Knight-Swift Transportation Holdings Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets (Unaudited) June 30, 2020 December 31, 2019 (In thousands, except per share data) ASSETS Current assets: Cash and cash equivalents $ 117,760 $ 159,722 Cash and cash equivalents – restricted 39,583 41,331 Restricted investments, held-to-maturity, amortized cost 8,272 8,912 Trade receivables, net of allowance for doubtful accounts of $ 20,568 and $ 18,178 , respectively 522,075 518,547 Contract balance – revenue in transit 14,679 12,696 Prepaid expenses 54,515 62,160 Assets held for sale 39,641 41,786 Income tax receivable 5,902 17,026 Other current assets 27,073 27,848 Total current assets 829,500 890,028 Gross property and equipment 3,947,597 3,742,739 Less: accumulated depreciation and amortization ( 1,053,027 ) ( 892,019 ) Property and equipment, net 2,894,570 2,850,720 Operating lease right-of-use assets 136,953 169,425 Goodwill 2,922,970 2,918,992 Intangible assets, net 1,412,192 1,379,459 Other long-term assets 82,843 73,108 Total assets $ 8,279,028 $ 8,281,732 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 128,731 $ 99,194 Accrued payroll and purchased transportation 109,398 110,065 Accrued liabilities 95,863 175,222 Claims accruals – current portion 168,012 150,805 Finance lease liabilities and long-term debt – current portion 403,738 377,651 Operating lease liabilities – current portion 65,741 80,101 Total current liabilities 971,483 993,038 Revolving line of credit 235,000 279,000 Finance lease liabilities – less current portion 48,179 57,383 Operating lease liabilities – less current portion 76,266 96,160 Accounts receivable securitization 164,840 204,762 Claims accruals – less current portion 186,317 196,912 Deferred tax liabilities 792,839 771,719 Other long-term liabilities 38,515 14,455 Total liabilities 2,513,439 2,613,429 Commitments and contingencies (Notes 4, 10, and 11) Stockholders’ equity: Preferred stock, par value $ 0.01 per share; 10,000 shares authorized; none issued — — Common stock, par value $ 0.01 per share; 500,000 shares authorized; 170,162 and 170,688 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively. 1,701 1,707 Additional paid-in capital 4,287,293 4,269,043 Retained earnings 1,474,466 1,395,465 Total Knight-Swift stockholders' equity 5,763,460 5,666,215 Noncontrolling interest 2,129 2,088 Total stockholders’ equity 5,765,589 5,668,303 Total liabilities and stockholders’ equity $ 8,279,028 $ 8,281,732 See accompanying notes to condensed consolidated financial statements (unaudited). 4 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Condensed Consolidated Statements of Comprehensive Income (Unaudited) Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 (In thousands, except per share data) Revenue: Revenue, excluding trucking fuel surcharge $ 997,597 $ 1,122,754 $ 2,024,692 $ 2,219,710 Trucking fuel surcharge 63,101 119,329 160,804 226,908 Total revenue 1,060,698 1,242,083 2,185,496 2,446,618 Operating expenses: Salaries, wages, and benefits 365,311 380,354 720,144 744,209 Fuel 86,381 151,309 208,236 289,748 Operations and maintenance 66,067 82,443 134,471 162,203 Insurance and claims 45,302 48,796 99,582 98,932 Operating taxes and licenses 20,883 21,560 43,052 43,363 Communications 4,902 4,960 9,776 10,043 Depreciation and amortization of property and equipment 114,601 102,938 224,822 203,875 Amortization of intangibles 11,474 10,692 22,948 21,385 Rental expense 22,372 32,875 47,747 68,420 Purchased transportation 200,107 261,273 425,383 530,622 Impairments 353 2,182 1,255 2,182 Miscellaneous operating expenses 20,778 34,108 43,794 46,744 Total operating expenses 958,531 1,133,490 1,981,210 2,221,726 Operating income 102,167 108,593 204,286 224,892 Other income (expenses): Interest income 437 977 1,269 1,993 Interest expense ( 4,021 ) ( 7,156 ) ( 10,128 ) ( 14,504 ) Other income, net 8,499 3,101 1,992 9,240 Total other income (expenses), net 4,915 ( 3,078 ) ( 6,867 ) ( 3,271 ) Income before income taxes 107,082 105,515 197,419 221,621 Income tax expense 26,815 26,076 51,369 53,999 Net income 80,267 79,439 146,050 167,622 Net income attributable to noncontrolling interest ( 78 ) ( 234 ) ( 435 ) ( 479 ) Net income attributable to Knight-Swift $ 80,189 $ 79,205 $ 145,615 $ 167,143 Earnings per share: Basic $ 0.47 $ 0.46 $ 0.86 $ 0.97 Diluted $ 0.47 $ 0.46 $ 0.85 $ 0.97 Dividends declared per share: $ 0.08 $ 0.06 $ 0.16 $ 0.12 Weighted average shares outstanding: Basic 169,948 172,078 170,283 172,522 Diluted 170,624 172,724 170,958 173,162 See accompanying notes to the condensed consolidated financial statements (unaudited). 5 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Year-to-Date June 30, 2020 2019 (In thousands) Cash flows from operating activities: Net income $ 146,050 $ 167,622 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, equipment, and intangibles 247,770 225,260 Gain on sale of property and equipment ( 4,724 ) ( 19,267 ) Impairments 1,255 2,182 Deferred income taxes 23,112 9,519 Non-cash lease expense 46,493 59,501 Other adjustments to reconcile net income to net cash provided by operating activities 19,229 ( 2,282 ) (Decrease) increase in cash resulting from changes in: Trade receivables ( 11,440 ) 50,495 Income tax receivable 11,124 ( 28,494 ) Accounts payable 8,417 ( 25,165 ) Accrued liabilities and claims accrual ( 75,069 ) ( 16,910 ) Operating lease liabilities ( 48,243 ) ( 59,745 ) Other assets and liabilities 19,386 96 Net cash provided by operating activities 383,360 362,812 Cash flows from investing activities: Proceeds from maturities of held-to-maturity investments 6,950 12,945 Purchases of held-to-maturity investments ( 7,852 ) ( 5,847 ) Proceeds from sale of property and equipment, including assets held for sale 64,463 103,818 Purchases of property and equipment ( 259,641 ) ( 323,722 ) Expenditures on assets held for sale ( 418 ) ( 7,961 ) Net cash and equivalents invested in acquisitions ( 46,811 ) — Other cash flows from investing activities ( 9,757 ) ( 3,115 ) Net cash used in investing activities ( 253,066 ) ( 223,882 ) Cash flows from financing activities: Repayment of finance leases and long-term debt ( 31,893 ) ( 36,941 ) (Repayments) borrowings on revolving line of credit, net ( 44,000 ) 75,000 Borrowings under accounts receivable securitization — 90,000 Repayment of accounts receivable securitization ( 40,000 ) ( 185,000 ) Proceeds from common stock issued 9,892 5,363 Repurchases of the Company's common stock ( 34,630 ) ( 86,892 ) Dividends paid ( 27,673 ) ( 20,952 ) Other cash flows from financing activities ( 5,467 ) ( 2,600 ) Net cash used in financing activities ( 173,771 ) ( 162,022 ) Net decrease in cash, restricted cash, and equivalents ( 43,477 ) ( 23,092 ) Cash, restricted cash, and equivalents at beginning of period 202,228 130,976 Cash, restricted cash, and equivalents at end of period $ 158,751 $ 107,884 See accompanying notes to condensed consolidated financial statements (unaudited). 6 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Condensed Consolidated Statements of Cash Flows (Unaudited) — Continued Year-to-Date June 30, 2020 2019 (In thousands) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 10,455 $ 14,277 Income taxes 3,632 72,467 Non-cash investing and financing transactions: Equipment acquired included in accounts payable $ 27,463 $ 50,091 Equipment sales receivables 3,388 5,677 Financing provided to independent contractors for equipment sold 2,553 3,204 Transfers from property and equipment to assets held for sale 37,779 65,264 Contingent consideration associated with acquisition 18,245 — Right-of-use assets obtained in exchange for new operating lease liabilities 1,633 8,643 Right-of-use assets obtained in exchange for new operating lease liabilities through acquisitions 12,356 — Property and equipment obtained in exchange for financing lease liabilities reclassified from operating lease liabilities 48,659 32,153 Reconciliation of Cash, Restricted Cash, and Equivalents: June 30, 2020 December 31, 2019 June 30, 2019 December 31, 2018 (In thousands) Condensed Consolidated Balance Sheets Cash and cash equivalents $ 117,760 $ 159,722 $ 55,063 $ 82,486 Cash and cash equivalents – restricted ¹ 39,583 41,331 51,602 46,888 Other long-term assets ¹ 1,408 1,175 1,219 1,602 Condensed Consolidated Statements of Cash Flows Cash, restricted cash, and equivalents $ 158,751 $ 202,228 $ 107,884 $ 130,976 ________ 1 Reflects cash and cash equivalents that are primarily restricted for claims payments. See accompanying notes to condensed consolidated financial statements (unaudited). 