation, as of December 31, 2015, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are at a reasonable level of assurance, effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f), promulgated under the Exchange Act as a process designed by, or under the supervision of, the principal executive and principal financial officers or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes policies and procedures under the following circumstances:
(1)
Policies and procedures pertaining to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2)
Policies and procedures providing reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(3)
Policies and procedures providing reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
With the supervision and participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission as of December 31, 2015. Based on our management's evaluation under the criteria set forth in the Internal Control - Integrated Framework (2013), management concluded that our internal control over financial reporting was effective as of December 31, 2015. No changes occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal year ended December 31, 2015, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of December 31, 2015, has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their attestation report included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Knight Transportation, Inc.
We have audited the internal control over financial reporting of Knight Transportation, Inc. (an Arizona corporation) and subsidiaries (the “Company”) as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s 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 Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2015, and our report dated February 29, 2016, expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Phoenix, Arizona
February 29, 2016
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers, and Corporate Governance
We incorporate by reference the information contained under the headings "Proposal No. 1 - Election of Class II Directors," "Continuing Directors," "Corporate Governance - Our Executive Officers and Significant Employees; Named Executive Officers," "Corporate Governance - The Board of Directors and Its Committees - Committees of the Board of Directors - The Audit Committee," "Corporate Governance - Section 16(a) Beneficial Ownership Reporting Compliance," and "Corporate Governance - Code of Ethics," from our definitive Proxy Statement to be delivered to our shareholders in connection with the 2016 Annual Meeting of Shareholders to be held May 12, 2016.
Item 11.
Item 11. Executive Compensation
We incorporate by reference the information contained under the headings "Executive Compensation," "Corporate Governance - The Board of Directors and Its Committees - Committees of the Board of Directors - The Compensation Committee - Compensation Committee Interlocks and Insider Participation," and "Corporate Governance - The Board of Directors and Its Committees - Committees of the Board of Directors - The Compensation Committee - Compensation Committee Report" from our definitive Proxy Statement to be delivered to our shareholders in connection with the 2016 Annual Meeting of Shareholders to be held May 12, 2016.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized For Issuance Under Equity Compensation Plans
The following table provides information, as of December 31, 2015, with respect to our compensation plans and other arrangements under which shares of our common stock are authorized for issuance.
Equity Compensation Plan Information
We have also issued restricted stock units and performance based restricted stock units to our employees, which are not included in the number of securities to be issued upon exercise of outstanding options, warrants, and rights, as listed in Column A above. Our restricted stock units and performance based restricted stock units vest gradually over periods ranging from four to 13 years.
We incorporate by reference the information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" from our definitive Proxy Statement to be delivered to our shareholders in connection with the 2016 Annual Meeting of Shareholders to be held May 12, 2016.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
We incorporate by reference the information contained under the headings "Certain Relationships and Related Transactions," and "Corporate Governance - The Board of Directors and Its Committees" from our definitive Proxy Statement to be delivered to our shareholders in connection with the 2016 Annual Meeting of Shareholders to be held May 12, 2016.
Item 14.
Item 14. Principal Accounting Fees and Services
We incorporate by reference the information contained under the heading "Principal Accounting Fees and Services" from our definitive Proxy Statement to be delivered to our shareholders in connection with the 2016 Annual Meeting of Shareholders to be held May 12, 2016.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report on Form 10-K beginning at page, below.
1. Consolidated Financial Statements:
Knight Transportation, Inc. and Subsidiaries
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Income for the years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2015, 2014, and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules required to be filed by Item 8 and Paragraph (b) of Item 15:
Valuation and Qualifying Accounts and Reserves
Schedules not listed (i.e., schedules, other than Schedule II) have been omitted because of the absence of conditions under which they are required or because the required material information is included in the Consolidated Financial Statements or Notes to the Consolidated Financial Statements included herein.
3. Exhibits.
The Exhibits required by Item 601 of Regulation S-K are listed at paragraph (b), below, and at the Exhibit Index appearing at the end of this report.
(b) Exhibits:
The following exhibits are filed with this Form 10-K or incorporated herein by reference to the document set forth next to the exhibit listed below:
*
Filed herewith.
**
In accordance with Regulation S-T, the XBRL-related information in this Annual Report on Form 10-K shall be deemed to be "furnished" and not "filed."
†
Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KNIGHT TRANSPORTATION, INC.
By:
/s/ David A. Jackson
David A. Jackson
Date: February 29, 2016
President and Chief Executive Officer, in his
capacity as such and on behalf of the registrant
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Knight Transportation, Inc.
We have audited the accompanying consolidated balance sheets of Knight Transportation, Inc. (an Arizona corporation) and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Knight Transportation, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company adopted new accounting guidance in 2015 related to the presentation of deferred income taxes.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2016, expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Phoenix, Arizona
February 29, 2016
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2015 and 2014
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2015 and 2014
(In thousands, except par value)
The accompanying notes are an integral part of these consolidated financial statements.
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31, 2015, 2014 and 2013
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2015, 2014 and 2013
(In thousands, except per share data)
(1)
Net of current income taxes of $3,318, $1,233, and $736, respectively.
(2)
Net of deferred income tax (benefits) expenses of $(2,870), $6,203, and $3,758, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015, 2014 and 2013
Organization and Summary of Significant Accounting Policies
a. Nature of Business
Knight Transportation, Inc. (an Arizona corporation) and subsidiaries (the "Company") is a truckload carrier of general commodities and transportation logistics services provider headquartered in Phoenix, Arizona. The Company also has service centers located throughout the United States. The Company has two reportable segments, Trucking and Logistics. The Trucking segment provides truckload carrier dry van, temperature-controlled (refrigerated), and drayage services, and the Logistics segment provides logistics, freight management, brokerage, rail intermodal, and other non-trucking services. The Company is subject to regulation by the U.S. Department of Transportation, U.S. Environmental Protection Agency, U.S. Department of Homeland Security, and various state regulatory authorities.
b. Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements include Knight Transportation, Inc. and its wholly owned and controlled subsidiaries. All intercompany accounts and transactions are eliminated upon consolidation.
Use of Estimates - The preparation of financial statements in conformity with United States Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates and assumptions also apply to the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents are comprised of cash, money market funds, and short-term, highly liquid instruments with insignificant interest rate risk and original maturities of three months or less. Cash balances with institutions may be in excess of Federal Deposit Insurance Corporation ("FDIC") limits or may be invested in sweep accounts that are not insured by the institution, the FDIC or any other government agency.
