Knight-Swift Transportation Holdings Inc. 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain acronyms and terms used throughout this Annual 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. Management's discussion and analysis of financial condition and results of operations should be read together with "Business" in Part I, Item 1 of this Annual Report, as well as the consolidated financial statements and accompanying footnotes in Part II, Item 8 of this Annual Report. This discussion contains forward-looking statements as a result of many factors, including those set forth under Part I, Item 1A. "Risk Factors" and Part I "Cautionary Note Regarding Forward-looking Statements" of this Annual Report, and elsewhere in this report. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those discussed. Executive Summary 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 1 and Note 25 in Part II, Item 8 of this Annual 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. 2017 Merger — On September 8, 2017, we became Knight-Swift Transportation Holdings Inc. upon the effectiveness of the 2017 Merger. Immediately upon the consummation of the 2017 Merger, former Knight stockholders and former Swift stockholders owned approximately 46.0% and 54.0%, respectively, of the Company. Upon closing of the 2017 Merger, the shares of Knight common stock that previously traded under the ticker symbol "KNX" ceased trading and were delisted from the NYSE. Our shares of Class A common stock commenced trading on the NYSE on a post-reverse split basis under the ticker symbol "KNX" on September 11, 2017. Acquisitions — On January 1, 2020, the Company acquired a warehousing company to complement its suite of services. Please refer to Note 5 in Part II, Item 8 of this Annual Report. 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 brokerage 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 brokerage 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 certain 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- 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 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. 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 intangibles, 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 discussed in detail in "Part I, Item 1A. Risk Factors," as well as in various disclosures in our press releases, stockholder reports, and other filings with the SEC. Key Financial Highlights and Operating Metrics 2020 2019 GAAP Financial data: (Dollars in thousands, except per share data) Total revenue $ 4,673,863 $ 4,843,950 Revenue, excluding trucking fuel surcharge $ 4,369,207 $ 4,395,332 Net income attributable to Knight-Swift $ 410,002 $ 309,206 Diluted EPS $ 2.40 $ 1.80 Operating ratio 87.9 % 91.2 % Non-GAAP financial data: Adjusted Net Income Attributable to Knight-Swift 1 $ 466,147 $ 373,082 Adjusted EPS 1 $ 2.73 $ 2.17 Adjusted Operating Ratio 1 85.3 % 88.4 % Revenue equipment: 2 Average tractors (Trucking segment only) 3 18,448 18,877 Average trailers 4 57,722 58,315 Average containers 10,604 9,862 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 See "Results of Operations — Segment Review — Operating Statistics" in Part II, Item 7 of this Annual Report regarding definitions of these operating data. 3 Our tractor fleet had a weighted average age of 2.2 years and 1.9 years for 2020 and 2019, respectively. Average tractors within our Trucking segment includes 16,379 and 16,432 company-owned tractors for 2020 and 2019, respectively. 4 Our trailer fleet had a weighted average age of 7.8 years and 7.5 years for 2020 and 2019, respectively. 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 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 market in 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 6.7% 1 as of December 31, 2020. The impact of the COVID-19 pandemic and efforts to contain it continued to affect the labor market. Economic activities that were once curtailed during the initial surge of the pandemic began to resume during the third quarter and into the fourth quarter of 2020. Within our industry, social distancing measures continue to affect the population of available trained drivers across the nation. Additionally, ongoing competition for experienced hires, increased safety regulations, and various alternative sources of income to potential drivers continue to hamper driver sourcing efforts throughout the industry. During the fourth quarter of 2020, the US gross domestic product, which is the broadest measure of goods and services produced across the economy, increased at an annual rate of 4.0% 3 per third-party estimates. This reflects the US economy's continued recovery from the ongoing impact of the COVID-19 pandemic, which caused economic declines earlier in 2020. This may result in an expected annualized