Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, for Marten Transport, Ltd. and subsidiaries (the “Company”). This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) 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 (iii) 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 and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projection of any evaluation of the effectiveness of internal control over financial reporting to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s Chief Executive Officer and Executive Vice President and Chief Financial Officer, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this evaluation, management used the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021. Further, the Company’s independent registered public accounting firm, Grant Thornton LLP, has issued a report on the Company’s internal controls over financial reporting on page 28 of this Report.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
December 31, 2021, 2020 and 2019
1. Summary of Significant Accounting Policies
Nature of business: Marten Transport, Ltd. is a multifaceted business offering a network of refrigerated and dry truck-based transportation capabilities across our five distinct business platforms – Truckload, Dedicated, Intermodal, Brokerage and MRTN de Mexico. We are one of the leading temperature-sensitive truckload carriers in the United States, specializing in transporting and distributing food and other consumer packaged goods that require a temperature-controlled or insulated environment. We operate throughout the United States and into and out of Mexico and Canada.
Principles of consolidation: The accompanying consolidated financial statements include Marten Transport, Ltd. and its subsidiaries. All intercompany accounts and transactions are eliminated upon consolidation.
Cash and cash equivalents: Cash in excess of current operating requirements is invested in short-term, highly liquid investments. We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. We maintain our cash and cash equivalents in bank accounts which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts.
Trade accounts receivable: Trade accounts receivable are recorded at the invoiced amounts, net of an allowance for credit losses. Our allowance for credit losses was $348,000 at each of December 31, 2021 and 2020. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past-due balances, including any billing disputes. In order to assess the collectibility of these receivables, we perform ongoing credit evaluations of our customers’ financial condition. Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The allowance for credit losses is based on the best information available to us and is reevaluated and adjusted as additional information is received. We evaluate the allowance based on historical write-off experience, the size of the individual customer balances, past-due amounts and the overall national economy. We review the adequacy of our allowance for credit losses monthly. Invoice balances over 30 days after the contractual due date are considered past due per our policy and are reviewed individually for collectibility. Initial payments by new customers are monitored for compliance with contractual terms. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential recovery is considered remote.
Property and equipment: Additions and improvements to property and equipment are capitalized at cost. Maintenance and repair expenditures are charged to operations. Gains and losses on disposals of revenue equipment are included in operations as they are a normal, recurring component of our operations.
Depreciation is computed based on the cost of the asset, reduced by its estimated salvage value, using the straight-line method for financial reporting purposes. We begin depreciating assets in the month that each asset is placed in service and, therefore, is ready for its intended use, and depreciate each asset until it is taken out of service and available for sale. Accelerated methods are used for income tax reporting purposes. Following is a summary of estimated useful lives for financial reporting purposes:
| | Years |
| Tractors | | 5 | |
| Trailers | | 7 | |
| Refrigerated containers | | 12 | |
| Service and other equipment | 3 | - | 15 |
| Buildings and improvements | 20 | - | 40 |
In 2021, we replaced our company-owned tractors within an average of 4.3 years and our trailers within an average of 6.4 years after purchase. Our useful lives for depreciating tractors is five years, for trailers is seven years and for refrigerated containers is 12 years, with a 25% salvage value for tractors, a 35% salvage value for trailers and no salvage value for refrigerated containers. These salvage values are based upon the expected market values of the equipment after five years for tractors and seven years for trailers. Depreciation expense calculated in this manner approximates the continuing declining value of the revenue equipment and continues at a consistent straight-line rate for units held beyond the normal replacement cycle.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the costs to sell.
Tires in service: The cost of original equipment and replacement tires placed in service is capitalized. Amortization is calculated based on cost, less estimated salvage value, using the straight-line method over 24 months. Tire amortization, which is included within supplies and maintenance in our consolidated statements of operations, was $6.4 million in 2021, $6.6 million in 2020 and $6.9 million in 2019. The current portion of capitalized tires in service is included in prepaid expenses and other in the accompanying consolidated balance sheets. The long-term portion of capitalized tires in service and the estimated salvage value are included in revenue equipment in the accompanying consolidated balance sheets. The cost of recapping tires is charged to operations as incurred.
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 basis. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We have reflected the necessary deferred tax assets and liabilities in the accompanying consolidated balance sheets. We believe the future tax deductions will be realized principally through future reversals of existing taxable temporary differences and future taxable income.
In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Potential accrued interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.
Insurance and claims: We self-insure, in part, for losses relating to workers’ compensation, auto liability, general liability, cargo, and property damage claims, along with employees’ health insurance with varying risk retention levels. We are responsible for the first $1.0 million on each auto liability claim. We are also responsible for the first $750,000 on each workers’ compensation claim. We maintain insurance coverage for per-incident and total losses in excess of these risk retention levels in amounts we consider adequate based upon historical experience and our ongoing review. We reserve currently for the estimated cost of the uninsured portion of pending claims, including legal costs. These reserves are periodically evaluated and adjusted based on our evaluation of the nature and severity of outstanding individual claims and an estimate of future claims development based on historical development. Under agreements with our insurance carriers and regulatory authorities, we have $18.5 million in standby letters of credit to guarantee settlement of claims.
Revenue recognition: We account for our revenue in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 606, Revenue from Contracts with Customers. The current revenue standard requires us to recognize revenue and related expenses within each of our four reporting segments over time as our customers simultaneously receive and consume benefits as we perform the freight services.
