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EXCEL - IDEA: XBRL DOCUMENT - KNIGHT TRANSPORTATION INCFinancial_Report.xls
EX-31.2 - EXHIBIT 31.2 (SECTION 302 CERTIFICATION ADAM W. MILLER) - KNIGHT TRANSPORTATION INCexhibit312.htm
EX-31.1 - EXHIBIT 31.1 (SECTION 302 CERTIFICATION KEVIN P. KNIGHT) - KNIGHT TRANSPORTATION INCexhibit311.htm
EX-32.2 - EXHIBIT 32.2 (SECTION 906 CERTIFICATION ADAM W. MILLER) - KNIGHT TRANSPORTATION INCexhibit322.htm
EX-32.1 - EXHIBIT 32.1 (SECTION 906 CERTIFICATION KEVIN P. KNIGHT) - KNIGHT TRANSPORTATION INCexhibit321.htm
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2014
 
Or
   
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                       to

Commission File Number: 001-32396

KNIGHT TRANSPORTATION, INC.
(Exact name of registrant as specified in its charter)

Arizona
86-0649974
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
20002 North 19th Avenue
Phoenix, Arizona
85027
(Address of Principal Executive Offices)
(Zip Code)
   
Registrant's telephone number, including area code:
602-269-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X]  Yes     [  ]   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X]  Yes     [  ]   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer  [X]
Accelerated filer   [  ]
Non-accelerated filer   [  ]
Smaller reporting company  [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[  ]  Yes     [X]   No

The number of shares outstanding of registrant's common stock, par value $0.01 per share, as of July 31, 2014, was 81,019,185 shares.

 
 

 


KNIGHT TRANSPORTATION, INC.

TABLE OF CONTENTS


 
Page Number
PART I – FINANCIAL INFORMATION
 
   
Item 1.
Financial Statements
 
     
 
Condensed Consolidated Unaudited Balance Sheets as of June 30, 2014 and December 31, 2013
     
 
Condensed Consolidated Unaudited Statements of Income for the three and six months ended June 30, 2014 and 2013
     
 
Condensed Consolidated Unaudited Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013
     
 
Condensed Consolidated Unaudited Statements of Cash Flows for the six months ended June 30, 2014 and 2013
     
 
Notes to Condensed Consolidated Unaudited Financial Statements
     
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
     
Item 4.
Controls and Procedures
     
Part II – OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
     
Item 1A.
Risk Factors
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
     
Item 3.
Defaults Upon Senior Securities
     
Item 4.
Mine Safety Disclosures
     
Item 5.
Other Information
     
Item 6.
Exhibits
     
Signatures
 

 
 

 

PART I - FINANCIAL INFORMATION

Item 1.                      Financial Statements

KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Unaudited Balance Sheets
 
(in thousands)
 
   
   
June 30,
2014
   
December 31,
2013
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 103     $ 992  
Trade receivables, net of allowance for doubtful accounts of $2,764 and $2,409, respectively
    121,903       116,391  
Notes receivable, net of allowance for doubtful notes receivable of $309 and $312, respectively
    775       774  
Related party notes and interest receivable
    -       748  
Prepaid expenses
    13,750       15,026  
Assets held for sale
    10,500       16,476  
Other current assets
    11,611       11,066  
Current deferred tax assets
    3,942       3,359  
Total current assets
    162,584       164,832  
                 
Property and Equipment:
               
Revenue equipment
    700,900       683,275  
Land and land improvements
    46,585       45,615  
Buildings and building improvements
    121,263       115,201  
Furniture and fixtures
    15,529       18,605  
Shop and service equipment
    16,543       9,564  
Leasehold improvements
    3,022       3,382  
Gross property and equipment
    903,842       875,642  
Less:  accumulated depreciation and amortization
    (282,475 )     (283,851 )
Property and equipment, net
    621,367       591,791  
Notes receivable, long-term
    3,991       4,047  
Goodwill
    10,247       10,257  
Other long-term assets, restricted cash and investments
    40,593       36,194  
       Total long-term assets
    676,198       642,289  
Total assets
  $ 838,782     $ 807,121  

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.


 
1

 


KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Unaudited Balance Sheets (continued)
 
(in thousands, except par values)
 
             
   
June 30,
2014
   
December 31,
2013
 
LIABILITIES AND SHAREHOLDERS' EQUITY
           
Current Liabilities:
           
Accounts payable
  $ 19,394     $ 14,354  
Accrued payroll and purchased transportation
    17,156       13,864  
Accrued liabilities
    18,140       19,062  
Claims accrual – current portion
    16,888       15,616  
Dividend payable – current portion
    181       168  
Total current liabilities
    71,759       63,064  
                 
Long-term Liabilities:
               
Claims accrual – long-term portion
    9,668       8,889  
Long-term dividend payable and other liabilities
    2,407       2,486  
Deferred tax liabilities
    133,472       140,149  
Long-term debt
    15,362       38,000  
Total long-term liabilities
    160,909       189,524  
                 
Total liabilities
    232,668       252,588  
                 
Commitments and Contingencies (Note 6)
               
                 
Shareholders' Equity:
               
Preferred stock, $0.01 par value; 50,000 shares authorized; none issued and outstanding
    -       -  
Common stock, $0.01 par value; 300,000 shares authorized; 80,977 and 80,199 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
    810       802  
Additional paid-in capital
    164,485       150,858  
Accumulated other comprehensive income
    8,118       4,582  
Retained earnings
    431,573       397,346  
Total Knight Transportation shareholders' equity
    604,986       553,588  
Noncontrolling interest
    1,128       945  
Total shareholders’ equity
    606,114       554,533  
                 
Total liabilities and shareholders' equity
  $ 838,782     $ 807,121  

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

 
2

 


KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Unaudited Statements of Income
(in thousands, except per share data)
 
   
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
REVENUE:
                       
Revenue, before fuel surcharge
  $ 218,908     $ 200,104     $ 424,504     $ 389,704  
Fuel surcharge
    45,247       44,679       88,814       90,479  
Total revenue
    264,155       244,783       513,318       480,183  
OPERATING EXPENSES:
                               
Salaries, wages and benefits
    64,750       56,807       125,483       114,461  
Fuel
    52,192       52,739       104,201       108,432  
Operations and maintenance
    17,156       15,919       34,176       31,828  
Insurance and claims
    7,462       7,295       14,885       14,450  
Operating taxes and licenses
    3,861       3,985       7,926       7,893  
Communications
    1,178       1,200       2,457       2,372  
Depreciation and amortization
    21,951       21,089       43,738       42,597  
Purchased transportation
    56,319       49,883       108,288       92,675  
Miscellaneous operating expenses
    387       3,941       2,015       8,006  
Total operating expenses
    225,256       212,858       443,169       422,714  
                                 