growth rate of approximately 5.0% to 6.0% 3 for full-year 2021, as third-party forecasts are predicting additional fiscal stimulus that may support continued economic rebound. The 2020 US employment cost index rose 2.5% 1 on a year-over-year basis. From a freight market perspective, demand toward the beginning of the year was weak, but gradually strengthened throughout 2020. We are encouraged by the continued strength in freight demand; however, we expect demand will be difficult to predict for 2021. Consolidated revenue, excluding trucking fuel surcharge, decreased by 0.6%, while operating income increased by 32.1% and Adjusted Operating Income increased by 25.7% in 2020, as compared to 2019. Our business model continues to generate a meaningful amount of free cash flow (computed as net cash provided by operating activities, less net cash capital expenditures), which was $531.8 million in 2020. Our Trucking segment improved its Adjusted Operating Income by 25.5%, resulting in a 350 basis point Adjusted Operating Ratio improvement to 83.0% in 2020 from 86.5% in 2019. Our Logistics segment produced a 94.5% Adjusted Operating Ratio in 2020, as a result of an 18.5% improvement in its revenue per load, excluding intersegment transactions in 2020, as compared to 2019. Our Intermodal segment generated a 100.2% Adjusted Operating Ratio in 2020, as load volumes were pressured, compared to the prior year. We continue to manage our leverage ratio relative to 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. Impact of COVID-19 — Refer to Note 1 in Part II, Item 8 of this Annual Report for discussion around the impact of COVID-19 on our company. Refer to Part 1, Item 1A "Risk Factors" of this Annual Report for discussion about trends, potential risks, and uncertainties surrounding the COVID-19 pandemic that may impact our business, results of operations, or financial condition. _________ 1 bls.gov 2 bea.gov 3 kiplinger.com 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 Note regarding presentation: A discussion of changes in our results of operations from 2018 to 2019 has been omitted from this Annual Report, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Annual Report filed with the SEC on February 27, 2020. Operating Results: 2020 Compared to 2019 — The $100.8 million increase in net income attributable to Knight-Swift to $410.0 million in 2020 from $309.2 million in 2019, includes the following: • Contributor — $109.8 million increase in operating income within our Trucking segment driven by a 3.5% increase in revenue per loaded mile, excluding fuel surcharge and intersegment transactions, partially offset by a 1.5% decrease in total miles per tractor . • Contributor — $34.3 million improvement in operating results within the non-reportable segments. Improved operating loss within the non-reportable segments was primarily due to a $29.5 million year-over-year reduction in recorded legal costs for increases in legal reserves in 2019 related to various pre-2017 Merger related legal matters, which were previously disclosed by Swift, as well as additional income earned from a warehousing company acquired in 2020. These improvements were offset by a $6.7 million of expenses in 2020 for the change in fair value of the deferred earnout related to the acquisition of the recently acquired warehousing company and a $4.1 million impairment related to investments in certain alternative fuel technology. • Offset — $45.9 million increase in consolidated income tax expense was primarily due to an increase in pre-tax earnings and negative impacts from certain tax-related items within our Mexico operations recognized as a discrete item. This was partially offset by stock compensation deductions and a partial release of our reserve for uncertain tax positions recognized as discrete items. In 2019, we recognized discrete items related to a partial release of our reserve for uncertain tax positions, which was partially offset by a decrease in foreign income tax deductions. All of these factors resulted in a 2020 effective tax rate of 26.7% and a 2019 effective tax rate of 25.1%. See additional discussion of our operating results within "Results of Operations — Consolidated Operating and Other Expenses" below. 2020 Liquidity and Capital — During 2020, we generated $919.6 million in operating cash flows. We invested $387.8 million in capital expenditures (net of equipment sales proceeds), reduced our operating lease liabilities by $83.7 million , repurchased $179.6 million of our common stock, and returned $54.6 million in quarterly dividends to our stockholders during the year. We ended the year with $156.7 million in unrestricted cash and cash equivalents, $210.0 million outstanding on the Revolver, $300.0 million outstanding on the Term Loan, and $5.9 billion of stockholders' equity. We 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 and growth through acquisition. See discussion under "Liquidity and Capital Resources" for additional information. 