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EX-31.2 - EXHIBIT 31.2 (SECTION 302 CERTIFICATION - ADAM W. MILLER) - KNIGHT TRANSPORTATION INCexhibit312.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 - DAVID A. JACKSON) - KNIGHT TRANSPORTATION INCexhibit321.htm
EX-31.1 - EXHIBIT 31.1 (SECTION 302 CERTIFICATION - DAVID A. JACKSON) - KNIGHT TRANSPORTATION INCexhibit311.htm
EX-23.1 - EXHIBIT 23.1 (CONSENT OF GRANT THORNTON LLP) - KNIGHT TRANSPORTATION INCexhibit231.htm
EX-21.1 - EXHIBIT 21.1 (SUBSIDIARIES) - KNIGHT TRANSPORTATION INCexhibit211.htm

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

FORM 10-K

(Mark One)

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2016
[  ]
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)

(602) 269-2000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   [X] Yes   [  ] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   [   ] Yes   [X] No

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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [X] Yes   [  ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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 definition of "accelerated filer," "large accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer [X]
 
Accelerated filer  [  ]
Non-accelerated filer  [  ] (Do not check if a smaller reporting company)
 
Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  [  ] Yes   [X] No
1

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2016, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $1.9 billion (based upon $26.58 per share closing price on that date as reported by the New York Stock Exchange).  In making this calculation, the registrant has assumed, without admitting for any purpose, that all executive officers and directors, and no other persons, are affiliates.

The number of shares outstanding of the registrant's common stock as of February 24, 2017 was 80,323,565.
 
DOCUMENTS INCORPORATED BY REFERENCE

Materials from the registrant's Notice and Proxy Statement relating to the 2017 Annual Meeting of Shareholders to be held on May 11, 2017 have been incorporated by reference into Part III of this Form 10-K.
2


TABLE OF CONTENTS
 
PART I
 
 
Item 1.
4
 
Item 1A.
14
 
Item 1B.
24
 
Item 2.
24
 
Item 3.
25
 
Item 4.
25
PART II
 
 
Item 5.
26
 
Item 6.
28
 
Item 7.
29
 
Item 7A.
45
 
Item 8.
45
 
Item 9.
46
 
Item 9A.
46
  Item 9B.  Other Information 48
PART III
 
 
Item 10.
48
 
Item 11.
48
 
Item 12.
48
 
Item 13.
49
 
Item 14.
49
PART IV
 
 
Item 15.
49
 
Item 16.
50
       
51
   
CONSOLIDATED FINANCIAL STATEMENTS
 
 
F-1
 
F-2
 
F-4
 
F-5
 
F-6
 
F-7
 
F-8

 
 
PART I
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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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, the flexibility of our model to adapt to market conditions, 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, the expected freight environment and economic trends, whether we grow organically, 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 and allocation of capital, 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, regulatory changes and the impact thereof, 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," "hopes," 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 below.  Readers should review and consider the factors discussed in "Item 1A. Risk Factors," along with various disclosures in our press releases, shareholder reports, and other filings with the United States Securities and Exchange Commission (“SEC”).

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.

References in this Annual Report to "we," "us," "our," "Knight," or the "Company" or similar terms refer to Knight Transportation, Inc. and its consolidated subsidiaries.

General

We are a provider of multiple full truckload transportation and logistics services, which generally involve the movement of full trailer or container loads of freight from origin to destination for a single customer.  We are one of North America's largest truckload transportation providers.  We provide significant capacity and a broad range of truckload and logistics services through our nationwide network of service centers, one of the country's largest truckload tractor fleets, and our 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 for customers. Historically, we have grown through a combination of organic growth and acquisitions, including through the creation of Kold Trans, LLC (“Kold Trans”), and the acquisition of Barr-Nunn Transportation, Inc. and certain of its affiliates (“Barr-Nunn”) in the fourth quarter of 2014, which has enhanced our business and service offerings with additional service centers and increased our driving associates, tractor fleet and capacity. Through our multiple service offerings, capabilities, and transportation modes, we are able to transport, or arrange for the transportation of, general commodities for our diversified customer base throughout the contiguous United States and parts of Canada and Mexico using state-of-the-art equipment, information technology, and qualified driving associates and non-driver employees.  We are committed to providing our customers with a wide range of truckload and logistics services and continue to invest considerable resources toward developing a range of solutions for our customers across multiple service offerings and transportation modes.  Our overall objective is to provide truckload and logistics services that, when combined, lead the industry for margin and growth, while providing efficient and cost-effective solutions for our customers.
 
 
We have two reportable segments: (i) Trucking and (ii) Logistics.  Financial information regarding these two segments is provided in the Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.

Our Trucking segment is comprised of three operating units:  (i) dry van truckload ("Dry Van"), (ii) temperature-controlled truckload ("Refrigerated"), and (iii) drayage services ("Drayage").  We were founded as a provider of dry van truckload services, and in 2004, we took the first step towards our strategy of providing customers with a diversified range of truckload solutions with the creation of Knight Refrigerated, LLC, which provides our refrigerated services.  In 2008, we further enhanced our services by creating Knight Port Services, LLC, which provides drayage services between ocean ports, rail ramps, and shipping docks. In 2014, we grew our asset-based refrigerated offerings through Kold Trans, and we strengthened our dry van and expedited services through the acquisition of Barr-Nunn. We operate a large, modern tractor fleet supplemented with independent contractors to provide various asset-based 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.

Our Logistics segment consists of two primary operating units:  (i) freight brokerage services ("Brokerage") and (ii) rail intermodal ("Intermodal"). We also provide logistics, freight management and other non-Trucking services to our customers through our Logistics business. In 2005, we established Knight Logistics, LLC (formerly known as Knight Brokerage, LLC), which develops contractual relationships with thousands of third-party capacity providers who provide their equipment and services to transport customer freight.  In 2010, we advanced our objective of growing our services with the addition of our Intermodal services.  Our Logistics offerings meet our customers' transportation needs by providing a diverse range of shipping alternatives from our network of third-party capacity providers and our rail providers. We believe that the diversified customer offerings of our Trucking and Logistics segments strategically position us for growth with existing and new truckload and logistics customers.

Our headquarters and service center support is located in Phoenix, Arizona.

Operations

Our Trucking operating strategy is to gain truckload market share by leveraging our service offerings provided through our service center network, developing and enhancing customer relationships, and improving asset productivity through enhanced technology and market knowledge, while maintaining an extreme focus on cost.  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 our customers.  This operating strategy allows us to service the large amount of truckload freight transported in regional markets.  Our service centers enable us to better serve our customers and to work more closely with our driving associates.  We operate a modern fleet to appeal to drivers and customers, reduce maintenance expenses and downtime, and enhance our operating efficiencies.  We employ technology in both our Trucking and Logistics segments to assist us in controlling operating costs and enhancing revenue.  Our Logistics operating strategy is to match the shipping needs of our customers with the capacity provided by our network of third-party carriers and our rail providers.  Our goal is to increase our market presence, both in existing operating regions and in other areas where we believe the freight environment meets our operating strategy, while seeking to achieve industry-leading operating margins and returns on investment.
 
Our overall operating strategy includes the following important elements:

Regional Service Centers.  We believe that regional operations offer several advantages, including:

Obtaining greater freight volumes;
Achieving higher revenue per mile by focusing on high-density freight lanes to minimize non-revenue miles;
Enhancing our ability to recruit and train high quality driving associates;
Enhancing safety and driver development and retention;
Enhancing our ability to provide a high level of service and consistent capacity to our customers;
Enhancing accountability for performance and growth; and
Furthering our Trucking and Logistics capabilities to provide various shipment solutions to our customers and to contract with more third-party capacity providers.
 
We operate primarily in the United States with minor operations in Canada and Mexico.  Substantially all of our revenue is generated from within the United States.  All of our tractors are domiciled in the United States, and for the past three years, we estimate that less than one percent of our revenue has been generated in Canada and Mexico.  We do not separately track domestic and foreign revenue from customers, and providing such information would not be meaningful.  All of our long-lived assets are, and have been for the last three fiscal years, located within the United States.

Operating Efficiencies.  We were founded on a philosophy of maintaining operating efficiencies and controlling costs.  We operate modern tractors and trailers in order to obtain operating efficiencies and attract and retain driving associates.  A generally compatible fleet of tractors and trailers simplifies our maintenance procedures and reduces parts, supplies, and maintenance costs.  We regulate vehicle speed in order to maximize fuel efficiency, reduce wear and tear, and enhance safety.  We continue to update our fleet with more fuel-efficient post-2014 U.S. Environmental Protection Agency ("EPA") emission compliant engines, install aerodynamic devices on our tractors, and equip our trailers with trailer blades, which have led to meaningful improvements in fuel efficiency.  Our Logistics segment focuses on effectively optimizing and meeting the transportation and logistics requirements of our customers and providing customers with various sources and modes of transportation capacity across our nationwide service network. We invest in technology that enhances our ability to optimize our freight opportunities while maintaining a low cost per transaction.

Customer Service.  We strive to provide superior, on-time service at a meaningful value to our customers and seek to establish ourselves as a preferred truckload and logistics provider for our customers.  We provide truckload capacity for customers in high-density lanes, where we can provide them with a high level of service, as well as flexible and customized logistics services on a nationwide basis.  Our Trucking services include Dry Van, Refrigerated, and Drayage, which also include dedicated truckload services, customized according to customer needs.  Our Logistics services include Brokerage, Intermodal, and certain logistics, freight management, and non-Trucking services, which provide various shipping alternatives and transportation modes for customers by utilizing our expansive network of third-party capacity providers and rail partners.  We price our Trucking and Logistics services commensurately with the level of service our customers require and market conditions.  By providing customers a high level of service, we believe we avoid competing solely based on price.

Using Technology that Enhances Our Business.  We purchase and deploy technology that we believe will allow us to operate more safely, securely, and efficiently.  All of our company-owned tractors are equipped with in-cab communication devices that enable us to communicate with our drivers, obtain load position updates, manage our fleets, and provide our customers with freight visibility, as well as with electronic logging devices that automatically record our drivers' hours-of-service.  The majority of our trailers are equipped with trailer-tracking technology that allows us to better manage our trailers.  We have purchased and developed software for our Logistics businesses that provides greater visibility of the capacity of our third-party providers and enhances our ability to provide our customers with solutions that offer a superior level of service.  We have automated many of our back-office functions, and we continue to invest in technology that allows us to better serve our customers and improve overall efficiency.

Growth Strategy

Our growth strategy is focused on the following key areas:

Strengthening our customer relationships.  We market our services to both existing and new customers who value our broad geographic coverage, various transportation and logistics services, and truckload capacity and freight lanes that complement our existing operations.  We seek customers who will diversify our freight base.  We market our Dry Van, Refrigerated, Drayage, Brokerage, and Intermodal services, including dedicated services within those offerings, to existing customers who may be in need of multiple services but do not currently take advantage of our array of truckload solutions.

Improving asset productivity.  We focus on improving the revenue generated from our tractors and trailers without compromising safety.  We anticipate that we can accomplish this objective through increased miles driven and an increased rate per mile.

Acquiring and growing opportunistically.  We regularly evaluate acquisition and other development and growth opportunities.  Since 1999, we have acquired five short-to-medium haul truckload carriers, including the acquisition of Barr-Nunn during 2014.  These acquisitions have involved the purchase of all outstanding stock, or the purchase of substantially all of the trucking assets, of such carriers.  We are actively looking for acquisition and other opportunities that could favorably contribute to Trucking and Logistics development and growth.

Expanding existing service centers.  Historically, a substantial portion of our revenue growth has been generated by our expansion into new geographic regions through the opening of additional service centers.  Although we continue to seek opportunities to further increase our business in this manner, our primary focus is on developing and expanding our existing service centers by strengthening our customer relationships, recruiting quality driving associates and non-driver employees, adding new customers, and expanding the range of transportation and logistics solutions offered from these service centers.
 
 
Diversifying our service offerings. We are committed to providing our customers a broad and growing range of truckload and logistics services and continue to invest considerable resources toward developing a range of solutions for our customers.  We believe that these offerings contribute meaningfully to our results and reflect our strategy to bring complementary services to our customers to assist them with their supply chain needs.  We plan to continue to leverage our nationwide footprint and expertise to add value to our customers through our diversified service offerings.

We believe we have the service center network, systems capability, and management capacity to support substantial growth.  We have established a geographically diverse network that can support a substantial increase in freight volumes, organic or acquired.  Our network and business lines afford us the ability to provide multiple Trucking and Logistics solutions for our customers, and we maintain the flexibility within our network to adapt to freight market conditions.  We believe our unique mix of regional management, together with our consistent efforts to centralize certain business functions to achieve collective economies of scale, allow us to develop future company leaders with relevant operating and industry experience, minimize the potential diseconomies of scale that can come with growth in size, take advantage of regional knowledge concerning capacity and customer shipping needs, and manage our overall business with a high level of performance accountability.
 
Marketing and Customers

Our marketing mission is to be a strategic, efficient transportation capacity partner for our customers by providing truckload and logistics solutions customizable to the unique needs of our customers.  We deliver these capacity solutions through our network of owned assets, contracted independent contractors, third-party capacity providers, and our rail providers.  The diverse and premium services we offer provide a comprehensive approach to providing ample supply chain solutions to our customers. 