Income from operations
    38,899       31,925       70,149       57,469  
                                 
Interest income
    109       96       222       205  
Interest expense
    (87 )     (77 )     (204 )     (219 )
Other income
    2,591       (168 )     3,457       53  
Income before income taxes
    41,512       31,776       73,624       57,508  
                                 
Income taxes
    15,496       12,712       28,276       23,010  
Net income
    26,016       19,064       45,348       34,498  
                                 
Net income attributable to noncontrolling interest
    (255 )     (125 )     (524 )     (376 )
Net income attributable to Knight Transportation
  $ 25,761     $ 18,939     $ 44,824     $ 34,122  
                                 
                                 
Basic Earnings Per Share
  $ 0.32     $ 0.24     $ 0.56     $ 0.43  
Diluted Earnings Per Share
  $ 0.31     $ 0.24     $ 0.55     $ 0.43  
                                 
Weighted Average Shares Outstanding – Basic
    80,864       79,954       80,684       79,898  
                                 
Weighted Average Shares Outstanding – Diluted
    81,835       80,296       81,596       80,209  

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.


 
3

 



KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES,
Condensed Consolidated Unaudited Statements of Comprehensive Income
(in thousands)
 
   
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net income attributable to Knight Transportation
  $ 25,761     $ 18,939     $ 44,824     $ 34,122  
Other comprehensive income, net of tax:
Unrealized gain/(loss) from available-for-sale securities
    2,456       (200 )     3,535       51  
Comprehensive income
  $ 28,217     $ 18,739     $ 48,359     $ 34,173  

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.





 
4

 

KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Unaudited Statements of Cash Flows
(in thousands)
 
   
   
Six Months Ended
June 30,
 
   
2014
   
2013
 
Cash Flows From Operating Activities:
           
             
Net income
  $ 45,348     $ 34,498  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    43,738       42,597  
Gain on sale of equipment
    (8,881 )     (3,022 )
Gain from sale of available-for-sale securities
    (902 )     (47 )
Impairment of Transportation Resource Partners I
    1,041       -  
Gain from investment in Transportation Resource Partners III
    (2,036 )     (6 )
Non-cash compensation expense for issuance of common stock to certain members of board of directors
    200       168  
Provision for doubtful accounts and notes receivable
    565       489  
Excess tax benefits related to stock-based compensation
    (794 )     -  
Stock-based compensation expense, net
    1,886       1,233  
Deferred income taxes
    (9,449 )     (4,364 )
                 
Changes in operating assets and liabilities:
               
Trade receivables
    (6,042 )     (7,607 )
Other current assets
    (545 )     1,505  
Prepaid expenses
    1,276       5,664  
Other long-term assets
    835       (990 )
Accounts payable
    7,198       5,881  
Accrued liabilities and claims accrual
    4,414       (3,742 )
                 
Net cash provided by operating activities
    77,852       72,257  
                 
Cash Flows From Investing Activities:
               
Purchases of property and equipment
    (109,027 )     (42,122 )
Proceeds from sale of equipment/assets held for sale
    47,669       24,300  
Proceeds from notes receivable
    762       1,606  
      Payments for notes receivable
    -       (74 )
Proceeds from related party notes receivable
    748       748  
Change in restricted cash and investments
    (8 )     358  
Proceeds from sale of available-for-sale securities
    1,901       2,080  
Investment activity in Transportation Resource Partners
    506       (1,956 )
                 
Net cash used in investing activities
    (57,449 )     (15,060 )

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.


 
5

 
 
KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES
Condensed Consolidated Unaudited Statements of Cash Flows (continued)
(in thousands)
 
   
   
Six Months Ended
June 30,
 
   
2014
   
2013
 
Cash Flows From Financing Activities:
           
Dividends paid
  $ (9,862 )   $ (9,816 )
Payments on line of credit borrowings, net
    (22,638 )     (54,000 )
Excess tax benefits related to stock-based compensation
    794       -  
Cash distribution to noncontrolling interest holder
    (341 )     (347 )
Proceeds from exercise of stock options
    10,755       2,029  
                 
Net cash used in financing activities
    (21,292 )     (62,134 )
                 
Net decrease in Cash and Cash Equivalents
    (889 )     (4,937 )
Cash and Cash Equivalents, beginning of period
    992       5,684  
                 
Cash and Cash Equivalents, end of period
  $ 103     $ 747  
                 
Supplemental Disclosures:
               
Non-cash investing and financing transactions:
               
Equipment acquired included in accounts payable
  $ 695     $ 5,936  
Transfer from property and equipment to assets held for sale
  $ 24,376     $ 18,937  
Transfer from related party notes receivable to notes receivable
  $ -     $ 403  
Financing provided to independent contractors for equipment sold
  $ 704     $ 754  
Net dividend accrued for restricted stock units
  $ 87     $ 98  
Cash flow information:
               
Income taxes paid
  $ 40,024     $ 29,562  
Interest expense paid
  $ 219     $ 199  
 
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.


 
6

 

KNIGHT TRANSPORTATION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

Note 1.                      Financial Information

References in this Report on Form 10-Q to "we," "us," "our," "Knight," or the "Company" or similar terms refer to Knight Transportation, Inc. and its consolidated subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

The accompanying condensed consolidated unaudited financial statements of Knight Transportation, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America and Regulation S-X, instructions to Form 10-Q, and other relevant rules and regulations of the Securities and Exchange Commission (the "SEC"), as applicable to the preparation and presentation of interim financial information. Certain information and footnote disclosures have been omitted or condensed pursuant to such rules and regulations.  We believe all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Results of operations in interim periods are not necessarily indicative of results for a full year.  These condensed consolidated unaudited financial statements and notes thereto should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Revision of Prior Period Reported Amounts

During the first quarter of 2014, we identified errors associated with income tax accounts reported in prior periods.  Specifically, the errors related to our income tax accounting for incentive stock options since the adoption of FAS 123R in 2006 and errors in recording required annual adjustments to the tax provision and taxes payable.   The aforementioned errors resulted in an overstatement of the deferred tax liability by $2,355,000, understatement of income tax payable by $262,000, understatement of additional paid-in capital by $779,000, and understatement of retained earnings by $1,314,000 as of December 31, 2013.  We have adjusted our previously reported income taxes payable, deferred tax liability, additional paid in capital, and retained earnings accounts as of January 1, 2013 to correct these errors and such adjustments are reflected in the accompanying condensed consolidated financial statements. 

Pursuant to the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality, we concluded that the errors were not material to any of our prior period financial statements.  However, in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatement in the Current Year Financial Statements, the prior period financial statements were revised to facilitate comparability between current and prior year periods.