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 Results of Operations — Segment Review During the first quarter of 2019, the Company reorganized its reportable segments. Accordingly, the Company now has three reportable segments: Trucking, Logistics, and Intermodal, as well as certain non-reportable segments. Refer to Note 25 in Part II, Item 8 of this Annual Report for descriptions of our segments. Refer to Part I, Item 1, "Business – Our Mission and Company Strategy" of this Annual Report for discussion related to our segment operating strategies. Consolidating Tables for Total Revenue and Operating Income (Loss) 2020 2019 Revenue: (Dollars in thousands) Trucking $ 3,786,030 81.0 % $ 3,952,866 81.6 % Logistics $ 375,841 8.0 % $ 352,988 7.3 % Intermodal $ 391,462 8.4 % $ 455,466 9.4 % Subtotal $ 4,553,333 97.4 % $ 4,761,320 98.3 % Non-reportable segments $ 188,882 4.0 % $ 130,782 2.7 % Intersegment eliminations $ (68,352) (1.4 %) $ (48,152) (1.0 %) Total revenue $ 4,673,863 100.0 % $ 4,843,950 100.0 % 2020 2019 Operating income (loss): (Dollars in thousands) Trucking $ 578,512 102.5 % $ 468,749 109.7 % Logistics $ 20,245 3.6 % $ 21,869 5.1 % Intermodal $ (943) (0.2 %) $ 4,501 1.1 % Subtotal $ 597,814 105.9 % $ 495,119 115.9 % Non-reportable segments $ (33,376) (5.9 %) $ (67,681) (15.9 %) Operating income $ 564,438 100.0 % $ 427,438 100.0 % 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 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 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 Segment Review Trucking Segment We generate revenue in the Trucking segment primarily through irregular route, dedicated, refrigerated, flatbed, expedited, and cross-border service offerings, with 13,386 irregular route tractors and 5,062 dedicated route tractors. 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 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. 2020 2019 2020 vs. 2019 (Dollars in thousands, except per tractor data) Increase (decrease) Total revenue $ 3,786,030 $ 3,952,866 (4.2 %) Revenue, excluding fuel surcharge and intersegment transactions $ 3,480,621 $ 3,504,091 (0.7 %) GAAP: Operating income $ 578,512 $ 468,749 23.4 % Non-GAAP: Adjusted Operating Income 1 $ 593,085 $ 472,537 25.5 % Average revenue per tractor 2 $ 188,672 $ 185,628 1.6 % GAAP: Operating ratio 2 84.7 % 88.1 % (340 bps) Non-GAAP: Adjusted Operating Ratio 1 2 83.0 % 86.5 % (350 bps) Non-paid empty miles percentage 2 13.1 % 12.8 % 30 bps Average length of haul (miles) 2 425 430 (1.2 %) Total miles per tractor 2 90,993 92,363 (1.5 %) Average tractors 2 3 18,448 18,877 (2.3 %) Average trailers 2 57,722 58,315 (1.0 %) 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined within "Operating Statistics" above. 3 Includes 16,379 and 16,432 company-owned tractors for 2020 and 2019, respectively. 2020 Compared to 2019 — Operating ratio improved by 340 basis points to 84.7% in 2020 and Adjusted Operating Ratio improved by 350 basis points to 83.0% in 2020. Average revenue per tractor increased by 1.6% driven by a 3.5% increase in revenue per loaded mile, excluding fuel surcharge and intersegment transactions, and was partially offset by a 1.5% decrease in total miles per tractor . Our focus in our Trucking segment remains on developing our freight network, improving the productivity of our assets and controlling costs in areas where we have experienced higher than normal inflation, such as maintenance, driving associate pay, and professional fees. 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 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, trailing equipment, 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 purchased transportation that we pay to third-party capacity providers, which is a primarily variable cost, and is included in "Purchased transportation" in the 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 consolidated statements of comprehensive income. 2020 2019 2020 vs. 2019 (Dollars in thousands, except per load data) Increase (decrease) Total revenue $ 375,841 $ 352,988 6.5 % Revenue, excluding intersegment transactions $ 365,099 $ 343,883 6.2 % GAAP: Operating income $ 20,245 $ 21,869 (7.4 %) Non-GAAP: Adjusted Operating Income 1 2 $ 20,245 $ 22,490 (10.0 %) Revenue per load – Brokerage only 2 $ 1,689 $ 1,425 18.5 % Gross margin percentage – Brokerage only 2 14.5 % 15.9 % (140 bps) GAAP: Operating ratio 2 94.6 % 93.8 % 80 bps Non-GAAP: Adjusted Operating Ratio 1 2 94.5 % 93.5 % 100 bps 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined under "Operating Statistics" above. 