7 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Condensed Consolidated Statements of Stockholders' Equity (Unaudited) Common Stock Additional Paid-in Capital Retained Earnings Total Knight-Swift Stockholders' Equity Noncontrolling Interest Total Stockholders’ Equity Shares Par Value (In thousands, except per share data) Balances – December 31, 2019 170,688 $ 1,707 $ 4,269,043 $ 1,395,465 $ 5,666,215 $ 2,088 $ 5,668,303 Common stock issued to employees 567 5 8,309 8,314 8,314 Common stock issued to the Board 13 — 515 515 515 Common stock issued under ESPP 33 — 1,063 1,063 1,063 Company shares repurchased ( 1,139 ) ( 11 ) ( 34,619 ) ( 34,630 ) ( 34,630 ) Shares withheld – RSU settlement ( 4,500 ) ( 4,500 ) ( 4,500 ) Employee stock-based compensation expense 8,363 8,363 8,363 Cash dividends paid and dividends accrued ($0.08 per share) ( 27,495 ) ( 27,495 ) ( 27,495 ) Net income attributable to Knight-Swift 145,615 145,615 145,615 Distribution to noncontrolling interest ( 394 ) ( 394 ) Net income attributable to noncontrolling interest 435 435 Balances – June 30, 2020 170,162 $ 1,701 $ 4,287,293 $ 1,474,466 $ 5,763,460 $ 2,129 $ 5,765,589 Common Stock Additional Paid-in Capital Retained Earnings Total Knight-Swift Stockholders' Equity Noncontrolling Interest Total Stockholders’ Equity Shares Par Value (In thousands, except per share data) Balances – December 31, 2018 172,844 $ 1,728 $ 4,242,369 $ 1,216,852 $ 5,460,949 $ 1,770 $ 5,462,719 Common stock issued to employees 347 3 3,700 3,703 3,703 Common stock issued to the Board 19 — 531 531 531 Common stock issued under ESPP 42 1 1,128 1,129 1,129 Company shares repurchased ( 2,874 ) ( 29 ) ( 86,863 ) ( 86,892 ) ( 86,892 ) Shares withheld – RSU settlement ( 2,304 ) ( 2,304 ) ( 2,304 ) Employee stock-based compensation expense 6,569 6,569 6,569 Cash dividends paid and dividends accrued ($0.06 per share) ( 20,761 ) ( 20,761 ) ( 20,761 ) Net income attributable to Knight-Swift 167,143 167,143 167,143 Distribution to noncontrolling interest ( 296 ) ( 296 ) Net income attributable to noncontrolling interest 479 479 Balances – June 30, 2019 170,378 $ 1,703 $ 4,254,297 $ 1,274,067 $ 5,530,067 $ 1,953 $ 5,532,020 See accompanying notes to condensed consolidated financial statements (unaudited). 8 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Condensed Consolidated Statements of Stockholders' Equity (Unaudited) — Continued Common Stock Additional Paid-in Capital Retained Earnings Total Knight-Swift Stockholders' Equity Noncontrolling Interest Total Stockholders’ Equity Shares Par Value (In thousands, except per share data) Balances – March 31, 2020 169,776 1,698 4,275,834 1,410,527 5,688,059 2,265 5,690,324 Common stock issued to employees 356 3 5,600 5,603 5,603 Common stock issued to the Board 13 — 515 515 515 Common stock issued under ESPP 17 — 517 517 517 Shares withheld – RSU settlement ( 2,529 ) ( 2,529 ) ( 2,529 ) Employee stock-based compensation expense 4,827 4,827 4,827 Cash dividends paid and dividends accrued ($0.08 per share) ( 13,721 ) ( 13,721 ) ( 13,721 ) Net income attributable to Knight-Swift 80,189 80,189 80,189 Distribution to noncontrolling interest ( 214 ) ( 214 ) Net income attributable to noncontrolling interest 78 78 Balances – June 30, 2020 170,162 1,701 4,287,293 1,474,466 5,763,460 2,129 5,765,589 Common Stock Additional Paid-in Capital Retained Earnings Total Knight-Swift Stockholders' Equity Noncontrolling Interest Total Stockholders’ Equity Shares Par Value (In thousands, except per share data) Balances – March 31, 2019 173,066 $ 1,730 4,248,188 $ 1,292,838 $ 5,542,756 $ 1,867 $ 5,544,623 Common stock issued to employees 149 1 1,327 1,328 1,328 Common stock issued to the Board 19 — 531 531 531 Common stock issued under ESPP 18 1 562 563 563 Company shares repurchased ( 2,874 ) ( 29 ) ( 86,863 ) ( 86,892 ) ( 86,892 ) Shares withheld – RSU settlement ( 790 ) ( 790 ) ( 790 ) Employee stock-based compensation expense 3,689 3,689 3,689 Cash dividends paid and dividends accrued ($0.06 per share) ( 10,323 ) ( 10,323 ) ( 10,323 ) Net income attributable to Knight-Swift 79,205 79,205 79,205 Distribution to noncontrolling interest ( 148 ) ( 148 ) Net income attributable to noncontrolling interest 234 234 Balances – June 30, 2019 170,378 $ 1,703 $ 4,254,297 $ 1,274,067 $ 5,530,067 $ 1,953 $ 5,532,020 See accompanying notes to condensed consolidated financial statements (unaudited). 9 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 — Introduction and Basis of Presentation Certain acronyms and terms used throughout this Quarterly Report are specific to the Company, commonly used in the trucking industry, or are otherwise frequently used throughout this document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document. Description of Business Knight-Swift is a transportation solutions provider, headquartered in Phoenix, Arizona. During the first half of 2020, the Company operated an average of 18,428 tractors (comprised of 16,327 company tractors and 2,101 independent contractor tractors) and 57,456 trailers within the Trucking segment. Additionally, the Company operated an average of 586 tractors and 10,355 containers in the Intermodal segment. The Company's three reportable segments are Trucking, Logistics, and Intermodal. Basis of Presentation The condensed consolidated financial statements and footnotes included in this Quarterly Report include the accounts of Knight-Swift Transportation Holdings Inc. and its subsidiaries and should be read in conjunction with the consolidated financial statements and footnotes included in Knight-Swift's 2019 Annual Report. In management's opinion, these condensed consolidated financial statements were prepared in accordance with GAAP and include all adjustments necessary (consisting of normal recurring adjustments) for the fair statement of the periods presented. With respect to transactional/durational data, references to years pertain to calendar years. Similarly, references to quarters pertain to calendar quarters. Changes in Presentation Changes in presentation associated with adopting accounting pronouncements are included in Note 2. 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. At the same time, operating expenses generally increase, and tractor productivity of the Company's fleet, independent contractors, and third-party carriers decreases during the winter months due to 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. These factors typically lead to lower operating profitability, as compared to other parts of the year. Additionally, beginning in the latter half of the third quarter and continuing into the fourth quarter, the Company typically experiences surges pertaining to holiday shopping trends toward delivery of gifts purchased over the Internet, as well as the length of the holiday season (consumer shopping days between Thanksgiving and Christmas). However, cyclical changes in the trucking industry, including imbalances in supply and demand, can override the seasonality faced in the industry. Impact of COVID-19 During the first half of 2020, COVID-19 became a global pandemic, which triggered a significant downturn in the global economy. The Company continues to operate its business through the COVID-19 pandemic and has taken additional precautions to ensure the safety of its employees, customers, vendors, and the communities in which it operates. During the quarter and year-to-date periods ended June 30, 2020, the Company incurred $ 10.0 million and $ 12.3 million, respectively, of expenses directly attributable to the pandemic, which were incremental to those incurred prior to the outbreak. These primarily pertained to payroll premiums paid to drivers and shop technicians, additional disinfectants and cleaning supplies, and various other pandemic-specific items. The costs are clearly separable from normal business operations and are not expected to recur once the pandemic subsides. 