A reconciliation of the effects of the adjustments to our previously reported balance sheet as of December 31, 2013 follows:
 
   
December 31, 2013
(in thousands)
 
Account
 
As Previously
Reported
   
Adjustment
   
As Adjusted
 
Accrued liabilities(1)
  $ 18,800     $ 262     $ 19,062  
Total current liabilities
    62,802       262       63,064  
Deferred tax liability
    142,504       (2,355 )     140,149  
Total long term liabilities
    191,879       (2,355 )     189,524  
Total liabilities
    254,681       (2,093 )     252,588  
Additional paid-in capital
    150,079       779       150,858  
Retained earnings
    396,032       1,314       397,346  
Total Knight Transportation Shareholders’ Equity
    551,495       2,093       553,588  
Total shareholders' equity
    552,440       2,093       554,533  

(1) 
Income tax payable is included in Accrued Liabilities of our consolidated balance sheets.
 
 
 
7

 

Note 2.                      Stock-Based Compensation

In May 2012, our shareholders approved the 2012 Equity Compensation Plan. This replaced the stock-based employee compensation plan known as the Knight Transportation, Inc. Amended and Restated 2003 Stock Option and Equity Compensation Plan, as amended and restated in May 2009 (the "2003 Plan").  Grants outstanding under the 2003 Plan will continue in force and effect. Any grants of stock-based compensation after May 18, 2012, are made under the 2012 Equity Compensation Plan.  Stock based compensation cost for the three months, and six months ended June 30, 2014, and 2013, respectively, are as follows:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
(in thousands)
   
(in thousands)
 
   
2014
   
2013
   
2014
   
2013
 
Stock compensation expense for options, net of forfeitures
  $ 188     $ 93     $ 272     $ 131  
Stock compensation expense for restricted stock units and performance restricted stock units, net of forfeitures
    861       494       1,614       1,102  
Combined stock compensation expense
  $ 1,049     $ 587     $ 1,886     $ 1,233  

We received approximately $3.3 million and $10.8 million in cash from the exercise of stock options during the three months and six months ended June 30, 2014, compared to $1.0 million and $2.0 million for the same periods in 2013.
 
As of June 30, 2014, we have approximately $2.2 million of unrecognized compensation cost related to unvested options granted under our equity compensation plan.  This cost is expected to be recognized over a weighted-average period of 2.1 years and a total period of 3.7 years.  We also have approximately $14.6 million of unrecognized compensation expense related to restricted stock unit awards, which is anticipated to be recognized over a weighted average period of 4.2 years and a total period of 8.6 years.

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:

   
Six Months Ended
June 30,
 
   
2014
   
2013
 
Dividend yield (1)
    1.06 %     1.54 %
Expected volatility (2)
    28.04 %     24.92 %
Risk-free interest rate (3)
    0.82 %     0.34 %
Expected terms (4)
 
2.74 years
   
2.74 years
 
Weighted average fair value of options granted
  $ 3.97     $ 2.25  

(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.

 
 
8

 
 
A total of 394,550 stock options were granted during the first six months of 2014 and 429,800 stock options were granted during the first six months of 2013. A summary of the option award activity under our equity compensation plan as of June 30, 2014, and changes during the six-month period is presented below:

   
Option Totals
   
Weighted Average Exercise
Price Per Share
 
Outstanding as of December 31, 2013
    3,374,846     $ 16.26  
Granted
    394,550       22.61  
Exercised
    (699,280 )     15.37  
Forfeited
    (46,325 )     16.71  
Outstanding as of June 30, 2014
    3,023,791     $ 17.29  

A total of 9,000 and 147,111 restricted stock unit awards were granted during the first six months of 2014 and 2013, respectively.  A summary of the restricted stock unit award activity under our equity compensation plan as of June 30, 2014, and changes during the six-month period is presented below:

   
Number of
Restricted Stock
Unit Awards
   
Weighted Average
Grant Date
Fair Value
 
Unvested as of December 31, 2013
    1,213,698     $ 16.04  
Granted
    9,000       22.61  
Vested
    (107,459 )     16.02  
Forfeited
    (19,870 )     16.31  
Unvested as of June 30, 2014
    1,095,369     $ 16.09  

The fair value of each restricted stock unit is based on the closing market price on the date of grant.

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 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.
 
 
 
9

 
 
During the three months ended March 31, 2014, we granted 181,112 PRSUs, no awards were granted in the three months ended June 30, 2014 . The performance measurement period for this award is January 1, 2014 to December 31, 2016 (for Fiscal Year 2014, 2015, and 2016). This award will vest January 31, 2018, or thirteen months following the expiration of the performance period. 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:

   
Six Months Ended
June 30, 2014
 
Dividend yield (1)
    1.06 %
Expected volatility (2)
    26.11 %
Average peer volatility(2)
    36.01 %
Average peer correlation coefficient(3)
    0.5796  
Risk-free interest rate (4)
    0.66 %
Expected term (5)
    2.80  
Weighted average fair value of PRSUs granted
  $ 23.85  

(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 Monte Carlo 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.

Our policy is to recognize compensation cost on a straight-line basis over the requisite service period for the entire award.

As of June 30, 2014, there was $4.0 million of unrecognized compensation cost related to unvested performance awards.  That cost is expected to be recognized over a weighted-average period and total period of 3.6 years.

Note 3.                      Earnings Per Share

A reconciliation of the basic and diluted earnings per share computations for the three months and six months ended June 30, 2014 and 2013, respectively, is as follows:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(in thousands, except for per share data)
 
Weighted average common shares outstanding – basic
    80,864       79,954       80,684       79,898  
Dilutive effect of stock options and unvested restricted stock units
    971       342       912       311  
Weighted average common shares outstanding – diluted
    81,835       80,296       81,596       80,209  
                                 
Net income attributable to Knight Transportation
  $ 25,761     $ 18,939     $ 44,824     $ 34,122  
                                 
Basic Earnings Per Share
  $ 0.32     $ 0.24     $ 0.56     $ 0.43  
Diluted Earnings per Share
  $ 0.31     $ 0.24     $ 0.55     $ 0.43  

 
10

 

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 few shares repurchased than the weighted equity awards outstanding hypothetically exercised per the treasury method.
 