2020 Compared to 2019 — Operating ratio increased by 80 basis points and Adjusted Operating Ratio increased by 100 basis points year-over-year. Brokerage gross margin decreased to 14.5% in 2020 from 15.9% in 2019. An 18.5% increase in brokerage revenue per load, partially offset by an 8.3% decrease in brokerage load volumes, contributed to a 8.8% increase in brokerage revenue, excluding intersegment transactions. Load volumes grew 67.0% year-over-year within our power-only service offering, contributing to 96.3% revenue growth within power-only and representing 24.3% of our total 2020 brokerage load volumes. In the first half of 2020, we introduced our Select platform, which digitally matches shippers with available capacity across our brands through frictionless transactions. By the fourth quarter of 2020, over 5,000 carriers were digitally matched with loads through our Select platform, representing approximately 20% of our brokerage load volume. 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 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 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 containers and chassis, as well as non-driver employee compensation and benefits. 2020 2019 2020 vs. 2019 (Dollars in thousands, except per load data) Increase (decrease) Total revenue $ 391,462 $ 455,466 (14.1 %) Revenue, excluding intersegment transactions $ 391,098 $ 453,978 (13.9 %) GAAP: Operating (loss) income $ (943) $ 4,501 (121.0 %) Non-GAAP: Adjusted Operating (Loss) Income 1 2 $ (830) $ 4,501 (118.4 %) Average revenue per load 2 $ 2,342 $ 2,426 (3.5 %) GAAP: Operating ratio 2 100.2 % 99.0 % 120 bps Non-GAAP: Adjusted Operating Ratio 1 2 100.2 % 99.0 % 120 bps Load count 166,977 187,131 (10.8 %) Average tractors 2 3 577 643 (10.3 %) Average containers 2 10,604 9,862 7.5 % 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined within "Operating Statistics" above. 3 Includes 518 and 568 c ompany-owned tractors for 2020 and 2019, respectively. 2020 Compared to 2019 — Our Intermodal se gment produced a 100.2% operating ratio during 2020, compared to 99.0% during 2019. Total revenue decreased 14.1% due to a 10.8% decrease in load volumes and a decrease of 3.5% in average revenue per load. We continue to work on initiatives to support our business, develop our network, and improve our cost structure within the Intermodal segment, and we expect to see improved results in 2021. 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 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 $45.9 million in annual amortization of intangibles related to the 2017 Merger and various acquisitions). 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Total revenue $ 188,882 $ 130,782 44.4 % Operating loss $ (33,376) $ (67,681) (50.7 %) 2020 Compared to 2019 — The increase in total revenue within our non-reportable segments is primarily attributed to revenues from the acquisition of a warehousing company made at the beginning of the year. Improved operating loss within the non-reportable segments was primarily due to a $29.5 million year-over-year reduction in recorded legal costs for increases in legal reserves in 2019 related to various pre-2017 Merger related legal matters, which were previously disclosed by Swift, as well as additional income earned from a warehousing company acquired in 2020. These improvements were offset by a $6.7 million of expenses in 2020 for the change in fair value of the deferred earnout related to the acquisition of the recently acquired warehousing company and a $4.1 million impairment related to investments in certain alternative fuel technology. Results of Operations — Consolidated Operating and Other Expenses Consolidated Operating Expenses The following tables present certain operating expenses from our 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. 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. 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Salaries, wages, and benefits $ 1,483,188 $ 1,474,073 0.6 % % of total revenue 31.7 % 30.4 % 130 bps % of revenue, excluding trucking fuel surcharge 33.9 % 33.5 % 40 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 our biggest headwind, although we continue to seek ways to attract and retain qualified driving associates, including heavily investing in our recruiting efforts, our driving academies, technology, and terminals that improve the experience of driving associates. We expect driving associate pay to remain inflationary, leading to additional driving associate pay increases. 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 2020 Compared to 2019 — The increase in consolidated salaries, wages, and benefits was primarily due to $9.0 million in incremental payroll premiums paid during the first half of 2020 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. 