10 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED There are various uncertainties that have arisen from the COVID-19 pandemic. While management is continuing to monitor the impact of the pandemic on Knight-Swift, including its employees, customers, independent contractors, stockholders, and other business partners and stakeholders, it is difficult to predict the impact that the pandemic will have on future results of its operations, financial position, and liquidity. This has caused some uncertainties around various accounting estimates. Due to these uncertainties, the Company's accounting estimates may change, as management's assessment of the impacts of the COVID-19 pandemic continues to evolve. Refer to Part II, Item 1A "Risk Factors" in our Quarterly Report for the quarterly period ended March 31, 2020 for more discussion about potential risks and uncertainties surrounding the COVID-19 pandemic that may impact our business, results of operations, or financial condition. Note 2 — Recently Adopted Accounting Pronouncements ASU 2016-13: Financial Instruments – Credit Losses (Topic 326) — Measurements of Credit Losses on Financial Instruments Summary of the Standard — In June 2016, the FASB issued ASU 2016-13, which, in addition to several clarifying ASUs, established the new ASC Topic 326, Financial Instruments — Credit Losses ("CECL"). The new CECL standard amends the FASB's guidance on the impairment of financial instruments. Specifically, it adds the CECL impairment model to GAAP which is based on expected losses rather than incurred losses. This is intended to result in more timely recognition of such losses. Under the new CECL standard, an entity recognizes as an allowance its estimate of lifetime expected credit losses. The new CECL standard is also intended to reduce the complexity of GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. Further, the new CECL standard makes targeted changes to the impairment model for available-for-sale debt securities and moves the guidance from ASC Topic 320, Investments — Debt and Equity Securities, to ASC Subtopic 326-30. For public business entities, the new standard was effective for annual and interim reporting periods beginning after December 15, 2019. For most debt instruments, entities are required to adopt the new CECL standard using a modified retrospective approach, meaning that entities should record a cumulative-effect adjustment to equity as of the beginning of the first reporting period in which the guidance is effective. Practical Expedient — As permitted under ASU 2016-13 (and related ASUs), management elected to apply the collateral-dependent financial asset practical expedient which allows entities to measure the expected credit losses for the financial asset by comparing the amortized cost basis with the fair value of the collateral at the reporting date, rather than using the fair value of the financial asset. Current Period Impact of Adoption — The Company adopted ASC Topic 326 on January 1, 2020 using the modified retrospective approach. Upon adoption of the standard management assessed the potential impact of the CECL model on each type of the Company's financial assets and determined that there was no material impact on the Company's financial statements or accounting policies. ASU 2018-15: Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract Summary of the Standard — In August 2018, the FASB issued ASU 2018-15, which amended ASC Subtopic 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract ("Service CCA"). The amendments in ASU 2018-15 align the accounting for costs incurred to implement a Service CCA with previously codified guidance on capitalizing costs associated with developing or obtaining internal-use software. 11 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Specifically, the ASU amends ASC Subtopic 350-40 to include in its scope implementation costs incurred with a Service CCA. This addition clarifies that a customer should apply the guidance from ASC Paragraph 350-40-25 to determine which stage the project is in before assessing whether implementation costs should be capitalized in a Service CCA that is considered a service contract. These capitalized items should be recorded within the same balance sheet line item as a prepayment for any fees. Any capitalized costs from the Service CCA should be expensed over the term of the hosting arrangement, which includes the noncancelable period and any options to extend that are reasonably certain to be exercised and recorded in the same line item as fees associated with the hosting element of the arrangement. The amendments in this ASU were effective for public business entities for fiscal years beginning after December 15, 2019 and could be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Current Period Impact of Adoption — The Company adopted the amendments in ASU 2018-15 on January 1, 2020 and elected to apply the amendments on a prospective basis to implementation costs incurred after the date of adoption. Upon review of the Service CCA's entered into during year-to-date June 30, 2020, management has determined that adoption of the amendments has not had a material impact on the Company's financial statements and related accounting policies. ASU 2017-04: Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment Summary of the Standard — In January 2017, the FASB issued ASU 2017-04, which amends ASC Topic 350 by simplifying the goodwill impairment test. The amendments in this ASU are intended to simplify subsequent measurement of goodwill. The key amendment in the ASU eliminates Step 2 from the goodwill impairment test, in which entities measured a goodwill impairment loss by comparing the implied fair value to the carrying amount of a reporting unit's goodwill. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with the carrying amount of a reporting unit and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments also require companies to disclose the amounts of goodwill allocated to each reporting unit with a zero or negative carrying amount of assets. The amendments were effective for public business entities for fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Current Period Impact of Adoption — The Company adopted the amendments in ASU 2017-14 on January 1, 2020 on a prospective basis. Management has updated the Company's accounting policy to incorporate the amendments in the ASU and has included the revised disclosure requirements below. Refer to Note 7 for disclosures about the Company's goodwill balances. Accounting Policy Update Goodwill — Management evaluates goodwill on an annual basis as of June 30 th , or more frequently if indicators of impairment exist. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company conducts a quantitative goodwill impairment test. Management estimates the fair values of its reporting units using a combination of the income and market approaches. If the carrying amount of a reporting unit exceeds the fair value, then management recognizes an impairment loss of the same amount. This loss is only limited to the total amount of goodwill allocated to that reporting unit. Other ASUs There were various other ASUs that became effective during year-to-date June 30, 2020, which did not have a material impact on the Company's results of operations, financial position, cash flows, or disclosures. 12 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Note 3 — Recently Issued Accounting Pronouncements Date Issued Reference Description Adoption Date and Method Financial Statement Impact March 2020 2020-04: Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting 1 The amendments in this Update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The amendments in this ASU are effective for any interim period after March 12, 2020 and should be applied on a prospective basis. March 2020 No material impact 2 March 2020 2020-03: Codification Improvements to Financial Instruments 1 The amendments within this ASU updated several sections of the Codification and how various topics and subtopics interacted due to new guidance on financial instruments. This includes addressing issues related to fair value option disclosures, line-of-credit or revolving-debt arrangements and leases among others. The amendments should be applied prospectively and have varying effective dates, which were all in effect for public business entities prior to issuance of the ASU. March 2020, Prospective No material impact February 2020 2020-02: Financial Instruments – Credit Losses (Topic 326) and Leases – (Topic 842) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) 1 The amendments in this ASU incorporate discussion from SEC Staff Accounting Bulletin No. 119 about expected implementation practices related to ASC Topic 326. The amendments also codify the SEC Staff's announcement that it would not object to the FASB's update to effective dates for major updates, which were amended within ASU 2019-10. January 2021, Adoption method varies by amendment Adopted January 1, 2020, no material impact January 2020 2020-01: Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) The amendments clarify that an entity should consider observable transactions when determining to apply or discontinue the equity method for the purposes of applying the measurement alternative. The amendments also clarify that an entity would not consider whether a purchased option would be accounted for under the equity method when applying ASC 815-10-15-141(a). January 2021, Prospective Currently under evaluation, but not expected to be material 1 Adopted during the first quarter of 2020. 