We account for revenue of our Intermodal and Brokerage segments and revenue on freight transported by independent contractors within our Truckload and Dedicated segments on a gross basis because we are the principal service provider controlling the promised service before it is transferred to each customer. We are primarily responsible for fulfilling the promise to provide each specified service to each customer. We bear the primary risk of loss in the event of cargo claims by our customers. We also have complete control and discretion in establishing the price for each specified service. Accordingly, all such revenue billed to customers is classified as operating revenue and all corresponding payments to carriers for transportation services we arrange in connection with brokerage and intermodal activities and to independent contractor providers of revenue equipment are classified as purchased transportation expense within our consolidated statements of operations. See Note 16 for more information.
Our largest customer, Walmart, accounted for 23% of our revenue in 2021 and 22% of our trade receivables as of December 31, 2021, 24% of our revenue in 2020 and 24% of our trade receivables as of December 31, 2020 and 17% of our revenue in 2019. Our second largest customer, The Coca-Cola Company, accounted for 9% of our revenue in 2021, 12% of our revenue in 2020 and 8% of our trade receivables as of December 31, 2020 and 14% of our revenue in 2019. During each of 2021, 2020 and 2019, approximately 99% of our revenue was generated within the United States.
Share-based payment arrangement compensation: Under our stock incentive plans, all of our employees and any subsidiary employees, as well as all of our non-employee directors, may be granted stock-based awards, including incentive and non-statutory stock options and performance unit awards. We account for share-based payment arrangements in accordance with FASB ASC 718, Compensation-Stock Compensation, which requires all share-based payments to employees and non-employee directors, including grants of employee stock options and performance unit awards, to be recognized in the income statement based on their fair values at the date of grant.
Earnings per common share: Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed by dividing net income by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares related to stock options and performance unit awards had been issued using the treasury stock method.
Segment reporting: We report our operating segments in accordance with accounting standards codified in FASB ASC 280, Segment Reporting. We have five current operating segments that are aggregated into four reporting segments (Truckload, Dedicated, Intermodal and Brokerage) for financial reporting purposes. See Note 16 for more information.
Use of estimates: We must make estimates and assumptions to prepare the consolidated financial statements in conformity with U.S. generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities in the consolidated financial statements and the reported amount of revenue and expenses during the reporting period. These estimates are primarily related to insurance and claims accruals and depreciation. Ultimate results could differ from these estimates.
2. Details of Consolidated Balance Sheet Accounts
Prepaid expenses and other: As of December 31, prepaid expenses and other consisted of the following:
| (In thousands) | | 2021 | | | 2020 | |
| License fees | | $ | 5,485 | | | $ | 5,529 | |
| Tires in service | | | 4,624 | | | | 4,701 | |
| Parts and tires inventory | | | 4,375 | | | | 3,372 | |
| Insurance premiums | | | 3,749 | | | | 3,653 | |
| Contract assets | | | 2,243 | | | | 1,545 | |
| Other | | | 3,504 | | | | 3,103 | |
| | | $ | 23,980 | | | $ | 21,903 | |
Accrued and other current liabilities: As of December 31, accrued and other current liabilities consisted of the following:
| (In thousands) | | 2021 | | | 2020 | |
| Salaries and wages | | $ | 11,690 | | | $ | 7,584 | |
| Accrued expenses | | | 8,606 | | | | 6,299 | |
| Vacation | | | 8,572 | | | | 7,733 | |
| Other | | | 2,527 | | | | 2,881 | |
| | | $ | 31,395 | | | $ | 24,497 | |
3. Long-Term Debt
We maintain a credit agreement that provides for an unsecured committed credit facility with an aggregate principal amount of $30.0 million which matures in August 2023. At December 31, 2021, there was no outstanding principal balance on the facility. As of that date, we had outstanding standby letters of credit to guarantee settlement of self-insurance claims of $18.5 million and remaining borrowing availability of $11.5 million. At December 31, 2020, there was also no outstanding principal balance on the facility. As of that date, we had outstanding standby letters of credit of $17.0 million on the facility. This facility bears interest at a variable rate based on the London Interbank Offered Rate or the lender’s Prime Rate, in each case plus/minus applicable margins. The interest rate for the facility that would apply to outstanding principal balances was 0.78% at December 31, 2021.
Our credit facility prohibits us from paying, in any fiscal year, stock redemptions and dividends in excess of 25% of our net income from the prior fiscal year. Waivers allowing stock redemptions and dividends in excess of the 25% limitation in total amounts of up to $80 million in 2021, of up to $60 million in 2020 and of up to $65 million in 2019 were obtained from the lender in August 2021, November 2020 and August 2019, respectively. This facility also contains restrictive covenants which, among other matters, require us to maintain compliance with cash flow leverage and fixed charge coverage ratios. We were in compliance with all covenants at December 31, 2021 and 2020.
4. Related Party Transactions
The following related party transactions occurred during the three years ended December 31, 2021:
(a) We purchase fuel and tires and obtain related services from a company in which one of our directors is the chairman of the board and chief executive officer. We paid that company $306,000 in 2021, $241,000 in 2020 and $392,000 in 2019 for fuel, tires and related services. In addition, we paid $2.0 million in each of 2021 and 2020 and $1.7 million in 2019 to tire manufacturers for tires that were provided by the same company. The same company received commissions from the tire manufacturers related to these purchases. We did not have any payables to that company as of December 31, 2021. Payables were $900 as of December 31, 2020.