Notes Receivable - The Company provides financing to independent contractors and third parties on equipment sold or leased under the Company's equipment sale program. Most of the notes are collateralized and are due in weekly installments, including principal and interest payments, ranging from 2% to 20%. The Company had 104 and 109 loans outstanding from independent contractors and third parties as of December 31, 2015 and 2014, respectively.
The notes receivable balances are classified separately between current and long-term notes in the consolidated balance sheets. The current and long-term balances of our notes receivables as of December 31, 2015 and 2014 are as follows:
Assets Held for Sale - The Company had $29.3 million and $23.2 million of revenue equipment not being utilized in operations, which is classified as assets held for sale, as of December 31, 2015 and 2014, respectively. Assets held for sale are recorded at the lower of depreciated value or fair market value less selling costs and are not subject to depreciation. The Company periodically reviews the carrying value of these assets for possible impairment. No impairment was recorded in 2015, 2014, or 2013. The Company expects to sell these assets within 12 months.
Other Current Assets - Included in other current assets are inventories of tires, spare parts, and fuel.
Property and Equipment - Property and equipment is stated at cost less accumulated depreciation. Property and equipment is depreciated to estimated salvage values using the straight-line method of depreciation over the following estimated useful lives:
To ensure that our facilities remain modern and efficient, we periodically have facility upgrades, or new construction, in process at our various service center locations or corporate headquarters. Until these projects are completed, we consider these to be assets not yet placed in service and they are not depreciated. Once they are placed into service, we depreciate them according to our depreciation policy. At December 31, 2015 and December 31, 2014, we had approximately $17.5 million and $6.9 million, respectively, of facility construction in process assets included under "Buildings and building improvements” on the accompanying consolidated balance sheets.
The Company expenses repairs and maintenance as incurred. For the years ended December 31, 2015, 2014, and 2013, repairs and maintenance expense totaled approximately $33.4 million, $30.9 million, and $30.5 million, respectively. The expense is included in “Operations and maintenance” expense in the accompanying consolidated statements of income.
The Company periodically reviews the reasonableness of its estimates regarding useful lives and salvage values for revenue equipment and other long-lived assets based upon, among other things, the Company's experience with similar assets, conditions in the used revenue equipment market, and prevailing industry practice.
Tires on revenue equipment purchased are capitalized as a part of the equipment cost and depreciated over the life of the vehicle. Replacement tires and recapping costs are expensed when placed in service.
Other Long-term Assets and Restricted Cash and Investments include:
In 2003, the Company signed a partnership agreement with TRP, a company that makes privately negotiated equity investments. According to the original partnership agreement, the Company committed to invest $5.0 million out of approximately $260.0 million total, for a 1.9% ownership interest. In early 2006, the Company increased the commitment amount to $5.5 million. Contributions to TRP are accounted for using the cost method as the level of influence over the operations of TRP is minor, and no contributions have been made to TRP since 2011. In 2015, the Company recorded gains and received distributions totaling $208,000. In 2014, distributions of $2.1 million were received and a $1.6 million gain was recorded, while in 2013, distributions received and gains recorded were $467,000. The gains are recognized in the year distributions are received. The Company also recorded impairment of $177,000, $1.0 million and $209,000 in 2015, 2014, and 2013, respectively, for other-than-temporary loss on the investments remaining within the TRP portfolio. The Company's ownership interest in TRP is approximately 2.2%, with a carrying value of $300,000 and $477,000 at December 31, 2015 and 2014, respectively.
In the fourth quarter of 2008, the Company committed to invest $15.0 million in a new partnership managed and operated by the managers and principals of TRP. The new partnership, TRP III, focuses on the same investment opportunities as TRP. Since its inception, the Company has contributed approximately $11.0 million to TRP III.In June 2015, based on an analysis of expected future fund activity, TRP III released investors from a portion of their outstanding commitment. The Company’s share of the commitment release was $2.1 million leaving an outstanding commitment of $1.9 million as of December 31, 2015. The investment in TRP III is accounted for using the equity method. The Company has recorded income of approximately $422,000, $6.1 million, and $669,000 for its investment in TRP III for years ended December 31, 2015, 2014, and 2013, respectively. In 2015, the Company received distributions totaling $152,000 from TRP III for the sale of TRP III portfolio companies. At December 31, 2015, the investment balance in TRP III was $5.8 million, compared to $5.4 million at December 31, 2014. The Company's ownership interest was approximately 6.1% as at December 31, 2015.
In the third quarter of 2015, the Company committed to invest in a new partnership, TRP Capital Partners, LP (TRP IV”). The new partnership is managed and operated by the managers and principals of TRP and TRP III, and is focused on similar investment opportunities. The Company committed to contribute a total of $4.9 million to the new partnership, and has contributed $41,000 as of December 31, 2015.
Since the year-end, the Company has committed to invest in another TRP partnership, TRP CoInvest Partners (NTI) I, LP. This new partnership is also operated and managed by the managers and principals of TRP and TRP III, and is focused on similar investment opportunities. The Company committed to contribute a total of $10.0 million to the new partnership, and fulfilled its commitment in February 2016.
Restricted Cash and Investments - In connection with the Company's self-insurance program, $3.3 million has been set aside in escrow accounts to meet statutory requirements as of December 31, 2015 and 2014, respectively.
In accordance with the provisions of ASC 210, Balance Sheet, and ASC 320, Investments - Debt and Equity Securities, the Company's investments in debt or equity securities are classified as either trading securities, held-to-maturity securities, or available-for-sale securities, based on the Company's intent with respect to those securities. Investments in debt and equity securities are classified as trading securities if they are held principally for the purpose of selling in the near term. Investments in debt securities are classified as held-to-maturity if the Company has the positive intent to hold such securities to maturity and the ability to do so. Investments in debt and equity securities not classified as trading or held-to-maturity are classified as available-for-sale.
Impairment of Long-Lived Assets - ASC 360-10, Property, Plant and Equipment, provides a single accounting model for the assessment of impairment of long-lived assets. In accordance with ASC 360-10, Long-lived Assets, such as property and equipment and purchased intangibles to be held and used in operations, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are grouped at the lowest level at which identifiable cash flows are largely independent when assessing impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets classified as held for sale are not depreciated and are presented in the Company's consolidated balance sheets at the lower of the carrying amount or fair value less costs to sell. Revenue equipment classified as held for sale is presented in "Assets held for sale" on the Company's consolidated balance sheets. Recoverability of long-lived assets is dependent upon, among other things, the Company's ability to continue to achieve profitability in order to meet its obligations when they become due. In the opinion of management, based upon current information, the carrying amount of long-lived assets will be recovered by future cash flows generated through the use of such assets over their respective estimated useful lives.
