Knight-Swift Transportation Holdings Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report contains certain statements that may be considered "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 27A of the Securities Act of 1933, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: • any projections of or guidance regarding earnings, earnings per share, revenues, cash flows, dividends, capital expenditures, or other financial items, • any statement of plans, strategies, and objectives of management for future operations, • any statements concerning proposed acquisition plans, new services, or developments, • any statements regarding future economic conditions or performance, and • any statements of belief and any statements of assumptions underlying any of the foregoing. In this Quarterly Report, forward-looking statements include, but are not limited to, statements we make concerning: • the ability of our infrastructure to support future growth, whether we grow organically or through potential acquisitions, • the impacts of the COVID-19 global pandemic, • the future impact of acquisitions, including achievement of anticipated synergies, • the flexibility of our model to adapt to market conditions, • our ability to recruit and retain qualified driving associates, • future safety performance, • future performance of our segments or businesses, • our ability to gain market share, • the ability, desire, and effects of expanding our logistics, brokerage, and intermodal operations, • future equipment prices, our equipment purchasing or leasing plans, and our equipment turnover (including expected tractor trade-ins), • our ability to sublease equipment to independent contractors, • the impact of pending legal proceedings, • the expected freight environment, including freight demand and volumes, • economic conditions and growth, including future inflation, consumer spending, supply chain conditions, and US Gross Domestic Product ("GDP") changes, • future pricing terms from vendors and suppliers, • expected liquidity and methods for achieving sufficient liquidity, • future fuel prices and the expected impact of fuel efficiency initiatives, • future expenses and our ability to control costs, • future operating profitability, • future third-party service provider relationships and availability, • future contracted pay rates with independent contractors and compensation arrangements with driving associates, • our expected need or desire to incur indebtedness, 30 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED • future capital expenditures and expected sources of liquidity, capital allocation, capital structure, capital requirements, and growth strategies and opportunities, • expected capital expenditures, • future mix of owned versus leased revenue equipment, • future asset utilization, • future return on capital, • future share repurchases and dividends, • future tax rates, • future trucking industry capacity and balance between industry demand and capacity, • future rates, • future depreciation and amortization, • expected tractor and trailer fleet age, • future investment in and deployment of new or updated technology, • political conditions and regulations, including trade regulation, quotas, duties, or tariffs, and any future changes to the foregoing, • future insurance claims, premiums, and retention limits, • future purchased transportation expense, and • others. Such statements may be identified by their use of terms or phrases such as "believe," "may," "could," "will," "would," "should," "expects," "estimates," "designed," "likely," "foresee," "goals," "seek," "target," "forecast," "projects," "anticipates," "plans," "intends," "hopes," "strategy," "objective," "continue," "outlook," and similar terms and phrases. Forward-looking statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to materially differ from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A "Risk Factors" in our 2019 Annual Report, Part II, Item 1A "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and various disclosures in our press releases, stockholder reports, and other filings with the SEC. All such forward-looking statements speak only as of the date of this Quarterly Report. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein, to reflect any change in our expectations with regard thereto, or any change in the events, conditions, or circumstances on which any such statement is based. Reference to Glossary of Terms Certain acronyms and terms used throughout this Quarterly Report are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document. Reference to Annual Report The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements (unaudited) and footnotes included in this Quarterly Report, as well as the consolidated financial statements and footnotes included in our 2019 Annual Report. 31 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Executive Summary Impact of COVID-19 During the second quarter and first half of 2020, we incurred approximately $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 our drivers and shop technicians, as well as additional disinfectants and cleaning supplies, and various other pandemic-specific items. The costs are clearly separable from our normal business operations and are not expected to recur once the pandemic subsides. Refer to Note 1 in Part I, Item 1 of this Quarterly Report for further discussion around the impact of COVID-19 on our company. 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. Company Overview Knight-Swift Transportation Holdings Inc. is North America's largest truckload carrier and a provider of transportation solutions, headquartered in Phoenix, Arizona. The Company provides multiple truckload transportation, intermodal, and logistics services using a nationwide network of business units and terminals in the US and Mexico to serve customers throughout North America. In addition to its truckload services, Knight-Swift also contracts with third-party capacity providers to provide a broad range of shipping solutions to its customers while creating quality driving jobs for our driving associates and successful business opportunities for independent contractors. Our three reportable segments are Trucking, Logistics, and Intermodal. Additionally, we have various non-reportable segments. Refer to Note 15 in Part I, Item 1 of this Quarterly Report for descriptions of our segments. Our objective is to operate our business with industry-leading margins and growth while providing safe, high-quality, cost-effective solutions for our customers. Revenue • Our trucking services include irregular route and dedicated, refrigerated, expedited, flatbed, and cross-border transportation of various products, goods, and materials for our diverse customer base. We primarily generate revenue by transporting freight for our customers through our Trucking segment. • Our logistics and intermodal operations provide a multitude of shipping solutions, including additional sources of truckload capacity and alternative transportation modes, by utilizing our vast network of third-party capacity providers and rail providers, as well as certain logistics and freight management services. Revenue in our logistics and intermodal operations is generated through our Logistics and Intermodal segments. • Our non-reportable segments include support services provided to our 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). • In addition to the revenues earned from our customers for the trucking and non-trucking services discussed above, we also earn fuel surcharge revenue from our customers through our fuel surcharge program, which serves to recover a majority of our fuel costs. This applies only to loaded miles and typically does not offset non-paid empty miles, idle time, and out-of-route miles driven. Fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly, but typically require a specified minimum change in fuel cost to prompt a change in fuel surcharge revenue. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue for our Trucking segment. 