(b) We paid $154,000 in 2020 for various construction projects to a company in which one of our directors is the chief executive officer and the principal stockholder. We did not pay the same company for any services in 2021 or 2019. We did not have any accounts payable to that company as of December 31, 2021 or 2020.
(c) We provided transportation services to MW Logistics, LLC, or MWL, a 45% owned affiliate through October 31, 2019, as described in Note 10.
5. Income Taxes
The components of the income taxes expense (benefit) consisted of the following:
| (In thousands) | | 2021 | | | 2020 | | | 2019 | |
| Current: | | | | | | | | | | | | |
| Federal | | $ | 18,872 | | | $ | 21,312 | | | $ | (1,210 | ) |
| State | | | 3,367 | | | | 3,498 | | | | 1,782 | |
| Total current | | | 22,239 | | | | 24,810 | | | | 572 | |
| | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| Federal | | | 3,462 | | | | (1,557 | ) | | | 15,572 | |
| State | | | 603 | | | | 633 | | | | 473 | |
| Total deferred | | | 4,065 | | | | (924 | ) | | | 16,045 | |
| Total expense (benefit) | | $ | 26,304 | | | $ | 23,886 | | | $ | 16,617 | |
The federal statutory income tax rate is reconciled to the effective income tax rate as follows:
| | | 2021 | | | 2020 | | | 2019 | |
| Federal statutory income tax rate | | | 21 | % | | | 21 | % | | | 21 | % |
| Increase in taxes arising from state income taxes, net of federal income tax benefit | | | 3 | | | | 4 | | | | 2 | |
| Per diem and other non-deductible expenses | | | - | | | | 1 | | | | 1 | |
| Federal tax credits | | | - | | | | (1 | ) | | | (2 | ) |
| Other, net | | | - | | | | 1 | | | | (1 | ) |
| Effective tax rate | | | 24 | % | | | 26 | % | | | 21 | % |
As of December 31, the net deferred tax liability consisted of the following:
| (In thousands) | | 2021 | | | 2020 | |
| Deferred tax assets: | | | | | | | | |
| Reserves and accrued liabilities | | $ | 11,975 | | | $ | 12,050 | |
| Other | | | 1,597 | | | | 1,768 | |
| | | | 13,572 | | | | 13,818 | |
| Deferred tax liabilities: | | | | | | | | |
| Depreciation | | | 135,306 | | | | 131,650 | |
| Prepaid expenses | | | 3,429 | | | | 3,266 | |
| | | | 138,735 | | | | 134,916 | |
| Net deferred tax liability | | $ | 125,163 | | | $ | 121,098 | |
We have not provided a valuation allowance against deferred tax assets at December 31, 2021 or 2020. We believe the deferred tax assets will be realized principally through future reversals of existing taxable temporary differences (deferred tax liabilities) and future taxable income.
Our reserves for unrecognized tax benefits were $4.1 million at each of December 31, 2021 and 2020. If recognized, $4.0 million of the unrecognized tax benefits as of December 31, 2021 would favorably impact our effective tax rate. Potential interest and penalties related to unrecognized tax benefits of $10,000 and $12,000 were recognized in our financial statements as of December 31, 2021 and 2020, respectively. The federal statute of limitations remains open for 2018 and forward. We file tax returns in numerous state jurisdictions with varying statutes of limitations.
6. Earnings per Common Share
Basic and diluted earnings per common share were computed as follows:
| (In thousands, except per share amounts) | | 2021 | | | 2020 | | | 2019 | |
| Numerator: | | | | | | | | | | | | |
| Net income | | $ | 85,428 | | | $ | 69,500 | | | $ | 61,071 | |
| Denominator: | | | | | | | | | | | | |
| Basic earnings per common share - weighted-average shares | | | 82,872 | | | | 82,527 | | | | 81,945 | |
| Effect of dilutive stock options | | | 536 | | | | 637 | | | | 725 | |
| Diluted earnings per common share - weighted-average shares and assumed conversions | | | 83,408 | | | | 83,164 | | | | 82,670 | |
| Basic earnings per common share | | $ | 1.03 | | | $ | 0.84 | | | $ | 0.75 | |
| Diluted earnings per common share | | $ | 1.02 | | | $ | 0.84 | | | $ | 0.74 | |
Options totaling 605,550, 266,650 and 330,450 equivalent shares were outstanding but were not included in the calculation of diluted earnings per share for 2021, 2020 and 2019, respectively, because including the options in the denominator would be antidilutive, or decrease the number of weighted-average shares, due to their exercise prices exceeding the average market price of the common shares, or because inclusion of average unrecognized compensation expense in the calculation would cause the options to be antidilutive.
Unvested performance unit awards (see Note 12) totaling 71,734, 46,705 and 104,454 equivalent shares for 2021, 2020 and 2019, respectively, were considered outstanding but were not included in the calculation of diluted earnings per share because inclusion of average unrecognized compensation expense in the calculation would cause the performance units to be antidilutive.
7. Stock Split
On August 13, 2020, we effected a three-for-two stock split of our common stock, $.01 par value, in the form of a 50% stock dividend. Our consolidated financial statements, related notes, and other financial data contained in this report have been adjusted to give retroactive effect to the stock split for all periods presented.