The number of anti-dilutive shares are:

 
Three Months Ended
June 30,
(in thousands)
 
Six Months Ended
June 30,
(in thousands)
 
2014
 
2013
 
2014
 
2013
Number of anti-dilutive shares
391,825
 
2,071,140
 
334,232
 
2,112,859

Note 4.                      Segment Information

We have two operating segments:  (i) the Trucking (Asset-Based) segment comprised of three operating units (Dry Van, Refrigerated, and Drayage), and (ii) the Logistics (Non-Asset-Based) segment comprised of two operating units (Brokerage and Intermodal). We also provide logistics, freight management and other non-trucking services through our Logistics (Non-Asset-Based) businesses. Through our Trucking (Asset-Based) and Logistics (Non-Asset-Based) segment capabilities, we are able to transport, or can arrange for the transportation of, general commodities for customers throughout the United States and parts of Canada and Mexico.

We, in determining our reportable operating segments, focus 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 our operations.

Our operating segments provide transportation and related services for one another.  Such intersegment revenues and expenses are eliminated in our consolidated results.

The following table sets forth revenue and operating income between the Trucking (Asset-Based) and Logistics (Non-Asset-Based) segments for the three month and six month periods ended June 30, 2014 and 2013.

   
Three Months Ended
June 30, 2014
   
Three Months Ended
June 30, 2013
   
Six Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2013
 
Revenues:
   $       %      $       %      $       %      $       %  
Trucking (Asset-Based) Segment
  $ 216,300       81.9     $ 205,656       84.0     $ 421,723       82.2 %   $ 409,212       85.2 %
Logistics (Non-Asset-Based) Segment
    49,114       18.6       40,616       16.6       93,730       18.3       73,824       15.4  
Subtotal
    265,414               246,272               515,453               483,036          
Intersegment Eliminations Asset-Based
    (32 )     0.0       (21 )     0.0       (61 )     0.0       (74 )     0.0  
Intersegment Eliminations Non-Asset-
   Based
    (1,227 )     (0.5 )     (1,468 )     (0.6 )     (2,074 )     (0.4 )     (2,779 )     (0.6 )
Total
  $ 264,155       100 %   $ 244,783       100 %   $ 513,318       100 %   $ 480,183       100. %
                                                                 
Operating Income:
                                                               
Trucking (Asset-Based) Segment
  $ 35,856       92.2     $ 29,404       92.1     $ 64,977       92.6     $ 52,638       91.6  
Logistics (Non-Asset-Based) Segment
    3,043       7.8       2,521       7.9       5,172       7.4       4,831       8.4  
Total
  $ 38,899       100 %   $ 31,925       100 %   $ 70,149       100 %   $ 57,469       100 %
 
 
 
11

 
 
Trucking (Asset-Based) Segment Information

The Trucking (Asset-Based) trucking units operate 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 (Asset-Based) 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 we use to evaluate the profitability of the Trucking (Asset-Based) 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 our industry (operating expenses, net of Trucking (Asset-Based) fuel surcharge revenue, expressed as a percentage of Trucking (Asset-Based) revenue, excluding Trucking (Asset-Based) 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.  The tables below compare operating ratio using both methods.

The following table sets forth the Trucking (Asset-Based) segment operating ratio on a GAAP basis (amount in thousands).

   
Three Months Ended
June 30, 2014
   
Three Months Ended
June 30, 2013
   
Six Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2013
 
Trucking (Asset-Based) Segment
  $       %      $       %      $       %      $       %  
Revenue
  $ 216,300             $ 205,656             $ 421,723             $ 409,212          
Operating expenses
    180,444       83.4       176,252       85.7       356,746       84.6       356,574       87.1  
Operating income
  $ 35,856             $ 29,404             $ 64,977             $ 52,638          

The following table sets forth the Trucking (Asset-Based) segment operating ratio as if fuel surcharges are excluded from total revenue and instead reported as a reduction of operation expenses, excluding intersegment activity (amount in thousands).

   
Three Months Ended
June 30, 2014
   
Three Months Ended
June 30, 2013
   
Six Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2013
 
Trucking (Asset-Based) Segment
   $       %      $       %      $       %      $       %  
Revenue
  $ 216,300             $ 205,656             $ 421,723             $ 409,212          
Less: Trucking (Asset-Based) fuel
   surcharge revenue
    (45,247 )             (44,679 )             (88,814 )             (90,479 )        
Less: Intersegment transactions(1)
    (32 )             (21 )             (61 )             (74 )        
Revenue, net of fuel surcharge and
    intersegment transactions(1)
    171,021               160,956               332,848               318,659          
Operating expenses
    180,444               176,252               356,746               356,574          
Less: Trucking (Asset-Based) fuel
   surcharge revenue
    (45,247 )             (44,679 )             (88,814 )             (90,479 )        
Less: Intersegment transactions(1)
    (32 )             (21 )             (61 )             (74 )        
Operating expenses, net of fuel
   surcharge and intersegment
   transactions(1)
    135,165       79.0       131,552       81.7       267,871       80.5       266,021       83.5  
Operating income
  $ 35,856             $ 29,404             $ 64,977             $ 52,638          

(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.

Our Trucking (Asset-Based) segment requires substantial capital expenditures for purchases of new revenue equipment.  Total depreciation and amortization expense for the Trucking (Asset-Based) Segment was approximately $20.7 million and $19.9 million for the three months ended June 30, 2014 and 2013, respectively. Depreciation and amortization expense for the Trucking (Asset-Based) Segment was approximately $41.4 million and $40.1 million for the six months ended June 30, 2014 and 2013, respectively.
 
 
 
12

 
 
Logistics (Non-Asset-Based) Segment Information

Logistics (Non-Asset-Based) 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 their customers. We also provide logistics, freight management and other non-trucking services through our Non-Asset-Based 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 (Non-Asset-Based) revenue is mainly affected by the rates we are able to negotiate with customers, the freight volumes that are shipped through third-party capacity providers and our ability to secure qualified third-party capacity providers to transport customer freight.

The following table sets forth the Logistics (Non-Asset-Based) segment revenue, other operating expenses, and operating income (amount in thousands).

   
Three Months Ended
 June 30, 2014
   
Three Months Ended
 June 30, 2013
   
Six Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2013
 
Logistics (Non-Asset-Based)
   $       %      $       %      $       %     $       %  
Revenue
  $ 49,114             $ 40,616             $ 93,730             $ 73,824          
Other operating expenses
    46,071       93.8       38,095       93.8       88,558       94.5       68,993       93.5  
Operating income
  $ 3,043             $ 2,521             $ 5,172             $ 4,831          

The following table sets forth the Logistics (Non-Asset-Based) revenue, operating expenses, and operating income, excluding intersegment transactions (amount in thousands).
 