32 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Expenses — Our most significant expenses vary with miles traveled and include fuel, driving associate-related expenses (such as wages and benefits), and services purchased from independent contractors and other transportation providers (such as railroads, drayage providers, and other trucking companies). Maintenance and tire expenses, as well as the cost of insurance and claims generally vary with the miles we travel, but also have a controllable component based on safety improvements, fleet age, efficiency, and other factors. Our primary fixed costs are depreciation and lease expense for revenue equipment and terminals, amortization of intangible assets, interest expense, and non-driver employee compensation. Operating Statistics — We measure our consolidated and segment results through certain operating statistics, which are discussed under "Results of Operations — Segment Review — Operating Statistics," below. Our results are affected by various economic, industry, operational, regulatory, and other factors, which are set forth in Part I, Item 1A "Risk Factors" in our 2019 Annual Report, Part II, Item 1A "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and various disclosures in our press releases, stockholder reports, and other filings with the SEC. Consolidated Key Financial Highlights and Operating Metrics Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 GAAP financial data: (Dollars in thousands, except per share data) Total revenue $ 1,060,698 $ 1,242,083 $ 2,185,496 $ 2,446,618 Revenue, excluding trucking fuel surcharge $ 997,597 $ 1,122,754 $ 2,024,692 $ 2,219,710 Net income attributable to Knight-Swift $ 80,189 $ 79,205 $ 145,615 $ 167,143 Earnings per diluted share $ 0.47 $ 0.46 $ 0.85 $ 0.97 Operating ratio 90.4 % 91.3 % 90.7 % 90.8 % Non-GAAP financial data: Adjusted Net Income Attributable to Knight-Swift 1 $ 96,498 $ 100,627 $ 172,703 $ 196,808 Adjusted EPS 1 $ 0.57 $ 0.58 $ 1.01 $ 1.14 Adjusted Operating Ratio 1 87.6 % 87.8 % 88.1 % 88.1 % Revenue equipment: Average tractors (Trucking segment only) 2 18,393 18,985 18,428 18,959 Average trailers 3 57,269 58,263 57,456 56,902 Average containers 10,853 9,863 10,355 9,864 1 Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, and Adjusted Operating Ratio are non-GAAP financial measures and should not be considered alternatives, or superior to, the most directly comparable GAAP financial measures. However, management believes that presentation of these non-GAAP financial measures provides useful information to investors regarding the Company's results of operations. Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, and Adjusted Operating Ratio are reconciled to the most directly comparable GAAP financial measures under "Non-GAAP Financial Measures," below. 2 The average age of our company-owned tractor fleet was 2.1 years as of June 30, 2020 and 2019. 3 The average age of our trailer fleet was 7.6 years and 7.3 years as of June 30, 2020 and 2019, respectively . 33 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Market Trends and Company Performance Trends and Outlook — Our operational discipline, agility, and cost-control culture enabled us to execute through the unprecedented challenges presented by the COVID-19 pandemic, which introduced a new source of volatility throughout the global markets during the first half of 2020. Our diversified customer base, networks, and unique brands positioned us to navigate a disrupted freight environment of unpredictable shipping volumes, shifts in pricing, and continued challenges in driver sourcing. The national unemployment rate was 11.1% 1 as of June 30, 2020 after the COVID-19 pandemic resulted in higher unemployment rates in the beginning of the quarter, which began to decline in May and June as economic activities resumed. A more pronounced reduction in trained drivers (primarily due to social distancing measures across the nation), ongoing competition for experienced hires, increased safety regulations, and various alternative sources of income to potential drivers are all hampering driver sourcing efforts throughout the industry. During the second quarter of 2020, the US gross domestic product, which is the broadest measure of goods and services produced across the economy, decreased by 32.9% 2 , per preliminary third-party forecasts. This may result in an expected annualized growth rate of approximately -5.0% to -6.0% 3 for full-year 2020, as third-party forecasts are predicting an economic rebound in the latter half of this year. The second quarter 2020 US employment cost index rose 2.7% 1 and 0.5% 1 on a year-over-year and sequential basis, respectively. From a freight market perspective, demand in April was weak, but gradually strengthened throughout the quarter, and remained strong in July. We are encouraged by the continued strength in freight demand in July; however, demand may be difficult to predict for the back half of the year. We believe supply has and will continue to exit the market as evidenced by significantly lower class 8 truck orders, a weak used equipment market, and lower transportation employment levels. Looking across our portfolio of brands and freight networks, some of our operating segments performed consistently throughout the quarter, while others experienced more volatility in results. Our Trucking segment improved its Adjusted Operating Ratio to 85.5% in the second quarter of 2020, as strong cost controls and lower fuel prices overcame a 6.5% decrease in average revenue per tractor and a $5.8 million (or $0.03 of earnings per diluted share, after taxes) decline in gain on sales of used equipment. Our Logistics segment produced an Adjusted Operating Ratio of 95.5% in the second quarter of 2020, primarily driven by a gross margin of 15.7% within our brokerage business. Consistent with port industry trends, load volumes within our Intermodal segment continued to be pressured and decreased by 23.9% in the second quarter of 2020, as compared to the same quarter last year, while margins worsened. We anticipate that depreciation and amortization expense will increase and rental expense will correspondingly decrease, as a percentage of revenue excluding trucking fuel surcharge, as we intend to purchase, rather than lease, a majority of our revenue equipment in 2020. With significant tightening in the insurance markets, we may also experience changes in premiums and retention limits in 2020. While fuel expense is generally offset by fuel surcharge revenue, our fuel expense, net of fuel surcharge revenue may increase in the future. We continue to maintain our leverage ratio within our targeted range and remain committed to a strong capital structure, which we believe will position us for long-term success and enable us to pursue further opportunities for organic growth, growth through acquisitions, and other capital allocation opportunities. We do not foresee material liquidity constraints or any issues with our ongoing ability to meet our debt covenants. ________ 1 Source: bls.gov 2 Source: bea.gov 3 Source: kiplinger.com 34 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Comparison Between the Quarters Ended June 30, 2020 and 2019 — The $1.0 million increase in net income attributable to Knight-Swift to $80.2 million during the quarter ended June 30, 2020 from $79.2 million during the same period last year includes the following: • Contributor — $22.2 million decrease in operating loss from our non-reportable segments. Operating results within the non-reportable segments improved in the second quarter of 2020, which included additional income earned from warehousing activities, as compared to the second quarter of 2019, when we incurred $15.5 million in costs associated with a jury verdict. • Contributor — $5.4 million increase in "Other income, net" primarily related to an increase in gains recognized within our portfolio of investments. • Offset — $18.0 million decrease in operating income within our Trucking Segment, which was primarily due to a 6.5% decrease in average revenue per tractor and a $5.8 million reduction in gain on sales of revenue equipment, as well as $9.9 million in incremental expenses related to the COVID-19 pandemic. • Offset — $8.7 million change from operating income in the second quarter of 2019 to operating loss in the second quarter of 2020 in our Intermodal Segment due to continued market pressures, including the impact of the COVID-19 pandemic on port volumes. Comparison Between Year-to-Date June 30, 2020 and 2019 — The $21.5 million decrease in net income attributable to Knight-Swift to $145.6 million during year-to-date June 30, 2020 from $167.1 million during the same period last year includes the following: • Contributor — $25.8 million decrease in operating income within our Trucking Segment, which was primarily due to a $14.5 million reduction in gain on sales of revenue equipment, a 4.6% decrease in average revenue per tractor, as well as $12.1 million in COVID-19 related incremental expenses. • Contributor — $13.8 million change from operating income in the first half of 2019 to operating loss in the first half of 2020 in our Intermodal Segment due to continued market pressures, including the impact of the COVID-19 pandemic on port volumes. • Contributor — $5.5 million decrease in operating income within our Logistics Segment which was primarily due to a 4.1% decrease in revenue per load. • Offset — $24.5 million decrease in operating loss from our non-reportable segments primarily due to the $15.5 million jury verdict recognized in the first half of 2019 and additional income earned from warehousing activities in the first half of 2020. See additional discussion of our operating results within "Results of Operations — Consolidated Operating and Other Expenses" below. Liquidity and Capital — During the first half of the year, we generated $383.4 million in operating cash flows, reduced our operating lease liabilities by $48.2 million, used $195.2 million for capital expenditures (net of equipment sales proceeds), and returned $27.7 million to our stockholders in the form of quarterly dividends. We also repurchased $34.6 million worth of our common stock at an average price of $30.41 per share (all within the first quarter of 2020). We ended the quarter with $117.8 million in unrestricted cash and cash equivalents, $235.0 million outstanding on the Revolver, $365.0 million face value outstanding on the Term Loan, and $5.8 billion of stockholders' equity. We continue to maintain our leverage ratio within our targeted range and remain committed to a strong capital structure, which we believe will position us for long-term success and enable us to pursue further opportunities for organic growth, growth through acquisitions, and other capital allocation opportunities. We do not foresee material liquidity constraints or any issues with our ongoing ability to meet our debt covenants. See discussion under "Liquidity and Capital Resources" and "Off-Balance Sheet Arrangements" for additional information. 