8. Share Repurchase Program
In August 2019, our Board of Directors approved and we announced an increase from current availability in our existing share repurchase program providing for the repurchase of up to $34 million, or approximately 1.8 million shares, of our common stock, which was increased by our Board of Directors to 2.7 million shares in August 2020 to reflect the three-for-two stock split effected in the form of a stock dividend on August 13, 2020. The share repurchase program allows purchases on the open market or through private transactions in accordance with Rule 10b-18 of the Exchange Act. The timing and extent to which we repurchase shares depends on market conditions and other corporate considerations. The repurchase program does not have an expiration date.
We repurchased and retired 53,064 shares of common stock for $597,000 in the first quarter of 2020. We did not repurchase any shares in 2019, in the rest of 2020 or in 2021. As of December 31, 2021, future repurchases of up to $33.4 million, or approximately 2.6 million shares, were available in the share repurchase program.
9. Dividends
In 2010, we announced that our Board of Directors approved a regular cash dividend program to our stockholders, subject to approval each quarter. We paid cash dividends totaling $54.7 million in 2021 which consisted of a special dividend of $0.50 per share of common stock in October, along with quarterly cash dividends of $0.04 per share of common stock in March, June, October and December. We paid cash dividends totaling $52.4 million in 2020 which consisted of a special dividend of $0.50 per share of common stock in December, along with quarterly cash dividends of $0.04 per share of common stock in the third and fourth quarters and of $0.027 per share of common stock in the first and second quarters. We paid cash dividends totaling $42.1 million in 2019 which consisted of a special dividend of $0.433 per share of common stock in September, along with quarterly cash dividends of $0.02 per share of common stock in each quarter of 2019.
Our ability to pay cash dividends is currently limited by restrictions contained in our revolving credit facility, which prohibits us from paying, in any fiscal year, stock redemptions and dividends in excess of 25% of our net income from the prior fiscal year. Waivers allowing stock redemptions and dividends in excess of the 25% limitation in total amounts of up to $80 million in 2021, of up to $60 million in 2020 and of up to $65 million in 2019 were obtained from the lender in August 2021, November 2020 and August 2019, respectively.
10. Equity Investment
We owned a 45% equity interest in MWL, a third-party provider of logistics services to the transportation industry, until October 31, 2019, at which time we sold our entire membership interest for approximately $1.3 million. Prior to the sale of our interest, a non-related party owned the other 55% equity interest in MWL. We accounted for our ownership interest in MWL under the equity method of accounting. We received $2.2 million of our revenue for loads transported by our tractors and arranged by MWL for the first ten months of 2019.
11. Leases
We lease facilities, drop yards, office space, land, chassis and equipment. All leases are classified as operating leases. We do not have any financing leases. Payments for operating leases that extend beyond 12 months are fixed.
Some leases include options to renew, with renewal terms that can extend the lease term from six months to three years or more. The exercise of lease renewal options is at our sole discretion and is considered in the determination of the operating lease assets and lease liabilities once reasonably certain of exercise.
Management has elected to apply the short-term lease exemption to leases with an initial term of 12 months or less and these leases are not capitalized. This primarily affects drop yards and chassis, for which we recognize lease expense on a straight-line basis over the lease term.
As of December 31, the classification of operating leases in our consolidated balance sheets was as follows:
| (In thousands) | | | | | | | | |
| | | 2021 | | | 2020 | |
| Assets: | | | | | | |
| Other noncurrent assets (a) | | $ | 540 | | | $ | 918 | |
| Liabilities: | | | | | | | | |
| Accrued and other current liabilities | | | 249 | | | | 507 | |
| Noncurrent operating lease liabilities | | | 291 | | | | 411 | |
| Total liabilities | | $ | 540 | | | $ | 918 | |
| | (a) | Operating lease asset balances at December 31, 2021 and 2020. |
The maturity of the operating lease liabilities is as follows:
| | | Amount | |
| Maturities: | | | | |
| 2022 | | $ | 270 | |
| 2023 | | | 208 | |
| 2024 | | | 113 | |
| 2025 and 2026 | | | 3 | |
| Total lease payments | | | 594 | |
| Adjust to present value | | | (54 | ) |
| Total operating lease liabilities | | $ | 540 | |
The weighted-average remaining lease term at December 31, 2021 was 29 months and at December 31, 2020 was 30 months. The weighted-average discount rate was 2.3% at December 31, 2021 and 2.1% at December 31, 2020. The operating leases identified do not specify implicit rates, accordingly, we use our incremental borrowing rate at the time of lease inception to determine the present value of lease payments.
There were no operating lease assets obtained in exchange for lease obligations in 2021, while this amount totaled $88,000 in 2020. We paid $504,000 of cash for capitalized operating leases during 2021 and $591,000 during 2020.
Total operating lease expense for 2021 was $3.7 million and for 2020 was $3.0 million. These amounts are reported within other operating expenses in our consolidated statements of operations and include $3.2 million and $2.4 million, respectively, of short-term lease expense with an initial term of 12 months or less.
12. Employee Benefits
Equity Incentive Plans - In May 2015, our stockholders approved our 2015 Equity Incentive Plan (the “2015 Plan”). Our Board of Directors adopted the 2015 Plan in March 2015. Under our 2015 Plan, all of our employees and any subsidiary employees, as well as all of our non-employee directors, may be granted stock-based awards, including non-statutory stock options, performance unit awards and shares of common stock, of which 2,345,554 shares have been awarded as of December 31, 2021. Stock options expire within 7 or 10 years after the date of grant and the exercise price must be at least the fair market value of our common stock on the date of grant. Stock options issued to employees are generally exercisable beginning one year from the date of grant in cumulative amounts of 20% per year. Performance unit awards are subject to vesting requirements over a five-year period, primarily based on our earnings growth. Options exercised and performance unit award shares issued represent newly issued shares.