Goodwill & Intangibles, net - Goodwill is not amortized, but it is reviewed for impairment at least annually or more frequently should any of the circumstances listed in ASC 350-20, Goodwill, occur. The Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the impairment test as prescribed in ASC 350-20. Goodwill is required to be tested for impairment at the reporting unit level utilizing a two-step methodology. The initial step requires the Company to determine the fair value of the reporting unit and compare it to the carrying value of such unit, including goodwill. No impairment is recognized if the fair value exceeds the carrying value; however, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the reporting unit may be impaired. The amount, if any, of the impairment would then be measured in the second step.
In 2015, the Company changed the date of the annual impairment testing to June 30 from September 30. This change did not result in the delay, acceleration or avoidance of an impairment charge. The Company believes this change in accounting principle is preferable because it better aligns with the Company’s annual strategic and planning process and alleviates administrative burden during the year-end reporting period. This change to the annual goodwill impairment testing was applied prospectively and had no effect on these consolidated financial statements. This change was not applied retrospectively as it is impractical to do so because retrospective application would have required the application of significant estimates and assumptions without use of hindsight. The Company completed this annual test as of June 30, 2015, and September 30, 2014, and no adjustment for impairment was determined to be necessary.
In conjunction with the acquisition of Roads West in 2006, the basis of goodwill for tax purposes was determined to be in excess of the book basis of goodwill. Under this circumstance, ASC 740, Income Taxes, requires that the goodwill be separated into two components for acquisitions prior to the adoption of ASC 805, Business Combination. The first component is equivalent to book goodwill, and future tax amortization of this component is treated as a temporary difference, for which a deferred tax liability is established. The second component is the excess tax goodwill over book goodwill, for which no deferred taxes are recognized. The tax benefit from the recognition of the amortization of the second component on the tax return is treated as a reduction in the book basis of goodwill. The finite lived intangible portion was amortized using the straight-line method over a five-year period, and was fully amortized as of December 31, 2011.
The changes in the carrying amounts of goodwill were as follows:
Identifiable intangible assets subject to amortization relate to customer relations and trade names acquired through the 2014 acquisition of Barr-Nunn Transportation, Inc. and certain of its affiliates (“Barr-Nunn”). The intangible assets acquired were recorded at fair value at the date of acquisition.
Intangible asset balances were as follows:
These intangible assets are being amortized over a weighted average amortization period of 7.6 years. Amortization expense associated with these intangible assets was $0.5 million, and $0.1 million for the year ended December 31, 2015, and December 31, 2014, respectively, and was included in depreciation and amortization expense in the accompanying consolidated statements of income. Future amortization expense for intangible assets is estimated at $0.5 million for 2016 through 2019, and $0.4 million in 2020.
Claims Accrual - The claims reserves represent accruals for estimated pending claims within the self-insured retention ("SIR"), including adverse development of known claims and incurred but not reported claims. These estimates are based on the Company's claims experience, including claims settlement patterns, historical payment trends, the experience/knowledge of the Company's self-administered claims as well as that of the third-party administrator as it relates to workers' compensation claims, along with assumptions about future events. The most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported, and the expected costs to settle or pay outstanding claims. Changes in assumptions and changes in actual experience could cause these estimates to change significantly in the near term. A higher SIR may cause assumptions and estimates to vary more unpredictably than a lower SIR.
Revenue Recognition - The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. These conditions are met upon delivery.
In accordance with ASC 605-45, Revenue Recognition - Principal Agent Consideration, the Company accounts for revenue from our Trucking operations, our Logistics operations, and revenue on freight transported by independent contractors on a gross basis. The Company is the primary obligor in the arrangements, the Company has the ability to establish prices, the Company has discretion in selecting the independent contractor or other third-party that will perform the service, the Company has the risk of loss in the event of cargo claims, and the Company bears credit risk with customer payments. Accordingly, all such revenue billed to customers is classified as operating revenue and all corresponding payments to carriers for transportation services the Company arranges in connection with Brokerage and Intermodal activities and to independent contractor providers of revenue equipment are classified as purchased transportation expense.
Allowance for Doubtful Accounts - Revenue is recognized when freight is delivered, creating a credit sale and an account receivable. Credit terms for customer accounts are typically on a net 30 day basis. The Company establishes an allowance for doubtful accounts based on historical experience and any known trends or uncertainties related to customer billing and account collectability. The Company reviews the adequacy of its allowance for doubtful accounts on a quarterly basis. Uncollectible accounts are written off when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts. Historically, the Company has not had significant losses related to uncollectible accounts.
Allowance for Doubtful Notes Receivable - The Company evaluates the collectability of notes and finance lease receivables on a customer-by-customer basis. The Company establishes an allowance for credit losses based on specific customer circumstances, payment patterns, credit risk changes, and historical loss experience. The Company reviews the adequacy of its allowance for doubtful notes receivable quarterly. Uncollectible accounts are written off when deemed uncollectible, and notes receivable are presented net of an allowance for doubtful accounts. Historically, the Company has not had significant losses related to uncollectible accounts.
Income Taxes - The Company accounts for income taxes under the asset and liability method. This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income in the period that includes the enactment date.
The Company records a valuation allowance for deferred tax assets to the extent it believes these assets are not more likely than not to be realized. In making such determinations, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial operations. A valuation allowance for deferred tax assets has not been deemed necessary due to the Company's profitable operations.
The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.
Financial Instruments - The Company's financial instruments include cash equivalents, investments held for trading, available-for-sale securities, trade receivables, notes receivable, accounts payable and long-term debt. Due to the short-term nature of cash equivalents, trade receivables, and accounts payable, the fair value of these instruments approximates their recorded value. Available-for-sale and trading securities consist of marketable equity and debt securities stated at fair value. Due to the variable interest rate, the carrying value of long-term debt approximates fair value.
Concentration of Credit Risk - Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables and notes receivable. Aggregate revenue for the Company's three largest customers accounted for approximately 11.5%, 11.7% and 11.0% of the total revenue for the years ended 2015, 2014 and 2013, respectively. As of December 31, 2015, aggregate balances due from the three largest customers account for approximately 12.0% of the total trade receivable balance compared to 6.7% as of December 31, 2014. Revenue from the Company's single largest customer represented approximately 4.5% of total revenue for the year ended December 31, 2015, and approximately 4.3%, and 4.0%, for the years ended 2014, and 2013, respectively. The balance due from the single largest customer accounts for approximately 1.2% of the total trade receivable balance as of December 31, 2015, compared to 3.2% as of December 31, 2014.