Our Trucking and Logistics sales and marketing leaders are members of our senior management team, who are assisted by other sales professionals in each segment.  Our sales team emphasizes our industry-leading service, superior safety record, environmental leadership, and our ability to accommodate a variety of customer needs, provide consistent capacity, and financial strength and stability.
 
We strive to maintain a diversified customer base.  For the year ended December 31, 2016, our top 25 customers among our Trucking and Logistics segments represented approximately 46.5% of revenue; our top 10 customers represented approximately 30.3% of revenue; and our top 5 customers represented approximately 20.5% of revenue.  No single customer represented more than 6.5% of revenue in 2016.

To be responsive to the needs of our customers and driving associates, we offer dedicated truckload services under our Trucking segment, in which we assign particular drivers and revenue equipment to prescribed routes.  This provides individual customers with a guaranteed source of capacity, and allows our driving associates to have more predictable schedules and routes.  Our dedicated tractor fleet services may provide a significant part of a customer's transportation requirements.  Under our dedicated transportation services, we provide drivers, equipment, maintenance, and, in some instances, transportation management services that supplement the customer's in-house transportation department.

Each of our service centers is linked to our corporate information technology system in our Phoenix headquarters.  The capabilities of this system and its software enhance our operating efficiency by providing cost-effective access to detailed information concerning equipment location and availability, shipment tracking and on-time delivery status, and other specific customer requirements.  The system also enables us to respond promptly and accurately to customer requests and assists us in matching available equipment with customer loads geographically.  Additionally, our customers can track shipments and obtain copies of shipping documents via our website.  We also provide electronic data interchange services to customers desiring these services.
 
 
Drivers, Other Employees, and Independent Contractors

As of December 31, 2016, we had 5,971 total employees, of which 4,738 were company drivers.  None of our employees are subject to a union contract or other collective bargaining unit.

Our operating model creates an environment where our employees are able to learn the many aspects of truckload transportation and logistics and demonstrate their talents, entrepreneurial spirit, and commitment.  We believe that the depth of our employee talent within our service center network is one of our competitive advantages.  Our front-line employees bring a high level of commitment to our customers and driving associates, while leveraging the substantial resource of our national network.

We recognize that the recruitment, training, and retention of a professional driver workforce, which is one of our most valuable assets, are essential to our continued growth and meeting the service requirements of our customers.  We hire qualified drivers who hold a valid commercial driver's license, satisfy applicable federal and state safety performance and measurement requirements, and meet our objective guidelines relating primarily to their safety history, road test evaluations, and other personal evaluations, including mandatory drug and alcohol testing.  In order to attract and retain safe drivers who are committed to the highest levels of customer service and safety, we focus our operations for drivers around a collaborative and supportive team environment.  We provide late model and comfortable equipment, direct communication with senior management, competitive wages and benefits, and other incentives designed to encourage driver safety, retention, and long-term employment.  We also recognize our drivers for providing superior service and developing good safety records.  Our drivers are compensated on a per mile basis, based on the length of haul and a predetermined number of miles.  Drivers are also compensated for additional flexible services provided to our customers.  Our drivers and other employees are invited to participate in our 401(k) program, and company-sponsored health, life, and dental plans.  We believe these factors help us in attracting, recruiting, and retaining professional drivers in a competitive driver market.

Through Squire Transportation, LLC ("Squire"), our trucking training company, we focus on developing skilled, productive, and safe qualified drivers.  Squire's mission is to provide our drivers with the skills necessary to have a safe driving career with us.  We believe Squire will continue to be very beneficial for recruiting and retaining qualified drivers.

We also maintain an independent contractor program.  Because independent contractors provide their own tractors and drivers and are responsible for their own operating expenses, the independent contractor program provides us with an alternate method of obtaining additional truckload capacity.  We intend to continue our use of independent contractors, but competition for independent contractors is intense.  As of December 31, 2016, we had 448 contracts with independent contractors.  Independent contractors contract with us to provide the tractor and driver to service the load offered to them.  We pay independent contractors a fixed rate and a fuel protection based on a predetermined number of loaded and empty miles, fuel prices, and other factors.  We offer tractor maintenance services to our independent contractors, although they are financially responsible for the costs and pay for their own fuel.  We provide trailers for each independent contractor.  In certain instances, we provide financing to independent contractors to assist them to purchase revenue equipment.  As of December 31, 2016, outstanding loans to independent contractors totaled in the aggregate approximately $1.0 million.
 
Revenue Equipment

In 2016, we operated an average of 4,286 company-owned tractors with an average age of 1.9 years.  We also had under contract 448 tractors owned and operated by independent contractors as of December 31, 2016.  We also operated an average of 12,288 trailers in 2016.  Growth of our tractor and trailer fleet is determined by market conditions and our experience and expectations regarding equipment utilization.  In acquiring revenue equipment, we consider a number of factors, including economy, price, rate, economic environment, technology, warranty terms, manufacturer support, driver comfort, and resale value.  We maintain strong relationships with our equipment vendors and the financial flexibility to react as market conditions dictate.

We have adopted an equipment configuration that meets a wide variety of customer needs and facilitates customer requirements.  We adhere to a comprehensive maintenance program that minimizes downtime and enhances the resale value of our equipment.  We perform routine servicing and maintenance of our equipment at most of our service centers, and we routinely inspect our equipment and that of our independent contractors to determine and monitor compliance with the United States Department of Transportation (“DOT”) requirements.  Our current policy is to replace our tractors between 48 months and 60 months after purchase and to replace our trailers over a five- to ten-year period. Changes in the current market for used tractors and trailers, regulatory changes, and difficult market conditions faced by tractor and trailer manufacturers, may result in price increases that may affect the period of time for which we operate our equipment.
 
 
Safety and Risk Management

We are committed to safe and secure operations. We conduct a mandatory intensive driver qualification process, including defensive driving training for all driving associates, which includes our company drivers, independent contractors, and trainees.  We regularly communicate with driving associates to promote safety and instill safe work habits through effective use of various media and safety review sessions. We also regularly conduct safety training for our drivers, independent contractors, and non-driving personnel.  We dedicate personnel and resources to ensure safe operation and regulatory compliance.  We employ safety personnel whose primary responsibility is the administration of our safety programs.  We employ technology to assist us in managing risks associated with our business.  In addition, we have an innovative recognition program for driver safety performance and emphasize safety through our equipment specifications and maintenance programs. Our Corporate Directors of Safety review all accidents and report weekly to the Senior Director of Safety and Risk Management.

We require prospective drivers to meet higher qualification standards than those required by the DOT. The DOT requires drivers to obtain commercial drivers' licenses and requires that we perform drug and alcohol testing that meets DOT regulations. Our program includes pre-employment, random, and post-accident drug testing and all other testing required by the DOT as well as additional Company required testing. We are authorized by the DOT to haul hazardous materials. We require any driver who transports hazardous materials to have the proper endorsement and to be regularly trained as prescribed by DOT regulations.

The primary claims arising in our business consist of auto liability, including personal injury, property damage, physical damage, and cargo loss. We are insured against auto liability claims under a self-insured retention ("SIR") policy.  For the policy periods from March 1, 2015 to March 1, 2016, and from March 1, 2016 to March 1, 2017, our SIR is $2.5 million with no additional responsibility for "aggregate" losses.  We regularly review insurance limits and retentions. We have secured excess liability coverage up to $130.0 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 $1.0 million per occurrence.  We also maintain primary and excess coverage for employee medical expenses and hospitalization, with self-insured retention of $225,000 per claimant for 2015, $240,000 per claimant for 2016 and 2017.

Competition

The freight transportation industry is highly competitive and fragmented.  We compete primarily with other truckload carriers and logistics companies, as well as railroads and airfreight providers.  Our Trucking segment competes with other motor carriers for the services of drivers, independent contractors, and management employees.  Our Logistics segment competes with other logistics companies for the services of third-party capacity providers and management employees.  A number of our competitors have greater financial resources, own more revenue equipment, and carry a larger volume of freight than we do.  We believe that the principal differentiating factors in our business, relative to competition, are service, efficiency, pricing, the availability and configuration of equipment that satisfies customers' needs, and our ability to provide multiple transportation solutions to our customers.

The freight environment was more challenging in 2016 compared to 2015 and modestly improved as the year progressed.  We attribute the change to excess trucking capacity in the markets we serve, and fewer non-contract opportunities that pressured our revenue per loaded mile. However, we sustained improvement in our asset utilization and experienced more favorable freight conditions toward the end of the year. In this environment, we diligently focused our efforts on cost control and continued to seek operational efficiencies while providing industry-leading service.

Regulation

Our operations are regulated and licensed by various government agencies, including the DOT, EPA, and the U.S. Department of Homeland Security ("DHS").  These and other federal and state agencies also regulate our equipment, operations, drivers, and third-party capacity providers.  We currently have, and have always maintained, a satisfactory DOT safety rating, which is the highest available rating, and we take continuous efforts to maintain our satisfactory rating.

The DOT, through the Federal Motor Carrier Safety Administration (the “FMCSA”), imposes safety and fitness regulations on us and our drivers, including rules that restrict driver hours-of-service.  In December 2011, the FMCSA published its 2011 Hours-of-Service Final Rule (the “2011 Rule”).  The 2011 Rule requires drivers to take 30-minute breaks after eight hours of consecutive driving and reduces the total number of hours a driver is permitted to work during each week from 82 hours to 70 hours.  The 2011 Rule provides that the 34-hour restart may only be used once per week and must include two rest periods between one a.m. and five a.m. (together, the “2011 Restart Restrictions”).  These rule changes became effective in July 2013.
 
 
In December 2014, the 2015 Omnibus Appropriations bill was signed into law.  Among other things, the legislation provided temporary relief from the 2011 Restart Restrictions while the FMCSA conducted a study to determine whether such restrictions had a positive result on driver safety (the “Study”), and essentially reverted to the more straightforward 34-hour restart rule that was in effect before the 2011 Rule became effective.  In December 2016, a short-term funding bill was signed into law that directly ties the reinstatement of the 2011 Restart Restrictions to the outcome of the Study, and requires the Study to demonstrate that the 2011 Restart Restrictions offer a “statistically significant improvement” in safety related matters in order for the 2011 Restart Restrictions to be reinstated.

There are two methods of evaluating the safety and fitness of carriers.  The first method is the application of a safety rating that is based on an onsite investigation and affects a carrier’s ability to operate in interstate commerce. We currently have a satisfactory DOT safety rating under this method, which is the highest available rating under the current safety rating scale.  If we were to receive a conditional or unsatisfactory DOT safety rating, it could adversely affect our business, as some of our existing customer contracts require a satisfactory DOT safety rating.  In January 2016, the FMCSA published a Notice of Proposed Rulemaking outlining a revised safety rating measurement system, which would replace the current methodology.  Under the proposed rule, the current three safety ratings of “satisfactory,” “conditional,” and “unsatisfactory” would be replaced with a single safety rating of “unfit,” and a carrier would be deemed fit when no rating was assigned.  Moreover, the proposed rules would use roadside inspection data, in addition to investigations and onsite reviews to determine a carrier’s safety fitness on a monthly basis.  Under the current rules, a safety rating can only be given upon completion of a comprehensive onsite audit or review.  The proposed rule underwent a public comment period that ended in June 2016 and several industry groups and lawmakers expressed their disagreement with the proposed rule, arguing that it violates the requirements of the FAST Act and that the FMCSA must first finalize its review of the CSA scoring system, described in further detail below. Based on this feedback, in January 2017, the FMCSA determined that a Supplemental Notice of Proposed Rulemaking outlining certain changes to the proposed rule would be released in the future. Therefore, it is uncertain if, when, or under what form this proposed rule could take effect. However, if this rule or a similar rule was adopted, and we were to receive a rating of "unfit," it could materially adversely affect our operations.
 
In addition to the safety rating system, the FMCSA has adopted the Compliance Safety Accountability program (“CSA”) as an additional safety enforcement and compliance model that evaluates and ranks fleets on certain safety-related standards. The CSA program analyzes data from roadside inspections, moving violations, crash reports from the last two years, and investigation results. The data is organized into seven categories.  Carriers are grouped by category with other carriers that have a similar number of safety events (e.g., crashes, inspections, or violations) and carriers are ranked and assigned a rating percentile to prioritize them for interventions if they are above a certain threshold.  Currently, these scores do not have a direct impact on a carrier’s safety rating.  However, the occurrence of unfavorable scores in one or more categories may (i) affect driver recruiting and retention by causing high-quality drivers to seek employment with other carriers, (ii) cause our customers to direct their business away from the us and to carriers with higher fleet safety rankings, (iii) subject us to an increase in compliance reviews and roadside inspections, or (iv)  cause us to incur greater than expected expenses in our attempts to improve unfavorable scores, any of which could adversely affect the our results of operations and profitability.

Under CSA, these scores were initially made available to the public in five of the seven categories.  However, pursuant to the FAST Act, which was signed into law in December 2015, the FMCSA is required to remove from public view the previously available CSA scores while it reviews the reliability of the scoring system.  During this period of review by the FMCSA, we will continue to have access to our own scores and will still be subject to intervention by the FMCSA when such scores are above the intervention thresholds.