At our 2019 Annual Meeting of Stockholders held on May 7, 2019, our stockholders approved an amendment to the Marten Transport, Ltd. 2015 Equity Incentive Plan, which was previously approved and adopted by our Board of Directors, subject to approval by our stockholders. The amendment increased the number of shares of common stock authorized for issuance under the 2015 Plan by 1.3 million shares and the number of shares of common stock authorized for issuance pursuant to full-value awards by 558,334 shares. The amendment also adjusted certain numbers to reflect the stock split that occurred in July 2017.
On August 13, 2020, we effected a three-for-two stock split of our common stock, $0.01 par value, in the form of a 50% stock dividend. In July 2020, our Board of Directors approved an increase in the number of shares of common stock authorized for issuance under the 2015 plan, along with in the number of shares reserved for issuance under all outstanding options and performance unit awards and shares held within our Deferred Compensation Plan, to reflect the three-for-two stock split. As a result, the number of shares authorized for issuance under the 2015 Plan, as amended, increased to 3,950,000 shares.
As of December 31, 2021, there were 977,901 shares reserved for issuance under options outstanding and 322,529 shares reserved for issuance under outstanding performance unit awards under the 2015 Plan. The 2015 Plan replaces our 2005 Stock Incentive Plan (the “2005 Plan”), which expired by its terms in May 2015.
Under the 2005 Plan, officers, directors and employees were granted non-statutory stock options and performance unit awards with similar terms to the options and awards under the 2015 Plan. As of December 31, 2021, there were 51,565 shares reserved for issuance under options outstanding, which will continue according to their terms. As of the same date, there were no shares reserved for issuance under outstanding performance unit awards under the 2005 Plan. No additional awards will be granted under the 2005 Plan.
We use the Black-Scholes option pricing model to calculate the grant-date fair value of option awards. The fair value of service-based option awards granted was estimated as of the date of grant using the following weighted average assumptions:
| | | 2021 | | | 2020 | | | 2019 | |
| | | | | | | | | | | | | |
| Expected option life in years(1) | | | 6.0 | | | | 6.0 | | | | 6.0 | |
| Expected stock price volatility percentage(2) | | | 27 | % | | | 28 | % | | | 28 | % |
| Risk-free interest rate percentage(3) | | | 1.2 | % | | | 0.6 | % | | | 2.2 | % |
| Expected dividend yield(4) | | | 0.91 | % | | | 0.80 | % | | | 0.58 | % |
| Fair value as of the date of grant | | $ | 4.29 | | | $ | 3.85 | | | $ | 3.93 | |
| (1) | Expected option life – We use historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. We believe that this historical data is currently the best estimate of the expected term of a new option. We use a weighted-average expected life for all awards. |
| (2) | Expected stock price volatility – We use our stock’s historical volatility for the same period of time as the expected life. We have no reason to believe that its future volatility will differ from the past. |
| (3) | Risk-free interest rate – The rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the same period of time as the expected life. |
| (4) | Expected dividend yield – The calculation is based on the total expected annual dividend payout divided by the average stock price. |
Compensation costs associated with service-based option awards with graded vesting are recognized, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period, which is the period between the grant date and the award’s stated vesting term. Service-based option awards become immediately exercisable in full in the event of death or disability and upon a change in control with respect to all options that have been outstanding for at least six months.
In May 2015, we granted 87,503 performance unit awards under our 2015 Equity Incentive Plan to certain employees. This was our sixth grant of such awards. As of December 31, 2015 and each December 31st thereafter through December 31, 2019, each award vested and became the right to receive a number of shares of common stock equal to a total vesting percentage multiplied by the number of units subject to such award. The total vesting percentage for each of the five years was equal to the sum of a performance vesting percentage, which was the percentage increase, if any, in our diluted net income per share for the year being measured over the prior year, and a service vesting percentage of five percentage points. All payments were made in shares of our common stock. One half of the vested performance units were paid to the employees immediately upon vesting, with the other half being credited to the employees’ accounts within the Marten Transport, Ltd. Deferred Compensation Plan, which restricts the sale of vested shares to the later of each employee’s termination of employment or attainment of age 62. We also granted 48,750 performance unit awards in May 2015 with similar terms to the above awards, except that all vested performance units were paid to the employees immediately upon vesting.
In May 2016, we granted 86,505 performance unit awards under our 2015 Equity Incentive Plan with similar terms to the awards previously granted, except that the calculation of vesting shares was based on our increase in net income instead of our increase in diluted net income per share. As permitted in the performance unit award agreements granted in 2011 through 2015, the calculation of the performance vesting component beginning with the year 2015 was adjusted to be based on the increase in net income. We also granted 32,513 performance unit awards in May 2016 and 2,501 awards in August 2016 with similar terms to such awards, except that all vested performance units were paid to the employees immediately upon vesting. All awards granted in 2016 vested from December 31, 2016 through 2020.
In May 2017, we granted 163,754 performance unit awards under our 2015 Equity Incentive Plan with similar terms to the awards granted in 2016, except that the service-based component was increased from five percent to ten percent per year. The Compensation Committee adjusted the equity vesting formula to better align it with our long-range growth plan. We also granted 65,013 performance unit awards in May 2017 and 3,000 awards in August 2017 with similar terms to such awards, except that all vested performance units were paid to the employees immediately upon vesting. All awards granted in 2017 vested from December 31, 2017 through 2021.