Earnings Per Share - A reconciliation of the numerator (net income) and denominator (weighted average number of shares outstanding) of the basic and diluted earnings per share ("EPS") computations for 2015, 2014, and 2013 are as follows (in thousands, except per share data):
Certain shares of options, restricted stock units, and performance restricted stock units (“equity awards”) were excluded from the computation of diluted earnings per share because the equity award’s exercise prices were greater than the average market price of the common shares and the sum total of assumed proceeds resulted in fewer shares repurchased than the weighted equity awards outstanding hypothetically exercised per the treasury method. A summary of those shares for the years ended December 31, 2015, 2014, and 2013, respectively, is as follows:
New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update seeks to increases the transparency and comparability among entities by requiring public entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. To satisfy the standard’s objective, a lessee will recognize a right-of-use asset representing its right to use the underlying asset for the lease term and a lease liability for the obligation to make lease payments. Both the right-of-use asset and lease liability will initially be measured at the present value of the lease payments, with subsequent measurement dependent on the classification of the lease as either a finance or an operating lease. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. Accounting by lessors will remain mostly unchanged from current U.S. GAAP.
In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that companies may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases, leveraged leases, and amounts previously recognized in accordance with the business combinations guidance for leases. The new standard is effective for public companies for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company is currently evaluating the effect that adopting this standard will have on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10).This update was issued to enhance the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. The update (i) requires equity investments (except those accounted for under the equity method or that are consolidated) to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for an entity to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost; (iv) requires an entity to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (v) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. These provisions are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. The standard is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. The Company is currently evaluating the effect that adopting this standard will have on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This update requires noncurrent classification of all deferred tax assets and liabilities for all public entities for annual periods beginning after December 15, 2016. The update provides for early adoption for all entities as of the beginning of an annual period. For the year ended December 31, 2015, the Company has early adopted ASU 2015-17 and presents all its deferred tax assets and liabilities as non-current for the year ended December 31, 2015. The Company has applied the Standard on a prospective basis. Therefore, the classification of deferred tax assets and liabilities in periods prior to the period ended December 31, 2015 have not been changed from the original presentation.
In June 2014, the FASB issued ASU 2014-12, Stock Compensation - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this update require performance targets that could be achieved after the requisite service period be treated as performance conditions that affect the vesting of the award. The amendment is effective as of January 1, 2016 and is not expected to have an impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The main objective of this update is to require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The guidance in this update supersedes virtually all present U.S. GAAP guidance on revenue recognition. The amendments to the standard require the use of more estimates and judgments than the present standards and require additional disclosures. In July 2015, the FASB deferred the effective date for the revenue recognition standard. The accounting standard will now be effective for reporting periods beginning after December 15, 2017. The Company is currently evaluating this standard and its existing revenue recognition policies to determine which of its customer arrangements in the scope of the guidance will be affected by the new requirements and what impact they would have on the Company’s consolidated financial statements upon adoption of this standard.
2. Fair Value Measurements
US GAAP has established a framework for measuring fair value and a fair value hierarchy based on the inputs used to measure fair value. This framework maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the transparency of inputs as follows:
Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs, only used to the extent that observable inputs are not available, reflect the Company's assumptions about the pricing of an asset or liability.
In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's financial assets and liabilities that are required to be measured on a recurring basis at fair value as of December 31, 2015 and December 31, 2014.
The Company has certain marketable equity securities classified as available-for-sale securities, which are recorded at fair value with unrealized gains and losses, net of tax, as a component of "Accumulated other comprehensive income" in shareholders' equity in the accompanying consolidated balance sheets. Realized gains and losses on available-for-sale securities are included in the determination of net income. The Company uses specific identification to determine the cost of securities sold, and amounts reclassified out of accumulated other comprehensive income into earnings.
The following table shows the Company’s realized gains during the years ended December 31, 2015, 2014, and 2013, on certain securities that were held as available-for-sale. The cost of securities sold is based on the specific identification method and included in “Other income” in the accompanying consolidated statements of income.
As of December 31, 2015, the available-for-sale equity investments included in "Other long-term assets and restricted cash and investments" in the accompanying consolidated balance sheets was approximately $7.1 million, including gross unrealized gains of approximately $4.2 million, or $2.6 million (net of tax). As of December 31, 2014, the available-for-sale investment balance was approximately $26.9 million, including gross unrealized gains of approximately $20.0 million, or $12.2 million (net of tax). The cost basis of these investments at December 31, 2015, and 2014, is approximately $2.9 million and $6.9 million, respectively.
3. Line of Credit and Long-Term Debt
The Company maintained a revolving line of credit with Wells Fargo Bank, which permitted revolving borrowings and letters of credit. The line of credit is maintained at $300.0 million, and matures December 1, 2017. Interest is incurred on borrowings under the line of credit at either the prime rate, or LIBOR plus 0.625%, determined at the time of borrowing. The Company had $112.0 million and $134.4 million outstanding under the line of credit as of December 31, 2015 and 2014, respectively. The weighted average variable annual percentage rate ("APR") for amounts borrowed in 2015 was 0.88%, and 0.91% for amounts borrowed in 2014. Borrowing under the line of credit is recorded in the "Long-term debt" line of the accompanying consolidated balance sheets. In connection with the Company’s self-insurance program, as of December 31, 2015, the Company also utilized $27.4 million of the line of credit for letters of credit issued to various regulatory authorities. The Company has $160.6 million available for future borrowings at December 31, 2015. After consideration of fees incurred for the unused portion of our line of credit, our weighted average variable annual percentage rate ("APR") for the year ended December 31, 2015 was 1.05%, and 1.31% for the year ended December 31, 2014. The Company is obligated to comply with certain financial and other covenants under the line of credit agreement and was in compliance with such covenants at December 31, 2015 and December 31, 2014.
4. Income Taxes
Income tax expense consisted of the following (in thousands):
The effective income tax rate is different than the amount that would be computed by applying statutory corporate income tax rates to income before income taxes. The differences are summarized as follows (in thousands):
The net effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2015 and 2014 are as follows (in thousands):
For the years ended December 31, 2015, 2014, and 2013, the Company does not have any uncertain tax positions, nor any unrecognized tax benefits based upon an analysis of the Company's historic and future tax positions. There are no tax uncertainties for which it is reasonably possible an amount of unrecognized tax benefit should be recognized. Unrecognized tax benefits are defined as the difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to ASC Topic 740.