   
Three Months Ended June 30, 2014
   
Three Months Ended June 30, 2013
   
Six Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2013
 
Logistics (Non-Asset-Based)
   $       %      $       %      $       %      $       %  
Revenue
  $ 49,114             $ 40,616             $ 93,730             $ 73,824          
Less: Intersegment transactions
    (1,227 )             (1,468 )             (2,074 )             (2,779 )        
Revenue excluding intersegment
   transactions
    47,887               39,148               91,656               71,045          
Operating expenses
    46,071               38,095               88,558               68,993          
Less: Intersegment transactions
    (1,227 )             (1,468 )             (2,074 )             (2,779 )        
Operating expenses excluding
    intersegment transactions
    44,844       93.6       36,627       93.6       86,484       94.4       66,214       93.2  
Operating income
  $ 3,043             $ 2,521             $ 5,172             $ 4,831          

We primarily measure the Logistics (Non-Asset-Based) segment's profitability by reviewing the gross margin percentage (revenue net of intersegment elimination), less purchased transportation expense, expressed as a percentage of revenue (net of intersegment elimination) 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 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 our Brokerage and Intermodal businesses combined.

 
Three Months Ended
June 30, 2014
 
 Three Months Ended
June 30, 2013
 
Six Months Ended
June 30, 2014
 
Six Months Ended
June 30, 2013
Combined Brokerage and Intermodal gross
   margin percent(1)
14.1%
 
13.6%
 
13.6%
 
13.7%

(1)
Gross margin percentage is based on revenue net of intersegment elimination.

Our Logistics (Non-Asset-Based) segment does not require significant capital expenditures and is not asset-intensive like the Trucking (Asset-Based) segment.  Total Logistics (Non-Asset-Based) segment depreciation and amortization expense is primarily attributed to equipment leased to third parties, which was approximately $1.2 million for the three months ended June 30, 2014 and 2013. Depreciation and amortization expense for the Logistics (Non-Asset-Based) segment was approximately $2.4 million and $2.5 million for the six months end June 30, 2014 and 2013, respectively.

No segmental asset information is provided as we do not prepare balance sheets by segment, and the chief operating decision makers do not review segment assets to make operating decisions.
 
 
13

 
 
Note 5.                      Joint Venture

In 2010, we partnered with a non-related investor to form an Arizona limited liability company for the purpose of sourcing commercial vehicle parts. We contributed $26,000 to acquire 52% ownership of this entity. In accordance with ASC 810-10-15-8, Consolidation, we consolidate the financial activities of this entity into the consolidated financial statements. The noncontrolling interest for this entity is presented as a separate component of the consolidated financial statements.

Note 6.                      Commitments and Contingencies

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, property damage, physical damage, and cargo loss incurred in the transportation of freight or for personnel matters, as well as certain class action litigation in which plaintiffs allege failure to provide meal and rest breaks, unpaid wages, unauthorized deductions, and other items.

We are insured against auto liability claims under a self-insured retention ("SIR") policy.  For the policy year February 1, 2012 to January 31, 2013, the SIR was $2.0 million with an additional $1.0 million responsibility for "aggregate" losses.  For the policy period February 1, 2013 to January 31, 2014, our SIR was $3.0 million with no additional responsibility for "aggregate" losses.  For the policy period February 1, 2014 to March 1, 2015, our SIR is $2.5 million with no additional responsibility for "aggregate" losses.  In the past, our retention generally ranged from $1.0 million to $3.0 million per occurrence, plus "aggregate" losses of up to $1.5 million. We have secured excess liability coverage up to $105.0 million per occurrence.  We also carry a $2.5 million aggregate deductible for any loss or losses that rise to the excess coverage layer.

We are self-insured for workers' compensation claims up to a maximum limit of $500,000 per occurrence.  We also maintain primary and excess coverage for employee medical expenses and hospitalization, with self-insured retention of $225,000 per claimant.

Based on claims resolved this quarter, and our 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 us. 

Note 7.                      Dividends

On May 15, 2014, we announced a cash dividend of $0.06 per share of our common stock.  The dividend was payable to shareholders of record on June 6, 2014, and was paid on June 27, 2014. 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.

Note 8.                      Property and Equipment

To ensure that our facilities remain modern and efficient, we periodically have facility upgrades, or new construction, in process at our various service center or corporate headquarters locations. 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 June 30, 2014 and December 31, 2013, we had approximately $8.1 million and $6.5 million, respectively, of facility construction in process assets included under "Buildings and building improvements” on the accompanying consolidated balance sheets.

Note 9.                      Goodwill

Goodwill represents the excess of the purchase price of our acquisitions over the fair value of the net assets acquired. The tax benefit from the recognition on the tax return of the amortization of the excess tax goodwill over book goodwill is treated as a reduction in the book basis of goodwill.  The changes in the carrying amount of goodwill for the six months ended June 30, 2014, is as follows:

   
In thousands
 
Goodwill at December 31, 2013
  $ 10,257  
Amortization relating to deferred tax assets
    (10 )
Goodwill at June 30, 2014
  $ 10,247  
 
 
14

 
 
Note 10.                      Investments and Related Commitments

In 2003, we signed a partnership agreement with Transportation Resource Partners ("TRP"), a company that makes privately negotiated equity investments. Per the original partnership agreement, we committed to invest $5.0 million in TRP. In 2006, we increased the commitment amount to $5.5 million. In the second quarter of 2014 we recognized a net gain of $519,000 from TRP investment activity and the carrying value of our investment in TRP was $477,000 and $2.0 million at June 30, 2014 and December 31, 2013, respectively.

In the fourth quarter of 2008, we formed Knight Capital Growth, LLC and committed $15.0 million to invest in a new partnership managed and operated by the managers and principals of TRP. The new partnership, Transportation Resource Partners III, LP ("TRP III"), is focused on investment opportunities similar to TRP. As of June 30, 2014, we have contributed approximately $10.9 million to TRP III, leaving an outstanding commitment of $4.1 million. Our investment in TRP III is accounted for using the equity method. In the second quarter of 2014 we recognized a gain of approximately $1.2 million for TRP III under the equity method of accounting. The carrying value of our investment in TRP III was $13.5 million and $11.4 million as of June 30, 2014 and December 31, 2013, respectively.

Note 11.                      Marketable Equity Securities

We have 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 on the accompanying consolidated balance sheets. Realized gains and losses on available-for-sale securities are included in the determination of net income.We use specific identification to determine the cost of securities sold, or amounts reclassified out of accumulated other comprehensive income into earnings.

For the three and six months ended June 30, 2014, gross proceeds from the sale of available-for-sale securities totaled $1.9 million, and gross realized gains from sales of these securities of approximately $902,000 were included in “Other income” on the accompanying consolidated statements of income. There were no sales of available-for-sale securities in the three months ended June 30, 2013. For the six months ended June 30, 2013, gross proceeds from the sale of available-for-sale securities totaled $2.1 million, and gross realized gains of approximately $47,000 were included in “Other income” on the accompanying consolidated statements of income.