In May 2018, we granted 68,550 performance unit awards under our 2015 Equity Incentive Plan with similar terms to the awards granted in 2017. We also granted 42,000 performance unit awards in May 2018 and 3,000 awards in August 2018 with similar terms to such awards, except that all vested performance units will be paid to the employees immediately upon vesting. These awards granted in 2018 vest from December 31, 2018 through 2022. We also granted 3,000 performance unit awards in December 2018 with similar terms to the awards granted in August 2018, except that the awards vest from December 31, 2019 through 2023.
In May 2019, we granted 60,000 performance unit awards under our 2015 Equity Incentive Plan with similar terms to the awards granted in 2017. We also granted 45,000 performance unit awards in May 2019 with similar terms to such awards, except that all vested performance units will be paid to the employees immediately upon vesting. These awards granted in 2019 vest from December 31, 2019 through 2023.
In May 2020, we granted 73,205 performance unit awards under our 2015 Equity Incentive Plan with similar terms to awards granted in 2017, except that all vested performance units will be paid to the employees immediately upon vesting. These awards granted in 2020 vest from December 31, 2020 through 2024.
In May 2021, we granted 98,400 performance unit awards under our 2015 Equity Incentive Plan with similar terms to awards granted in 2020. These awards granted in 2021 vest from December 31, 2021 through 2025.
On May 5, 2020, our Compensation Committee and Board of Directors approved the termination of our deferred compensation plan. The termination was effective May 5, 2021. All shares of Company common stock within the plan will be distributed by May 5, 2022.
The fair value of each performance unit is based on the closing market price on the date of grant. We recognize compensation expense for these awards based on the estimated number of units probable of achieving the vesting requirements of the awards, net of an estimated forfeiture rate.
The amount of share-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We currently expect, based on an analysis of our historical forfeitures and known forfeitures on existing awards, that approximately 1.25% of unvested outstanding awards will be forfeited each year. This analysis will be re-evaluated on a quarterly basis and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.
Total share-based compensation expense recorded in 2021 was $2.5 million ($1.9 million net of income tax benefit, $0.02 earnings per basic and diluted share), in 2020 was $1.9 million ($1.4 million net of income tax benefit, $0.02 earnings per basic and diluted share) and in 2019 was $1.8 million ($1.4 million net of income tax benefit, $0.02 earnings per basic and diluted share). All share-based compensation expense was recorded in salaries, wages and benefits expense.
As of December 31, 2021, there was a total of $2.4 million of unrecognized compensation expense related to unvested service-based option awards, which is expected to be recognized over a weighted-average period of 3.9 years, and $2.1 million of unrecognized compensation expense related to unvested performance unit awards, which will be recorded based on the estimated number of units probable of achieving the vesting requirements of the awards through 2025.
Option activity in 2021 was as follows:
| | | Shares | | | Weighted Average Exercise Price | |
| Outstanding at December 31, 2020 | | | 711,780 | | | $ | 11.47 | |
| Granted | | | 429,500 | | | | 17.00 | |
| Exercised | | | (98,512 | ) | | | 8.88 | |
| Forfeited | | | (13,302 | ) | | | 14.46 | |
| Outstanding at December 31, 2021 | | | 1,029,466 | | | $ | 14.00 | |
| Exercisable at December 31, 2021 | | | 398,415 | | | $ | 10.97 | |
The 1,029,466 options outstanding as of December 31, 2021 have a weighted average remaining contractual life of 4.6 years and an aggregate intrinsic value based on our closing stock price on December 31, 2021 for in-the-money options of $3.2 million. The 398,415 options exercisable as of the same date have a weighted average remaining contractual life of 2.7 years and an aggregate intrinsic value similarly calculated of $2.5 million.
The fair value of options granted in 2021, 2020 and 2019 was $1.8 million, $160,000 and $401,000, respectively, for service-based options. The total intrinsic value of options exercised in 2021, 2020 and 2019 was $789,000, $4.1 million and $1.4 million, respectively. Intrinsic value is the difference between the fair value of the acquired shares at the date of exercise and the exercise price, multiplied by the number of options exercised. Proceeds received from option exercises in 2021, 2020 and 2019 were $874,000, $4.8 million and $1.6 million, respectively.
Nonvested service-based option awards as of December 31, 2021 and changes during 2021 were as follows:
| | | Shares | | | Weighted Average Grant Date Fair Value | | | Weighted Average Remaining Contractual Life (in Years) | |
| Nonvested at December 31, 2020 | | | 332,562 | | | $ | 3.71 | | | | 4.8 | |
| Granted | | | 429,500 | | | | 4.29 | | | | 6.7 | |
| Vested | | | (118,009 | ) | | | 3.48 | | | | 3.4 | |
| Forfeited | | | (13,002 | ) | | | 4.02 | | | | 4.3 | |
| Nonvested at December 31, 2021 | | | 631,051 | | | $ | 4.14 | | | | 5.9 | |
The total fair value of options which vested during 2021, 2020 and 2019 was $411,000, $539,000 and $569,000, respectively.