2 As identified within the 2018 RSA, the lender can trigger an amendment by identifying and deciding upon a replacement for LIBOR. The Company's Term Loan also references LIBOR and management is currently underway with refinancing, as the Term Loan matures in October of 2020. 13 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Note 4 — Acquisition On January 1, 2020 , pursuant to a stock purchase agreement (the "SPA") the Company acquired 100.0 % of the equity interests of a warehousing-related company (the "Warehousing Co.") with locations throughout the Central US. The total purchase price consideration of $ 66.9 million included $ 48.2 million in cash to the sellers at closing, which was funded through cash-on-hand and borrowing on the Revolver on the transaction date. At closing, $ 6.8 million of the cash consideration was placed in escrow to secure certain of the sellers' indemnification obligations and remains subject to further adjustments. The purchase price also included contingent consideration consisting of three additional annual payments of up to $ 8.1 million each (or $ 24.3 million in total), representing the maximum possible annual deferred payments to the sellers based on Warehousing Co.'s earnings before interest and taxes ("EBIT") for each of the calendar years ending December 31, 2020, December 31, 2021, and the annualized six-month period ending June 30, 2022. In order to estimate Warehousing Co.'s future performance, the Company utilized the Monte Carlo simulation method using certain inputs, including Warehousing Co.'s forecasted EBIT, discount rate, dividend yields, expected volatility, and expected stock returns during the above measurement periods. Based on the above inputs, the present value of the total contingent consideration, along with the estimated net working capital adjustment equaled $ 18.7 million as of January 1, 2020. During the second quarter of 2020, the net working capital adjustment, was reduced by $ 0.4 million based on the actual versus estimated net working capital adjustment as of the transaction date. This adjustment resulted in the total estimated contingent consideration and net working capital adjustment decreasing to $ 18.3 million. The total purchase price consideration, as if adjusted at the January 1, 2020 transaction date, is identified in the table below. The SPA included an election under the Internal Revenue Code Section 338(h)(10). Accordingly, the book and tax basis of the acquired assets and liabilities are the same as of the purchase date. The SPA contains customary representations, warranties, covenants, and indemnification provisions. The goodwill recognized represents expected synergies from combining the operations of Warehousing Co. with the Company, including enhanced service offerings, as well as other intangible assets that did not meet the criteria for separate recognition. The goodwill is expected to be deductible for tax purposes. The purchase price allocation for the acquisition is preliminary and has been allocated based on estimated fair values of the assets acquired and liabilities assumed at the acquisition date, pending the completion of the valuation of acquired tangible assets, an independent valuation of certain acquired intangible assets, assessment of lease agreements, assessment of certain liabilities, the calculation of deferred taxes based upon the underlying tax basis of assets acquired and liabilities assumed, and assessment of other tax related items. As the Company obtains more information, the preliminary purchase price allocation disclosed below is subject to change. Any future adjustments to the preliminary purchase price allocation, including changes within identifiable intangible assets or estimation uncertainty impacted by market conditions, may impact future net earnings. The purchase price allocation adjustments can be made through the end of the measurement period, which is not to exceed one year from the acquisition date. 14 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED The following table summarizes the fair value of the consideration transferred as of the acquisition date: January 1, 2020 Opening Balance Sheet as Reported at March 31, 2020 Second Quarter 2020 Adjustments January 1, 2020 Opening Balance Sheet as Reported at June 30, 2020 (in thousands) Fair value of the consideration transferred $ 66,854 $ ( 410 ) $ 66,444 Cash and cash equivalents 1,388 — 1,388 Trade and other receivables 3,301 — 3,301 Prepaid expenses 608 — 608 Other current assets 78 — 78 Property and equipment 1,938 — 1,938 Operating lease right-of-use assets 12,356 — 12,356 Identifiable intangible assets ¹ 55,681 — 55,681 Deferred tax assets 54 — 54 Other noncurrent assets 404 — 404 Total assets 75,808 — 75,808 Accounts payable ( 347 ) — ( 347 ) Accrued liabilities ( 644 ) — ( 644 ) Operating lease liabilities – current portion ( 4,451 ) — ( 4,451 ) Operating lease liabilities – less current portion ( 7,905 ) — ( 7,905 ) Total liabilities ( 13,347 ) — ( 13,347 ) Goodwill $ 4,393 $ ( 410 ) $ 3,983 1 Includes $ 53.8 million in customer relationships, $ 0.7 million in noncompete agreements, $ 0.6 million in internally developed software, and a $ 0.6 million trade name. 15 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Note 5 — Restricted Investments, Held-to-Maturity The following tables present the cost or amortized cost, gross unrealized gains and temporary losses, and estimated fair value of the Company's restricted investments, held-to-maturity: June 30, 2020 Gross Unrealized Cost or Amortized Cost Gains Temporary Losses Estimated Fair Value (In thousands) US corporate securities $ 8,272 $ 27 $ ( 3 ) $ 8,296 Restricted investments, held-to-maturity $ 8,272 $ 27 $ ( 3 ) $ 8,296 December 31, 2019 Gross Unrealized Cost or Amortized Cost Gains Temporary Losses Estimated Fair Value (In thousands) US corporate securities $ 8,912 $ 4 $ ( 1 ) $ 8,915 Restricted investments, held-to-maturity $ 8,912 $ 4 $ ( 1 ) $ 8,915 As of June 30, 2020, the contractual maturities of the restricted investments, held-to-maturity, were one year or less. There were three securities and seven securities that were in an unrealized loss position for less than twelve months as of June 30, 2020 and December 31, 2019, respectively. The Company did no t recognize any impairment losses related to its held-to-maturity investments during the quarter or year-to-date periods ended June 30, 2020 or 2019, respectively. Refer to Note 16 for additional information regarding fair value measurements of the Company's investments. Note 6 — Assets Held for Sale The Company expects to sell its assets held for sale, which primarily consist of revenue equipment, within the next twelve months . Revenue equipment held for sale totaled $ 39.6 million and $ 41.8 million as of June 30, 2020 and December 31, 2019, respectively. Net gains on disposals, including disposals of property and equipment classified as assets held for sale, reported in "Miscellaneous operating expenses" in the condensed consolidated statements of comprehensive income, were: • $ 1.7 million and $ 7.5 million for the quarter-to-date periods ended June 30, 2020 and 2019, respectively. • $ 4.7 million and $ 19.2 million for the year-to-date periods ended June 30, 2020 and 2019, respectively. The Company recognized impairment losses related to assets held for sale of approximately $ 0.4 million during the quarter and year-to-date periods ended June 30, 2020. The Company did no t recognize any impairment losses related to assets held for sale during the quarter or year-to-date periods ended June 30, 2019. 