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Fuel $ 416,307 $ 583,123 (28.6 %) % of total revenue 8.9 % 12.0 % (310 bps) % of revenue, excluding trucking fuel surcharge 9.5 % 13.3 % (380 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, and out-of-route miles driven. Typical fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly, but typically require a specified minimum change in fuel cost to prompt a change in fuel surcharge revenue for our trucking segments. 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, managing tractor speeds, updating our fleet with more fuel-efficient engines, managing fuel procurement, and driving associate training programs that we believe contribute to controlling our fuel expense. 2020 Compared to 2019 — The decrease in consolidated fuel expense is primarily due to a decrease in the average DOE fuel price to $2.56 per gallon for 2020 from $3.06 per gallon for 2019, and a 0.8% reduction in the total miles driven by company driving associates. 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Operations and maintenance $ 275,290 $ 322,188 (14.6 %) % of total revenue 5.9 % 6.7 % (80 bps) % of revenue, excluding trucking fuel surcharge 6.3 % 7.3 % (100 bps) Operations and maintenance expense consists of direct operating expenses, such as driving associate hiring and recruiting expenses, equipment maintenance, and tire expense. Operations and maintenance expenses are affected by the age of our company-owned fleet of tractors and trailers, as well as total miles driven by company driving associates. We expect the driver market to remain competitive into 2021, which could increase future driving associate development and recruiting costs and negatively affect our operations and maintenance expense. We expect to continue refreshing our fleet in the coming quarters to maintain our current fleet age and low maintenance costs. 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 2020 Compared to 2019 — The decrease in consolidated operations and maintenance expense is attributed to the reduced maintenance expense associated with refreshing our fleet with newer equipment and the 0.8% reduction in total miles driven by company driving associates noted above. 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Insurance and claims $ 192,840 $ 194,336 (0.8 %) % of total revenue 4.1 % 4.0 % 10 bps % of revenue, excluding trucking fuel surcharge 4.4 % 4.4 % — bps Insurance and claims expense consists of claims costs related to our self-insured limits for liability, physical damage, and cargo, and will vary based upon the frequency and severity of claims, as well as excess premium expense above these limits. 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 or reduce excess coverage 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, higher self-retention limits or lower excess coverage limits may cause increased volatility in our consolidated insurance and claims expense. 2020 Compared to 2019 — Consolidated insurance and claims expense decreased, but remained flat as a percentage of revenue, excluding trucking fuel surcharge. We expect insurance expense to stabilize as we begin to see the realization of our increased focus on improving our safety standards for our driving associates and independent contractors. 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Operating taxes and licenses $ 87,422 $ 88,481 (1.2 %) % of total revenue 1.9 % 1.8 % 10 bps % of revenue, excluding trucking fuel surcharge 2.0 % 2.0 % — bps Operating taxes and licenses include expenses such as state franchise taxes, federal highway use taxes, property taxes, vehicle license and registration fees, and fuel and mileage taxes. The expense is impacted by changes in the tax rates and registration fees associated with our tractor fleet and regional operating facilities. 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Communications $ 19,596 $ 19,520 0.4 % % of total revenue 0.4 % 0.4 % — bps % of revenue, excluding trucking fuel surcharge 0.4 % 0.4 % — bps Communications expense is comprised of costs associated with our tractor and trailer tracking systems, information technology systems, and phone systems. 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Depreciation and amortization of property and equipment $ 460,775 $ 420,082 9.7 % % of total revenue 9.9 % 8.7 % 120 bps % of revenue, excluding trucking fuel surcharge 10.5 % 9.6 % 90 bps 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 Depreciation relates primarily to our owned tractors, trailers, buildings, ELDs and other communication units, and other similar assets. Changes to this fixed cost are generally attributed to increases or decreases to company-owned equipment, 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. 