The following table summarizes our nonvested performance unit award activity in 2021:
| | | Shares | | | Weighted Average Grant Date Fair Value | |
| Nonvested at December 31, 2020 | | | 154,361 | | | $ | 13.99 | |
| Granted | | | 98,400 | | | | 17.36 | |
| Vested | | | (120,635 | ) (1) | | | 14.43 | |
| Nonvested at December 31, 2021 | | | 132,126 | | | $ | 16.10 | |
| (1) | This number of performance unit award shares vested based on our financial performance in 2021 and was distributed in March 2022. The fair value of unit award shares that vested in 2021 was $1.7 million. |
Retirement Savings Plan - We sponsor a defined contribution retirement savings plan under Section 401(k) of the Internal Revenue Code. Employees are eligible for the plan after three months of service. Participants are able to contribute up to the limit set by law, which in 2021 was $19,500 for participants less than age 50 and $26,000 for participants age 50 and above. We contribute 35% of each participant’s contribution, up to a total of 6% contributed. Our contribution vests at the rate of 20% per year for the first through fifth years of service. In addition, we may make elective contributions as determined by the Board of Directors. No elective contributions were made in 2021, 2020 or 2019. Total expense recorded for the plan was $3.0 million in each of 2021 and 2020 and $2.7 million in 2019.
Stock Purchase Plans - An Employee Stock Purchase Plan and an Independent Contractor Stock Purchase Plan are sponsored to encourage employee and independent contractor ownership of our common stock. Eligible participants specify the amount of regular payroll or contract payment deductions and voluntary cash contributions that are used to purchase shares of our common stock. The purchases are made at the market price on the open market. We pay the broker’s commissions and administrative charges for purchases of common stock under the plans.
13. Termination of Deferred Compensation Plan
In August 2010, our Board of Directors approved and adopted the Marten Transport, Ltd. Deferred Compensation Plan. The deferred compensation plan was an unfunded, nonqualified deferred compensation plan designed to allow board elected officers and other select members of our management designated by our Compensation Committee to save for retirement on a tax-deferred basis.
Under the terms of the plan, each participant was eligible to defer portions of their base pay, annual bonus, or receipt of common stock otherwise payable under a vested performance unit award. Each participant could have elected a fixed distribution date for the participant’s deferral account other than certain required performance unit award deferrals credited to the discretionary account, which were to be distributed after the later of the date of the participant’s termination of employment or the date the participant attains age 62. Upon termination of a participant’s employment with the company, the plan required a lump-sum distribution of the deferral account, excluding the required performance unit award deferrals, unless the participant had elected an installment distribution. Upon a participant’s death, the plan provided that a participant’s distributions accelerate and be paid in a lump sum to the participant’s beneficiary. We had the ability to terminate the plan and accelerate distributions to participants, but only to the extent and at the times permitted under Section 409A of the Internal Revenue Code of 1986, as amended. We had the ability to terminate the plan and accelerate distributions upon a change in control, which was not a payment event under the plan. In conjunction with the approval of the plan, our Board of Directors also adopted an amendment to the Marten Transport, Ltd. 2005 Stock Incentive Plan to allow for deferral of receipt of income from a performance unit award under the plan. Such deferral is also provided for within the Marten Transport, Ltd. 2015 Equity Incentive Plan. As of December 31, 2021, 102,737 shares of Company common stock with a value of $1.8 million were credited to account balances within the plan. These shares were required performance unit award deferrals of vested awards, and dividends earned on such shares.
On May 5, 2020, our Compensation Committee and Board of Directors approved the termination of our deferred compensation plan. The termination was effective May 5, 2021. All shares of Company common stock within the plan will be distributed by May 5, 2022.
14. Fair Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments.
15. Commitments and Contingencies
We are committed to $28.3 million of new revenue equipment and $2.6 million in building construction in 2022. We also have commitments to purchase $14.5 million of new revenue equipment in 2023. Operating lease obligations total $594,000 through 2026.
We self-insure, in part, for losses relating to workers’ compensation, auto liability, general liability, cargo and property damage claims, along with employees’ health insurance with varying risk retention levels. We maintain insurance coverage for per-incident and total losses in excess of these risk retention levels in amounts we consider adequate based upon historical experience and our ongoing review, and reserve currently for the estimated cost of the uninsured portion of pending claims.
We are also involved in other legal actions that arise in the ordinary course of business. In the opinion of management, based upon present knowledge of the facts, it is remote that the ultimate outcome of any such legal actions will have a material adverse effect upon our long-term financial position or results of operations.
16. Revenue and Business Segments
We account for our revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers. We combine our five current operating segments into four reporting segments (Truckload, Dedicated, Intermodal and Brokerage) for financial reporting purposes. These four reporting segments are also the appropriate categories for the disaggregation of our revenue under FASB ASC 606.
We have strategically transitioned from a refrigerated long-haul carrier to a multifaceted business offering a network of refrigerated and dry truck-based transportation capabilities across our five distinct business platforms – Truckload, Dedicated, Intermodal, Brokerage and MRTN de Mexico.
The primary source of our operating revenue is provided by our Truckload segment through a combination of regional short-haul and medium-to-long-haul full-load transportation services. We transport food and other consumer packaged goods that require a temperature-controlled or insulated environment, along with dry freight, across the United States and into and out of Mexico and Canada. Our agreements with customers are typically for one year.
Our Dedicated segment provides customized transportation solutions tailored to meet individual customers’ requirements, utilizing temperature-controlled trailers, dry vans and other specialized equipment within the United States. Our agreements with customers range from three to five years and are subject to annual rate reviews.