The Company files federal and state income tax returns with varying statutes of limitations. The 2012 through 2015 tax years generally remain subject to examination by the federal authority, and the 2011 through 2015 tax years generally remain subject to examination by state tax authorities. The Company does not believe the unrecognized tax benefits will change significantly over the next 12 months.
Historically, in accordance with GAAP, the Company presented deferred tax assets and liabilities separately in current amounts and non-current amounts on the basis of the classification of the related asset or liability for financial reporting. Deferred tax assets and liabilities that are not related to an asset or liability for financial reporting, are classified according to the expected reversal date of the temporary difference. On November 20, 2015 the FASB issued an amendment to the current standard, ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes which requires noncurrent classification of all deferred tax assets and liabilities for all public entities for annual periods beginning after December 15, 2016. The standard provides for early adoption for all entities as of the beginning of an annual period. For the year ended December 31, 2015, the Company has early adopted ASU 2015-17, and presents all its deferred tax assets and liabilities as non-current for the year ended December 31, 2015. The Company has applied the Standard on a prospective basis. Therefore, the classifications of deferred tax assets and liabilities in periods prior to the period ended December 31, 2015 have not been changed from the original presentation.
5. Commitments and Contingencies
a. Purchase Commitments
The Company's purchase commitments for 2016 total $103.0 million, which primarily consists of revenue equipment, net of equipment trade-ins from contracted vendors, and a carry forward of approximately $7.1 million from 2015 contracts. The Company generally has the option to cancel with advanced notice ranging from 9 weeks to 90 days prior to the scheduled production.
b. Investment Commitments
The Company's commitment to invest in TRP is $5.5 million. The Company's commitment to invest in TRP III is $15.0 million. As of December 31, 2015, the Company has contributed approximately $11.0 million to TRP III, and $2.1 million was released leaving an outstanding commitment of $1.9 million as of December 31, 2015. The Company’s commitment to invest in TRP IV is $4.9 million, and $41,000 has been contributed as of December 31, 2015. The Company’s commitment to invest in TRP CoInvest Partners (NTI) I, LP is $10.0 million, and the Company contributed $10.0 million in February 2016.
c. Operating Leases
The Company periodically leases revenue equipment, certain service center building facilities, and communication equipment under non-cancelable operating leases. The Company also has operating leases for trailer storage. Operating lease expense under operating leases was approximately $4.7 million, $2.8 million, and $2.2 million for the years ended December 31, 2015, 2014, and 2013, respectively. Operating lease expense is included as an operating expense under "Miscellaneous operating expenses" in the consolidated statements of income.
Future minimum lease payments under non-cancelable operating leases as of December 31, 2015 are as follows:
d. Other
The Company is involved in certain claims and pending litigation arising in the normal course of business. These proceedings primarily involve claims for personal injury or property damage incurred in the transportation of freight or for personnel matters. The Company maintains insurance to cover liabilities arising from the transportation of freight in amounts in excess of self-insurance retentions, and accrues for estimated self-insured claims liabilities as described in Note 6. Based on present knowledge of the facts and, in certain cases, advice of outside counsel, management believes the resolution of claims and pending litigation, taking into account existing reserves, will not have a materially adverse effect on the Company's financial position or results of operations. However, the final disposition of these matters and the impact of such final dispositions cannot be determined at this time.
The Company is also involved in certain class action litigation in which the plaintiffs allege claims for failure to provide meal and rest breaks, unpaid wages, unauthorized deductions and other items. The Company is a defendant in a class action lawsuit which was filed on May 8, 2008, in the California Superior Court for Tulare County. The plaintiffs, who are current and former drivers and who worked for the Company during the period of May 8, 2004 through August 6, 2015, allege claims for failure to provide meal periods, inaccurate itemized pay statements and other items under the California Labor Code. During the second quarter of 2015, the Company reached a preliminary settlement with the plaintiffs, and in December 2015, the court issued final approval of the settlement.
The Company is also a defendant in a class action lawsuit that was filed on June 10, 2010, in the Oregon Circuit Court for Multnomah County. The plaintiffs, who are current and former drivers who worked for the Company during the period of June 10, 2004 through June 10, 2010, allege the Company failed to pay minimum wage for attending pre-employment orientation and failed to pay minimum wage for work performed during certain pay periods after the start of employment. On July 2, 2015, the court, following a bench trial, issued a decision finding that the Company failed to pay minimum wage to some class members for work performed during certain pay periods and assessed statutory penalties and prejudgment interest related to our failure to comply with minimum wage obligations. In the fourth quarter of 2015, the Company reached a preliminary settlement with the plaintiffs and the current and former drivers who worked for the Company during the period June 11, 2010 through September 30, 2015. In December 2015, the court issued final approval of the settlement.
As a result of the California settlement and the Oregon decision, during the second quarter of 2015, the Company accrued a total of $7.2 million, including the plaintiffs’ estimated attorneys’ fees and related costs and excluding attorneys’ fees and costs related to our defense, in our condensed consolidated financial statements. The Company had previously accrued $0.2 million as of December 31, 2014 related to these cases.
Based on claims resolved this year, and the Company’s present knowledge of the facts and in certain cases, advice of outside counsel, management believes the resolution of open claims and pending litigation, taking into account existing reserves, is not likely to have a materially adverse effect on our consolidated financial statements.
6. Claims Accrual
The primary claims arising for the Company consist of auto liability (personal injury and property damage), cargo liability, collision, comprehensive and workers' compensation. The Company is insured against auto liability claims under a SIR policy with retention ranging from $1.0 million to $3.0 million per occurrence and in some years, depending on the applicable policy year, the Company has been responsible for aggregate losses up to $1.5 million. For the policy periods February 1, 2014 to March 1, 2015 and March 1, 2015 to March 1, 2016, the Company's SIR is $2.5 million with no additional responsibility for "aggregate" losses. The Company is also self-insured for workers' compensation coverage, with a self-retention level of a maximum $500,000 per occurrence. The Company establishes reserves to cover these self-insured liabilities and maintains insurance to cover liabilities in excess of those amounts. The Company's insurance policies provide for excess personal injury and property damage liability up to a total of $105.0 million per occurrence, which also includes a separate $2.5 million dollar aggregate deductible.
The Company also maintains excess coverage for employee medical expenses and hospitalization. The self- retention amount for employee medical health was $225,000 per claimant for 2015 and 2014, and will be $240,000 per claimant for 2016.