2020 Compared to 2019 — The increase in consolidated depreciation and amortization of property and equipment is primarily due to an increase in owned versus leased equipment. We expect consolidated depreciation and amortization of property and equipment to generally increase both in total and as a percentage of consolidated revenue, excluding trucking fuel surcharge , as we do not plan to use operating leases as a primary means of funding our equipment purchases in 2021. 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Amortization of intangibles $ 45,895 $ 42,876 7.0 % % of total revenue 1.0 % 0.9 % 10 bps % of revenue, excluding trucking fuel surcharge 1.1 % 1.0 % 10 bps Amortization of intangibles relates to intangible assets identified with the 2017 Merger and other acquisitions. See Note 5 and Note 11 in Part II, Item 8, of this Annual Report for further details regarding the Company's intangible assets, historical amortization, and anticipated future amortization. 2020 Compared to 2019 — The increase in consolidated amortization of intangibles for 2020 is attributed to an acquisition completed on January 1, 2020. See Note 5 in Part II, Item 8, of this Annual Report for more details regarding details of our acquisitions. . 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Rental expense $ 86,640 $ 122,738 (29.4 %) % of total revenue 1.9 % 2.5 % (60 bps) % of revenue, excluding trucking fuel surcharge 2.0 % 2.8 % (80 bps) Rental expense consists primarily of payments for tractors and trailers financed with operating leases. The primary factors affecting the expense are the size our revenue equipment fleet and the relative percentage of owned versus leased equipment. 2020 Compa red to 2019 — The decrease in consolidated rental expense 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 do not plan to use operating leases as a primary means of funding our equipment purchases in 2021. 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 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Purchased transportation $ 936,649 $ 1,035,969 (9.6 %) % of total revenue 20.0 % 21.4 % (140 bps) % of revenue, excluding trucking fuel surcharge 21.4 % 23.6 % (220 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 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. 2020 Compared to 2019 — The decrease in consolidated purchased transportation expense is primarily due to a 17.5% decrease in miles driven by independent contractors, as well as lower purchased transportation expense from third-party carrier activities in our Logistics and Intermodal segments. We expect consolidated purchased transportation will increase as a percentage of revenue, excluding trucking fuel surcharge, if we grow our logistics and intermodal businesses at a faster rate than our trucking business. The increase could be partially offset if independent contractors exit the market due to regulatory changes. 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Impairments $ 5,335 $ 3,486 53.0 % 2020 Compared to 2019 — During 2020, impairments were related to investments in certain alternative fuel technology (within the non-reportable segments), certain tractors (within the Trucking segment), certain legacy trailers (within the non-reportable segments) as a result of a softer used equipment market, and trailer tracking equipment (within the Trucking segment). During 2019, we incurred impairment charges related to certain revenue equipment technolog y, warehousing equipment no longer in use, leasehold improvements from the early termination of a lease of one of our operating properties, and certain Swift legacy trailer models as a result of a softer used equipment market. The impairments were recorded across various segments, depending on the nature of the impairment. 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Miscellaneous operating expenses $ 99,488 $ 109,640 (9.3 %) Miscellaneous operating expenses primarily consists of legal and professional services fees, general and administrative expenses, and other costs, net of gain on sales of equipment. 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 2020 Compared to 2019 — The decrease in consolidated miscellaneous operating expenses is primarily due to a $29.5 million year-over-year reduction in recorded legal costs for increases in legal reserves in 2019 related to various pre-2017 Merger legal matters previously disclosed by Swift. This was partially offset by a $23.2 million reduction in gain on sales of equipment due to a softer used truck market and the $6.7 million expense for the change in fair value of a deferred earnout related to the acquisition of a warehousing company. Consolidated Other Expenses, net The following table summarizes fluctuations in certain non-operating expenses, included in our consolidated statements of comprehensive income: 2020 2019 2020 vs. 2019 (Dollars in thousands) Increase (decrease) Interest income $ (1,928) $ (3,834) (49.7 %) Interest expense $ 17,309 $ 29,433 (41.2 %) Other income, net $ (11,254) $ (12,137) (7.3 %) Income tax expense $ 149,676 $ 103,798 44.2 % Interest income — Interest income includes interest earned from financing revenue equipment to independent contractors, as well as interest earned from our investments. 