Summary of Significant Accounting Policies

Nature of business:

Marten Transport, Ltd. is a multifaceted business offering a network of 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. Our dry freight services are expanding, with

1,600

dry vans operating as of

December 31, 2018.

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 doubtful accounts. 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 doubtful accounts 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 doubtful accounts monthly. Invoice balances over

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
Service and other equipment	3	-	15
Buildings and improvements	20	-	40

2018,

we replaced our company-owned tractors within an average of

3.7

years and our trailers within an average of

5.5

years after purchase. Our useful lives for depreciating tractors is

five

years and for trailers is

seven

years, with a

25%

salvage value for tractors and a

35%

salvage value for trailers. 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

months. Tire amortization, which is included within supplies and maintenance in our consolidated statements of operations, was

$7.0

million in

2018,

$7.1

million in

2017

and

$6.9

million in

2016.

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,

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

$14.6

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

, which we adopted on

January 1, 2018

using the modified retrospective method. The new revenue standard requires us to recognize revenue and related expenses within each of our

four

reporting segments over time, compared with our former policy in which we recorded revenue and related expenses on the date shipment of freight was completed.

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

for more information.

Our largest customer, Walmart, accounted for

15%

of our revenue in

2018

and

12%

of our trade receivables as of

December 31, 2018,

19%

of our revenue in

2017

and

15%

of our trade receivables as of

December 31, 2017

and

17%

of our revenue in

2016.

Our

second

largest customer, The Coca-Cola Company, accounted for

13%

of our revenue in

2018

and

of our trade receivables as of

December 31, 2018.

During each of

2018,

2017

and

2016,

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

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.

Recent accounting pronouncements:

February 2016,

the FASB issued Accounting Standards Update, or ASU,

No.

2016

02,

“Leases” which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance also requires additional disclosures related to leasing transactions. The standard is effective for the

first

quarter of

2019.

We will adopt the standard effective

January 1, 2019

under the modified retrospective approach by recognizing the cumulative effect of initially applying the standard as an increase of

$1.0

million to each of our assets and liabilities in our consolidated balance sheets. We expect the impact of the adoption of the standard to be immaterial to our consolidated balance sheets, statements of operations and statements of cash flows on an ongoing basis. We will include the additional required disclosures beginning with our Form

-Q for the

first

quarter of

2019.