35 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Results of Operations — Segment Review The Company has three reportable segments: Trucking, Logistics, and Intermodal, as well as certain non-reportable segments. Refer to Note 15 to the condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report for descriptions of the operations of these reportable segments. Consolidating Tables for Total Revenue and Operating Income (Loss) 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 36 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Operating Statistics Our chief operating decision makers monitor the GAAP results of our reportable segments, as supplemented by certain non-GAAP information. Refer to "Non-GAAP Financial Measures" below for more details. Additionally, we use a number of primary indicators to monitor our revenue and expense performance and efficiency. Operating Statistic Relevant Segment(s) Description Average Revenue per Tractor Trucking Measures productivity and represents revenue (excluding fuel surcharge and intersegment transactions) divided by average tractor count Total Miles per Tractor Trucking Total miles (including loaded and empty miles) a tractor travels on average Average Length of Haul Trucking Average miles traveled with loaded trailer cargo per order Non-paid Empty Miles Percentage Trucking Percentage of miles without trailer cargo Average Tractors Trucking, Intermodal Average tractors in operation during the period including company tractors and tractors provided by independent contractors Average Trailers Trucking Average trailers in operation during the period Average Revenue per Load Logistics, Intermodal Total revenue (excluding intersegment transactions) divided by load count Gross Margin Percentage Logistics (Brokerage only) Brokerage gross margin (revenue, excluding intersegment transactions, less purchased transportation expense, excluding intersegment transactions) as a percentage of brokerage revenue, excluding intersegment transactions Average Containers Intermodal Average containers in operation during the period GAAP Operating Ratio Trucking, Logistics, Intermodal Measures operating efficiency and is widely used in our industry as an assessment of management's effectiveness in controlling all categories of operating expenses. Calculated as operating expenses as a percentage of total revenue, or the inverse of operating margin. Non-GAAP Adjusted Operating Ratio Trucking, Logistics, Intermodal Measures operating efficiency and is widely used in our industry as an assessment of management's effectiveness in controlling all categories of operating expenses. Consolidated and segment Adjusted Operating Ratios are reconciled to their corresponding GAAP operating ratios under "Non-GAAP Financial Measures," below. 37 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Segment Review Trucking Segment We generate revenue in the Trucking segment primarily through irregular route, dedicated, refrigerated, flatbed, expedited, and cross-border service offerings. Generally, we are paid a predetermined rate per mile or per load for our trucking services. Additional revenues are generated by charging for tractor and trailer detention, loading and unloading activities, dedicated services, and other specialized services, as well as through the collection of fuel surcharge revenue to mitigate the impact of increases in the cost of fuel. The main factors that affect the revenue generated by our Trucking segment are rate per mile from our customers, the percentage of miles for which we are compensated, and the number of loaded miles we generate with our equipment. The most significant expenses in the Trucking segment are primarily variable and include fuel and fuel taxes, driving associate-related expenses (such as wages, benefits, training, and recruitment), and costs associated with independent contractors primarily included in "Purchased transportation" in the condensed consolidated statements of comprehensive income. Maintenance expense (which includes costs for replacement tires for our revenue equipment) and insurance and claims expenses have both fixed and variable components. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. The main fixed costs in the Trucking segment are depreciation and rent expenses from leasing and acquiring revenue equipment and terminals, as well as compensating our non-driver employees. Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands, except per tractor data) Increase (Decrease) Total revenue $ 879,369 $ 1,020,027 $ 1,798,430 $ 1,993,272 (13.8 %) (9.8 %) Revenue, excluding fuel surcharge and intersegment transactions $ 816,033 $ 900,648 $ 1,637,117 $ 1,766,278 (9.4 %) (7.3 %) GAAP: Operating income $ 107,788 $ 125,772 $ 215,122 $ 240,947 (14.3 %) (10.7 %) Non-GAAP: Adjusted Operating Income ¹ $ 118,166 $ 128,303 $ 228,971 $ 243,827 (7.9 %) (6.1 %) Average revenue per tractor ² $ 44,366 $ 47,440 $ 88,839 $ 93,163 (6.5 %) (4.6 %) GAAP: Operating ratio ² 87.7 % 87.7 % 88.0 % 87.9 % — bps 10 bps Non-GAAP: Adjusted Operating Ratio ¹ ² 85.5 % 85.8 % 86.0 % 86.2 % (30 bps) (20 bps) Non-paid empty miles percentage ² 13.8 % 12.9 % 13.3 % 12.9 % 90 bps 40 bps Average length of haul (miles) ² 420 429 424 429 (2.1 %) (1.2 %) Total miles per tractor ² 22,741 23,656 45,307 46,181 (3.9 %) (1.9 %) Average tractors ² ³ 18,393 18,985 18,428 18,959 (3.1 %) (2.8 %) Average trailers ² 57,269 58,263 57,456 56,902 (1.7 %) 1.0 % 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined under "Operating Statistics," above. 3 Includes 16,315 and 16,491 average company-owned tractors for the second quarter of 2020 and 2019, respectivel y. Includes 16,327 and 16,352 average company-owned tractors for the year-to-date June 30, 2020 and 2019 periods, respectively. 38 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Comparison Between the Quarters Ended June 30, 2020 and 2019 — Operating Ratio was 87.7% in the second quarters of 2020 and 2019. We improved the Adjusted Operating Ratio within this segment to 85.5% in the second quarter of 2020 from 85.8% in the second quarter of 2019, despite a $5.8 million reduction in gain on sales of revenue equipment. We continued to see improvement in our dedicated and refrigerated operating segments during the quarter. Average revenue per tractor decreased by 6.5%, driven by a 3.9% decrease in miles per tractor. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions, was flat sequentially and decreased 1.7% year-over-year. We expect rate per mile to inflect positively year-over-year in the third quarter. Comparison Between Year-to-Date June 30, 2020 and 2019 — Operating Ratio was 88.0% in the first half of 2020 compared to 87.9% in the first half of 2019. We improved the Adjusted Operating Ratio within this segment to 86.0% in the first half of 2020 from 86.2% in the first half 2019, despite a $14.5 million reduction in gain on sales of revenue equipment. Average revenue per tractor decreased by 4.6%, driven by a 1.9% decrease in miles per tractor. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions, decreased 2.4% when comparing the first halves of 2020 and 2019. Logistics Segment The Logistics segment is less asset-intensive than the Trucking segment and is dependent upon capable non-driver employees, modern and effective information technology, and third-party capacity providers. Logistics revenue is primarily generated by its brokerage operations. We generate additional revenue by offering specialized logistics solutions (including, but not limited to, origin management, surge volume, disaster relief, special projects, and other logistic needs). Logistics revenue is mainly affected by the rates we obtain from customers, the freight volumes we ship through third-party capacity providers, and our ability to secure third-party capacity providers to transport customer freight. The most significant expense in the Logistics segment is the (primarily) variable cost of purchased transportation that we pay to third-party capacity providers, included in "Purchased transportation" in the condensed consolidated statements of comprehensive income. Variability in this expense depends on truckload capacity, availability of third-party capacity providers, rates charged to customers, current freight demand, and customer shipping needs. Fixed Logistics operating expenses primarily include non-driver employee compensation and benefits recorded in "Salaries, wages, and benefits" and depreciation and amortization expense recorded in "Depreciation and amortization of property and equipment" in the condensed consolidated statements of comprehensive income. Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands, except per load data) Increase (Decrease) Total revenue $ 70,104 $ 82,929 $ 149,302 $ 171,881 (15.5 %) (13.1 %) Revenue, excluding intersegment transactions $ 67,066 $ 80,304 $ 143,823 $ 167,495 (16.5 %) (14.1 %) Operating income $ 3,038 $ 5,021 $ 6,757 $ 12,304 (39.5 %) (45.1 %) Revenue per load – Brokerage only ¹ $ 1,408 $ 1,475 $ 1,392 $ 1,452 (4.5 %) (4.1 %) Gross margin percentage – Brokerage only ¹ 15.7 % 16.2 % 15.1 % 17.0 % (50 bps) (190 bps) GAAP: Operating ratio ¹ 95.7 % 93.9 % 95.5 % 92.8 % 180 bps 270 bps Non-GAAP: Adjusted Operating Ratio ¹ ² 95.5 % 93.7 % 95.3 % 92.7 % 180 bps 260 bps 1 Defined under "Operating Statistics," above. 2 Refer to "Non-GAAP Financial Measures" below. Comparison Between the Quarters Ended June 30, 2020 and 2019 — Operating Ratio was 95.7% in the second quarter of 2020 compared to 93.9% in the second quarter of 2019. Adjusted Operating Ratio in the Logistics segment (which primarily consists of our brokerage services) increased to 95.5% in the second quarter of 2020 from 93.7% in the second quarter of 2019. 39 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Brokerage-only — With recent tightening of capacity, brokerage gross margin decreased to 15.7% in the second quarter of 2020 from 16.2% in the second quarter of 2019. Margins were strong to begin the quarter and subsequently compressed, as the truckload market improved throughout the second quarter of 2020. A 10.1% decrease in brokerage load volumes and a 4.5% decrease in brokerage revenue per load resulted in a 14.2% decrease in brokerage revenue, excluding intersegment transactions. Our power-only service offering experienced 73.8% year-over-year growth in load volumes and represented 17.3% of our total brokerage load volumes in the second quarter of 2020. Comparison Between Year-to-Date June 30, 2020 and 2019 — Operating Ratio was 95.5% in the first half of 2020 compared to 92.8% in the first half of 2019. Adjusted Operating Ratio in the Logistics segment (which primarily consists of our brokerage services) increased to 95.3% in the first half of 2020 from 92.7% in the first half of 2019. Brokerage-only — Brokerage gross margin decreased to 15.1% in the first half of 2020 from 17.0% in the first half of 2019. An 8.2% decrease in brokerage load volumes and a 4.1% decrease in brokerage revenue per load resulted in a 12.0% decrease in brokerage revenue, excluding intersegment transactions. Intermodal Segment The Intermodal segment complements our regional operating model, allows us to better serve customers in longer haul lanes, and reduces our investment in fixed assets. Through the Intermodal segment, we generate revenue by moving freight over the rail in our containers and other trailing equipment, combined with revenue for drayage to transport loads between railheads and customer locations. The most significant expense in the Intermodal segment is the cost of purchased transportation that we pay to third-party capacity providers (including rail providers), which is primarily variable and included in "Purchased transportation" in the condensed consolidated statements of comprehensive income. Purchased transportation varies as it relates to rail capacity, freight demand, and customer shipping needs. The main fixed costs in the Intermodal segment are depreciation of our company tractors related to drayage, containers, and chassis, as well as non-driver employee compensation and benefits. Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands, except per load data) Increase (Decrease) Total revenue $ 82,820 $ 118,195 $ 177,551 $ 234,562 (29.9 %) (24.3 %) Revenue, excluding intersegment transactions $ 82,699 $ 117,727 $ 177,321 $ 233,404 (29.8 %) (24.0 %) GAAP: Operating (loss) income $ (4,475) $ 4,192 $ (7,212) $ 6,553 (206.8 %) (210.1 %) Non-GAAP: Adjusted Operating (Loss) Income $ (4,410) $ 4,192 $ (7,099) $ 6,553 (205.2 %) (208.3 %) Average revenue per load ¹ $ 2,249 $ 2,438 $ 2,283 $ 2,447 (7.8 %) (6.7 %) GAAP: Operating ratio ¹ 105.4 % 96.5 % 104.1 % 97.2 % 890 bps 690 bps Non-GAAP: Adjusted Operating Ratio 1 2 105.3 % 96.4 % 104.0 % 97.2 % 890 bps 680 bps Load count 36,769 48,290 77,658 95,399 (23.9 %) (18.6 %) Average tractors ¹ ³ 571 651 586 672 (12.3 %) (12.8 %) Average containers ¹ 10,853 9,863 10,355 9,864 10.0 % 5.0 % 1 Defined under "Operating Statistics," above. 2 Refer to "Non-GAAP Financial Measures" below. 3 Includes 510 and 572 company-owned tractors for the second quarter of 2020 and 2019, respectively. Includes 523 and 592 company-owned tractors for the year-to-date June 30, 2020 and 2019 periods, respectively. 40 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Comparison Between the Quarters Ended June 30, 2020 and 2019 — Operating Ratio was 105.4% in the second quarter of 2020 compared to 96.5% in the second quarter of 2019. During the second quarter of 2020, our Intermodal segment produced an Adjusted Operating Ratio of 105.3%, compared to 96.4% during the second quarter of 2019. Continued market pressures, including the impact of the COVID-19 pandemic on port volumes, contributed to a 29.8% decrease in revenue, excluding intersegment transactions, as load counts decreased 23.9% and revenue per load decreased 7.8%. We continue to develop our Intermodal network and cost structure and expect to see improved results in the back half of the year. Comparison Between Year-to-Date June 30, 2020 and 2019 — Operating Ratio was 104.1% in the first half of 2020 compared to 97.2% in the first half of 2019. During the first half of 2020, our Intermodal segment produced an Adjusted Operating Ratio of 104.0%, compared to 97.2% during the first half of 2019. Continued market pressures, including the impact of the COVID-19 pandemic on port volumes, contributed to a 24.0% decrease in revenue, excluding intersegment transactions, as load counts decreased 18.6% and revenue per load decreased 6.7%. Non-reportable Segments The non-reportable segments include support services provided to our 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 $11.2 million in quarterly amortization of intangibles related to the 2017 Merger and various acquisitions). Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Total revenue $ 45,289 $ 29,597 $ 91,531 $ 67,361 53.0 % 35.9 % Operating loss $ (4,184) $ (26,392) $ (10,381) $ (34,912) (84.1 %) (70.3 %) Comparison Between the Quarters Ended June 30, 2020 and 2019 — Operating results within the non-reportable segments improved in the second quarter of 2020, which included additional income earned from warehousing activities, as compared to the second quarter of 2019, when we incurred $15.5 million in costs associated with a jury verdict. Comparison Between Year-to-Date June 30, 2020 and 2019 — Operating results within the non-reportable segments improved in the first half of 2020, which included additional income earned from warehousing activities, as compared to the first half of 2019, when we incurred $15.5 million in costs associated with a jury verdict. 41 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Results of Operations — Consolidated Operating and Other Expenses Consolidated Operating Expenses The following tables present certain operating expenses from our condensed consolidated statements of comprehensive income, including each operating expense as a percentage of total revenue and as a percentage of revenue, excluding trucking fuel surcharge. Trucking fuel surcharge revenue can be volatile and is primarily dependent upon the cost of fuel, rather than operating expenses unrelated to fuel. Therefore, we believe that revenue, excluding trucking fuel surcharge is a better measure for analyzing many of our expenses and operating metrics. Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Salaries, wages, and benefits $ 365,311 $ 380,354 $ 720,144 $ 744,209 (4.0 %) (3.2 %) % of total revenue 34.4 % 30.6 % 33.0 % 30.4 % 380 bps 260 bps % of revenue, excluding trucking fuel surcharge 36.6 % 33.9 % 35.6 % 33.5 % 270 bps 210 bps Salaries, wages, and benefits expense is primarily affected by the total number of miles driven by company driving associates, the rate per mile we pay our company driving associates, and employee benefits, including healthcare, workers' compensation, and other benefits. To a lesser extent, non-driver employee headcount, compensation, and benefits affect this expense. Driving associate wages represent the largest component of salaries, wages, and benefits expense. Several ongoing market factors have reduced the pool of available driving associates, contributing to a challenging driver sourcing market, which we believe will continue. Having a sufficient number of qualified driving associates is a significant headwind, although we continue to seek ways to attract and retain qualified driving associates, including heavily investing in our recruiting efforts, our driving academies, and technology and terminals that improve the experience of driving associates. We expect driving associate pay to remain inflationary, which could result in additional driving associate pay increases in the future. • Comparison Between the Quarters Ended June 30, 2020 and 2019 — The $15.0 million decrease within consolidated salaries, wages and benefits was primarily attributed to a decrease in miles driven by company drivers, favorable developments within workers' compensation expense, as well as lower medical insurance costs. These decreases were partially offset by $7.8 million in incremental payroll premiums paid to our company driving associates and shop technicians in response to the COVID-19 pandemic. The COVID-19 expenses were clearly separable from our normal business operations and are not expected to recur once the pandemic subsides. • Comparison Between Year-to-Date June 30, 2020 and 2019 — The $24.1 million decrease within consolidated salaries, wages and benefits was primarily attributed to a decrease in miles driven by company drivers, favorable developments within workers' compensation expense, as well as lower medical insurance costs. These decreases were partially offset by $9.0 million in incremental payroll premiums paid to our company driving associates and shop technicians in response to the COVID-19 pandemic. The COVID-19 expenses were clearly separable from our normal business operations and are not expected to recur once the pandemic subsides. 