For the three and six months ended June 30, 2014, we reclassified gains of $557,000, net of tax impact of $345,000, from accumulated other comprehensive income and included in net income. No reclassification was recorded in the three months ended June 30, 2013, and gains of $29,000, net of tax impact of $18,000, were reclassified in the six months ended June 30, 2013. Net unrealized gains on available-for-sale securities of $3.0 million were included in accumulated comprehensive income for the three months ended June 30, 2014, while net unrealized losses of $200,000 were included in accumulated comprehensive income for the three months ended June 30, 2013.  Net unrealized gains on available-for-sale securities of $4.1 million were included in accumulated comprehensive income for the six months ended June 30, 2014, while net unrealized gains of $80,000 were included in accumulated comprehensive income for the six months ended June 30, 2013.

As of June 30, 2014, our available-for-sale equity investment included in "Other long-term assets and restricted cash and investments" on the accompanying consolidated balance sheets, was approximately $22.2 million, including gross unrealized gains of approximately $13.1 million, or $8.1 million (net of tax). As of December 31, 2013, our available-for-sale investment balance was approximately $17.5 million, including gross unrealized gains of approximately $7.4 million, or $4.6 million (net of tax).

Note 12.                      Assets Held for Sale

Revenue equipment that is not utilized in continuing operations and is held for sale is classified as "Assets held for sale" on the accompanying consolidated balance sheets.  Assets held for sale at June 30, 2014 and December 31, 2013, totaled $10.5 million and $16.5 million, respectively. Assets held for sale are no longer subject to depreciation, and are recorded at the lower of depreciated carrying value or fair market value less selling costs. We expect to sell these assets and replace them with new assets within twelve months of being classified as "Assets held for sale."

Note 13.                      Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. For interim reporting purposes, our income tax provisions are recorded based on the estimated annual effective tax rate. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and tax basis 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 in income in the period that includes the enactment date.

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider 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 our profitable operations.

We recognize 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. We file federal and state income tax returns with varying statutes of limitations. The 2010 through 2013 tax years generally remain subject to examination by federal authority, and the 2009 through 2013 tax years generally remain subject to examination by state tax authorities.  We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our consolidated financial position, results of operations and cash flows.  Our policy is to recognize interest and penalties related to unrecognized tax benefits as income tax expense.  We have not recorded any unrecognized tax benefits at June 30, 2014 or December 31, 2013.
 
 
15

 
 
Note 14.                      Company Share Repurchase Programs

In November 2008, our Board of Directors unanimously authorized the repurchase of up to 3.0 million shares of our common stock, and in May 2011, our Board of Directors unanimously authorized the repurchase of an additional 10.0 million shares of our common stock. The repurchase authorization is intended to afford 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 effected based upon share price and market conditions.

We did not purchase any shares in either of the six months ended June 30, 2014 or 2013. As of June 30, 2014, there were 7,438,556 shares remaining for future purchases under our repurchase program. The repurchase authorization will remain in effect until the share limit is reached or the programs are terminated.

Note 15.                      Fair Value Measurements

Our assets and liabilities measured at fair value are based on principles set forth in ASC 820-10, Fair Value Measurements and Disclosure, for non-recurring fair value measurements of non-financial assets and liabilities. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value.  Observable inputs are those which are obtained from market participants external to us while unobservable inputs are generally developed internally, utilizing management's estimates, assumptions, and specific knowledge of the nature of the assets or liabilities and related markets.  The three levels are defined as follows:

Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have 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 our 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 our financial assets and liabilities that are required to be measured at fair value as of June 30, 2014 and December 31, 2013. 

   
Total
   
Total
   
Level One
   
Level Two
   
Level Three
 
   
Balance at
June 30,
2014
   
Balance at
December 31, 2013
   
Balance at
June 30,
2014
   
Balance at
December 31, 2013
   
Balance at
June 30,
2014
   
Balance at
December 31, 2013
   
Balance at
June 30,
2014
   
Balance at
December 31, 2013
 
   
(in thousands)
 
Assets:
                                               
Available-for-sale Securities:
Equity securities - common shares
  $ 22,180     $ 17,454     $ 22,180     $ 17,454       -       -       -       -  
Restricted cash and investments:
                                                         
Money market funds
  $ 1,399     $ 1,371     $ 1,399     $ 1,371       -       -       -       -  
Trading Securities:
                                                               
Debt securities - municipal securities
  $ 2,212     $ 2,232       -       -     $ 2,212     $ 2,232       -       -  
 
 
 
16

 

 
Note 16.                      Notes Receivable

We provide financing to independent contractors and third parties on equipment sold or leased under our equipment sale program. Most of the notes are collateralized and are due in weekly installments, including principal and interest payments generally ranging from 2% to 20%. We had 113 and 117 loans outstanding from independent contractors and third parties as of June 30, 2014 and December 31, 2013, respectively.

The notes receivable balances are classified separately between current and long-term on the accompanying consolidated balance sheets.  The current and long-term balance of our notes receivable at June 30, 2014 and December 31, 2013, are as follows:

   
June 30,
2014
   
December 31, 2013
 
   
(in thousands)
 
Notes receivable from independent contractors
  $ 564     $ 503  
Notes receivable from third parties
    4,511       4,630  
Gross notes receivable
    5,075       5,133  
Allowance for doubtful notes receivable
    (309 )     (312 )
Total notes receivable, net of allowance
    4,766       4,821  
                 
Current portion, net of allowance
    775       774  
Long-term portion
  $ 3,991     $ 4,047  

Note 17.                      Related Party Transactions

We have provided general business loans to US West Agriculture Exporters, LLC, ("USW") a company that transacted business with our drayage operation, and in which Larry Knight is a 33% owner. Larry Knight is an employee of the Company and the brother of Kevin Knight and Keith Knight, our Chief Executive Officer and Chief Operating Officer, respectively. The loan balance, including interest due from USW, at December 31, 2013, was approximately $748,000. The principal loan and interest balance was recorded in "Related party notes and interest receivable" on our consolidated balance sheet at December 31, 2013.  During the first quarter of 2014, we received full payment for the remaining balance of the loan to USW.