16 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Note 7 — Goodwill and Other Intangible Assets Goodwill The changes in the carrying amount of goodwill were as follows: (In thousands) Goodwill, balance at December 31, 2019 $ 2,918,992 Adjustments relating to deferred tax assets ( 5 ) Acquisition ¹ 3,983 Goodwill, balance at June 30, 2020 $ 2,922,970 1 The goodwill associated with the acquisition referenced in Note 4 was allocated to the non-reportable segment, and is net of purchase price accounting adjustments. The Company did no t record any goodwill impairments during the quarter or year-to-date periods ended June 30, 2020 or 2019. Other Intangible Assets Other intangible asset balances were as follows: June 30, 2020 December 31, 2019 (In thousands) Definite-lived intangible assets ¹ Gross carrying amount $ 894,597 $ 839,516 Accumulated amortization ( 122,905 ) ( 99,957 ) Definite-lived intangible assets, net 771,692 739,559 Trade names: Gross carrying amount 640,500 639,900 Intangible assets, net $ 1,412,192 $ 1,379,459 1 The major categories of the Company's definite-lived intangible assets include customer relationships, non-compete agreements, internally-developed software, and others. Identifiable intangible assets subject to amortization have been recorded at fair value. Intangible assets related to acquisitions other than the 2017 Merger are amortized over a weighted-average amortization period of 18.9 years. The Company's customer relationship intangible assets related to the 2017 Merger are being amortized over a weighted average amortization period of 19.9 years. As of June 30, 2020, management anticipates that the composition and amount of amortization associated with intangible assets will be $ 22.9 million for the remainder of 2020, $ 45.9 million in 2021, $ 45.8 million in 2022, and $ 45.2 million for each of the years 2023 and 2024. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets, and other events. 17 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Note 8 — Income Taxes Effective Tax Rate — The quarter-to-date June 30, 2020 and June 30, 2019 effective tax rates were 25.0 % and 24.7 %, respectively. The Company recognized a discrete item relating to stock compensation deductions during the quarter ended June 30, 2020. The Company also recognized discrete items relating to stock compensation deductions as well as the partial release of its reserve for uncertain tax positions during the quarter ended June 30, 2019. The year-to-date June 30, 2020 and June 30, 2019 effective tax rates were 26.0 % and 24.4 %, respectively. The Company recognized discrete items relating to stock compensation deductions partially offset by unfavorable foreign currency fluctuations for the year-to-date June 30, 2020. The Company also recognized discrete items relating to stock compensation deductions as well as a partial release of its reserve for uncertain tax positions during the year-to-date period ended June 30, 2019. Valuation Allowance — The Company has no t established a valuation allowance as it has been determined that, based upon available evidence, a valuation allowance is not required. Management believes that it is more like ly than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. All other deferred tax assets are expected to be realized and utilized by continued profitability in future periods. Unrecognized Tax Benefits — Management believes it is reasonably possible that a decrease of up to $ 1.0 million in unrecognized tax benefits relating to federal deductions may be necessary within the next twelve months. Interest and Penalties — Accrued interest and penalties related to unrecognized tax benefits were approximately $ 0.5 million and $ 0.4 million as of June 30, 2020 and December 31, 2019, respectively. Tax Examinations — The Company is currently under examination by the IRS for the 2012 tax year and management does not expect any adjustments that would have a material impact on the Company's effective tax rate. Certain of the Company's subsidiaries are also currently under examination by various state jurisdictions for tax years ranging from 2013 to 2018 . At the completion of these examinations, management does not expect any adjustments that would have a material impact on the Company's effective tax rate. Years subsequent to 2014 remain subject to examination. Note 9 — Accounts Receivable Securitization The 2018 RSA is a secured borrowing that is collateralized by the Company's eligible receivables, for which the Company is the servicing agent. The Company's receivable originator subsidiaries sell, on a revolving basis, undivided interests in all of their eligible accounts receivable to Swift Receivables Company II, LLC ("SRCII") who in turn sells a variable percentage ownership in those receivables to the various purchasers. The Company's eligible receivables are included in "Trade receivables, net of allowance for doubtful accounts" in the condensed consolidated balance sheets. As of June 30, 2020, the Company's eligible receivables generally have high credit quality, as determined by the obligor's corporate credit rating. The 2018 RSA is subject to fees, various affirmative and negative covenants, representations and warranties, and default and termination provisions customary for facilities of this type. The Company was in compliance with these covenants as of June 30, 2020. Collections on the underlying receivables by the Company are held for the benefit of SRCII and the various purchasers and are unavailable to satisfy claims of the Company and its subsidiaries. 18 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED The following table summarizes the key terms of the 2018 RSA (dollars in thousands): Effective date July 11, 2018 Final maturity date July 9, 2021 Borrowing capacity $ 325,000 Accordion option ¹ $ 175,000 Unused commitment fee rate ² 20 to 40 basis points Program fees on outstanding balances ³ one-month LIBOR + 80 to 100 basis points 1 The accordion option increases the maximum borrowing capacity, subject to participation of the purchasers. 2 The 2018 RSA commitment fee rate is based on the percentage of the maximum borrowing capacity utilized. 3 The 2018 RSA program fee is based on the Company's consolidated total net leverage ratio. As identified within the 2018 RSA, the lender can trigger an amendment by identifying and deciding upon a replacement for LIBOR. Availability under the 2018 RSA is calculated as follows: June 30, 2020 December 31, 2019 (In thousands) Borrowing base, based on eligible receivables $ 273,800 $ 299,100 Less: outstanding borrowings ¹ ( 165,000 ) ( 205,000 ) Less: outstanding letters of credit ( 68,841 ) ( 70,841 ) Availability under accounts receivable securitization facilities $ 39,959 $ 23,259 1 Outstanding borrowings are included in "Accounts receivable securitization" in the condensed consolidated balance sheets, offset by $ 0.2 million of deferred loan costs as of June 30, 2020 and December 31, 2019 . Interest accrued on the aggregate principal balance at a rate of 1.1 % and 2.6 % as of June 30, 2020 and December 31, 2019 , respectively. Program fees and unused commitment fees are recorded in "Interest expense" in the condensed consolidated statements of comprehensive income. The Company incurred accounts receivable securitization program fees of $ 0.7 million and $ 1.9 million during the quarter-to-date June 30, 2020 and 2019 periods, respectively. The Company incurred accounts receivable securitization program fees of $ 2.1 million and $ 3.9 million during the year-to-date June 30, 2020 and 2019 periods, respectively. Refer to Note 16 for information regarding the fair value of the 2018 RSA. 19 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Note 10 — Commitments Purchase Commitments As of June 30, 2020, the Company had outstanding commitments to purchase revenue equipment of $ 317.9 million in the remainder of 2020 ($ 224.0 million of which were tractor commitments) and none thereafter. These purchases may be financed through any combination of operating leases, finance leases, debt, proceeds from sales of existing equipment, and cash flows from operations. As of June 30, 2020, the Company had outstanding commitments to purchase facilities and non-revenue equipment of $ 19.2 million in the remainder of 2020, $ 1.8 million in the two-year period 2021 through 2022, $ 0.2 million in the two-year period 2023 through 2024, and none thereafter. Factors such as costs and opportunities for future terminal expansions may change the amount of such expenditures. TRP Commitments Since 2003, Knight has entered into partnership agreements with entities that make privately-negotiated equity investments. In these agreements, Knight committed to invest in return for an ownership percentage. During the first quarter of 2020, Knight entered into a $ 20.0 million commitment to invest in the newly formed TRP Capital Partners V, LP with $ 16.8 million outstanding as of June 30, 2020. There were no other material changes related to the previously disclosed TRP commitments during the quarter ended June 30, 2020. Note 11 — Contingencies and Legal Proceedings Legal Proceedings Information is provided below regarding the nature, status, and contingent loss amounts, if any, associated with the Company's pending legal matters. There are inherent uncertainties in these legal matters, some of which are beyond management's control, making the ultimate outcomes difficult to predict. Moreover, management's views and estimates related to these matters may change in the future, as new events and circumstances arise and the matters continue to develop. The Company has made accruals with respect to its legal matters where appropriate, which are included in "Accrued liabilities" in the condensed consolidated balance sheets. The Company has recorded an aggregate accrual of approximately $ 27.9 million, relating to the Company's outstanding legal proceedings as of June 30, 2020. Based on management's present knowledge of the facts and (in certain cases) advice of outside counsel, management does not believe that loss contingencies arising from pending matters are likely to have a material adverse effect on the Company's overall financial position, operating results, or cash flows after taking into account any existing accruals. However, actual outcomes could be material to the Company's financial position, operating results, or cash flows for any particular period. 