42 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Fuel $ 86,381 $ 151,309 $ 208,236 $ 289,748 (42.9 %) (28.1 %) % of total revenue 8.1 % 12.2 % 9.5 % 11.8 % (410 bps) (230 bps) % of revenue, excluding trucking fuel surcharge 8.7 % 13.5 % 10.3 % 13.1 % (480 bps) (280 bps) Fuel expense consists primarily of diesel fuel expense for our company-owned tractors and fuel taxes. The primary factors affecting our fuel expense are the cost of diesel fuel, the fuel economy of our equipment, and the miles driven by company driving associates. Our fuel surcharge programs help to offset increases in fuel prices, but apply only to loaded miles and typically do not offset non-paid empty miles, idle time, or out-of-route miles driven. Typical fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly, but typically require a specified minimum change in fuel cost to prompt a change in fuel surcharge revenue for our Trucking segment. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue. Due to this time lag, our fuel expense, net of fuel surcharge, negatively impacts our operating income during periods of sharply rising fuel costs and positively impacts our operating income during periods of falling fuel costs. We continue to utilize our fuel efficiency initiatives such as trailer blades, idle-control, management of tractor speeds, fleet updates for more fuel-efficient engines, management of fuel procurement, and driving associate training programs that we believe contribute to controlling our fuel expense. • Comparison Between the Quarters Ended June 30, 2020 and 2019 — The $64.9 million decrease in consolidated fuel expense is primarily due to a decrease in average DOE fuel prices to $2.44 per gallon for the second quarter of 2020 from $3.12 per gallon for the second quarter of 2019 and a 3.3% decrease in the total miles driven by company driving associates. • Comparison Between Year-to-Date June 30, 2020 and 2019 — The $81.5 million decrease in consolidated fuel expense is primarily due to a decrease in average DOE fuel prices to $2.67 per gallon for year-to-date June 30, 2020 from $3.07 per gallon for year-to-date June 30, 2019 and a 0.4% decrease in miles driven by company driving associates. 43 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Operations and maintenance $ 66,067 $ 82,443 $ 134,471 $ 162,203 (19.9 %) (17.1 %) % of total revenue 6.2 % 6.6 % 6.2 % 6.6 % (40 bps) (40 bps) % of revenue, excluding trucking fuel surcharge 6.6 % 7.3 % 6.6 % 7.3 % (70 bps) (70 bps) Operations and maintenance expense consists of direct operating expenses, equipment maintenance, and tire expense. Operations and maintenance expenses are affected by the age of our company-owned fleet of tractors and trailers. We expect the driver market to remain competitive throughout 2020, which could increase future driving associate development and recruiting costs and negatively affect our operations and maintenance expense. We expect to continue refreshing our tractor fleet in the coming quarters, and anticipate that maintenance costs will gradually decrease as we reduce the average age of our fleet. The second quarter decrease of $16.4 million and year-to-date decrease of $27.7 million in consolidated operations and maintenance expense was attributed to reduced maintenance expense associated with refreshing our fleet with newer equipment and the decreases in miles driven by company driving associates noted above. Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Insurance and claims $ 45,302 $ 48,796 $ 99,582 $ 98,932 (7.2 %) 0.7 % % of total revenue 4.3 % 3.9 % 4.6 % 4.0 % 40 bps 60 bps % of revenue, excluding trucking fuel surcharge 4.5 % 4.3 % 4.9 % 4.5 % 20 bps 40 bps Insurance and claims expense consists of premiums for liability, physical damage, and cargo, and will vary based upon the frequency and severity of claims, as well as our level of self-insurance, and premium expense. In recent years, insurance carriers have raised premiums for many businesses, including transportation companies, and as a result, our insurance and claims expense could increase in the future, or we could raise our self-insured retention limits when our policies are renewed or replaced. Insurance and claims expense also varies based on the number of miles driven by company driving associates and independent contractors, the frequency and severity of accidents, trends in development factors used in actuarial accruals, and developments in large, prior-year claims. In future periods, our higher self-insured retention limits, as well as a tightening of excess insurance markets, may cause our consolidated insurance and claims expense to fluctuate more. • Comparison Between the Quarters Ended June 30, 2020 and 2019 — Consolidated insurance and claims expense decreased by $3.5 million for the second quarter of 2020, as compared to the same period last year. This decrease was primarily due to a decrease in total miles driven year-over-year, improvements within our current year experience as a result of lower frequency and severity of claims, and positive development with certain prior year losses. • Comparison Between Year-to-Date June 30, 2020 and 2019 — Consolidated insurance and claims expense increased by $0.7 million for year-to-date June 30, 2020, as compared to the same period last year. This increase was primarily due to negative development within certain prior year losses recognized during the first quarter which were partially offset by improvements within our current year experience as a result of lower frequency and severity in claims, as well as a decrease in total miles driven year-over-year. 44 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Operating taxes and licenses $ 20,883 $ 21,560 $ 43,052 $ 43,363 (3.1 %) (0.7 %) % of total revenue 2.0 % 1.7 % 2.0 % 1.8 % 30 bps 20 bps % of revenue, excluding trucking fuel surcharge 2.1 % 1.9 % 2.1 % 2.0 % 20 bps 10 bps Operating taxes and licenses include state franchise taxes, state and federal highway use taxes, property taxes, vehicle license and registration fees, fuel and mileage taxes, among others. The expense is impacted by changes in the tax rates and registration fees associated with our tractor fleet and regional operating facilities. • Comparison Between the Quarters Ended June 30, 2020 and 2019 — Consolidated operating taxes and licenses decreased by $0.7 million for the second quarter of 2020 as compared to the same period last year. The decrease was primarily due to a decrease in total company miles driven. • Comparison Between Year-to-Date June 30, 2020 and 2019 — Operating taxes and licenses decreased by $0.3 million, but remained relatively flat as a percentage of revenue, excluding trucking fuel surcharge. Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Communications $ 4,902 $ 4,960 $ 9,776 $ 10,043 (1.2 %) (2.7 %) % of total revenue 0.5 % 0.4 % 0.4 % 0.4 % 10 bps — bps % of revenue, excluding trucking fuel surcharge 0.5 % 0.4 % 0.5 % 0.5 % 10 bps — bps Communications expense is comprised of costs associated with our tractor and trailer tracking systems, information technology systems, and phone systems. Consolidated communications expense remained flat as a percentage of revenue, excluding trucking fuel surcharge for the second quarter of 2020 and first half of 2020, as compared to the same periods last year. 45 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Depreciation and amortization of property and equipment $ 114,601 $ 102,938 $ 224,822 $ 203,875 11.3 % 10.3 % % of total revenue 10.8 % 8.3 % 10.3 % 8.3 % 250 bps 200 bps % of revenue, excluding trucking fuel surcharge 11.5 % 9.2 % 11.1 % 9.2 % 230 bps 190 bps Depreciation relates primarily to our owned tractors, trailers, buildings, electronic logging devices, other communication units, and other similar assets. Changes to this fixed cost are generally attributed to increases or decreases to company-owned equipment, the relative percentage of owned versus leased equipment, and fluctuations in new equipment purchase prices, which have historically been precipitated in part by new or proposed federal and state regulations. Depreciation can also be affected by the cost of used equipment that we sell or trade and the replacement of older used equipment. Management periodically reviews the condition, average age, and reasonableness of estimated useful lives and salvage values of our equipment and considers such factors in light of our experience with similar assets, used equipment market conditions, and prevailing industry practice. Consolidated depreciation and amortization of property and equipment increased by $11.7 million in the second quarter of 2020 and $20.9 million in the first half of 2020, when compared to the same periods last year. These increases were primarily related to the increase in owned versus leased equipment. We expect consolidated depreciation and amortization of property and equipment to increase both in total and as a percentage of consolidated revenue, excluding trucking fuel surcharge , as we currently do not plan to use operating leases as a primary means of funding our equipment purchases in the remainder of 2020. Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Amortization of intangibles $ 11,474 $ 10,692 $ 22,948 $ 21,385 7.3 % 7.3 % % of total revenue 1.1 % 0.9 % 1.1 % 0.9 % 20 bps 20 bps % of revenue, excluding trucking fuel surcharge 1.2 % 1.0 % 1.1 % 1.0 % 20 bps 10 bps Amortization of intangibles relates to intangible assets identified with the 2017 Merger and other acquisitions. See Note 7 in Part I, Item 1, of this Quarterly Report for further details regarding the Company's intangible assets. The increases of $0.8 million for the second quarter and $1.6 million for the first half of 2020, when compared to the same periods last year, were attributed to an acquisition completed on January 1, 2020. See Note 4 in Part I, Item 1, of this Quarterly Report for more details regarding details of our acquisitions. 46 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Rental expense $ 22,372 $ 32,875 $ 47,747 $ 68,420 (31.9 %) (30.2 %) % of total revenue 2.1 % 2.6 % 2.2 % 2.8 % (50 bps) (60 bps) % of revenue, excluding trucking fuel surcharge 2.2 % 2.9 % 2.4 % 3.1 % (70 bps) (70 bps) Rental expense consists primarily of payments for tractors and trailers financed with operating leases. The primary factors affecting the expense are the size of our revenue equipment fleet and the relative percentage of owned versus leased equipment. Consolidated rental expense decreased by $10.5 million and $20.7 million for the second quarter and first half of 2020, as compared to the same periods last year. This was primarily due to increasing our ratio of owned versus leased equipment. We expect consolidated rental expense to continue to decrease both in total and as a percentage of consolidated revenue, excluding trucking fuel surcharge, as we currently do not plan to use operating leases as a primary means of funding our equipment purchases in the remainder of 2020. Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Purchased transportation $ 200,107 $ 261,273 $ 425,383 $ 530,622 (23.4 %) (19.8 %) % of total revenue 18.9 % 21.0 % 19.5 % 21.7 % (210 bps) (220 bps) % of revenue, excluding trucking fuel surcharge 20.1 % 23.3 % 21.0 % 23.9 % (320 bps) (290 bps) Purchased transportation expense is comprised of payments to independent contractors in our trucking operations, as well as payments to third-party capacity providers related to logistics, freight management, and non-trucking services in our logistics and intermodal businesses. Purchased transportation is generally affected by capacity in the market as well as changes in fuel prices. As capacity tightens, our payments to third-party capacity providers and to independent contractors tend to increase. Additionally, as fuel prices increase, payments to third-party capacity providers and independent contractors increase. We expect purchased transportation will increase as a percentage of revenue if we grow our logistics and intermodal businesses. The increase could be partially offset if independent contractors exit the market due to regulatory changes. Consolidated purchased transportation expense decreased by $61.2 million for the second quarter of 2020 and $105.2 million for the first half of 2020, as compared to the same periods last year. This was primarily due to a decrease in miles driven by independent contractors of 23.0% and 22.7% for the second quarter and first half of 2020, respectively and lower fuel reimbursement expenses to independent contractors due to fewer miles and the lower fuel prices discussed above. In addition, experienced lower purchased transportation expense from third-party carrier activities in our Logistics and Intermodal segments. Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Impairments $ 353 $ 2,182 $ 1,255 $ 2,182 (83.8 %) (42.5 %) In 2020, we incurred impairment charges associated with revenue equipment held for sale and trailer tracking systems (within our Trucking and non-reportable segments). In 2019, we incurred impairment charges of leasehold improvements (within the Trucking segment) from the early termination of a lease of one of our operating properties. 47 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Miscellaneous operating expenses $ 20,778 $ 34,108 $ 43,794 $ 46,744 (39.1 %) (6.3 %) Miscellaneous operating expenses primarily consist of legal and professional services fees, general and administrative expenses, other costs, as well as net gain on sales of equipment. • Comparison Between the Quarters Ended June 30, 2020 and 2019 — The $13.3 million decrease in net consolidated miscellaneous operating expenses was primarily due to a decrease in legal expenses as we incurred $15.5 million in incremental costs associated with an unfavorable verdict in the second quarter of 2019, which were partially offset by a $5.8 million reduction in gain on sales of equipment. • Comparison Between Year-to-Date June 30, 2020 and 2019 — The $3.0 million decrease in net consolidated miscellaneous operating expenses is primarily due to the decrease in legal expenses noted above, which were partially offset by a $14.5 million reduction in gain on sales of equipment. Consolidated Other Expenses, net Quarter-to-Date June 30, Year-to-Date June 30, QTD 2020 vs. YTD 2020 vs. 2020 2019 2020 2019 QTD 2019 YTD 2019 (Dollars in thousands) Increase (Decrease) Interest expense $ 4,021 $ 7,156 $ 10,128 $ 14,504 (43.8 %) (30.2 %) Other (income), net (8,499) (3,101) (1,992) (9,240) 174.1 % (78.4 %) Income tax expense 26,815 26,076 51,369 53,999 2.8 % (4.9 %) Interest expense — Interest expense is comprised of debt and finance lease interest expense as well as amortization of deferred loan costs. The quarter and year-to-date decreases in interest expense were primarily due to lower overall interest rates. Other (income), net — Other (income), net is primarily comprised of unrealized (gains) and losses from our various equity investments, including our TRP investments accounted for under the equity method, as well as certain other non-operating income and expense items that may arise outside of the normal course of business. • Comparison Between the Quarters Ended June 30, 2020 and 2019 — The $5.4 million favorable change between the second quarter of 2020 and 2019 is primarily attributed to unrealized gains from our various equity investments. • Comparison Between Year-to-Date June 30, 2020 and 2019 — The $7.2 million unfavorable change between the first half of 2020 and the first half of 2019 is primarily attributed to unrealized losses from our investments in TRP. 48 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Income tax expense — In addition to the discussion below, Note 8 in Part I, Item 1 of this Quarterly Report provides further analysis related to income taxes. • Comparison Between the Quarters Ended June 30, 2020 and 2019 — The $0.7 million increase in consolidated income tax expense was primarily due to an increase in pre-tax earnings, partially offset by an increase in stock compensation deductions recognized as a discrete item in the second quarter of 2020, as compared to the second quarter of 2019. During the second quarter of 2019, we recognized discrete items related to a partial release of our reserve for uncertain tax positions and a decrease in stock compensation deductions. All of these factors resulted in an effective tax rate of 25.0% for the second quarter of 2020 and 24.7% for the second quarter of 2019. • Comparison Between Year-to-Date June 30, 2020 and 2019 — The $2.6 million decrease in consolidated income tax expense was primarily due to a decrease in pre-tax earnings, an increase in stock compensation deductions, and an increase in unfavorable foreign currency fluctuations recognized as discrete items. During the first half of 2019, we also recognized discrete items related to a reduction in our reserve for uncertain tax positions and a decrease in stock compensation deductions. All of these factors resulted in an effective tax rate of 26.0% for the first half of 2020 and 24.4% for the first half of 2019. 49 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Non-GAAP Financial Measures The terms "Adjusted Net Income Attributable to Knight-Swift," "Adjusted EPS," "Adjusted Operating Income," and "Adjusted Operating Ratio," as we define them, are not presented in accordance with GAAP. These financial measures supplement our GAAP results in evaluating certain aspects of our business. We believe that using these measures improves comparability in analyzing our performance because they remove the impact of items from our operating results that, in our opinion, do not reflect our core operating performance. Management and the Board focus on Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, Adjusted Operating Income, and Adjusted Operating Ratio as key measures of our performance, all of which are reconciled to the most comparable GAAP financial measures and further discussed below. We believe our presentation of these non-GAAP financial measures is useful because it provides investors and securities analysts the same information that we use internally for purposes of assessing our core operating performance. Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, Adjusted Operating Income, and Adjusted Operating Ratio are not substitutes for their comparable GAAP financial measures, such as net income, cash flows from operating activities, operating income, or other measures prescribed by GAAP. There are limitations to using non-GAAP financial measures. Although we believe that they improve comparability in analyzing our period to period performance, they could limit comparability to other companies in our industry if those companies define these measures differently. Because of these limitations, our non-GAAP financial measures should not be considered measures of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis. Pursuant to the requirements of Regulation G, the following tables reconcile GAAP consolidated net income attributable to Knight-Swift to non-GAAP consolidated Adjusted Net Income attributable to Knight-Swift, GAAP consolidated earnings per diluted share to non-GAAP consolidated Adjusted EPS, GAAP consolidated operating ratio to non-GAAP consolidated Adjusted Operating Ratio, GAAP reportable segment operating income to non-GAAP reportable segment Adjusted Operating Income, and GAAP reportable segment operating ratio to non-GAAP reportable segment Adjusted Operating Ratio. Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 (In thousands) GAAP: Net income attributable to Knight-Swift $ 80,189 $ 79,205 $ 145,615 $ 167,143 Adjusted for: Income tax expense attributable to Knight-Swift 26,815 26,076 51,369 53,999 Income before income taxes attributable to Knight-Swift 107,004 105,281 196,984 221,142 Amortization of intangibles ¹ 11,474 10,692 22,948 21,385 Impairments ² 353 2,182 1,255 2,182 Legal accruals ³ — 15,500 — 15,500 COVID-19 incremental costs 4 9,966 — 12,259 — Adjusted income before income taxes 128,797 133,655 233,446 260,209 Provision for income tax expense at effective rate (32,299) (33,028) (60,743) (63,401) Non-GAAP: Adjusted Net Income Attributable to Knight-Swift $ 96,498 $ 100,627 $ 172,703 $ 196,808 50 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Note: Since the numbers reflected in the table below are calculated on a per share basis, they may not foot due to rounding. Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 GAAP: Earnings per diluted share $ 0.47 $ 0.46 $ 0.85 $ 0.97 Adjusted for: Income tax expense attributable to Knight-Swift 0.16 0.15 0.30 0.31 Income before income taxes attributable to Knight-Swift 0.63 0.61 1.15 1.28 Amortization of intangibles ¹ 0.07 0.06 0.13 0.12 Impairments ² — 0.01 0.01 0.01 Legal accruals ³ — 0.09 — 0.09 COVID-19 incremental costs 4 0.06 — 0.07 — Adjusted income before income taxes 0.75 0.77 1.37 1.50 Provision for income tax expense at effective rate (0.19) (0.19) (0.36) (0.37) Non-GAAP: Adjusted EPS $ 0.57 $ 0.58 $ 1.01 $ 1.14 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in the 2017 Merger and other acquisitions. Refer to Note 4 in Part I, Item 1 of this Quarterly Report for additional details regarding the acquisition. 2 "Impairments" 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. In the second quarter of 2019, we incurred a non-cash impairment of leasehold improvements (within the Trucking segment) which were incurred during the early termination of a lease related to one of our operating properties. 3 "Legal accruals" reflects costs incurred in the second quarter of 2019 associated with a jury verdict issued, which is included in "Miscellaneous operating expenses" in the condensed consolidated statements of comprehensive income. 4 "COVID-19 incremental costs" reflects costs incurred during 2020 that were directly attributable to the pandemic and were incremental to those incurred prior to the outbreak. These include payroll premiums paid to our drivers and shop technicians, additional disinfectants and cleaning supplies, and various other pandemic-specific items. The costs are clearly separable from our normal business operations and are not expected to recur once the pandemic subsides. 51 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Non-GAAP Reconciliation: Consolidated Adjusted Operating Income and Adjusted Operating Ratio Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 GAAP Presentation (Dollars in thousands) Total revenue $ 1,060,698 $ 1,242,083 $ 2,185,496 $ 2,446,618 Total operating expenses (958,531) (1,133,490) (1,981,210) (2,221,726) Operating income $ 102,167 $ 108,593 $ 204,286 $ 224,892 Operating ratio 90.4 % 91.3 % 90.7 % 90.8 % Non-GAAP Presentation Total revenue $ 1,060,698 $ 1,242,083 $ 2,185,496 $ 2,446,618 Trucking fuel surcharge (63,101) (119,329) (160,804) (226,908) Revenue, excluding trucking fuel surcharge 997,597 1,122,754 2,024,692 2,219,710 Total operating expenses 958,531 1,133,490 1,981,210 2,221,726 Adjusted for: Trucking fuel surcharge (63,101) (119,329) (160,804) (226,908) Amortization of intangibles ¹ (11,474) (10,692) (22,948) (21,385) Impairments ² (353) (2,182) (1,255) (2,182) Legal accruals ³ — (15,500) — (15,500) COVID-19 incremental costs 4 (9,966) — (12,259) — Adjusted Operating Expenses 873,637 985,787 1,783,944 1,955,751 Adjusted Operating Income $ 123,960 $ 136,967 $ 240,748 $ 263,959 Adjusted Operating Ratio 87.6 % 87.8 % 88.1 % 88.1 % 1 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 1 . 2 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 2. 3 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 3. 4 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 4. 52 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Non-GAAP Reconciliation: Reportable Segment Adjusted Operating Income and Adjusted Operating Ratio Trucking Segment Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 GAAP Presentation (Dollars in thousands) Total revenue $ 879,369 $ 1,020,027 $ 1,798,430 $ 1,993,272 Total operating expenses (771,581) (894,255) (1,583,308) (1,752,325) Operating income $ 107,788 $ 125,772 $ 215,122 $ 240,947 Operating ratio 87.7 % 87.7 % 88.0 % 87.9 % Non-GAAP Presentation Total revenue $ 879,369 $ 1,020,027 $ 1,798,430 $ 1,993,272 Fuel surcharge (63,101) (119,329) (160,804) (226,908) Intersegment transactions (235) (50) (509) (86) Revenue, excluding fuel surcharge and intersegment transactions 816,033 900,648 1,637,117 1,766,278 Total operating expenses 771,581 894,255 1,583,308 1,752,325 Adjusted for: Fuel surcharge (63,101) (119,329) (160,804) (226,908) Intersegment transactions (235) (50) (509) (86) Amortization of intangibles ¹ (324) (349) (648) (698) Impairments ² (153) (2,182) (1,055) (2,182) COVID-19 incremental costs ³ (9,901) — (12,146) — Adjusted Operating Expenses 697,867 772,345 1,408,146 1,522,451 Adjusted Operating Income $ 118,166 $ 128,303 $ 228,971 $ 243,827 Adjusted Operating Ratio 85.5 % 85.8 % 86.0 % 86.2 % 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in historical Knight acquisitions. 2 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 2. 3 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 4. 53 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Logistics Segment Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 GAAP Presentation (Dollars in thousands) Total revenue $ 70,104 $ 82,929 $ 149,302 $ 171,881 Total operating expenses (67,066) (77,908) (142,545) (159,577) Operating income $ 3,038 $ 5,021 $ 6,757 $ 12,304 Operating ratio 95.7 % 93.9 % 95.5 % 92.8 % Non-GAAP Presentation Total revenue $ 70,104 $ 82,929 $ 149,302 $ 171,881 Intersegment transactions (3,038) (2,625) (5,479) (4,386) Revenue, excluding intersegment transactions 67,066 80,304 143,823 167,495 Total operating expenses 67,066 77,908 142,545 159,577 Adjusted for: Intersegment transactions (3,038) (2,625) (5,479) (4,386) Adjusted Operating Expenses 64,028 75,283 137,066 155,191 Adjusted Operating Income $ 3,038 $ 5,021 $ 6,757 $ 12,304 Adjusted Operating Ratio 95.5 % 93.7 % 95.3 % 92.7 % Intermodal Segment Quarter-to-Date June 30, Year-to-Date June 30, 2020 2019 2020 2019 GAAP Presentation (Dollars in thousands) Total revenue $ 82,820 $ 118,195 $ 177,551 $ 234,562 Total operating expenses (87,295) (114,003) (184,763) (228,009) Operating (loss) income $ (4,475) $ 4,192 $ (7,212) $ 6,553 Operating ratio 105.4 % 96.5 % 104.1 % 97.2 % Non-GAAP Presentation Total revenue $ 82,820 $ 118,195 $ 177,551 $ 234,562 Intersegment transactions (121) (468) (230) (1,158) Revenue, excluding intersegment transactions 82,699 117,727 177,321 233,404 Total operating expenses 87,295 114,003 184,763 228,009 Adjusted for: Intersegment transactions (121) (468) (230) (1,158) COVID-19 incremental costs ¹ (65) — (113) — Adjusted Operating Expenses 87,109 113,535 184,420 226,851 Adjusted Operating (Loss) Income $ (4,410) $ 4,192 $ (7,099) $ 6,553 Adjusted Operating Ratio 105.3 % 96.4 % 104.0 % 97.2 % 1 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 4. 