The Company's claims reserves are classified separately between current and long-term in the balance sheet. The current and long-term balance of the Company's claims reserves at December 31, 2015 and 2014 are as follows:
A reconciliation of the beginning and ending amount of the Company's claims reserves for the years ended December 31, 2015 and 2014 is as follows:
(1)
Addition to claims reserve following acquisition of Barr-Nunn.
The provision recorded for the year ended December 31, 2015, is comprised of $33.4 million for insurance and claims expense, which is included in the "Insurance and claims" line of the consolidated statements of income, $7.9 million for workers' compensation expense, and $10.7 million for medical expense, both of which are included in the "Salaries, wages and benefits" line of the consolidated statements of income. The provision recorded for the year ended December 31, 2014, is comprised of $30.9 million for insurance and claims expense, $7.8 million for workers' compensation expense, and $10.4 million for medical expense.
7. Shareholders' Equity
During 2015, 2014, and 2013, certain non-employee Board of Director members received annual director fees through the issuance of common stock in equivalent shares. The table below reflects this activity for the years as presented.
8. Stock Based Compensation and Employee Benefit Plans
a. Stock-Based Compensation
In May 2015, our shareholders approved the Amended and Restated 2015 Omnibus Incentive Plan (the “2015 Plan”). This plan combines into a single plan the Company’s 2005 Executive Cash Bonus Plan (the “2005 Plan”) and the 2012 Equity Compensation Plan (the “2012 Plan”) and allows for future grants under the 2015 Omnibus Incentive Plan. Grants outstanding under the 2005 Plan and 2012 Plan will continue in force and effect and continue to be governed solely by the terms and conditions of the instrument evidencing such grants, and will be interpreted under the terms of the 2005 Plan and the 2012 Plan, as applicable. Since approval of the 2015 Omnibus Incentive Plan in May 2015, all grants of stock-based compensation are made under the 2015 Omnibus Incentive Plan.
The 2015 Plan is administered by the Compensation Committee of the Board of Directors (the "Compensation Committee"). The Compensation Committee has discretion to determine the number of shares subject to each grant and the terms and conditions of each grant, subject to the general limitations of the 2015 Plan, but in any calendar year, no single grant may exceed 650,000 shares. The Compensation Committee may award cash bonuses, incentive stock options, non-qualified stock options, restricted stock grants, restricted stock units, performance based restricted stock units, stock appreciation rights, or other incentive Awards permitted by the 2015 Plan to employees and officers. Incentive stock options are designed to comply with the applicable provisions of the Internal Revenue Code (the "Code") and are subject to restrictions within the Code. Vesting schedules for grants are set by the Compensation Committee and vary according to the goals of the grant. Grants, including stock options, must be granted with exercise price equal to the fair market value, determined by the closing price of the stock on the date the grant is made, as reported by the New York Stock Exchange. The exercise price of stock options granted may not be modified. Most stock options granted by the Company cannot be exercised until at least one (1) year after the date of grant and are forfeited upon termination of employment for reasons other than death, disability, or retirement. The 2015 Plan reserved 3,250,000 shares for the grant of equity compensation awards. The 2015 Plan will expire on May 13, 2025.
Under the 2015 Plan, the Compensation Committee is authorized to issue Awards of Common Stock to Directors as compensation for their services. In the past director compensation was paid 50% by cash and 50% by stock. In 2015, the Compensation Committee adopted a new Directors Equity Grant Policy which allows directors to elect to receive in excess of 50% of their total compensation in stock, up to 100%. Directors who are our officers or employees or 10% shareholders do not receive compensation for Board or Board committee service. Stock awards issued to directors are valued at the closing price of our Common Stock on the date of the grant.
Stock-based compensation charges were approximately $7.0 million, $4.5 million, and $2.8 million for the years ended December 31, 2015, 2014, and 2013, respectively, which reduced income from operations accordingly. Stock-based compensation expense recognized is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company received $9.9 million, $24.4 million, and $4.3 million in cash from the exercise of stock options during the years ended December 31, 2015, 2014 and 2013, respectively. The excess tax benefit realized for the tax deductions from the exercise of options of the share-based payment arrangements was approximately $3.2 million for the year ended December 31, 2015, $5.3 million for the year ended December 31, 2014, and zero for the year ended December 31, 2013. This tax benefit also decreased cash provided by operating activities, and increased cash provided by financing activities by the same amount for all years presented.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model. Listed below are the weighted average assumptions used for the fair value computation:
(1)
Dividend yield - the dividend yield is based on our historical experience and future expectation of dividend payouts.
(2)
Expected volatility - we analyzed the volatility of our stock using historical data.
(3)
Risk-free interest rate - the risk-free interest rate assumption is based on U.S. Treasury securities at a constant maturity with a maturity period that most closely resembles the expected term of the stock option award.
(4)
Expected term - the expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and has been determined based on an analysis of historical exercise behavior.
As of December 31, 2015, there was approximately $3.1 million of unrecognized compensation cost related to stock option compensation awards. That cost is expected to be recognized over a weighted-average period of 1.9 years, and a total period of 3.4 years.
A summary of the award activity for the years ended December 31, 2015, 2014, and 2013 is presented below:
As of December 31, 2015, the number of options that were currently vested and expected to become vested was 1,926,872. These options have a weighted-average exercise price of $21.12, a weighted-average contractual remaining term of 2.9 years, and an aggregate intrinsic value of $8.8 million.
The following table summarizes information about stock options to purchase the Company's common stock at December 31, 2015:
The total intrinsic value of options exercised during the twelve-month period was $8.3 million, $17.8 million, and $1.5 million in 2015, 2014, and 2013, respectively. Based on the market price as of December 31, 2015, the intrinsic value of options outstanding as of December 31, 2015, was approximately $8.8 million, and the intrinsic value of options exercisable for the same period was approximately $6.7 million. The weighted average remaining contractual life as of December 31, 2015, for vested and exercisable options is 2 years.
Since 2009, the Company has issued restricted stock units (“RSUs”) to its employees. The Company's RSU program consists of service based awards that vest gradually over a period ranging from 5 to 13 years. Stock compensation expense for these RSUs is being amortized using the straight-line method over the requisite service period. As of December 31, 2015, the Company had approximately $10.6 million of unrecognized compensation expense related to restricted stock awards, which will be recognized over a weighted average period of 3.6 years, and a total period of 7.1 years.