Note 18.                      Line of Credit

We maintain a revolving line of credit with Wells Fargo Bank, which permits revolving borrowings and letters of credit.  Previously, the line of credit had been maintained at $150.0 million with interest at either the prime rate, or LIBOR plus 0.625%.  In October 2013, we increased this limit to $300.0 million, and going forward it will bear interest at either the prime rate, or LIBOR plus 0.75%, determined by us at the time of borrowing, and has a maturity date of October 21, 2016.  We had $15.4 million outstanding under the line of credit as of June 30, 2014, compared to $38.0 million as of December 31, 2013.  The weighted average variable annual percentage rate ("APR") for amounts borrowed during the six-month period ended June 30, 2014 was 3.0%. Borrowings under the line of credit are recorded in the "Long-term debt" line of the consolidated balance sheets.  In connection with our self-insurance program, we also utilized $24.0 million of the line of credit for letters of credit issued to various regulatory authorities as of June 30, 2014.  With the outstanding letters of credit and debt borrowed, we have $260.6 million available for future borrowings as of June 30, 2014.  We are obligated to comply with certain financial and other covenants under the line of credit agreement and were in compliance with such covenants at June 30, 2014 and December 31, 2013.
 
 
 
17

 
 
Note 19.                      Recent Accounting Pronouncements

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 we do not expect it to have an impact on our 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. The amendments are effective as of January 1, 2017 and we are assessing the potential impact to our consolidated financial statements and financial statement disclosures.

In March 2014, the FASB issued ASU 2014-06, Technical Corrections and Improvements Related to Glossary Terms.  The amendments in this update represent changes to clarify the Master Glossary of the Codification, consolidate multiple instances of the same term into a single definition, or make minor improvements to the Master Glossary that are not expected to result in substantive changes to the application of existing guidance or create a significant administrative cost to most entities. Additionally, the amendments will make the Master Glossary easier to understand, as well as reduce the number of terms appearing in the Master Glossary.  The amendments do not have transition guidance and are effective upon issuance for both public entities and nonpublic entities.

Item 2.                      Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

Except for certain historical information contained herein, this report contains certain statements that may be considered "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, 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 fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, 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.  Words such as "believe," "may," "could," "will," "expects," "hopes," "estimates," "projects," "intends," "anticipates," and "likely," and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, 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 in our Form 10-K for the year ended December 31, 2013, along with any supplements in Part II below.

All such forward-looking statements speak only as of the date of this Form 10-Q.  You are cautioned not to place undue reliance on such forward-looking statements.  The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s 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 continued to grow our revenue by increasing the geographic reach of our service center network and by expanding the breadth of our services.  Our Trucking (Asset-Based) 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 (Non-Asset-Based) segment provide a multitude of shipment solutions, including additional sources of truckload capacity and alternative transportation modes, and by utilizing our vast network of third-party capacity providers and rail partners, as well as certain logistics, freight management, and other non-trucking services.  Our objective is to operate our Trucking (Asset-Based) and Logistics (Non-Asset-Based) business with industry-leading margins and growth, while providing safe, high-quality, cost-effective solutions for our customers.
 
 
 
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The main factors that affect our results are industry-wide economic factors, such as freight demand, truckload and rail intermodal capacity, fuel prices, 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.  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 (Asset-Based) and Logistics (Non-Asset-Based) 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 Quarter-End Financial Condition

Our consolidated results of operations for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, were as follows:

· Revenue, before fuel surcharge, increased 9.4%, to $218.9 million from $200.1 million;
 
· Net income attributable to Knight increased 36.0%, to $25.8 million from $18.9 million; and
 
· Net earnings attributable to Knight per diluted share increased to $0.31 per share from $0.24 per share.

During the second quarter of 2014, strong overall freight demand continued and capacity tightened. Several factors contributed to our improved performance, as compared to the second quarter of 2013, including our efforts to improve yield and drive operational efficiencies, continue our focus on recruiting and developing driving associates, provide industry-leading service, intensify our cost control efforts, and realize the benefits of a solid used equipment market.

In the second quarter of 2014, our Trucking (Asset-Based) segment increased both revenue, excluding trucking fuel surcharge, and operating income from the second quarter of 2013.  Productivity, as measured by average revenue per tractor, before fuel surcharge, increased 6.0% in the second quarter of 2014 compared to the second quarter of 2013.  This improvement is a result of a 7.1% improvement in revenue per total mile, a 1.1% decrease in miles per tractor, and a significant decrease of non-paid empty miles, to 9.4% in the second quarter of 2014, from 10.8% in the second quarter of 2013.

We continued to experience growth in our Logistics (Non-Asset-Based) service offerings as the number of Brokerage shipments increased creating revenue growth of 64.1% in the second quarter of 2014, as compared to the second quarter of 2013.

In the second quarter of 2014, we returned $4.9 million to our shareholders in the form of quarterly cash dividends and ended the quarter with $606.1 million of shareholders' equity. In the second quarter of 2014, we generated $41.4 million in cash flow from operations and used $55.6 million for capital expenditures net of equipment sales.

Our liquidity is not materially affected by off-balance sheet transactions.  See the discussion under "Liquidity and Capital Resources" for a description of our off-balance sheet transactions.

Revisions of Prior Period Reported Amounts

During the first quarter of 2014, we identified errors associated with income tax accounts reported in prior periods.  Specifically, the errors related to our income tax accounting for incentive stock options since the adoption of FAS 123R in 2006 and errors in recording required annual adjustments to the tax provision and taxes payable.   The aforementioned errors resulted in an overstatement of the deferred tax liability by $2,355,000, understatement of income tax payable by $262,000, understatement of additional paid-in capital by $779,000, and understatement of retained earnings by $1,314,000 as of December 31, 2013.  We have adjusted our previously reported income taxes payable, deferred tax liability, additional paid in capital, and retained earnings accounts as of January 1, 2013 to correct these errors and such adjustments are reflected in the accompanying condensed consolidated financial statements. 

Pursuant to the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality, we concluded that the errors were not material to any of our prior period financial statements.  However, in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatement in the Current Year Financial Statements, the prior period financial statements were revised to facilitate comparability between current and prior year periods.  Please refer to Item I, Note 1 for additional information.
 
 
19

 
 
Consolidated Revenue and Expenses

We primarily generate revenue by transporting freight for our customers in our Trucking (Asset-Based) segment or arranging for the transportation of customer freight in our Logistics (Non-Asset-Based) segment.  Our operating revenue is reported under "Results of Operations" and categorized as (i) Trucking (Asset-Based) revenue, net of fuel surcharge, (ii) Trucking (Asset-Based) fuel surcharge revenue, and (iii) Logistics (Non-Asset-Based) revenue.  Trucking (Asset-Based) revenue, net of fuel surcharge, and Trucking (Asset-Based) fuel surcharge revenue is largely generated by the trucking services provided by our three Trucking (Asset-Based) operating units (Dry Van, Refrigerated, and Drayage), whereas Logistics (Non-Asset-Based) revenue is mostly generated by the logistics services provided by our two Logistics (Non-Asset-Based) 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 (Non-Asset-Based) business.