In 2011, the FMCSA issued new rules that would require nearly all carriers, including us, to install and use electronic on-board recording devices (“EOBRs,” now referred to as electronic logging devices, or “ELDs”) in their tractors to electronically monitor truck miles and enforce hours-of-service.  These rules, however, were vacated by the Seventh Circuit Court of Appeals in August 2011. In response, Congress passed legislation in July 2012 renewing the mandate, subject to new regulations to be promulgated by the DOT. Pursuant to its rulemaking authority, the FMCSA published a new final rule in December 2015 which requires the use of ELDs by nearly all carriers by December 2017 (the "2015 ELD Rule"). We have proactively installed ELDs on 100% of our tractor fleet, so we don’t believe the 2015 ELD Rule will impact our operations or profitability or our use of ELDs. Furthermore, we believe that more effective hours-of-service enforcement after the 2015 ELD Rule takes effect may improve our competitive position by causing all carriers to adhere more closely to hours-of-service requirements.
 
 
In November 2015, the FMCSA published its final rule related to driver coercion, which took effect in January 2016.  Under this rule, carriers, shippers, receivers, or transportation intermediaries that are found to have coerced drivers to violate certain FMCSA regulations (including hours-of-service rules) may be fined up to $16,000 for each offense.

In December 2016, the FMCSA issued a final rule establishing a national clearinghouse for drug and alcohol testing results and requires motor carriers and medical review officers to provide records of violations by commercial drivers of FMCSA drug and alcohol testing requirements.  Motor Carriers will be required to query the clearinghouse to ensure drivers and driver applicants do not have unresolved violations of federal drug and alcohol testing regulations.

Other rules have been recently proposed or made final by the FMCSA, including (i) a rule requiring the use of speed limiting devices on heavy duty trucks to restrict maximum speeds, which was proposed in 2016 but has not yet been made final, and (ii) a rule setting forth minimum driver-training standards for new drivers applying for commercial driver licenses for the first time and to experienced drivers upgrading their licenses or seeking a hazmat endorsement, which was made final in December 2016, with a compliance date in February 2020. The effect of these rules could result in a decrease in fleet production and driver availability, either of which could adversely affect our business or operations.

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 continue to introduce legislation concerning the classification of independent contractors as employees, including legislation that proposes to increase the tax and labor penalties against employers who intentionally or unintentionally misclassify employees as independent contractors and are found to have violated employees' overtime or wage requirements.  Additionally, federal legislators have sought to (i) 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, (ii) extend the Fair Labor Standards Act to independent contractors, and (iii) impose notice requirements based upon employment or independent contractor status and fines for failure to comply.  Some states have adopted initiatives to increase their revenues from items such as unemployment, workers' compensation, and income taxes, and we believe a reclassification of independent contractor drivers as employees would help states with this initiative.  Federal and state taxing and other regulatory authorities and courts apply a variety of standards in their determination of independent contractor status.  If our independent contractors 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, which could potentially include prior periods, as well as potential liability for employee benefits and tax withholdings.  We currently observe and monitor our compliance with current related and applicable laws and regulations, but we cannot predict whether laws and regulations adopted in the future regarding the classification of our independent contractor drivers will adversely affect our business or operations.

In May 2010, an executive memorandum was executed directing the National Highway Traffic Safety Administration ("NHTSA") and EPA to develop new, stricter fuel efficiency standards for heavy tractors.  In August 2011, the NHTSA and EPA adopted a new rule that established the first-ever fuel economy and greenhouse gas standards for medium and heavy-duty vehicles, which include tractor-trailers (the “Phase 1 Standards”).  The Phase 1 Standards apply to tractor model years 2014 to 2018 and require the achievement of an approximate 20 percent reduction in fuel consumption by the 2018 model year, which equates to approximately four gallons of fuel for every 100 miles traveled.  In addition, in February 2014, President Obama announced that his administration would begin developing the next phase of tighter fuel efficiency and greenhouse gas standards for medium-and heavy-duty trucks and trailers (the “Phase 2 Standards”).  In October 2016, the EPA and NHTSA published the final rule mandating that the Phase 2 Standards will apply to trailers beginning with model year 2018 and tractors beginning with model year 2021.  The Phase 2 Standards require nine percent and 25 percent reductions in emissions and fuel consumption for trailers and tractors, respectively, by 2027.  We believe these requirements will result in additional increases in new tractor and trailer prices and additional parts and maintenance costs incurred to retrofit our tractors and trailers with technology to achieve compliance with such standards, which could adversely affect our operating results and profitability, particularly if such costs are not offset by potential fuel savings. We cannot predict, however, the extent to which our operations and productivity will be impacted.

The California Air Resources Board ("CARB") also adopted emission control regulations that will apply to all heavy-duty tractors that pull 53-foot or longer box-type trailers within the State of California.  The tractors and trailers subject to these CARB regulations must be either EPA SmartWay certified or equipped with low-rolling resistance tires and retrofitted with SmartWay-approved aerodynamic technologies.  Enforcement of these CARB regulations for 2011 model year equipment began in January 2010 and will be phased in over several years for older equipment.  In order to comply with the CARB regulations, we submitted a large fleet compliance plan to CARB in June 2010.  In addition, in February 2017 CARB proposed California Phase 2 standards that generally align with the federal Phase 2 Standards, with some minor additional requirements, and as proposed would stay in place even if the federal Phase 2 Standards are affected by action from the Trump administration.  We will continue monitoring our compliance with the CARB regulations.  Federal and state lawmakers also have proposed potential limits on carbon emissions under a variety of climate-change proposals.  Compliance with such regulations has increased the cost of our new tractors, may increase the cost of any new trailers that will operate in California, may require us to retrofit certain of our pre-2011 model year trailers that operate in California, and could impair equipment productivity and increase our operating expenses.  These adverse effects, combined with the uncertainty as to the reliability of the newly designed diesel engines and the residual values of these vehicles, could materially increase our costs or otherwise adversely affect our business or operations.
 
In order to reduce exhaust emissions, some states and municipalities have begun to restrict the locations and amount of time where diesel-powered tractors may idle.  These restrictions could force us to purchase on-board power units that do not require the engine to idle or to alter our drivers' behavior, which could result in a decrease in productivity, or increase in driver turnover.

In April 2016, the Food and Drug Administration published a final rule establishing requirements for shippers, loaders, carriers by motor vehicle and rail vehicle, and receivers engaged in the transportation of food, to use sanitary transportation practices to ensure the safety of the food they transport as part of the Food Safety Modernization Act of 2011 (the "FSMA").  This rule sets forth requirements related to (i) the design and maintenance of equipment used to transport food, (ii) the measures taken during food transportation to ensure food safety, (iii) the training of carrier personnel in sanitary food transportation practices, and (iv) maintenance and retention of records of written procedures, agreements, and training related to the foregoing items.  These requirements will take effect for larger carriers such as us in April 2017 and are applicable when we perform as a carrier or as a broker.  We believe that our current food shipping practices generally align with the carrier requirements under the rules and the company will be fully compliant with the rules prior to April 2017. If we are found to be in violation of applicable laws or regulations related to the FSMA, we could be subject to substantial fines, penalties and/or criminal liability, any of which could have a material adverse effect on our business, financial condition, and results of operations.

In addition to the foregoing laws and regulations, our operations are subject to other federal, state, and local environmental laws and regulations, many of which are implemented by the EPA and similar state agencies.  Such laws and regulations generally govern the management and handling of hazardous materials, discharge of pollutants into the air, surface water and groundwater preservation, and disposal of certain various substances.  We do not believe that our compliance with these statutory and regulatory measures have had a material adverse effect on our operating results, capital expenditures, or business and operations.

The regulatory environment has recently changed under the administration of President Trump.  In January 2017, the President’s office issued a temporary moratorium on proposed and recently published regulations, which will delay the effectiveness of such regulations for at least 60 days.  Additionally, in January 2017, the President signed an executive order requiring federal agencies to repeal two regulations for each new one they propose and imposing a regulatory budget, which would limit the amount of new regulatory costs federal agencies can impose on individuals and businesses each year.  The impact of these actions by the Trump administration may inhibit future new regulations and/or lead to the repeal or delayed effectiveness of existing regulations. Therefore, it is uncertain how we may be impacted in the future by existing or proposed regulations.

For further discussion regarding laws and regulations, refer to the "Risk Factors" section under Item 1A of Part I of this Annual Report.

Seasonality

In the transportation industry, results of operations generally follow a seasonal pattern.  Freight volumes in the first quarter are typically lower due to less consumer demand, customers reducing shipments following the holiday season, and inclement weather impeding operations. At the same time, operating expenses generally increase, and the tractor productivity of our fleet, independent contractors, and third-party carriers decreases during the winter months because of decreased fuel efficiency, increased cold weather-related equipment maintenance and repairs, and increased insurance claims and costs attributed to higher accident frequency from harsh weather.  During this period, the profitability of our Trucking operations is generally lower than during other parts of the year. Additionally, we have seen surges between Thanksgiving and Christmas resulting from holiday shopping trends toward delivery of gifts purchased over the internet, as well as the impact of shorter holiday seasons.

Acquisitions, Investments, and Dispositions

We regularly examine investment opportunities in areas related to our businesses.  Our investment strategy is to invest in businesses that will strengthen our overall position in the transportation industry, minimize our exposure to start-up risk, and provide us with an opportunity to realize a substantial return on our investment.  Since 1999, we have acquired all of the outstanding stock of five short-to-medium haul truckload carriers, or have acquired substantially all of the trucking assets of such carriers, including: (i) Granger, Iowa-based Barr-Nunn, acquired in 2014; (ii) Phoenix, Arizona-based Roads West Transportation, Inc., acquired in 2006; (iii) Idaho Falls, Idaho-based Edwards Bros., Inc., acquired in 2005; (iv) Gulfport, Mississippi-based John Fayard Fast Freight, Inc., acquired in 2000; and (v) Corsicana, Texas-based Action Delivery Service, Inc., acquired in 1999.  We have not conducted any acquisitions through our Logistics segment.  Although most of our growth has been internal, we continue to evaluate acquisition and other opportunities that contribute to Trucking and Logistics development and growth.
 
 
In 2003, we signed a partnership agreement with Transportation Resource Partners, LP (“TRP”), a company that makes privately negotiated equity investments.  Pursuant to the original partnership agreement, we committed to invest $5.0 million out of approximately $260.0 million total, for a 1.9% ownership interest. In early 2006, we increased the commitment amount to $5.5 million.  Contributions to TRP are accounted for using the cost method as our level of influence over the operations of TRP is minor, and no contributions have been made to TRP since 2011.  We did not record any gains or distributions in 2016, while we recorded gains from distributions totaling $208,000 in 2015. In 2014, we received distributions of $2.1 million of which $0.5 million was a return of capital, and $1.6 million was recorded as a gain. The gains are recognized in the year distributions are received. We also recorded impairment of $86,000, $177,000, and $1.0 million in 2016, 2015, and 2014, respectively, for other-than-temporary loss on the investments remaining within the TRP portfolio. Our ownership interest in TRP is approximately 2.3%, with a carrying value of $214,000 and $300,000 at December 31, 2016 and 2015, respectively.

In 2008, we committed to invest $15.0 million in a new partnership managed and operated by the managers and principals of TRP. The new partnership, Transportation Resource Partners III, LP (“TRP III”), focuses on the same investment opportunities as TRP. In 2015, based on an analysis of expected future fund activity, TRP III released investors from a portion of their outstanding commitment. Our share of the commitment release was $2.1 million. As of December 31, 2016, we have contributed approximately $11.1 million to TRP III, leaving an outstanding commitment of $1.8 million. The investment in TRP III is accounted for using the equity method. We have recorded income of approximately $533,000, $422,000, and $6.1 million for our investment in TRP III for years ended December 31, 2016, 2015, and 2014, respectively. In 2016, we received distributions totaling $496,000 from TRP III for the sale of TRP III portfolio companies. At December 31, 2016, the investment balance in TRP III was $5.9 million, compared to $5.8 million at December 31, 2015.  Our ownership interest was approximately 6.1% as at December 31, 2016.

In 2015, we committed to invest in another TRP partnership, TRP Capital Partners, LP (“TRP IV”). TRP IV is managed and operated by the managers and principals of TRP and TRP III, and is focused on similar investment opportunities. We committed to invest a total of $4.9 million to TRP IV, out of approximately $116.1 million total, for a 4.2% ownership interest and have contributed approximately $2.0 million, leaving an outstanding commitment of approximately $2.9 million as of December 31, 2016. Contributions to TRP IV are accounted for using the cost method. No gains or distributions were recorded during 2016.

In the first quarter of 2016, we committed to invest in another TRP partnership, TRP CoInvest Partners, (NTI) I, LP (“TRP Coinvestment”). The new partnership is managed and operated by the managers and principals of the other TRP partnerships, and is focused on similar investment opportunities. We committed to contribute, and have paid a total of, $10.0 million to the new partnership, leaving no outstanding commitment as of December 31, 2016. The investment in TRP Coinvestment is accounted for using the equity method, and the carrying value at December 31, 2016 was $10.0 million.