RSUs not yet vested are entitled to accumulate quarterly cash dividends that are paid to shareholders holding outstanding shares of the Company's common stock. Accrued dividends are paid to recipients as the RSUs vest. Accrued dividends are forfeited if RSUs are canceled or terminated. Dividends paid under the RSU program are charged to retained earnings.
The following tables summarize the Company's restricted stock award activity for the fiscal years ended December 31, 2015, 2014, and 2013:
In 2015 and 2014, the Company issued performance restricted stock units (“PRSUs”) to selected key employees that may be earned based on revenue growth and return on assets, and may then be modified based on our total shareholder return, as defined, over the three-year period. The primary award adjustment may range from 0 percent to 150 percent of the initial grant, based upon performance achieved. The primary award modifier, which would multiply the adjusted primary award by 75 percent to 125 percent, is measured by determining the percentile rank of the total shareholder return of Knight common stock in relation to the total shareholder return of a peer group for the three-year period. The final award will be based on performance achieved in accordance with the scale set forth in the plan agreement. Performance restricted stock units do not earn dividend equivalents.
The fair value of each PRSU grant is estimated on the date of grant using the Monte Carlo Simulation valuation model. Listed below are the weighted average assumptions used for the fair value computation:
(1)
The dividend yield, used to project stock price to the end of the performance period, is based on our historical experience and future expectation of dividend payouts. Total shareholder return is determined assuming that dividends are reinvested in the issuing entity over the performance period, which is mathematically equivalent to utilizing a 0% dividend yield.
(2)
We (or peer company) estimated volatility using our (or their) historical share price performance over the remaining performance period as of the grant date.
(3)
The correlation coefficients are used to model the way in which each entity tends to move in relation to each other; the correlation assumptions were developed using the same stock price data as the volatility assumptions.
(4)
The risk-free interest rate assumption is based on U.S. Treasury securities at a constant maturity with a maturity period that most closely resembles the expected term of the performance award.
(5)
Since the Monte Carlo simulation valuation is an open form model that uses an expected life commensurate with the performance period, the expected life of the PRSUs was assumed to be the period from the grant date to the end of the performance period.
During 2015, 165,720 PRSU’s were granted and during 2014, 181,112 PRSU’s were granted. The performance measurement period for the PRSUs granted in 2015 is April 1, 2015 to December 31, 2017, and the performance measurement period for the PRSUs granted in 2014 is January 1, 2014 to December 31, 2016. These awards will vest thirteen months following the expiration of the performance measurement period.
A summary of the award activity for the years ended December 31, 2015, 2014, and 2013 is presented below:
Our policy is to recognize compensation cost on a straight-line basis over the requisite service period.
As of December 31, 2015, there was $7.4 million of unrecognized compensation cost related to performance awards. That cost is expected to be recognized over a weighted-average period of 2.7 years and total period of 3.1 years.
b. 401(k) Profit Sharing Plan
The Company has a 401(k) profit sharing plan (the "Plan") for all employees who are 18 years of age or older and have completed six months of service with the Company. The Plan provides for a mandatory matching contribution equal to the amount of the employee's salary deduction not to exceed $1,150 annually per employee; this limit was increased in 2015 from 50% of the employee’s salary deduction not to exceed $1,000 in 2014. The limit of the mandatory matching contribution for 2016 has been increased to the amount of employee’s salary deductions not to exceed $1,400. The Plan also provides for a discretionary matching contribution. In 2015, 2014, and 2013, there were no discretionary contributions. Employees' rights to employer contributions vest equally over five years from their date of employment. The Company's mandatory matching contribution was approximately $795,000, $451,000, and $326,000 in 2015, 2014, and 2013, respectively.
9. Company Share Repurchase Program
In May 2011, the Company's Board of Directors unanimously authorized the repurchase of 10.0 million shares of the Company's common stock. The repurchase authorization is intended to afford the Company flexibility to acquire shares opportunistically in future periods and does not indicate an intention to repurchase any particular number of shares within a definite timeframe. Any repurchases would be affected based upon share price and market conditions.
The Company repurchased 1.6 million shares under the share repurchase program during the year ended December 31, 2015, and no shares were repurchased during 2014, and 2013. As of December 31, 2015, there were 5.8 million shares remaining for future purchases under the repurchase program. The repurchase authorization will remain in effect until the share limit is reached or the program is terminated.
10. Segment Information
The Company has two operating segments: (i) the Trucking segment comprised of three operating units (Dry Van, Refrigerated, and Drayage), and (ii) the Logistics segment comprised of two operating units (Brokerage and Intermodal). The Company also provides logistics, freight management and other non-trucking services through its Logistics businesses. Through its Trucking and Logistics segment capabilities, the Company is able to transport, or can arrange for the transportation of, general commodities for customers throughout the United States and parts of Canada and Mexico.
The Company, in determining its reportable operating segments, focuses on financial information such as operating revenues and expenses, operating income, operating ratios, and other key operating statistics common in the industry. The chief operating decision makers also use this information to evaluate segment performance and allocate resources to the Company's operations.
The Company's operating segments provide transportation and related services for one another. Such services are billed at cost, and no profit is earned. Such intersegment revenues and expenses are eliminated in the Company's consolidated results.
The following table sets forth revenue and operating income between the Trucking and Logistics segments for the years ended December 31, 2015, 2014, and 2013.
Trucking Segment Information
The Trucking segment operates large, modern, company-owned tractor fleets and use independent contractors to provide various transportation solutions, including multiple stop pick-ups and deliveries, dedicated equipment and personnel, on-time expedited pick-ups and deliveries, specialized driver training, and other truckload services. Revenues are generally set at a predetermined rate per mile or per load for the Trucking services. In addition, revenue streams are also generated by charging for tractor and trailer detention, loading and unloading activities, dedicated services, and other specialized services, as well as through the collection of fuel surcharges to mitigate the impact of increases in the cost of fuel.
The primary measurement the Company uses to evaluate the profitability of the Trucking segment is operating ratio, measured both on a GAAP basis (operating expenses expressed as a percentage of revenue) and non-GAAP basis used by many in the Company's industry (operating expenses, net of Trucking fuel surcharge revenue, expressed as a percentage of Trucking revenue, excluding Trucking fuel surcharge revenue). The Company believes the second method allows them to more effectively compare periods while excluding the potentially volatile effect of changes in fuel prices. The tables below compare operating ratio using both methods.
The following table sets forth the Trucking segment operating ratio on a GAAP basis.
The following table sets forth the Trucking segment operating ratio as if fuel surcharges are excluded from total revenue and instead reported as a reduction of operation expenses, excluding intersegment activity.