20 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED EMPLOYEE COMPENSATION AND PAY PRACTICES MATTERS CRST Expedited The plaintiff alleges tortious interference with contract and unjust enrichment related to non-competition agreements entered into with certain of its drivers. Plaintiff(s) Defendant(s) Date instituted Court or agency currently pending in CRST Expedited, Inc. Swift Transportation Co. of Arizona LLC. March 20, 2017 United States District Court for the Northern District of Iowa Recent Developments and Current Status In July 2019, a jury issued an adverse verdict in this lawsuit. The court issued a decision granting in part and denying in part certain motions related to the jury’s verdict. Both parties have appealed the court’s decision. The likelihood that a loss has been incurred is probable and estimable, and the loss has accordingly been accrued as of June 30, 2020. California Wage, Meal, and Rest Class Actions The plaintiffs generally allege one or more of the following: that the Company 1) failed to pay the California minimum wage; 2) failed to provide proper meal and rest periods; 3) failed to timely pay wages upon separation from employment; 4) failed to pay for all hours worked; 5) failed to pay overtime; 6) failed to properly reimburse work-related expenses; and 7) failed to provide accurate wage statements. Plaintiff(s) Defendant(s) Date instituted Court or agency currently pending in John Burnell 1 Swift Transportation Co., Inc March 22, 2010 United States District Court for the Central District of California James R. Rudsell 1 Swift Transportation Co. of Arizona, LLC and Swift Transportation Company April 5, 2012 United States District Court for the Central District of California Recent Developments and Current Status In April 2019, the parties reached settlement of this matter. In January 2020, the court granted final approval of the settlement. The plaintiff appealed the court’s decision granting final approval of the settlement. The likelihood that a loss has been incurred is probable and estimable, and the loss has accordingly been accrued as of June 30, 2020. Arizona Minimum Wage Class Action The plaintiffs generally allege one or more of the following: 1) failure to pay minimum wage for the first day of orientation; 2) failure to pay minimum wage for time spent studying; 3) failure to pay minimum wage for 16 hours per day; and 4) failure to pay minimum wage for the first eight hours of sleeper berth time. Plaintiff(s) Defendant(s) Date instituted Court or agency currently pending in Pamela Julian ¹ Swift Transportation Co., Inc. and Swift Transportation Co. of Arizona LLC December 29, 2015 United States District Court for the District of Arizona Recent Developments and Current Status In December 2019, the court awarded damages for failure to pay minimum wage for 16 hours per day. The likelihood that a loss has been incurred is probable and estimable, and the loss has accordingly been accrued as of June 30, 2020. 1 Individually and on behalf of all others similarly situated. 21 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED INDEPENDENT CONTRACTOR MATTERS Ninth Circuit Independent Contractor Misclassification Class Action The putative class alleges that Swift misclassified independent contractors as independent contractors, instead of employees, in violation of the Fair Labor Standards Act and various state laws. The lawsuit also raises certain related issues with respect to the lease agreements that certain independent contractors have entered into with Interstate Equipment Leasing, LLC. The putative class seeks unpaid wages, liquidated damages, interest, other costs, and attorneys' fees. Plaintiff(s) Defendant(s) Date instituted Court or agency currently pending in Joseph Sheer, Virginia Van Dusen, Jose Motolinia, Vickii Schwalm, Peter Wood ¹ Swift Transportation Co., Inc., Interstate Equipment Leasing, Inc., Jerry Moyes, and Chad Killebrew December 22, 2009 Unites States District Court of Arizona and Ninth Circuit Court of Appeals Recent Developments and Current Status In January 2020, the court granted final approval of the settlement in this matter. In March 2020, the Company paid the settlement amount approved by the court. As of June 30, 2020, the Company has a reserve accrued for anticipated costs associated with finalizing this matter. 1 Individually and on behalf of all others similarly situated. Self Insurance Automobile Liability, General Liability, and Excess Liability — Effective November 1, 2019, the Company has $ 130.0 million in excess auto liability ("AL") coverage. For prior years, Swift and Knight maintained separately varying excess AL and general liability limits. During prior policy periods, Swift AL claims were subject to a $ 10.0 million self-insured retention ("SIR") per occurrence and Knight AL claims were subject to a $ 1.0 million to $ 3.0 million SIR per occurrence. Additionally, Knight carries a $ 2.5 million aggregate deductible for any loss or losses within the $ 5.0 million excess of $ 5.0 million layer of coverage. Effective March 1, 2020, Knight and Swift retain the same $ 10.0 million SIR per occurrence. Cargo Damage and Loss — The Company is insured against cargo damage and loss with liability limits of $ 2.0 million per truck or trailer with a $ 10.0 million limit per occurrence. Workers' Compensation and Employers' Liability — The Company is self-insured for workers' compensation coverage. Swift maintains statutory coverage limits, subject to a $ 5.0 million SIR for each accident or disease. Effective March 1, 2019, Knight maintains statutory coverage limits, subject to a $ 2.0 million SIR for each accident or disease. Prior to March 1, 2019, the Knight SIR was $ 1.0 million per occurrence. Medical — Knight maintains primary and excess coverage for employee medical expenses, with a $ 0.3 million self-insured retention per claimant. Through December 31, 2019, Swift was fully insured on its medical benefits (subject to contributed premiums). Effective January 1, 2020, Swift provides primary and excess coverage for employee medical expenses, with an SIR of $ 0.5 million per claimant to all employees. 22 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Note 12 — Share Repurchase Plan On May 31, 2019, the Company announced that the Board approved the repurchase of up to $ 250.0 million worth of the Company's outstanding common stock (the "2019 Knight-Swift Share Repurchase Plan"). With the adoption of the 2019 Knight-Swift Share Repurchase Plan, the Company terminated the $ 250.0 million repurchase plan previously approved by the Board in June 2018 (the "2018 Knight-Swift Share Repurchase Plan"). There was approximately $ 0.2 million remaining under the 2018 Knight-Swift Share Repurchase Plan upon termination. The following table presents the Company's repurchases of its common stock under the respective share repurchase plans, excluding advisory fees: Share Repurchase Plan Quarter-to-Date June 30, 2020 Year-to-Date June 30, 2020 Board Approval Date Authorized Amount Shares Amount Shares Amount (in thousands) May 30, 2019 ¹ $ 250,000 — $ — 1,139 $ 34,630 — $ — 1,139 $ 34,630 Share Repurchase Plan Quarter-to-Date June 30, 2019 Year-to-Date June 30, 2019 Board Approval Date Authorized Amount Shares Amount Shares Amount (in thousands) June 1, 2018 $ 250,000 2,315 $ 70,500 2,315 $ 70,500 May 30, 2019 ¹ $ 250,000 559 16,392 559 16,392 2,874 $ 86,892 2,874 $ 86,892 1 $ 199.0 million and $ 233.6 million remained available under the 2019 Knight-Swift Share Repurchase Plan as of June 30, 2020 and December 31, 2019 , respectively. Note 13 — Weighted Average Shares Outstanding Earnings per share, basic and diluted, as presented in the condensed consolidated statements of comprehensive income, are calculated by dividing net income attributable to Knight-Swift by the respective weighted average common shares outstanding during the period. The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding: Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 (In thousands) Basic weighted average common shares outstanding 169,948 172,078 170,283 172,522 Dilutive effect of equity awards 676 646 675 640 Diluted weighted average common shares outstanding 170,624 172,724 170,958 173,162 Anti-dilutive shares excluded from diluted earnings per share ¹ 365 916 329 933 1 Shares were excluded from the dilutive-effect calculation because the outstanding awards' exercise prices were greater than the average market price of the Company's common stock for the periods presented. 