In the third quarter of 2016, we committed to invest in another TRP partnership, TRP CoInvest Partners, (QLS) I, LP (“TRP Coinvestment QLS”). The new partnership is managed and operated by the managers and principals of the other TRP partnerships, and is focused on similar investment opportunities. We committed to contribute, and have paid a total of, $9.7 million to the new partnership, leaving no outstanding commitment as of December 31, 2016. The investment in TRP Coinvestment QLS is accounted for using the equity method, and the carrying value at December 31, 2016 was $9.7 million.

In 2010, we partnered with an unrelated investor for the purpose of sourcing commercial vehicle parts. We contributed $26,000 to acquire 52% ownership of this entity. In accordance with Accounting Standards Codification (“ASC”) 810-10-15-8, Consolidation, we consolidate the financial activities of this entity into the condensed consolidated financial statements. The noncontrolling interest for this entity is presented as a separate component of the consolidated financial statements.

In 2014, we formed Kold Trans (formerly Kool Trans, LLC) for the purpose of expanding our refrigerated trucking business. We are entitled to 80% of the profits of the entity and have effective control over the management of the entity. In accordance with Accounting Standards Codification (“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.
 
 
We also invest in marketable equity and debt securities, which are stated at fair value and are included in the "Other long-term assets and restricted cash and other investments" item of the consolidated balance sheets.  During 2016, we disposed of our holdings in available-for-sale equity investments leaving no balance on the consolidated balance sheet as of December 31, 2016. Our trading debt securities balance was approximately $1.9 million at December 31, 2016.

Other Information

We were incorporated in 1989, and our headquarters are located at 20002 North 19th Avenue, Phoenix, Arizona, 85027.  This Annual Report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and all other reports filed with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act, can be obtained free of charge by visiting our website at www.knighttrans.com.  Information contained on our website is not incorporated into this Annual Report on Form 10-K, and you should not consider information contained on our website to be part of this report.

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, credit, business, and regulatory factors affecting the truckload industry that are largely beyond our control, any of which could have a materially adverse effect on our results of operations.

The truckload industry is highly cyclical, and 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.  We believe that some of the most significant of these factors include (i) excess tractor and trailer capacity in the trucking industry in comparison with shipping demand; (ii) declines in the resale value of used equipment; (iii) strikes, work stoppages, or work slowdowns at our facilities or at customer, port, border crossing, or other shipping-related facilities; (iv) increases in interest rates, fuel, taxes, tolls, and license and registration fees; and (v) rising costs of healthcare.

We are also affected by (i) recessionary economic cycles, such as the period from 2007 through 2009 and the 2016 freight environment, which was characterized by weak demand and downward pressure on rates; (ii) changes in customers’ inventory levels and in the availability of funding for their working capital; (iii) changes in the way our customers choose to source or utilize our services; and (iv) downturns in our customers’ business cycles. Economic conditions may adversely affect our customers and their demand for and ability to pay for our services. Customers encountering adverse economic conditions represent a greater potential for loss and we may be required to increase our allowance for doubtful accounts.

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 have experienced during prior recessionary periods, are as follows:

we may experience a reduction in overall freight levels, which may impair our asset utilization;
   
freight patterns may change as supply chains are redesigned, resulting in an imbalance between our capacity and our customers' freight demand;
   
customers may solicit bids for freight from multiple trucking companies or select competitors that offer lower rates from among existing choices in an attempt to lower their costs, and we might be forced to lower our rates or lose freight;
   
we may be forced to accept more freight from freight brokers, where freight rates are typically lower, or may be forced to incur more non-revenue miles to obtain loads; and
   
lack of access to current sources of credit or lack of lender access to capital, leading to an inability to secure credit financing on satisfactory terms, or at all.
 
 
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, driver and office employee wages, purchased transportation costs, taxes and interest rates, tolls, license and registration fees, insurance premiums and claims, revenue equipment and related maintenance costs, tires and other components, and healthcare and other benefits for our employees.  We could be affected by strikes or other work stoppages at our service centers or at customer, port, border, or other shipping locations. Further, we may not be able to appropriately adjust our costs and staffing levels to changing market demands. In periods of rapid change, it is more difficult to match our staffing level to our business needs.

Changing impacts of regulatory measures could impair our operating efficiency and productivity, decrease our operating 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 U.S. 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 results of operations and 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 in connection with such events could impair our operating efficiency and productivity and result in higher operating costs.

Our growth may not continue at historical rates and we may not be successful in sustaining or improving our profitability.

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 2016, 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 you 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 or that we will be able to sustain or improve our profitability in the future.

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, our results of 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 or 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, which could increase the volatility of, and decrease the amount of, our earnings, and could have a materially adverse effect on our results of operations.  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.

Healthcare legislation and inflationary cost increases also could negatively impact financial results by increasing annual employee healthcare costs.  We cannot presently determine the extent of the impact healthcare costs will have on our financial performance.  In addition, rising healthcare costs could force us to make changes to existing benefit programs, which could negatively impact our ability to attract and retain employees.

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 for new revenue equipment, design changes of new engines, decreased availability of new revenue equipment, and the failure of manufacturers to meet their sale or trade-back obligations to us could have a materially adverse effect on our business, financial condition, results of operations, and profitability.

We are subject to risk with respect to higher prices for new tractors for our Trucking operations.  We have experienced an increase in prices for new tractors over the past few years, and the resale value of the tractors has not increased to the same extent.  Prices have increased and may continue to 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.  Increased regulation has increased the cost of our new tractors and could impair equipment productivity, in some cases, result in lower fuel mileage, and increase our operating expenses.  Further 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 operations requirements.  Our business could be harmed if we are unable to continue to obtain an adequate supply of new tractors and trailers for these or other reasons. As a result, we expect to continue to pay increased prices for equipment and incur additional expenses for the foreseeable future. Furthermore, reduced equipment efficiency may result from new engines designed to reduce emissions, thereby increasing our operating expenses.

Tractor and trailer vendors may reduce their manufacturing output in response to lower demand for their products in economic downturns or shortages of component parts.  A decrease in vendor output may have a materially adverse effect on our ability to purchase a quantity of new revenue equipment that is sufficient to sustain our desired growth rate and to maintain a late-model fleet.  Moreover, an inability to obtain an adequate supply of new tractors or trailers could have a materially adverse effect on our business, financial condition, and results of operations.
 
 
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. Fuel prices also are affected by the rising demand for fuel in developing countries, and could be materially adversely affected by the use of crude oil and oil reserves for purposes other than fuel production and by diminished drilling activity.  Such events may lead not only to increases in fuel prices, but also to fuel shortages and disruptions in the fuel supply chain.  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.  In addition, because our fuel surcharge recovery lags behind changes in fuel prices, our fuel surcharge recovery may not capture the increased costs we pay for fuel, especially when prices are rising.  This could lead to fluctuations in our levels of reimbursement, which have occurred in the past. There can be no assurance that such fuel surcharges can be maintained indefinitely or will be sufficiently effective.  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, 2016, we did not have any derivative financial instruments to reduce our exposure to fuel price fluctuations.

Increases in driver compensation or difficulties attracting and retaining qualified drivers could have a materially adverse effect on our profitability and the ability to maintain or grow our fleet.

With respect to our trucking services, difficulty in attracting and retaining sufficient numbers of qualified drivers, which includes the engagement of 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.  Regulatory requirements, including those related to safety ratings, ELDs, and hours-of-service changes, and an improved economy could further reduce the number of eligible drivers or force us to increase driver compensation to attract and retain drivers.  We have seen evidence that stricter hours-of-service regulations adopted by the DOT have tightened, and may continue to tighten, the market for eligible drivers, and the required implementation of ELDs in December 2017 may further tighten the market.  We believe the shortage of qualified drivers and intense competition for drivers from other trucking companies will create difficulties in maintaining or increasing the number of drivers and may restrain our ability to engage a sufficient number of drivers and independent contractors; our inability to do so may negatively affect our operations. Further, the compensation we offer our drivers and independent contractor expenses are subject to market conditions, and we may find it necessary to increase driver and independent contractor compensation in future periods.

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.   In addition, we and many others suffer from a high turnover rate of drivers and independent contractors.  This high turnover rate requires us to continually recruit a substantial number of drivers and independent contractors in order to operate existing revenue equipment and maintain our independent contractor fleet.  If we are unable to continue 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, driver safety performance, and hours-of-service.  Matters such as weight, equipment dimensions, exhaust emissions, and fuel efficiency are also subject to government regulations.  We also may become subject to new or more restrictive regulations relating to fuel efficiency, exhaust emissions, hours-of-service, ergonomics, on-board reporting of operations, collective bargaining, security at ports, speed limiters, driver training, 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.  In addition, the Trump administration has indicated a desire to reduce regulatory burdens that constrain growth and productivity, and also to introduce legislation such as infrastructure spending, that could improve growth and productivity. Changes in regulations, such as those related to trailer size limits, hours-of-service, and mandating ELDs, could increase capacity in the industry or improve the position of certain competitors, either of which could negatively impact pricing and volumes, or require additional investments by us.  The short and long term impacts of changes in legislation or regulations are difficult to predict and could materially adversely affect our operations.  The "Regulation" section in Item 1 of Part I of this Annual Report discusses in detail several proposed, pending, suspended, and final regulations that could materially impact our business and operations.
 
The CSA program adopted by the FMCSA 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 materially adverse effect on our operations and profitability.

We currently have a satisfactory DOT rating, which is the highest available rating under the current safety rating scale.  If we were to receive a conditional or unsatisfactory DOT safety rating, it could materially adversely affect our business, financial condition, and results of operations as customer contracts may require a satisfactory DOT safety rating, and a conditional or unsatisfactory rating could materially adversely affect 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 materially 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, financial condition, and results of operations could be adversely affected.
 
Tax and other regulatory authorities, as well as independent contractors themselves, have increasingly asserted that independent contractor drivers in the trucking industry are employees rather than independent contractors for a variety of purposes, including income tax withholding, workers' compensation, wage and hour compensation, unemployment, and other issues. 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 those that engage independent contractor drivers and to increase the penalties of companies who misclassify their employees as independent contractors 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 adopted initiatives 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 these initiatives.  We are party to class actions from time-to-time alleging violations of the Fair Labor Standards Act and other labor laws seeking to reclassify independent contractors as employees.  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.

Compliance with various environmental laws and regulations to which our operations are subject may increase our costs of operations, and non-compliance with such laws and regulations could result in substantial fines or penalties.

In addition to direct regulation by the DOT and related agencies, we 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 air emissions from our equipment and facilities, and discharge and retention of storm water.  Our truck terminals often are located in industrial areas where groundwater or other forms of environmental contamination may have occurred or could 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 a wide array of regulations.  Although 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 results of operations.

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 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.
 
 
EPA regulations limiting exhaust emissions became more restrictive in 2010, when an executive memorandum was signed directing the NHTSA and the EPA to develop new, stricter fuel efficiency standards for heavy trucks. In 2011, the NHTSA and the EPA adopted final rules that established the Phase 1 Standards.  The Phase 1 Standards apply to tractor model years 2014 to 2018, which are required to achieve an approximate 20 percent reduction in fuel consumption by 2018, and equates to approximately four gallons of fuel for every 100 miles traveled. In addition, in October 2016, the EPA and NHTSA published the final rule establishing the Phase 2 Standards that will apply to trailers beginning with model year 2018 and tractors beginning with model year 2021.  The Phase 2 Standards require nine percent and 25 percent reductions in emissions and fuel consumption for trailers and tractors, respectively, by 2027.  We believe these requirements will result in additional increases in new tractor and trailer prices and additional parts and maintenance costs incurred to retrofit our tractors and trailers with technology to achieve compliance with such standards, which could adversely affect our results of operations and profitability, particularly if such costs are not offset by potential fuel savings. We cannot predict, however, the extent to which our operations and productivity will be impacted.  In addition, future additional emissions regulations are possible.  Any such regulations that impose restrictions, caps, taxes, or other controls on emissions of greenhouse gases could adversely affect our operations and financial results.  Until the timing, scope, and extent of any future regulation becomes known, we cannot predict its effect on our cost structure or our results of operations; however, any future regulation could impair our operating efficiency and productivity and result in higher operating costs.

We may not make acquisitions in the future, or if we do, we may not be successful in our acquisition strategy.

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 or integrating the acquired company's operations or assets into our business, 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 results of operations.  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 results of operations.

We operate in a highly competitive and fragmented industry, and numerous competitive factors could limit growth opportunities and could have a materially adverse effect on our results of operations.

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.  Additional factors may have a materially adverse effect on our results of operations.  These factors include the following:

many of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase freight rates or maintain significant growth in our business;
   
many customers reduce the number of carriers they use by selecting so-called "core carriers" as approved service providers or by engaging dedicated providers, and in some instances we may not be selected;
   
many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress freight rates or result in the loss of some of our business to competitors;
 
 
the market for qualified drivers is increasingly competitive, and our inability to attract and retain drivers could reduce our equipment utilization or cause us to increase compensation, both of which would adversely affect our profitability;
   
competition from non-asset-based and other logistics and freight brokerage companies may adversely affect our customer relationships and freight rates;
   
economies of scale that may be passed on to smaller carriers by procurement aggregation providers may improve their ability to compete with us;
   
some of our smaller competitors may not yet be fully compliant with pending regulations, such as regulations requiring the use of ELDs, which may allow such competitors to take advantage of additional driver productivity;
   
advances in technology may require us to increase investments in order to remain competitive, and our customers may not be willing to accept higher freight rates to cover the cost of these investments; and
   
higher fuel prices and, in turn, higher fuel surcharges to our customers may cause some of our customers to consider freight transportation alternatives, including rail transportation.