(1)
These items represent non-GAAP financial measures and are not substitutes for, and should be considered in addition to, the GAAP financial measures presented in the previous table.
The Company's Trucking segment requires substantial capital expenditures for purchases of new revenue equipment. Total depreciation and amortization expense for the Trucking Segment was approximately $107.0 million, $88.2 million, and $81.0 million in 2015, 2014, and 2013, respectively.
Logistics Segment Information
Logistics revenue is generated primarily by the Brokerage and Intermodal operating units, which charge a predetermined rate per mile or per load for arranging freight transportation for its customers. The Company also provides logistics, freight management and other non-trucking services through its Logistics business. Additional revenue is generated by offering specialized logistics solutions (including, but not limited to, origin management, surge volumes, disaster relief, special projects, and other logistics needs). Logistics revenue is mainly affected by the rates the Company is able to negotiate with clients, the freight volumes that are shipped through third-party capacity providers and the Company's ability to secure qualified third-party capacity providers to transport customer freight. This segment has seen continued growth in the number of shipments serviced by the Brokerage and Intermodal operating units, and contributed to the improved productivity and revenue realized in 2015.
The following table sets forth the Logistics segment revenue, other operating expenses, and operating income.
The following table sets forth the Logistics revenue, operating expenses, and operating income, excluding intersegment transactions.
The Company primarily measures the Logistics segment's profitability by reviewing the gross margin percentage (revenue, less purchased transportation expense, expressed as a percentage of revenue) and the operating income percentage. The gross margin percentage can be affected by customer rates and the costs of securing third-party capacity providers. The Company's third-party capacity providers are generally not subject to long-term or predetermined contracted rates, and the operating results could be affected if the availability of third-party capacity providers or the rates for such providers change in the future. The following table lists the gross margin percentage for the Company's Brokerage and Intermodal businesses.
(1)
Gross margin percentage is based on revenue net of intersegment elimination.
The Company's Logistics segment does not require significant capital expenditures and is not asset-intensive like the Trucking segment. Total Logistics segment depreciation and amortization expense is primarily attributed to equipment leased to third parties, which totaled to approximately $4.0 million, $4.7 million, and $5.1 million in 2015, 2014, and 2013, respectively.
No segmental asset information is provided as the Company does not prepare balance sheets by segment, and the chief operating decision makers do not review segment assets to make operating decisions.
11. Acquisition of Barr-Nunn Transportation, Inc.
On October 1, 2014, the Company entered into a Stock Purchase Agreement for the purchase of 100% of the outstanding stock of Barr-Nunn Transportation, Inc., and certain of its affiliates (“Barr-Nunn”).
Barr-Nunn is a transportation services carrier headquartered near Des Moines, Iowa, offering dry van truckload transportation and logistics services, with its primary operating territory in the eastern United States.
Barr-Nunn had an enterprise value at closing of approximately $112.4 million (before the potential earn-out payment discussed below). At closing, the Company paid approximately $111.2 million of total consideration for the stock and certain real estate, which was paid in cash and funded through borrowings under the Company’s line of credit on the date of the transaction. The purchase price was adjusted in December 2014 pursuant to a customary working capital adjustment, which produced a credit of approximately $0.7 million to the Company, resulting in total consideration paid of $110.5 million. The Stock Purchase Agreement included an election under the Internal Revenue Code Section 338(h)(10). Accordingly, the book and tax basis of the acquired assets and liabilities are the same as of the purchase date.
The Stock Purchase Agreement contains customary representations, warranties, covenants, and indemnification provisions. At closing, $8.0 million of the purchase price was placed in escrow to secure the Sellers' indemnification obligations.
The results of the acquired business have been included in the consolidated financial statements since the date of acquisition and represented 12.0% of consolidated total assets as of December 31, 2014, 3.0% of total revenue for 2014, and 3.8% of net income for 2014. The Company recorded approximately $429,000 of acquisition-related expenses, which are included within “Miscellaneous operating expenses” in the consolidated statement of income for the year ended December 31, 2014.
The following unaudited pro forma consolidated results of operations for the years ended December 31, 2014, and 2013, assume that the acquisition of Barr-Nunn occurred as of January 1, 2013.
These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred at the beginning of the periods presented or that may be obtained in the future.
The allocation of the purchase price is provided in the tables below. The final purchase price allocation was subject to a post-closing working capital adjustment, and subject to earn-out amounts achieved, and other adjustments. The goodwill recognized represents expected synergies from combining the operations of the Company with Barr-Nunn, including enhanced service offerings and sharing best practices in terms of driver recruiting and retention, as well as other intangible assets that did not meet the criteria for separate recognition. All tax goodwill recognized in the transaction is deductible for tax purposes over 15 years, and no deferred taxes were recorded.
Excess of consideration transferred over the net amount of assets and liabilities recognized (goodwill) was subject to final purchase price adjustment related to earn-out amounts achieved (if any) and other adjustments.
The assets and liabilities associated with Barr-Nunn were recorded at their fair values as of the acquisition date and the amounts are as follows:
The Stock Purchase Agreement also provides for a potential one-time earn-out payment of up to $3.5 million, contingent upon achievement of an operating income target for Barr-Nunn and retention of key personnel for the four fiscal quarters ending September 30, 2015. This contingent liability was estimated as of the date of the transaction and was included in the adjustments to liabilities at the transaction-date fair value recorded. The fair value of the contingent liability was subject to change based on actual results of Barr-Nunn over the four fiscal quarters ending September 30, 2015. All contingencies were satisfied and the earn-out was paid in full in October 2015.
12. Quarterly Financial Data (unaudited)
The following table sets forth certain unaudited information about the Company's revenue and results of operations on a quarterly basis for 2015 and 2014 (amount in thousands, except per share data):
The Company acquired 100% of the outstanding stock of Barr-Nunn on October 1, 2014 and therefore the operating results of the Company includes the operating results of Barr-Nunn for the periods from October 1, 2014 to December 31, 2015.
13. Subsequent Events
The Company has evaluated events occurring subsequent to December 31, 2015, through the filing date of this Annual Report on Form 10-K for disclosure. No events occurred requiring disclosure.
SCHEDULE II
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands)
(1)
Addition to allowance for doubtful accounts following acquisition of Barr-Nunn.
EXHIBIT INDEX
*
Filed herewith.
**
In accordance with Regulation S-T, the XBRL-related information in this Annual Report on Form 10-K shall be deemed to be "furnished" and not "filed."
†
Management contract or compensatory plan or arrangement.