54 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Liquidity and Capital Resources Sources of Liquidity Our primary sources of liquidity are funds provided by operations and the following: Source June 30, 2020 (In thousands) Cash and cash equivalents, excluding restricted cash $ 117,760 Availability under Revolver, due October 2022 ¹ 533,906 Availability under 2018 RSA, due July 2021 ² 39,959 Total unrestricted liquidity $ 691,625 Cash and cash equivalents – restricted ³ 40,991 Restricted investments, held-to-maturity, amortized cost ³ 8,272 Total liquidity, including restricted cash and restricted investments $ 740,888 1 As of June 30, 2020, we had $235.0 million in borrowings under our $800.0 million Revolver. We additionally had $31.1 million in outstanding letters of credit (discussed below), leaving $533.9 million available under the Revolver. 2 Based on eligible receivables at June 30, 2020, our borrowing base for the 2018 RSA was $273.8 million , while outstanding borrowings were $165.0 million . We additionally had $68.8 million in outstanding letters of credit (discussed below), leaving $40.0 million available under the 2018 RSA. Refer to Note 9 in Part I, Item 1 of this Quarterly Report for more information regarding the 2018 RSA. 3 Restricted cash and restricted investments are primarily held by our captive insurance companies for claims payments. "Cash and cash equivalents – restricted" consists of $39.6 million , included in "Cash and cash equivalents — restricted" in the condensed consolidated balance sheet and held by Mohave and Red Rock for claims payments. The remaining $1.4 million is included in "Other long-term assets" and is held in escrow accounts to meet statutory requirements. Uses of Liquidity Our business requires substantial amounts of cash for operating activities, including salaries and wages paid to our employees, contract payments to independent contractors, insurance and claims payments, tax payments, and others. We also use large amounts of cash and credit for the following activities: Capital Expenditures — When justified by customer demand, as well as our liquidity and our ability to generate acceptable returns, we make substantial cash capital expenditures to maintain a modern company tractor fleet, refresh our trailer fleet, fund replacement of our revenue equipment fleet, and, to a lesser extent, fund upgrades to our terminals and technology in our logistics service offerings. We expect that net capital expenditures from the aforementioned projects will be in the range of $500.0 – $525.0 million for the full-year 2020. We believe we have ample flexibility with our trade cycle and purchase agreements to alter our current plans if economic or other conditions warrant. Over the long-term, we will continue to have significant capital requirements, which may require us to seek additional borrowing, lease financing, or equity capital. The availability of financing or equity capital will depend upon our financial condition and results of operations as well as prevailing market conditions. If such additional borrowing, lease financing, or equity capital is not available at the time we need it, then we may need to borrow more under the Revolver (if not then fully drawn), extend the maturity of then-outstanding debt, rely on alternative financing arrangements, engage in asset sales, limit our fleet size, or operate our revenue equipment for longer periods. There can be no assurance that we will be able to obtain additional debt under our existing financial arrangements to satisfy our ongoing capital requirements. However, we believe the combination of our expected cash flows, financing available through operating and finance leases, available funds under the 2018 RSA, and availability under the Revolver will be sufficient to fund our expected capital expenditures for at least the next twelve months. 55 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Principal and Interest Payments — As of June 30, 2020, we had debt and finance lease obligations of $851.8 million , which are discussed under "Material Debt Agreements," below. Certain cash flows from operations are committed to minimum payments of principal and interest on our debt and lease obligations. Additionally, when our financial position allows, we periodically make voluntary prepayments on our outstanding debt balances. Letters of Credit — Pursuant to the terms of the 2017 Debt Agreement and the 2018 RSA, our lenders may issue standby letters of credit on our behalf. When we have letters of credit outstanding, the availability under the Revolver or 2018 RSA is reduced accordingly. Standby letters of credit are typically issued for the benefit of regulatory authorities, insurance companies and state departments of insurance for the purpose of satisfying certain collateral requirements, primarily related to our automobile, workers' compensation, and general insurance liabilities. Share Repurchases — From time to time, and depending on free cash flow availability, debt levels, common stock prices, general economic and market conditions, as well as Board approval, we may repurchase shares of our outstanding common stock. As of June 30, 2020, the Company had $199.0 million remaining under the 2019 Knight-Swift Share Repurchase Plan . Additional details are discussed in Note 12 in Part I, Item 1 of this Quarterly Report. Working Capital As of June 30, 2020 and December 31, 2019, we had working capital deficits of $142.0 million and $103.0 million, respectively. The deficits were primarily due to the Term Loan maturing on October 2, 2020. We intend to refinance the Term Loan prior to its maturity. Material Debt Agreements As of June 30, 2020, we had $851.8 million in material debt obligations at the following carrying values: • $364.9 million : Term Loan, due October 2020, net of $0.1 million in deferred loan costs • $164.8 million : 2018 RSA outstanding borrowings, due July 2021, net of $0.2 million in deferred loan costs • $87.1 million: Finance lease obligations • $235.0 million : Revolver, due October 2022 As of December 31, 2019, we had $918.8 million in material debt obligations at the following carrying values: • $364.8 million: Term Loan, due October 2020, net of $0.2 million in deferred loan costs • $204.8 million: 2018 RSA outstanding borrowings, due July 2021, net of $0.2 million in deferred loan costs • $70.2 million: Finance lease obligations • $279.0 million: Revolver, due October 2022 . 56 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Cash Flow Analysis Year-to-Date June 30, Change 2020 2019 (In thousands) Net cash provided by operating activities $ 383,360 $ 362,812 $ 20,548 Net cash used in investing activities (253,066) (223,882) (29,184) Net cash used in financing activities (173,771) (162,022) (11,749) Net Cash Provided by Operating Activities Comparison Between Year-to-Date June 30, 2020 and 2019 — T he $20.5 million increase in net cash provided by operating activities was primarily due to a $68.8 million decrease in cash paid for income taxes, net of refunds, and various changes within our working capital. This was all partially offset by a $93.4 million cash settlement paid during the first quarter of 2020, associated with pre-2017 Merger legal matters that were previously accrued and disclosed by Swift. Net Cash Used in Investing Activities Comparison Between Year-to-Date June 30, 2020 and 2019 — The $29.2 million increase in net cash used in investing activities was due to a $46.8 million increase in net cash used for acquisitions and was partially offset by a $24.7 million decrease in net capital expenditures. Net Cash Used in Financing Activities Comparison Between Year-to-Date June 30, 2020 and 2019 — Net cash used in financing activities increased by $11.7 million, primarily due to a $59.0 million decrease in net repayments of our debt obligations. This was partially offset by a $52.3 million decrease in cash used to repurchase shares of our common stock. Contractual Obligations "Liquidity and Capital Resources," above, includes details regarding changes in our contractual obligations table during the year-to-date June 30, 2020 period. Aside from these items, there were no material changes to the contractual obligations table, which was included in our 2019 Annual Report. Off Balance Sheet Arrangements Information about our off balance sheet arrangements is included in Note 10 of the notes to our condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report, which is incorporated by reference herein. See also "Contractual Obligations," above. 57 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Seasonality Discussion regarding the impact of seasonality on our business is included in Note 1 in the notes to the condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report, incorporated by reference herein. Inflation Inflation can have an impact on our operating costs. A prolonged period of inflation could cause interest rates, fuel, wages, and other costs to increase, which would adversely affect our results of operations unless freight rates correspondingly increased. Consistent with trends in the trucking industry overall, we continue to experience inflationary pressures with respect to driver wages, as compared to prior years. Recently Issued Accounting Pronouncements See Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference, for the impact of recently issued accounting pronouncements on the Company's condensed consolidated financial statements, as follows: • Note 2 for accounting pronouncements adopted during year-to-date June 30, 2020. • Note 3 for accounting pronouncements issued during year-to-date June 30, 2020. 58 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.