We derive a significant portion of our revenues from our 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 operating 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, 2016, our top 25 customers, based on revenue, accounted for approximately 46.5% of our revenue; our top 10 customers accounted for approximately 30.3% of our revenue; and our top 5 customers accounted for approximately 20.5% 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.

Economic conditions and capital markets may adversely affect our customers and their ability to remain solvent.  Our customers' financial difficulties can negatively impact our results of operations and financial condition, especially if these customers were to delay or default on payments to us.  For certain customers, we have entered into multi-year contracts, and the rates we charge may not remain advantageous.  A reduction in or termination of our services by one or more of our major customers could have a materially adverse effect on our business and results of operations.

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 results of operations.

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 results of operations.

We have invested, either directly or indirectly through one of our wholly owned subsidiaries, in TRP, TRP III, TRP IV, TRP Coinvestment, and TRP Coinvestment QLS, 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, TRP III's, TRP IV’s, TRP Coinvestment's, or TRP Coinvestment QLS' 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 results of operations.

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.

We receive and transmit confidential data with and among our customers, drivers, vendors, employees, and service providers in the normal course of business.  Despite our implementation of secure transmission techniques, internal data security measures, and monitoring tools, our information and communication systems are vulnerable to disruption of communications with our customers, drivers, vendors, employees, and service providers and access, viewing, misappropriation, altering, or deleting information in our systems, including customer, driver, vendor, employee, and service provider information and our proprietary business information.  A security breach could damage our business operations and reputation and could cause us to incur costs associated with repairing our systems, increased security, customer notifications, lost operating revenue, litigation, regulatory action, and reputational damage.

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.  The market for used equipment is affected by several factors, including the demand for freight, the supply of used equipment, the availability of financing, the presence of buyers for export to foreign countries, and commodity prices for scrap metal.  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.

Developments in labor and employment law and any unionizing efforts by employees could have a materially adverse effect on our results of operations.

We face the risk that Congress, federal agencies, or one or more states could adopt legislation or regulations 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, that would substantially liberalize the procedures for union organizing.  Any attempt to organize by our employees could result in increased legal and other associated costs. Additionally, given the National Labor Relations Board’s new “speedy election” rule, it would be difficult to timely and effectively address any unionizing efforts.  If we entered into a collective bargaining agreement with our domestic employees, the terms could materially adversely affect our costs, efficiency, and ability to generate acceptable returns on the affected operations.

In addition, the Department of Labor recently issued a final rule raising the minimum salary basis for executive, administrative, and professional exemptions from overtime payment.  The rule increases the minimum salary from the current amount of $23,660 to $47,476 and non-discretionary bonus, commission, and other incentive payments can be counted towards the minimum salary requirement.  The rule was scheduled to go into effect on December 1, 2016, but was enjoined by a federal district court in November 2016.  If this injunction is lifted, these changes could impact the way we classify certain positions and increase our payment of overtime wages, which may have a materially adverse impact on our financial and operational results.

Our business is subject to certain credit factors affecting the trucking industry that are largely out of our control and that could have a materially adverse effect on our results of operations.

If the economy and/or the credit markets weaken, or we are unable to enter into capital or operating leases to acquire revenue equipment on terms favorable to us, our business, financial results, and results of operations could be materially adversely affected, especially if consumer confidence declines and domestic spending decreases. We may need to incur additional indebtedness or issue additional debt or equity securities in the future to fund working capital requirements, make investments, or for general corporate purposes. If the credit and equity markets erode, our ability to do so may be constrained. A decline in the credit or equity markets or any increase in volatility could make it more difficult for us to obtain financing and may lead to an adverse impact on our profitability and operations.

Litigation may adversely affect our business, financial condition, and results of operations.

Our business is subject to the risk of litigation by employees, independent contractors, customers, vendors, government agencies, stockholders, and other parties through private actions, class actions, administrative proceedings, regulatory actions, and other processes. Recently, trucking companies, including us, have been subject to lawsuits, including class action lawsuits, alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal breaks, rest periods, overtime eligibility, and failure to pay for all hours worked. A number of these lawsuits have resulted in the payment of substantial settlements or damages by the defendants.

The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend litigation may also be significant. Not all claims are covered by our insurance, and there can be no assurance that our coverage limits will be adequate to cover all amounts in dispute. To the extent we experience claims that are uninsured, exceed our coverage limits, involve significant aggregate use of our self-insured retention amounts, or cause increases in future premiums, the resulting expenses could have a materially adverse effect on our business, results of operations, financial condition, or cash flows.
 

 
Seasonality and the impact of weather and other catastrophic events affect our operations and profitability.

Our tractor productivity decreases during the winter season because inclement weather impedes operations, and some shippers reduce their shipments after the winter holiday season.  Revenue can be affected by bad weather and holidays, since revenue is directly related to available working days of shippers.  At the same time, operating expenses increase because of harsh weather creating higher accident frequency, increased claims, and more equipment repairs, and fuel efficiency declines because of increased engine idling.  In addition, some of our customers demand additional capacity during the fourth quarter, which could limit our ability to take advantage of more attractive spot market rates that generally exist during such periods.  Further, despite our efforts to meet such demands, we may fail to do so, which may result in lost future business opportunities with such customers, which could have a materially adverse effect on our operations.  We may also suffer from weather-related or other unforeseen events such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes, and explosions.  These events may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy our assets, or adversely affect the business or financial condition of our customers, any of which could have a materially adverse effect on our results of operations or make our results of operations more volatile.

Item 1B.       Unresolved Staff Comments

None.

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, 2016: 

Company Location
 
Office
 
Shop
 
Fuel
 
Owned or Leased
Atlanta, GA
 
Yes
 
Yes
 
Yes
 
Owned
Boise, ID
 
Yes
 
No
 
No
 
Leased
Carlisle, PA
 
Yes
 
Yes
 
Yes
 
Owned
Charlotte, NC (Barr-Nunn)
 
Yes
 
Yes
 
No
 
Leased
Charlotte, NC
 
Yes
 
Yes
 
Yes
 
Owned
Columbus, OH (Barr-Nunn)
 
Yes
 
No
 
No
 
Leased
Columbus, OH
 
Yes
 
Yes
 
Yes
 
Owned
Dallas, TX
 
Yes
 
Yes
 
Yes
 
Owned
Denver, CO
 
Yes
 
Yes
 
No
 
Owned
El Paso, TX
 
Yes
 
No
 
No
 
Owned
Fontana, CA
 
Yes
 
Yes
 
No
 
Owned
Grand Rapids, MI
 
Yes
 
No
 
No
 
Leased
Granger, IA (Barr-Nunn)
 
Yes
 
Yes
 
No
 
Owned
Gulfport, MS
 
Yes
 
Yes
 
Yes
 
Owned
Idaho Falls, ID
 
Yes
 
Yes
 
Yes
 
Owned
Indianapolis, IN
 
Yes
 
Yes
 
Yes
 
Owned
Kansas City, KS
 
Yes
 
Yes
 
Yes
 
Owned
Katy, TX
 
Yes
 
Yes
 
Yes
 
Owned
Lakeland, FL
 
Yes
 
Yes
 
Yes
 
Owned
Las Vegas, NV
 
Yes
 
No
 
Yes
 
Owned
Manchester, PA (Barr-Nunn)
 
Yes
 
Yes
 
No
 
Leased
Memphis, MS
 
Yes
 
Yes
 
Yes
 
Owned
Minneapolis, MN
 
Yes
 
No
 
No
 
Leased
Nashville, TN
 
Yes
 
No
 
No
 
Owned
Phoenix, AZ (headquarters)
 
Yes
 
No
 
No
 
Owned
Phoenix, AZ (former headquarters)
 
Yes
 
Yes
 
Yes
 
Owned
Portland, OR
 
Yes
 
Yes
 
Yes
 
Owned
Rancho Dominguez, CA
 
Yes
 
No
 
No
 
Leased
Reno, NV
 
Yes
 
Yes
 
No
 
Owned
Salt Lake City, UT (Kold Trans)
 
Yes
 
No
 
No
 
Leased
Salt Lake City, UT
 
Yes
 
Yes
 
No
 
Owned
Seattle, WA
 
Yes
 
No
 
No
 
Owned
Tulare, CA
 
Yes
 
Yes
 
No
 
Owned
Tulsa, OK
 
Yes
 
No
 
No
 
Owned
Yankton, SD
 
Yes
 
No
 
No
 
Leased
 
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.          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.          Mine Safety Disclosures

None.

PART II
 
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.

2016
 
High
   
Low
 
First Quarter
 
$
27.11
   
$
20.56
 
Second Quarter
 
$
28.34
   
$
23.99
 
Third Quarter
 
$
30.38
   
$
26.39
 
Fourth Quarter
 
$
38.80
   
$
26.85
 
                 
2015
 
High
   
Low
 
First Quarter
 
$
34.73
   
$
28.43
 
Second Quarter
 
$
33.00
   
$
26.15
 
Third Quarter
 
$
29.00
   
$
23.64
 
Fourth Quarter
 
$
27.66
   
$
21.72
 

As of February 24, 2017, we had 46 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 24, 2017, the closing market price of our common stock on the NYSE was $32.15 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:

   
1st Quarter
   
2nd Quarter
   
3rd Quarter
   
4th Quarter
   
Total
 
2016 dividend paid per common share
 
$
0.06
   
$
0.06
   
$
0.06
   
$
0.06
   
$
0.24
 
2015 dividend paid per common share
 
$
0.06
   
$
0.06
   
$
0.06
   
$
0.06
   
$
0.24
 

Our most recent dividend was declared in February of 2017 for $0.06 per share of common stock, and is scheduled to be paid in March of 2017.

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.

In 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 cancelled and returned to unissued status.  During the years ended December 31, 2016 and 2015, we repurchased approximately 1.6 million shares of our common stock in the open market that were retired and made available for future issuance. As of December 31, 2016, there were approximately 4.2 million 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, 2016.

Period
 
(a)
Total
Number of
Shares
Purchased
   
(b)
Average
Price Paid
per Share
   
(c)
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
   
(d)
Maximum
Number of Shares that May Yet Be Purchased Under the Publicly Announced
Plans or
Programs
 
October 1-31, 2016
                       
Common Stock Repurchase Program (1)
   
-
     
-
     
-
     
4,247,001
 
Other Transactions (2)
   
-
     
-
     
-
     
-
 
November 1-30, 2016
                               
Common Stock Repurchase Program (1)
   
-
     
-
     
-
     
4,247,001
 
Other Transactions (2)
   
5,991
   
$
35.00
     
-
     
-
 
December 1-31, 2016
                               
Common Stock Repurchase Program (1)
   
-
     
-
     
-
     
4,247,001
 
Other Transactions (2)
   
-
     
-
     
-
     
-
 
Total
   
5,991
   
$
35.00
     
-
     
4,247,001
 

(1)
In 2011, our Board of Directors unanimously authorized the repurchase of up to 10.0 million shares of our common stock.  The repurchase authorization will remain in effect until the share limit is reached or the program is terminated.
(2)
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.          Selected Financial Data

The selected consolidated financial data presented below as of the end of the period ended December 31, 2016, and for each of the years in the preceding five-year period ended December 31, 2016, are derived from our consolidated financial statements (dollar amounts in thousands, except per share amounts and operating data).  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.