Generally, we are paid by the mile for our Truckload and Dedicated services. We also derive Truckload and Dedicated revenue from fuel surcharges, loading and unloading activities, equipment detention and other accessorial services. The main factors that affect our Truckload and Dedicated revenue are the rate per mile we receive from our customers, the percentage of miles for which we are compensated, the number of miles we generate with our equipment and changes in fuel prices. We monitor our revenue production primarily through average Truckload and Dedicated revenue, net of fuel surcharges, per tractor per week. We also analyze our average Truckload and Dedicated revenue, net of fuel surcharges, per total mile, non-revenue miles percentage, the miles per tractor we generate, our fuel surcharge revenue, our accessorial revenue and our other sources of operating revenue.
Our Intermodal segment transports our customers’ freight within the United States utilizing our refrigerated containers and our temperature-controlled trailers, each on railroad flatcars for portions of trips, with the balance of the trips using our tractors or, to a lesser extent, contracted carriers. The main factors that affect our Intermodal revenue are the rate per mile and other charges we receive from our customers.
Our Brokerage segment develops contractual relationships with and arranges for third-party carriers to transport freight for our customers in temperature-controlled trailers and dry vans within the United States and into and out of Mexico through Marten Transport Logistics, LLC, which was established in 2007 and operates pursuant to brokerage authority granted by the United States Department of Transportation, or DOT. We retain the billing, collection and customer management responsibilities. The main factors that affect our Brokerage revenue are the rate per mile and other charges that we receive from our customers.
Operating results of our MRTN de Mexico business which offers our customers door-to-door service between the United States and Mexico with our Mexican partner carriers is reported within our Truckload and Brokerage segments.
Our customer agreements are typically for one-year terms except for our Dedicated agreements which range from three to five years with annual rate reviews. Under FASB ASC 606, the contract date for each individual load within each of our four reporting segments is generally the date that each load is tendered to and accepted by us. For each load transported within each of our four reporting segments, the entire amount of revenue to be recognized is a single performance obligation and our agreements with our customers detail the per-mile charges for line haul and fuel surcharges, along with the rates for loading and unloading, stop offs and drops, equipment detention and other accessorial services, which is the transaction price. There are no discounts that would be a material right or consideration payable to a customer. We are required to recognize revenue and related expenses over time, from load pickup to delivery, for each load within each of our four reporting segments. We base our calculation of the amount of revenue to record in each period for individual loads picking up in one period and delivering in the following period using the number of hours estimated to be incurred within each period applied to each estimated transaction price. Contract assets for this estimated revenue which are classified within prepaid expenses and other within our consolidated balance sheets were $2.2 million and $1.5 million as December 31, 2021 and 2020, respectively. We had no impairment losses on contract assets in 2021 or 2020. We bill our customers for loads after delivery is complete with standard payment terms of 30 days.
The following table sets forth for the years indicated our operating revenue and operating income by segment. We do not prepare separate balance sheets by segment and, as a result, assets are not separately identifiable by segment.
| (Dollars in thousands) | | 2021 | | | 2020 | | | 2019 | |
| Operating revenue: | | | | | | | | | | | | |
| Truckload revenue, net of fuel surcharge revenue | | $ | 346,289 | | | $ | 342,357 | | | $ | 329,304 | |
| Truckload fuel surcharge revenue | | | 50,377 | | | | 36,791 | | | | 48,696 | |
| Total Truckload revenue | | | 396,666 | | | | 379,148 | | | | 378,000 | |
| | | | | | | | | | | | | |
| Dedicated revenue, net of fuel surcharge revenue | | | 276,883 | | | | 271,550 | | | | 223,935 | |
| Dedicated fuel surcharge revenue | | | 52,559 | | | | 38,234 | | | | 42,049 | |
| Total Dedicated revenue | | | 329,442 | | | | 309,784 | | | | 265,984 | |
| | | | | | | | | | | | | |
| Intermodal revenue, net of fuel surcharge revenue | | | 87,468 | | | | 79,944 | | | | 77,750 | |
| Intermodal fuel surcharge revenue | | | 14,777 | | | | 8,789 | | | | 12,644 | |
| Total Intermodal revenue | | | 102,245 | | | | 88,733 | | | | 90,394 | |
| | | | | | | | | | | | | |
| Brokerage revenue | | | 145,291 | | | | 96,709 | | | | 108,893 | |
| | | | | | | | | | | | | |
| Total operating revenue | | $ | 973,644 | | | $ | 874,374 | | | $ | 843,271 | |
| | | | | | | | | | | | | |
| Operating income: | | | | | | | | | | | | |
| Truckload | | $ | 51,032 | | | $ | 39,637 | | | $ | 29,666 | |
| Dedicated | | | 36,395 | | | | 40,909 | | | | 31,245 | |
| Intermodal | | | 9,479 | | | | 5,730 | | | | 6,612 | |
| Brokerage | | | 14,783 | | | | 6,970 | | | | 8,975 | |
| Total operating income | | $ | 111,689 | | | $ | 93,246 | | | $ | 76,498 | |
Truckload segment depreciation expense was $52.1 million, $54.7 million and $54.0 million, Dedicated segment depreciation expense was $43.0 million, $41.4 million and $34.6 million, Intermodal segment depreciation expense was $6.3 million, $5.6 million and $5.1 million, and Brokerage segment depreciation expense was $1.2 million, $1.2 million and $1.5 million, in 2021, 2020 and 2019, respectively.