The operating revenue and operating expenses of our Trucking (Asset-Based) and Logistics (Non-Asset-Based) segments are similarly affected by certain 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 lessen our risk related to fuel price fluctuations in our Trucking (Asset-Based) 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 that 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 (Asset-Based) fuel surcharge revenue separately and omit fuel surcharge revenue from our statistical calculations.  We believe that omitting this sometimes volatile source of revenue provides a more meaningful comparison of our operating results from period to period.

Trucking (Asset-Based) Strategy and Segment Information

Our Trucking (Asset-Based) 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 driver 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 in enhancing revenue.

Trucking (Asset-Based) 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 (Asset-Based) 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 (Asset-Based) 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 (Asset-Based) 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 (Asset-Based) 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 (Asset-Based) 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 (Asset-Based) fuel surcharge revenue, expressed as a percentage of Trucking (Asset-Based) revenue, excluding Trucking (Asset-Based) 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.  The tables below compare our operating ratio using both methods.
 
 
 
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The following table sets forth the Trucking (Asset-Based) segment operating ratio on a GAAP basis (amount in thousands).

   
Three Months Ended
June 30, 2014
   
Three Months Ended
June 30, 2013
   
Six Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2013
 
Trucking (Asset-Based)Segment
   $       %      $       %      $       %      $       %  
Revenue
  $ 216,300             $ 205,656             $ 421,723             $ 409,212          
Operating expenses
    180,444       83.4       176,252       85.7       356,746       84.6       356,574       87.1  
Operating income
  $ 35,856             $ 29,404             $ 64,977             $ 52,638          

The following table sets forth the Trucking (Asset-Based) segment operating ratio as if fuel surcharges are excluded from total revenue and instead reported as a reduction of operation expenses, excluding intersegment activity (amount in thousands).

   
Three Months Ended
 June 30, 2014
   
Three Months Ended
June 30, 2013
   
Six Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2013
 
Trucking (Asset-Based) Segment
   $       %      $       %      $       %      $       %  
Revenue
  $ 216,300             $ 205,656             $ 421,723             $ 409,212          
Less: Trucking (Asset-Based) fuel
   surcharge revenue
    (45,247 )             (44,679 )             (88,814 )             (90,479 )        
Less: Intersegment transactions(1)
    (32 )             (21 )             (61 )             (74 )        
Revenue, net of fuel surcharge and
    intersegment transactions(1)
    171,021               160,956               332,848               318,659          
Operating expenses
    180,444               176,252               356,746               356,574          
Less: Trucking (Asset-Based) fuel
   surcharge revenue
    (45,247 )             (44,679 )             (88,814 )             (90,479 )        
Less: Intersegment transactions(1)
    (32 )             (21 )             (61 )             (74 )        
Operating expenses, net of fuel
   surcharge and intersegment
   transactions(1)
    135,165       79.0       131,552       81.7       267,871       80.5       266,021       83.5  
Operating income
  $ 35,856             $ 29,404             $ 64,977             $ 52,638          

(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 (Asset-Based) revenue, we consider the following key operating statistics for each period:  (i) average revenue per tractor per week; (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 (Asset-Based) segment for the indicated periods.

   
Three Months Ended
June 30, 2014
   
Three Months Ended
June 30, 2013
   
Six Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2013
 
Average revenue per tractor(1)
  $ 42,938     $ 40,523     $ 83,546     $ 79,069  
Average length of haul (miles)
    497       482       499       481  
Non-paid empty mile percent
    9.4 %     10.8 %     9.5 %     10.9 %
Average tractors in operation during period
    3,983       3,963       3,984       4,020  
Average trailers in operation during period
    9,046       9,393       9,054       9,439  

(1)
Average revenue per tractor is based on trucking revenue net of intersegment elimination, and does not include fuel surcharge revenue.

Our Trucking (Asset-Based) 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 3,983 tractors in the second quarter of 2014, of which 3,557 were company-owned tractors as of June 30, 2014. The average age of our company-owned tractor fleet was 1.8 years at June 30, 2014, which we expect to maintain for the remainder of 2014.  We also operated an average of 9,046 trailers in the second quarter of 2014, with an average age of 5.3 years as of June 30, 2014.  We expect the average age of our trailers to decrease slightly during the remainder of 2014 as we refresh our fleet. Our net property, plant, and equipment at June 30, 2014, was $621.4 million, most of which relates to our Trucking (Asset-Based) segment. 
 
 
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Our capital expenditures can also affect depreciation expense.  Trucking (Asset-Based) depreciation relates primarily to our owned tractors, trailers, auxiliary power units, electronic logging devices and other communication units, and other similar assets.  Changes to this fixed cost 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 2007 and 2010 EPA engine emissions requirements and the California trailer efficiency requirements).  Depreciation can also generally 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 (Asset-Based) segment depreciation and amortization expense was approximately $20.7 million in the second quarter of 2014.

Logistics (Non-Asset-Based) Strategy and Segment Information

Logistics (Non-Asset-Based) 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 (Non-Asset-Based) business.  We are generally paid a predetermined rate per mile or per load for arranging freight transportation for our customers and providing other Logistics (Non-Asset-Based) 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 Non-Asset-Based 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 operating unit and continued increases in the number of customers utilizing our Logistics (Non-Asset-Based) services contributed to the improved productivity and revenue realized in the second quarter of 2014.

Our Logistics (Non-Asset-Based) segment is less asset-intensive and is instead dependent upon talented non-driver personnel, modern and effective information technology, and qualified third-party capacity providers.  The most significant expense of our Logistics (Non-Asset-Based) segment, which is primarily variable, is the cost of purchased transportation that we pay to third-party capacity providers (including our rail partners) 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 (Non-Asset-Based) 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 (Non-Asset-Based) segment revenue, other operating expenses, and operating income (amount in thousands).

   
Three Months Ended
June 30, 2014
   
Three Months Ended
June 30, 2013
   
Six Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2013
 
Logistics (Non-Asset-Based)
  $       %     $       %     $       %     $       %  
Revenue
  $ 49,114             $ 40,616             $ 93,730             $ 73,824          
Other operating expenses
    46,071       93.8       38,095       93.8       88,558       94.5       68,993       93.5  
Operating income
  $ 3,043             $ 2,521             $ 5,172             $ 4,831          

The following table sets forth the Logistics (Non-Asset-Based) revenue, operating expenses, and operating income, excluding intersegment transactions (amount in thousands).
 
   
Three Months Ended June 30, 2014
   
Three Months Ended June 30, 2013
   
Six Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2013
 
Logistics (Non-Asset-Based)
   $       %      $       %      $       %      $       %  
Revenue
  $ 49,114