   
For the Years Ended December 31,
 
   
2016
   
2015
   
2014(7)
   
2013
   
2012
 
Statements of Income Data:
                             
Total revenue
 
$
1,118,034
   
$
1,182,964
   
$
1,102,332
   
$
969,237
   
$
936,036
 
Operating expenses
   
969,555
     
1,004,964
     
939,610
     
855,328
     
827,769
 
Income from operations
   
148,479
     
178,000
     
162,722
     
113,909
     
108,267
 
Interest income & other income
   
5,248
     
9,502
     
9,838
     
3,257
     
1,967
 
Interest expense
   
(897
)
   
(998
)
   
(730
)
   
(462
)
   
(457
)
Income before income taxes
   
152,830
     
186,504
     
171,830
     
116,704
     
109,777
 
Net income
   
95,238
     
118,457
     
104,021
     
70,024
     
64,763
 
Net income attributable to Knight
   
93,863
     
116,718
     
102,862
     
69,282
     
64,117
 
Basic earnings per share
   
1.17
     
1.43
     
1.27
     
0.87
     
0.80
 
Diluted earnings per share
   
1.16
     
1.42
     
1.25
     
0.86
     
0.80
 
Balance Sheet Data (at end of period):
                                       
Working capital
 
$
111,541
   
$
164,090
   
$
145,667
   
$
101,768
   
$
109,274
 
Total assets
   
1,078,525
     
1,120,232
     
1,082,285
     
807,121
     
728,512
 
Total debt(1)
   
18,000
     
112,000
     
134,400
     
38,000
     
80,000
 
Cash dividend per share on common stock(2)
   
0.24
     
0.24
     
0.24
     
0.24
     
0.74
 
Knight Transportation shareholders' equity
   
786,473
     
738,398
     
677,760
     
553,588
     
490,232
 
Operating Data (Unaudited):
                                       
Operating ratio (consolidated)(3)
   
86.7
%
   
85.0
%
   
85.2
%
   
88.2
%
   
88.4
%
Operating ratio (consolidated), excluding fuel surcharge revenue(4)
   
85.6
%
   
83.2
%
   
82.4
%
   
85.6
%
   
85.6
%
Average revenue per tractor(5)
 
$
172,185
   
$
173,329
   
$
171,510
   
$
160,186
   
$
158,978
 
Average length of haul (miles)
   
498
     
503
     
492
     
479
     
482
 
Non-paid empty mile percent
   
12.5
%
   
12.0
%
   
10.1
%
   
10.6
%
   
10.6
%
Average tractors operated(6)
   
4,706
     
4,793
     
4,173
     
4,017
     
4,096
 
Average trailers operated
   
12,288
     
11,789
     
9,732
     
9,405
     
9,195
 

(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 Adjusted 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 29.
(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) (dollar amounts in thousands):

Consolidated Operating Ratio (“OR”) From 2012 to 2016
 
                                                             
GAAP Operating Ratio
(Consolidated):
 
2016
   
OR %
   
2015
   
OR %
   
2014
   
OR %
   
2013
   
OR %
   
2012
   
OR %
 
Revenue, before fuel surcharge
 
$
1,028,148
         
$
1,061,739
         
$
925,985
         
$
791,851
         
$
752,151
       
Fuel surcharge
   
89,886
           
121,225
           
176,347
           
177,386
           
183,885
       
Total revenue
   
1,118,034
           
1,182,964
           
1,102,332
           
969,237
           
936,036
       
                                                                       
Total operating expenses
   
969,555
     
86.7
%
   
1,004,964
     
85.0
%
   
939,610
     
85.2
%
   
855,328
     
88.2
%
   
827,769
     
88.4
%
Income from operations
 
$
148,479
           
$
178,000
           
$
162,722
           
$
113,909
           
$
108,267
         
                                                                                 
Adjusted Operating Ratio
(Consolidated):
   
2016
   
OR %
     
2015
   
OR %
     
2014
   
OR %
     
2013
   
OR %
     
2012
   
OR %
 
Total revenue
 
$
1,118,034
           
$
1,182,964
           
$
1,102,332
           
$
969,237
           
$
936,036
         
Less fuel surcharge:
   
(89,886
)
           
(121,225
)
           
(176,347
)
           
(177,386
)
           
(183,885
)
       
Revenue (excluding fuel surcharge)
   
1,028,148
             
1,061,739
             
925,985
             
791,851
             
752,151
         
                                                                                 
Total operating expenses
   
969,555
             
1,004,964
             
939,610
             
855,328
             
827,769
         
Less fuel surcharge
   
(89,886
)
           
(121,225
)
           
(176,347
)
           
(177,386
)
           
(183,885
)
       
Total operating expenses (net of fuel surcharge)
   
879,669
     
85.6
%
   
883,739
     
83.2
%
   
763,263
     
82.4
%
   
677,942
     
85.6
%
   
643,884
     
85.6
%
Income from operations
 
$
148,479
           
$
178,000
           
$
162,722
           
$
113,909
           
$
108,267
         

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, and Section 21E of the Exchange Act, 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, the flexibility of our model to adapt to market conditions, 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, the expected freight environment and economic trends, whether we grow organically, 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 and allocation of capital, 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, regulatory changes and the impact thereof, 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," "hopes," 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, shareholder reports, and other filings with the SEC.
 
 
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 full 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 for customers.  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.

Factors that affect our results of operations are industry-wide economic factors, such as freight demand, truckload and rail intermodal capacity, fuel prices, inventory levels, industrial production, government regulation, and unemployment rates, as well as our capital allocation, sales and marketing, operating, and spending decisions. We measure our 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 non-GAAP operating ratio (“Adjusted Operating Ratio”) in both segments. Please see the reconciliation table below for a reconciliation of GAAP operating ratio to Adjusted Operating Ratio. 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, 2016, compared to the year ended December 31, 2015, were as follows:

Total revenue decreased 5.5%, to $1.1 billion from $1.2 billion;
Net income attributable to Knight Transportation decreased 19.6%, to $93.9 million from $116.7 million; and
Net earnings attributable to Knight Transportation per diluted share decreased 18.4%, to $1.16 from $1.42.

Total revenue and net income decreased in 2016, compared to 2015. The freight environment was more challenging in 2016 compared to 2015, but modestly improved as the year progressed.  We attribute the change to excess trucking capacity in the markets we serve, and fewer non-contract opportunities that reduced our revenue per loaded mile. However, we sustained improvement in our asset utilization and experienced more favorable freight conditions toward the end of the year. In this environment, we diligently focused our efforts on cost control and continued to seek operational efficiencies, while providing industry-leading service.

In 2016, our Trucking segment operated an average of 4,706 tractors, a decrease of 87 tractors from a year ago.  Asset utilization, as measured by average miles per tractor, improved 1.4% in 2016 compared to 2015, while productivity, as measured by average annual revenue per tractor, before fuel surcharge, decreased 0.7% in 2016.   Our Trucking segment achieved an operating ratio of 84.9% and an Adjusted Operating Ratio of 83.2% in 2016, compared to an Adjusted Operating Ratio of 80.5% in 2015. Higher net fuel expense, less gain on sale of revenue equipment, and higher driver-related expenses were the main factors negatively affecting our 2016 operating results when compared to the prior year. Shipments serviced by our Logistics segment increased as we continued to increase our Logistics services customers, and to expand our third-party carrier network. However, revenues in our Logistics segment decreased 5.7% in 2016, compared to 2015, due to a decrease in revenue per load.
 
 
In 2016, we generated $243.4 million in cash flow from operations and used $89.0 million for capital expenditures, net of equipment sales. During 2016, we returned $59.5 million to our shareholders in the form of quarterly dividends and stock repurchases. We ended the year with $8.0 million of cash, $18.0 million of long-term debt, and $786.5 million of shareholders' equity.

The factors below should be considered when comparing our results of operations in 2016 to our results of operations in 2015. Our 2016 results included:

a $2.5 million pretax ($1.5 million after-tax) settlement expense for two class action lawsuits;
an $8.1 million pretax ($5.0 million after-tax) gain on sale of equipment;
a $4.5 million pretax ($2.8 million after-tax) gain on sale of available-for-sale securities; and
an effective tax rate that positively affected net income by $1.8 million.

Our 2015 results included:

a $7.2 million pretax ($4.4 million after-tax) settlement expense for two class action lawsuits;
a $15.3 million pretax ($9.7 million after-tax) gain in sale of equipment;
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 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 total revenue is reported under "Results of Operations" under Item 7 to Part II of this Annual Report and categorized as (i) Trucking revenue, before fuel surcharge, (ii) Trucking fuel surcharge revenue, and (iii) Logistics revenue.  Trucking revenue, before 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, sourcing, and other non-Trucking services, such as used equipment sales and leasing to independent contractors and third-parties through our Logistics business.

The total revenue and operating expenses of our Trucking and Logistics 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.  See the section entitled “Item 1A. Risk Factors,” set forth above, along with various disclosures in our press releases, shareholder reports, and other filings with the SEC.

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, 2016, 2015, and 2014 (dollar amounts in thousands).

   
2016
   
2015
   
2014
 
Revenues:
   $    
%
     $    
%
   
$
   
 
%
 
Trucking Segment
 
$
900,368
     
80.5
%
 
$
952,098
     
80.5
%
 
$
892,124
     
80.9
%
Logistics Segment
   
226,912
     
20.3
     
249,365
     
21.1
     
214,378
     
19.4
 
Subtotal
   
1,127,280
             
1,201,463
             
1,106,502
         
Intersegment Eliminations Trucking
   
(124
)
   
0.0
     
(163
)
   
0.0
     
(65
)
   
0.0
 
Intersegment Eliminations Logistics
   
(9,122
)
   
(0.8
)
   
(18,336
)
   
(1.6
)
   
(4,105
)
   
(0.3
)
Total
 
$
1,118,034
     
100
%
 
$
1,182,964
     
100
%
 
$
1,102,332
     
100
%
                                                 
Operating Income:
                                               
Trucking Segment
 
$
136,229
     
91.7
%
 
$
162,143
     
91.1
%
 
$
147,424
     
90.6
%
Logistics Segment
   
12,250
     
8.3
     
15,857
     
8.9
     
15,298
     
9.4
 
Total
 
$
148,479
     
100
%
 
$
178,000
     
100
%
 
$
162,722
     
100
%

Use of Non-GAAP Financial Information

The primary measures we use to evaluate the profitability of our Trucking segment are operating ratio, measured on a GAAP basis (operating expenses expressed as a percentage of revenue), and Adjusted Operating Ratio, which is a non-GAAP financial measure (operating expenses, net of Trucking fuel surcharge revenue, expressed as a percentage of Trucking revenue, excluding Trucking fuel surcharge revenue). We believe the use of Adjusted Operating Ratio allows us to more effectively compare periods, while excluding the potentially volatile effect of changes in fuel prices. The Board and management focus on our Adjusted Operating Ratio as an indicator of our performance from period to period. We believe our presentation of Adjusted Operating Ratio is useful because it provides investors and securities analysts the same information that we use internally to assess our core operating performance.

Adjusted Operating Ratio is not a substitute for operating ratio measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. Although we believe that Adjusted Operating Ratio improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry, if those companies define Adjusted Operating Ratio differently. Because of these limitations, Adjusted Operating Ratio should not be considered a measure of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis.

The tables below compare our GAAP operating ratio to our non-GAAP Adjusted Operating Ratio (dollars in thousands).

GAAP Presentation:
 
2016
   
2015
   
2014
 
Trucking
 
$
   
%
   
$
   
%
   
$
   
%
 
Total revenue
 
$
900,368
           
$
952,098
           
$
892,124
         
Operating expenses
   
764,139
     
84.9
     
789,955
     
83.0
     
744,700
     
83.5
 
Operating income
 
$
136,229
           
$
162,143
           
$
147,424
         
 

The following table sets forth the Trucking segment Adjusted Operating Ratio as if fuel surcharges are excluded from total revenue and instead reported as a reduction of operation expenses, excluding intersegment transactions (dollars in thousands).

Non-GAAP Presentation(1):
 
2016
   
2015
   
2014
 
Trucking
  $    
%
   
$
   
%
   
$
   
%
 
Total revenue
 
$
900,368
           
$
952,098
           
$
892,124
         
Less: Trucking fuel surcharge revenue
   
(89,886
)
           
(121,225
)
           
(176,347
)
       
Less: Intersegment transactions
   
(124
)
           
(163
)
           
(65
)
       
Revenue, net of fuel surcharge and intersegment transactions
   
810,358
             
830,710
             
715,712
         
Operating expenses
   
764,139
             
789,955
             
744,700
         
Less: Trucking fuel surcharge revenue
   
(89,886
)
           
(121,225
)
           
(176,347
)
       
Less: Intersegment transactions
   
(124
)
           
(163
)
           
(65
)
       
Operating expenses, net of fuel surcharge and intersegment transactions
   
674,129
     
83.2
     
668,567
     
80.5
     
568,288
     
79.4
 
Operating income
 
$
136,229
           
$
162,143
           
$
147,424
         

(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.

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 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 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.

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 non-paid 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 (dollars in thousands).
 
 
 
 
2016
   
2015
   
2014
 
Average revenue per tractor(1)
 
$
172,185
   
$
173,329
   
$
171,510
 
Average length of haul
   
498
     
503
     
492
 
Non-paid empty mile percent
   
12.5
%
   
12.0
%
   
10.1
%
Average tractors in operation during period
   
4,706
     
4,793
     
4,173
 
Average trailers in operation during period
   
12,288
     
11,789
     
9,732
 

(1)
Average revenue per tractor is based on Trucking revenue, net of intersegment transactions, 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 4,706 tractors in 2016, of which 4,286 were company-owned tractors. The average age of our company-owned tractor fleet was 1.9 years at December 31, 2016, which we expect to increase slightly in 2017.  We also operated an average of 12,288 trailers in 2016, with an average age of 4.4 years as of December 31, 2016.  We expect the average age of our trailers to remain relatively constant in 2017. Our net property and equipment at December 31, 2016 was $802.9 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 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 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 $111.7 million in 2016.

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 realized in 2016. We were able to provide Logistics services to our existing customers as well as effectively expand to new customers in 2016.

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 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, operating expenses, and operating income (dollars in thousands).

   
2016
   
2015
   
2014
 
Logistics
   $    
%
   
$
   
%
   
$
   
%
 
Total revenue
 
$
226,912
           
$
249,365
           
$
214,378
         
Other operating expense
   
214,662
     
94.6
     
233,508
     
93.6
     
199,080
     
92.9
 
Operating income
 
$
12,250
           
$
15,857
           
$
15,298
         

The following table sets forth the Logistics revenue, operating expenses, and operating income, excluding intersegment transactions (dollars in thousands).