23 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Note 14 — Related Party Transactions The following table presents Knight-Swift's transactions with companies controlled by and/or affiliated with its related parties: Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 Provided by Knight-Swift Received by Knight-Swift Provided by Knight-Swift Received by Knight-Swift Provided by Knight-Swift Received by Knight-Swift Provided by Knight-Swift Received by Knight-Swift (In thousands) Freight Services: Central Freight Lines ¹ $ 1,020 $ — $ 3,843 $ — $ 7,836 $ — $ 6,959 $ — SME Industries ¹ 28 — 62 — 28 — 217 — Total $ 1,048 $ — $ 3,905 $ — $ 7,864 $ — $ 7,176 $ — Facility and Equipment Leases: Central Freight Lines ¹ $ 23 $ 93 $ 78 $ 92 $ 23 $ 185 $ 322 $ 185 Other Affiliates ¹ 4 36 5 — 9 109 9 — Total $ 27 $ 129 $ 83 $ 92 $ 32 $ 294 $ 331 $ 185 Other Services: Central Freight Lines ¹ $ — $ — $ 542 $ — $ 15 $ — $ 542 $ — DPF Mobile ¹ — 19 — 54 $ — 31 — 98 Other Affiliates ¹ 10 — 12 614 19 — 22 1,232 Total $ 10 $ 19 $ 554 $ 668 $ 34 $ 31 $ 564 $ 1,330 1 Entities affiliated with former Board member Jerry Moyes include Central Freight Lines, SME Industries, Compensi Services, and DPF Mobile. "Other affiliates" includes entities that are associated with various board members and executives and require approval by the Board prior to completing transactions. Transactions with these entities generally include freight services, facility and equipment leases, equipment sales, and other services. • Freight Services Provided by Knight-Swift — The Company charges each of these companies for transportation services. • Freight Services Received by Knight-Swift — Transportation services received from Central Freight represent less-than-truckload freight services rendered to haul parts and equipment to Company shop locations. • Other Services Provided by Knight-Swift — Other services provided by the Company to the identified related parties include equipment sales and miscellaneous services. • Other Services Received by Knight-Swift — Consulting fees, diesel particulate filter cleaning, sales of various parts and tractor accessories, and certain third-party payroll and employee benefits administration services from the identified related parties are included in other services received by the Company. Receivables and payables pertaining to related party transactions were: June 30, 2020 December 31, 2019 Receivable Payable Receivable Payable (In thousands) Central Freight Lines $ 3,303 $ — $ 2,872 $ — SME Industries 22 — 17 — DPF Mobile — — — 2 Other Affiliates 1 2 — — Total $ 3,326 $ 2 $ 2,889 $ 2 24 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Note 15 — Information by Segment and Geography Segment Information The Company has three reportable segments: Trucking, Logistics, and Intermodal, as well as the non-reportable segments, discussed below. Based on how economic factors affect the nature, amount, timing, and uncertainty of revenue or cash flows, the Company disaggregates revenues by reportable segment for the purposes of applying the ASC Topic 606 guidance. The Company's twenty operating segments are structured around the types of transportation service offerings provided to our customers, as well as the equipment utilized. In addition, the operating segments may be further distinguished by the Company’s respective brands. The Company aggregated these various operating segments into the three reportable segments discussed below based on similarities with both their qualitative and economic characteristics. Trucking The Trucking reportable segment is comprised of nine trucking operating segments that provide similar transportation services to our customers utilizing similar transportation equipment over both irregular (one-way movement) and/or dedicated routes. The Trucking reportable segment consists of irregular route and dedicated, refrigerated, expedited, flatbed, and cross-border operations. Logistics The Logistics reportable segment is comprised of five logistics operating segments that provide similar transportation services to our customers and primarily consist of brokerage and other freight management services utilizing third-party transportation providers and their equipment. Intermodal The Intermodal reportable segment is comprised of two intermodal operating segments that provide similar transportation services to our customers. These transportation services include arranging the movement of customers' freight through third-party intermodal rail services on the Company’s trailing equipment (trailers on flat cars and rail containers), as well as drayage services to transport loads between the railheads and customer locations. Non-reportable The non-reportable segments include four operating segments that consist of support services provided to the Company's customers and independent contractors (including repair and maintenance shop services, equipment leasing, warranty services, and insurance), trailer parts manufacturing, warehousing, and certain driving academy activities, as well as certain corporate expenses (such as legal settlements and accruals, certain impairments, and amortization of intangibles related to the 2017 Merger and various acquisitions). Intersegment Eliminations Certain operating segments provide transportation and related services for other affiliates outside of their reportable segments. For certain operating segments, such services are billed at cost, and no profit is earned. For the other operating segments, revenues for such services are based on negotiated rates, and are reflected as revenues of the billing segment. These rates are adjusted from time to time, based on market conditions. Such intersegment revenues and expenses are eliminated in Knight-Swift's consolidated results. 25 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED The following tables present the Company's financial information by segment: Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 Revenue: (In thousands) Trucking $ 879,369 $ 1,020,027 $ 1,798,430 $ 1,993,272 Logistics 70,104 82,929 149,302 171,881 Intermodal 82,820 118,195 177,551 234,562 Subtotal $ 1,032,293 $ 1,221,151 $ 2,125,283 $ 2,399,715 Non-reportable segments 45,289 29,597 91,531 67,361 Intersegment eliminations ( 16,884 ) ( 8,665 ) ( 31,318 ) ( 20,458 ) Total revenue $ 1,060,698 $ 1,242,083 $ 2,185,496 $ 2,446,618 Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 Operating income (loss): (In thousands) Trucking $ 107,788 $ 125,772 $ 215,122 $ 240,947 Logistics 3,038 5,021 6,757 12,304 Intermodal ( 4,475 ) 4,192 ( 7,212 ) 6,553 Subtotal $ 106,351 $ 134,985 $ 214,667 $ 259,804 Non-reportable segments ( 4,184 ) ( 26,392 ) ( 10,381 ) ( 34,912 ) Operating income $ 102,167 $ 108,593 $ 204,286 $ 224,892 Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 Depreciation and amortization of property and equipment: (In thousands) Trucking $ 97,555 $ 86,842 $ 191,103 $ 171,352 Logistics 207 159 414 314 Intermodal 3,606 3,303 7,094 6,663 Subtotal $ 101,368 $ 90,304 $ 198,611 $ 178,329 Non-reportable segments 13,233 12,634 26,211 25,546 Depreciation and amortization of property and equipment $ 114,601 $ 102,938 $ 224,822 $ 203,875 Geographical Information In the aggregate, total revenue from the Company's foreign operations was less than 5.0 % of consolidated total revenue for the quarter and year-to-date periods ended June 30, 2020 and 2019. Additionally, long-lived assets on the Company's foreign subsidiary balance sheets were less than 5.0 % of consolidated total assets as of June 30, 2020 and December 31, 2019. 26 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Note 16 — Fair Value Measurement ASC Topic 820, Fair Value Measurements and Disclosures, requires that the Company disclose estimated fair values for its financial instruments. The estimated fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for the asset or liability. Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Changes in assumptions could significantly affect these estimates. Because the fair value is estimated as of June 30, 2020 and December 31, 2019, the amounts that will actually be realized or paid at settlement or maturity of the instruments in the future could be significantly different. The estimated fair values of the Company's financial instruments represent management's best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. The estimated fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the estimated fair value measurement reflects management's own judgments about the assumptions that market participants would use in pricing the asset or liability. These judgments are developed by the Company based on the best information available under the circumstances. The following summary presents a description of the methods and assumptions used to estimate the fair value of each class of financial instrument. Restricted Investments, Held-to-Maturity — The estimated fair value of the Company's restricted investments, held-to-maturity, is based on quoted prices in active markets that are readily and regularly obtainable. See Note 5 for additional disclosures regarding restricted investments, held-to-maturity. Transportation Resource Partners — The estimated fair value of the Company's investments with Transportation Resource Partners are privately negotiated equity investments. The carrying amount of these investments approximates the fair value. Equity Securities — The estimated fair value of the Company's investments in equity securities is based on quoted prices in active markets that are readily and regularly obtainable. Debt Instruments and Leases — For notes payable under the Revolver and the Term Loan, fair value approximates the carrying value due to the variable interest rate. The carrying value of the 2018 RSA approximates fair value, as the underlying receivables are short-term in nature and only eligible receivables (such as those with high credit ratings) are qualified to secure the borrowed amounts. For finance and operating lease liabilities, the carrying value approximates the fair value, as the Company's finance and operating lease liabilities are structured to amortize in a manner similar to the depreciation of the underlying assets. Contingent Consideration — The estimated fair value of the Company's contingent consideration owed to Warehousing Co.'s seller is calculated using a Monte Carlo simulation model based on the acquiree's earnings before interest and taxes. Other — Cash and cash equivalents, restricted cash, net accounts receivable, income tax refund receivable, and accounts payable represent financial instruments for which the carrying amount approximates fair value, as they are short-term in nature. These instruments are accordingly excluded from the disclosures below. All remaining balance sheet amounts excluded from the below are not considered financial instruments, subject to this disclosure. 27 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED The following table presents the carrying amounts and estimated fair values of the Company's major categories of financial assets and liabilities: June 30, 2020 December 31, 2019 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value (In thousands) Financial Assets: Restricted investments, held-to-maturity ¹ $ 8,272 $ 8,296 $ 8,912 $ 8,915 TRP Investments 36,018 36,018 30,878 30,878 Investments in equity securities ² 17,436 17,436 8,722 8,722 Financial Liabilities: Term Loan, due October 2020 ³ $ 364,942 $ 365,000 $ 364,825 $ 365,000 2018 RSA, due July 2021 4 164,840 165,000 204,762 205,000 Revolver, due October 2022 235,000 235,000 279,000 279,000 Contingent consideration associated with acquisition 5 17,570 17,570 — — 1 Refer to Note 5 for the differences between the carrying amounts and estimated fair values of the Company's restricted investments, held-to-maturity. 2 The investments are carried at fair value and are included in "Other long-term assets" on the condensed consolidated balance sheets. 3 The carrying amount of the Term Loan is included in "Finance lease liabilities and long-term debt – current portion," on the condensed consolidated balance sheets and is net of $ 0.1 million and $ 0.2 million in deferred loan costs as of June 30, 2020 and December 31, 2019, respectively. 4 The carrying amount of the 2018 RSA is included in "Accounts receivable securitization," on the condensed consolidated balance sheets and is net of $ 0.2 million in deferred loan costs as of June 30, 2020 and December 31, 2019. 5 The carrying amount of the contingent consideration associated with the acquisition is included in both the "Accrued liabilities" and "Other long-term liabilities" line items on the condensed consolidated balance sheets. Recurring Fair Value Measurements (Assets) — The following table depicts the level in the fair value hierarchy of the inputs used to estimate fair value of assets measured on a recurring basis as of June 30, 2020 and December 31, 2019: Fair Value Measurements at Reporting Date Using: Estimated Fair Value Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Gain (Loss) (In thousands) As of June 30, 2020 Investments in equity securities ¹ $ 17,436 $ 17,436 $ — $ — $ 2,314 As of December 31, 2019 Investments in equity securities ¹ $ 8,722 $ 8,722 $ — $ — $ ( 184 ) 1 Total unrealized gains (losses) for these investments are included within "Other (expense) income, net" within the condensed consolidated statements of comprehensive income for the quarter and year-to-date periods ended June 30, 2020. The Company did not sell any equity investments during the quarter and year-to-date periods ended June 30, 2020 or 2019 and therefore did not realize any losses on these investments. 28 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED Recurring Fair Value Measurements (Liabilities) — The following table depicts the level in the fair value hierarchy of the inputs used to estimate the fair value of liabilities measured on a recurring basis as of June 30, 2020: Fair Value Measurements at Reporting Date Using: Estimated Fair Value Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Gain (Loss) (In thousands) As of June 30, 2020 Contingent consideration associated with acquisition ¹ $ 17,570 $ — $ — $ 17,570 $ — 1 There were no material adjustments to the contingent consideration made during the quarter and year-to-date periods ended June 30, 2020 . As of December 31, 2019, there were no major categories of liabilities on the condensed consolidated balance sheets estimated at fair value that were measured on a recurring basis. Nonrecurring Fair Value Measurements (Assets) — The following table depicts the level in the fair value hierarchy of the inputs used to estimate fair value of assets measured on a nonrecurring basis as of June 30, 2020 and December 31, 2019: Fair Value Measurements at Reporting Date Using: Estimated Fair Value Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Loss (In thousands) As of June 30, 2020 Equipment ¹ $ 5,099 $ — $ 5,099 $ — $ ( 1,255 ) As of December 31, 2019 Leasehold improvements ² $ — $ — $ — $ — $ ( 2,182 ) Equipment ³ 1,380 — 1,380 — ( 870 ) Software 4 — — — — ( 434 ) 1 Reflects the non-cash impairment of certain tractors (within the Trucking segment) and certain legacy trailers (within the non-reportable segments) as a result of a softer used equipment market during the second quarter of 2020, as well as impairment charges of trailer tracking equipment (within the Trucking segment) during the first quarter of 2020. 2 During the second quarter of 2019, the Company incurred an impairment of leasehold improvements related to the early termination of a lease on one of its operating properties. This impairment was recorded in the Trucking segment. 3 During the fourth quarter of 2019, the Company incurred impairment charges which were associated with certain revenue equipment technology, warehousing equipment no longer in use, and certain Swift legacy trailer models as a result of a softer used equipment market. These impairments were allocated between the Logistics and non-reportable segments based on each segment’s use of the assets. 4 During the fourth quarter of 2019, the Company incurred impairment charges related to discontinued use of software systems. These impairments were allocated between the Logistics and non-reportable segments based on each segment's use of the assets. Nonrecurring Fair Value Measurements (Liabilities) — As of June 30, 2020 and December 31, 2019, the Company had no major categories of liabilities estimated at fair value that were measured on a nonrecurring basis. 29 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.