   
2016
   
2015
       2014  
Logistics
 
$
   
%
     $    
%
     $    
%
 
Total revenue
 
$
226,912
           
$
249,365
           
$
214,378
         
Less: Intersegment transactions
   
(9,122
)
           
(18,336
)
           
(4,105
)
       
Revenue excluding intersegment transactions
   
217,790
             
231,029
             
210,273
         
Operating expenses
   
214,662
             
233,508
             
199,080
         
Less: Intersegment transactions
   
(9,122
)
           
(18,336
)
           
(4,105
)
       
Operating expenses excluding intersegment transactions
   
205,540
     
94.4
     
215,172
     
93.1
     
194,975
     
92.7
 
Operating income
 
$
12,250
           
$
15,857
           
$
15,298
         

We primarily measure the Logistics segment's profitability by reviewing the gross margin percentage (revenue net of intersegment transactions, less purchased transportation expense, net of intersegment transactions, expressed as a percentage of revenue net of intersegment transactions) and the operating ratio.  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 combined.

 
 
2016
   
2015
   
2014
 
Combined Brokerage and Intermodal gross margin percent(1)
   
16.3
%
   
16.4
%
   
15.0
%

(1)
Gross margin percentage is based on Logistics revenue and purchased transportation net of intersegment transactions.

Our gross margin percentage remained consistent in 2016 from 2015, but our operating margin contracted.  The primary reason for the operating margin contraction was lower revenue per load.

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. As our Logistics services evolve, 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 $4.4 million in 2016, 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 2016, we experienced a challenging freight environment and although we made improvements in miles per tractor, we continued to experience excess trucking capacity in the markets we serve, which led to a more competitive pricing market and fewer non-contract opportunities that pressured our revenue per loaded mile. The market began to improve in the second half of the year and a more typical, but less robust seasonal freight market transpired. Market factors that included higher driver wages, lower gain on sale of revenue equipment, and fewer non-contract opportunities negatively affected our margins in our Trucking and Logistics segments.
 
 
In 2017, we expect the freight environment to continue to be challenging until capacity begins to tighten as a result of low new tractor orders, a weak demand for used equipment, and additional regulatory burdens expected to phase in over the coming quarters.  We expect the environment to become more favorable in the second half of the year, as we believe capacity will continue to exit the market and pricing will respond positively. 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, grow revenues in our Logistics segment, and continue to evaluate 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 affect 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 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 changes in 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 may continue to rise, medical, workers' compensation, and litigation expenses are increasing more rapidly than general inflation, and potentially higher fuel prices may not be 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, continue to grow our Logistics segment, 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 expect to continue to utilize the flexibility of our model to react and adapt to market conditions.  We believe we can 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 plan to continue to evaluate 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 total revenue and the percentage increase or decrease in the dollar amounts of those items compared to the prior year (dollars in thousands).

   
2016
   
2015
   
2014
   
Percentage Change in
Dollar Amounts
 
     
$
   
%
     
$
   
%
     
$
   
%
   
2016 to 2015
(%)
   
2015 to 2014
(%)
 
Trucking revenue
 
$
810,358
     
72.5
%
 
$
830,710
     
70.2
%
 
$
715,712
     
64.9
%
   
(2.4
%)
   
16.1
%
Trucking fuel surcharge revenue
   
89,886
     
8.0
%
   
121,225
     
10.3
%
   
176,347
     
16.0
%
   
(25.9
%)
   
(31.3
%)
Logistics revenue
   
217,790
     
19.5
%
   
231,029
     
19.5
%
   
210,273
     
19.1
%
   
(5.7
%)
   
9.9
%
Total revenue
   
1,118,034
     
100.0
%
   
1,182,964
     
100.0
%
   
1,102,332
     
100.0
%
   
(5.5
%)
   
7.3
%
                                                                 
Operating expenses:
                                                               
Salaries, wages and benefits
   
333,929
     
29.9
%
   
334,069
     
28.2
%
   
271,815
     
24.7
%
   
-
     
22.9
%
Fuel
   
129,696
     
11.6
%
   
152,752
     
12.9
%
   
203,758
     
18.5
%
   
(15.1
%)
   
(25.0
%)
Operations and maintenance
   
76,246
     
6.8
%
   
80,855
     
6.8
%
   
71,558
     
6.5
%
   
(5.7
%)
   
13.0
%
Operating taxes and licenses
   
18,728
     
1.6
%
   
18,911
     
1.6
%
   
17,972
     
1.6
%
   
(1.0
%)
   
5.2
%
Insurance and claims
   
34,441
     
3.1
%
   
33,632
     
2.9
%
   
31,133
     
2.8
%
   
2.4
%
   
8.0
%
Depreciation and amortization
   
116,160
     
10.4
%
   
111,023
     
9.4
%
   
92,893
     
8.4
%
   
4.6
%
   
19.5
%
Purchased transportation(1)
   
233,863
     
20.9
%
   
246,864
     
20.9
%
   
238,041
     
21.6
%
   
(5.3
%)
   
3.7
%
Communications
   
4,182
     
0.4
%
   
4,095
     
0.4
%
   
4,899
     
0.4
%
   
2.1
%
   
(16.4
%)
Miscellaneous operating expenses
   
22,310
     
2.0
%
   
22,763
     
1.9
%
   
7,541
     
0.7
%
   
(2.0
%)
   
201.9
%
Total operating expenses
   
969,555
     
86.7
%
   
1,004,964
     
85.0
%
   
939,610
     
85.2
%
   
(3.5
%)
   
7.0
%
                                                                 
Operating income
   
148,479
     
13.3
%
   
178,000
     
15.0
%
   
162,722
     
14.8
%
   
(16.6
%)
   
9.4
%
Total other income
   
4,351
     
0.4
%
   
8,504
     
0.8
%
   
9,108
     
0.8
%
   
(48.8
%)
   
(6.6
%)
Income before income taxes
   
152,830
     
13.7
%
   
186,504
     
15.8
%
   
171,830
     
15.6
%
   
(18.1
%)
   
8.5
%
Income taxes
   
57,592
     
5.2
%
   
68,047
     
5.8
%
   
67,809
     
6.2
%
   
(15.4
%)
   
0.4
%
Net income
   
95,238
     
8.5
%
   
118,457
     
10.0
%
   
104,021
     
9.4
%
   
(19.6
%)
   
13.9
%
Net income attributable to noncontrolling interest
   
(1,375
)
   
(0.1
%)
   
(1,739
)
   
(0.1
%)
   
(1,159
)
   
(0.1
%)
   
(20.9
%)
   
50.0
%
Net income attributable to Knight Transportation
   
93,863
     
8.4
%
   
116,718
     
9.9
%
   
102,862
     
9.3
%
   
(19.6
%)
   
13.5
%

(1)
Purchased transportation expense is comprised of (a) payments to independent contractors, which are primarily attributed to our Trucking segment; (b) payments to third-party capacity providers, which are 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 2016 Compared to Fiscal 2015

Operating Revenue

Total revenue decreased 5.5% for 2016 to $1.1 billion from $1.2 billion for 2015 generally due to a more challenging freight environment when compared to 2015. Both our Trucking and Logistics segments experienced a moderate freight market where excess capacity reduced contract pricing and non-contract opportunities were limited, when compared to the prior year, which combined with fewer trucks, lower fuel surcharge revenue, and less non-Trucking services revenue, led to the decline in total revenue.

Trucking revenue, net of fuel surcharge and intersegment transactions, was $810.4 million in 2016 compared to $830.7 million in 2015.  Trucking fuel surcharge revenue decreased to $89.9 million in 2016 from $121.2 million in 2015, as fuel prices were consistently lower during 2016 compared to 2015.  We increased average miles per tractor 1.4% in 2016, compared to 2015. However, this improvement was offset by a decrease in average revenue per loaded mile by 1.5%, and an increase in non-paid empty mile percentage rate to 12.5% from 12.0%. This negatively affected our tractor productivity, as measured by average annual Trucking revenue, before fuel surcharge, per tractor, which decreased by 0.7% in 2016, compared to 2015.  If economic conditions improve and capacity tightens, we anticipate that we will be able to obtain rate increases in 2017 and beyond; however, adverse changes in these factors could either prevent rate increases or negatively affect existing rates.

Logistics revenue is primarily generated by the Brokerage and Intermodal operating units.  Logistics revenue was $217.8 million in 2016 compared to $231.0 million in 2015. Logistics revenue decreased primarily due to declining revenue from our non-Trucking services as we exited our agricultural sourcing business in the first quarter of 2016, as well as due to lower revenue per load because of lower fuel surcharge. Revenue in our Brokerage business, which is the largest component of our Logistics segment, decreased in 2016 compared to 2015; however, we continued to see load volume growth. A shorter length of haul and lower non-contract pricing offset this load volume growth. We achieved this growth by providing more capacity to our customers through our third-party carriers and rail providers.
 
 
Operating Expenses

Salaries, wages and benefits expense, as a percentage of total revenue, increased to 29.9% in 2016 from 28.2% in 2015.  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. The primary reason for the increase is attributable to lower total revenue in 2016 compared to 2015, as the dollar expense remained relatively flat.  Additional factors affecting this expense included further increases to driver base pay during 2016, and a shift from driver pay to purchased transportation expense, as more of our fleet was comprised of independent contractors in 2016 compared to 2015. We believe that the driver market remains challenging and that several ongoing market factors, including the CSA implementation of stricter regulations, has further reduced the pool of available drivers. We expect that driver pay will continue to be inflationary on a year-over-year basis. Having a sufficient number of qualified driving associates continues to be a major concern, although 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 11.6% in 2016, from 12.9% in 2015, as the U.S. National Average Diesel Fuel price decreased by 14.9% in 2016. Fuel expense, net of Trucking fuel surcharge, expressed as a percentage of Trucking revenue, before Trucking fuel surcharge, increased to 4.9% in 2016, from 3.8% in 2015.  Our fuel surcharge program helps to offset increases in fuel prices, but applies only to loaded miles and typically does not offset non-paid 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 affects our operating income during periods of sharply rising fuel costs and positively affects our operating income during periods of falling fuel costs.  Fuel prices were falling throughout 2015 and bottomed out in the first quarter of 2016, before rising in each of the remaining quarters of 2016. We expect fuel expense will continue to increase during the first part of 2017. We continue to utilize fuel efficiency initiatives, such as trailer blades, idle-control, more fuel-efficient engines, and driver training programs that we believe will help to control our fuel expense.

Operations and maintenance expense, as a percentage of total revenue, remained flat at 6.8% in 2016 and 2015.  Operations and maintenance expense consists of direct operating expense, equipment maintenance, and tire expense.  Operations and maintenance expense as a percentage of revenue, before Trucking fuel surcharge, decreased to 7.4% in 2016 from 7.6% in 2015, due to improved cost control measures. Direct operating expenses decreased as a percentage of total revenue, before Trucking fuel surcharge, in 2016 due to lower operating supply costs and drayage related operating costs. We continue to experience tight driver market conditions, and we expect the driver market to remain competitive in 2017, which could negatively affect our recruiting costs.

Insurance and claims expense, as a percentage of total revenue, increased to 3.1% in 2016, from 2.9% in 2015. Insurance and claims expense as a percentage of total revenue, excluding fuel surcharge, increased slightly to 3.3% in 2016 from 3.2% in 2015, and increased slightly on a per mile basis, year-over-year. The increase was partly due to the decrease in total revenue in 2016 from 2015, combined with slightly higher premium costs and changes in the severity of claims. 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.

Operating taxes and licenses expense, as a percentage of total revenue, remained flat at 1.6% in 2016 and 2015. This expense line item is impacted by changes in various fuel tax rates and registration fees associated with our tractor fleet and regional operating facilities.

Communications expense, as a percentage of total revenue, remained flat at 0.4% for 2016 and 2015.  Communications expense is comprised of costs associated with our tractor and trailer tracking systems, information technology systems, and phone systems.

Depreciation and amortization expense, as a percentage of total revenue, increased to 10.4% for 2016 from 9.4% in 2015, in part due to the decrease in fuel surcharge revenue.  As a percentage of revenue, before Trucking fuel surcharge, depreciation and amortization increased to 11.3% in 2016 from 10.5% in 2015. This increase was due to a combination of the decrease in revenue, before fuel surcharge, driven by the decrease in average revenue per tractor in our Trucking segment, and the decrease in revenue from our less asset-intensive Logistics segment, driven by the decrease in revenue per load and reduced non-Trucking service revenue.  Depreciation and amortization expense for our Trucking segment, as a percentage of Trucking revenue, was 13.8% in 2016, compared to 12.9% in 2015. Factors contributing to the increase were the decrease in average revenue per tractor, rising new equipment prices, and an increase in our tractor to trailer ratio. Absent offsetting improvements in average revenue per tractor or growth in our Logistics operations, our expense as a percentage of revenue in this category could increase in the future. With rising equipment prices, and a continuing soft used equipment market, we have extended the expected trade cycle for our tractors, which is expected to reduce capital expenditures and restrict higher depreciation and amortization costs in the future. In implementing the extended trade cycle, we have been proactive in managing our preventative maintenance program with a goal of mitigating the additional maintenance cost commonly associated with a slightly older fleet.
 
Purchased transportation expense, as a percentage of total revenue, remained flat at 20.9% for 2016 and 2015.  Purchased transportation expense is comprised of (i) payments to independent contractors for our Dry Van, Refrigerated, and Drayage operations in our Trucking segment; (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. Purchased transportation costs generally take into account changes in diesel fuel prices, resulting in lower payments during periods of declining fuel prices. Purchased transportation expense within our Logistics segment decreased as expected with the decrease in Logistics revenue, but this decrease was hindered by increased costs associated with exiting our agriculture sourcing business in the first quarter of 2016. We expect purchased transportation will increase as a percentage of total revenue, if we are successful in continuing to grow our Logistics segment.

Miscellaneous operating expenses, as a percentage of total revenue, increased slightly to 2.0% in 2016, from 1.9% for 2015. The increase is due in part to the decrease in Trucking fuel surcharge revenue, and less gain on sale of equipment to offset these costs.  However, in both 2016 and 2015, we recorded infrequent expenses ($2.5 million pretax ($1.5 million after tax), and $7.2 million pretax ($4.4 million after tax)) respectively, relating to expected settlement costs for class action lawsuits involving employment-related claims in California and Oregon. Excluding these infrequent expenses, and excluding the effect of the decrease in the fuel surcharge component of total revenue, and lower gain on sale of equipment, miscellaneous operating expenses decreased due to decreased legal expense associated with the prior year infrequent claim expense, and decreased costs associated with technology and our management information systems. Gains from the sale of used equipment are included in miscellaneous operating expenses and decreased to $8.1 million in 2016, from $15.3 million in 2015, as a result of a soft used equipment resale market prevalent in 2016. We believe the used equipment market will continue to help offset other miscellaneous operating expenses, but not to the extent as it did in prior years, as the used equipment market softened beginning in the third quarter of 2015 and we expect a similar environment through the first half of 2017.

As a result of the above factors, our GAAP operating ratio (operating expenses expressed as a percentage of total revenue) was 86.7% for 2016, compared to 85.0% for 2015. Our Adjusted Operating Ratio (total operating expenses, net of fuel surcharge, as a percentage of total revenue, before fuel surcharge), was 85.6% in 2016, compared to 83.2% in 2015.  Please see the reconciliation table above for a reconciliation of GAAP operating ratio to Adjusted Operating Ratio.

Net interest and other income, as a percentage of revenue, decreased to 0.4% in 2016 from 0.8% in 2015.  Other income includes realized gains from the sale of available-for-sale securities and unrealized gains from our investments in TRP investments that use the equity method of accounting. Our realized gains from the sale of available-for-sale securities were lower in 2016, compared to 2015, primarily due to fewer securities sold during 2016.  We repurchased 1.6 million shares of our common stock in 2016 for $39.9 million, and interest expense decreased in 2016 because of the decreased average borrowing during the year.  Our debt balance decreased to $18.0 million at December 31, 2016 from $112.0 million at December 31, 2015.

We provide for income taxes at the statutory federal and state rates, adjusted for permanent differences between financial statement income and income for tax reporting.  Our effective tax rate was 38.0% for 2016 and 36.8% for 2015.  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 factors, our net income attributable to Knight Transportation decreased to 8.4%, compared to 9.9% in 2015.

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 increased tractor productivity and average revenue per loaded mile in our Trucking segment and shipment volume growth in our Logistics segment.

Trucking revenue increased to $830.7 million in 2015 from $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, but was partially offset by an increase in non-paid empty mile percentage rate to 12.0% from 10.1%.
 

Logistics revenue is primarily generated by the Brokerage and Intermodal operating units.  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 affected in 2015 as a result of lower fuel surcharge, a shorter length of haul, and fewer 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 expense 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 improved our pay and performance bonus for our driving associates in 2015 in response to an increasingly challenging driver market.

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 to 2014, as well as an increase in non-paid empty miles percentage (for which we do not receive fuel surcharges).  As discussed above, due to the time lag inherent in the fuel surcharge program, our fuel expense, net of fuel surcharge, negatively affects 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 expense consists of direct operating expense, equipment maintenance, and tire expense.  Operations and maintenance expense as a percentage of revenue, before 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 revenue, before 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.

Operating taxes and licenses expense, as a percentage of total revenue, remained flat at 1.6% for 2015 and 2014. This expense line item is impacted by changes in various fuel tax rates and registration fees associated with our tractor fleet and regional operating facilities.

Communications expense, as a percentage of total 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 revenue, before 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. 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.
 
Purchased transportation expense, as a percentage of total revenue, decreased to 20.9% for 2015 from 21.6% for 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.

Miscellaneous operating expenses, as a percentage of total revenue, increased to 1.9% in 2015, from 0.7% for 2014. The increase is primarily due to the infrequent expense recorded in the second quarter of 2015 for $7.2 million pretax ($4.4 million after tax) relating to expected settlement costs of two class action lawsuits involving employment-related claims in California and Oregon, and also 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.  Excluding this infrequent 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 infrequent 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.

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.  Our Adjusted Operating Ratio (total operating expenses, net of fuel surcharge, as a percentage of 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 Adjusted Operating Ratio.

Net interest and other income, as a percentage of revenue, remained constant at 0.8% in 2015, and 2014.  Other income included 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 were 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 common 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, that positively affected our net income by approximately $5.4 million.

As a result of the preceding factors, our net income attributable to Knight Transportation increased to 9.9%, compared to 9.3% in 2014.

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 $243.4 million, $205.8 million, and $177.2 million for the years ended December 31, 2016, 2015, and 2014, respectively.  The increase for 2016 is primarily due to lower income tax payments made in 2016, as we depleted the large income tax receivable balance on our consolidated balance sheet at December 31, 2015.
 
 
Net cash used in investing activities was approximately $101.0 million, $138.3 million, and $266.9 million for the years ended December 31, 2016, 2015, and 2014, 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 total consideration. 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 $89.0 million, $149.4 million, and $178.8 million for the years ended December 31, 2016, 2015, and 2014, respectively.  The decrease in 2016 is due to our decision to limit organic fleet expansion and extend the expected trade cycle of our tractors in response to a challenging freight market and soft used equipment market. Excluding any acquisitions, we currently anticipate capital expenditures, net of trade-ins, of approximately $95.0 million to $110.0 million for 2017.  We expect to use our capital expenditure estimate primarily to acquire new revenue equipment for replacement and not fleet growth.

Net cash from financing activities typically varies with borrowing activity on our line of credit. In 2016 and 2015, we had net payments to our line of credit of $94.0 million and $22.4 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 our common stock also contributed to the changes in cash used or provided by financing activities during the three years ended December 31, 2016. We repurchased $39.9 million of our common stock on the open market in 2016, and $45.3 million in 2015, while we did not repurchase any of our common stock in 2014. Proceeds from exercises of stock options were $13.2 million, $9.9 million, and $24.4 million in 2016, 2015, and 2014, respectively. We returned $19.6 million, $19.9 million, and $19.6 million to our shareholders by way of dividends in 2016, 2015, and 2014, 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 August 1, 2019.  As of December 31, 2016, the aggregate amount outstanding under our line of credit was $18.0 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 and insurance carriers in connection with our self-insurance programs.  The issued but unused letters of credit totaled $31.3 million as of December 31, 2016 and $27.4 million as of December 31, 2015.  Combining the amounts borrowed and letters of credit issued, we had $250.7 million available for future borrowing under our existing line of credit as of December 31, 2016, compared to $160.6 million as of December 31, 2015.  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, 2016 and December 31, 2015.

As of December 31, 2016, our cash and cash equivalents totaled approximately $8.0 million, compared to $8.7 million as of December 31, 2015.  During the next twelve 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 additional 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 lease revenue equipment under non-cancellable operating leases, and we lease some of our service centers and temporary trailer storage under non-cancellable 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 $5.0 million, $4.7 million, and $2.8 million for the years ended December 31, 2016, 2015, and 2014, respectively.
 
 
Tabular Disclosure of Contractual Obligations

The following table sets forth, as of December 31, 2016, our contractual obligations and payments due by corresponding period for our short- and long-term operating expenses and other commitments (amounts in thousands).

   
Payments Due by Period
 
Contractual Obligations
 
Total
   
1 year or
less
   
1-3
years
   
3-5
years
   
More than
5 years
 
Purchase obligations(1)
 
$
119,041
   
$
119,041
   
$
-
   
$
-
   
$
-
 
Long-term debt(2)
   
18,000
     
-
     
18,000
     
-
     
-
 
Investment commitments(3)
   
4,740
     
2,038
     
1,870
     
732
     
100
 
Operating leases – buildings & equipment
   
7,871
     
4,253
     
3,297
     
317
     
4
 
Dividend payable
   
1,782
     
271
     
502
     
477
     
532
 
Total
 
$
151,434
   
$
125,603
   
$
23,669
   
$
1,526
   
$
636
 

(1)
Purchase obligations primarily consist of obligations to purchase revenue equipment from contracted vendors, and a carry forward of approximately $3.5 million from 2016 contracts.
(2)
Long-term debt of $18.0 million is borrowings under our line of credit, which has a maturity date of August 2019.  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 is 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 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 affect 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 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.

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 8 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 achieving performance targets approved by our compensation committee annually. The initial award is subject to an adjustment determined by our performance achieved over a three-year performance period when compared to the objective performance standards adopted by the Compensation Committee; this adjustment ranges from 0 percent to 150 percent of the initial amount of the grant. A further adjustment is made based on our total shareholder return compared to a peer group approved by our Compensation Committee. This adjustment ranges from 75 percent to 125 percent of the award after adjustment for our performance. Furthermore, the PRSUs have additional service requirements subsequent to the achievement of the performance targets. PRSUs do not earn dividend equivalents. The fair value of each PRSU grant is estimated on the grant date using the Monte Carlo Simulation valuation model. Compensation expense is recognized straight-line over the requisite service period based on management’s estimated probability of the performance targets being satisfied, adjusted at each balance sheet date.
 
 
We have service and performance-based restricted stock awards outstanding.  Our compensation expense is based on 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 F-8 of this report for discussion of new accounting pronouncements.

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 2016, a 1.0% increase in our applicable interest rate would reduce pretax earnings, on an annualized basis, by approximately $0.7 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.  The fair market value of fixed rate securities may be 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 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, 2016, 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 2016, a 10% increase in the average price per gallon, net of fuel surcharge collection, would decrease pretax earnings, on an annualized basis, by approximately $6.3 million.

Item 8.          Financial Statements and Supplementary Data

The consolidated balance sheets of Knight Transportation, Inc. and subsidiaries, as of December 31, 2016 and 2015, 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, 2016, 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 F-1 in this report.
 
 
Item 9.          Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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, 2016, 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, 2016.  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, 2016.  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, 2016, 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, 2016, 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, 2016, 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, 2016, 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, 2016, and our report dated March 1, 2017, expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Phoenix, Arizona
March 1, 2017

Item 9B.          Other Information

None.

PART III

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; 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 Ethical Conduct," from our definitive Proxy Statement to be delivered to our shareholders in connection with the 2017 Annual Meeting of Shareholders to be held May 11, 2017.

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 2017 Annual Meeting of Shareholders to be held May 11, 2017.
 
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, 2016, with respect to our compensation plans and other arrangements under which shares of our common stock are authorized for issuance.

Equity Compensation Plan Information

Plan category
 
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
 
Weighted average exercise
price of outstanding options
warrants and rights
 
Number of securities
remaining eligible for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
   
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders
 
1,737,400
 
$23.19
 
1,566,969
Equity compensation plans not approved by security holders
 
-
 
-
 
-
Total
 
1,737,400
 
$23.19
 
1,566,969

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 2017 Annual Meeting of Shareholders to be held May 11, 2017.
 
 
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 2017 Annual Meeting of Shareholders to be held May 11, 2017.

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 2017 Annual Meeting of Shareholders to be held May 11, 2017.

PART IV

Item 15.          Exhibits and Financial Statement Schedule

(a)          The following documents are filed as part of this report on Form 10-K beginning at page F-1, 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, 2016 and 2015

Consolidated Statements of Income for the years ended December 31, 2016, 2015, and 2014

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015, and 2014

Consolidated Statements of Shareholders' Equity for the years ended December 31, 2016, 2015, and 2014

Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014

Notes to Consolidated Financial Statements

2.          Consolidated Financial Statement Schedules required to be filed by Item 8 and Paragraph (b) of Item 15:

Schedule II – 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:


Exhibit
Number
Descriptions
2.1
Stock Purchase Agreement, by and among Knight Transportation, Inc., Barr-Nunn Enterprises, Ltd., Barr-Nunn Transportation, Inc., Barr-Nunn Logistics, Inc., Sturgeon Equipment, Inc., and Jane E. Sturgeon, in her capacity as Seller's Representative, dated October 1, 2014 (Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 10-K for the period ended December 31, 2014.)
3.1
Second Amended and Restated Articles of Incorporation of the Company.  (Incorporated by reference to Appendix A to the Company