2020 Compared to 2019 — The decrease in consolidated interest income is primarily due to the rebalancing of our portfolio to cash and cash equivalents investments, due to lower yields from other types of short-term investments during 2020. Interest expense — Interest expense is comprised of debt and finance lease interest expense as well as amortization of deferred loan costs. 2020 Compared to 2019 — Consolidated interest expense decreased when compared to 2019, primarily due to reduced interest rates. See Note 16 in Part II, Item 8 of this Annual Report for further information related to the 2017 Debt Agreement and related interest rates and deferred loan costs. Other income, net — Other income, net is primarily comprised of income from unrealized gains (losses) from equity securities, realized gains (losses) from Knight's investments in Transportation Resource Partners ("TRP") 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. See Note 7 in Part II, Item 8, of this Annual Report. 2020 Compared to 2019 — The unfavorable change in consolidated other income is primarily due to lower performance from our portfolio of investments when compared to 2019. Income tax expense — In addition to the discussion below, Note 14 in Part II, Item 8 of this Annual Report provides further analysis related to income taxes. 2020 Compared to 2019 — The increase in consolidated income tax expense was primarily due to an increase in pre-tax earnings and negative impacts from certain tax-related items within our Mexico operations recognized as a discrete item. This was partially offset by stock compensation deductions and a partial release of our reserve for uncertain tax positions recognized as discrete items. In 2019, we recognized discrete items related to a partial release of our reserve for uncertain tax positions which was partially offset by a decrease in foreign income tax deductions. All of these factors resulted in a 2020 effective tax rate of 26.7% and a 2019 effective tax rate of 25.1%. 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," "Adjusted Operating Ratio", and "Free Cash Flows," 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, Adjusted Operating Ratio, and Free Cash Flows 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, Adjusted Operating Ratio, and Free Cash Flows are not substitutes for their comparable GAAP financial measures, such as net income, cash flows from operating activities, operating income, operating margin, 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 Earnings per Diluted Share, 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. Note regarding presentation: A discussion in changes in our results of operations from 2018 to 2019 has been omitted from this Annual Report, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Annual Report filed with the SEC on February 27, 2020. Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS 2020 2019 (Dollars in thousands) GAAP: Net income attributable to Knight-Swift $ 410,002 $ 309,206 Adjusted for: Income tax expense attributable to Knight-Swift 149,676 103,798 Income before income taxes attributable to Knight-Swift 559,678 413,004 Amortization of intangibles 1 45,895 42,876 Change in fair value of deferred earnout 2 6,730 — Impairments 3 5,335 3,486 Legal accruals 4 6,160 35,840 COVID-19 incremental costs 5 12,259 — Adjusted income before income taxes 636,057 495,206 Provision for income tax expense at effective rate 6 (169,910) (122,124) Non-GAAP: Adjusted Net Income Attributable to Knight-Swift $ 466,147 $ 373,082 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. 2020 2019 GAAP: Earnings per diluted share $ 2.40 $ 1.80 Adjusted for: Income tax expense attributable to Knight-Swift 0.88 0.60 Income before income taxes attributable to Knight-Swift 3.28 2.40 Amortization of intangibles 1 0.27 0.25 Change in fair value of deferred earnout 2 0.04 — Impairments 3 0.03 0.02 Legal accruals 4 0.04 0.21 COVID-19 incremental costs 5 0.07 — Adjusted income before income taxes 3.73 2.88 Provision for income tax expense at effective rate 6 (1.00) (0.71) Non-GAAP: Adjusted EPS $ 2.73 $ 2.17 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in the 2017 Merger, and other acquisitions. 2 "Change in fair value of deferred earnout" reflects the expense for the change in fair value of a deferred earnout related to the acquisition of a warehousing company, which is recorded in "Miscellaneous operating expenses." Refer to Note 5 in Part II Item 8 of this Annual Report for additional details. 3 "Impairments" reflects the following non-cash impairments: • During 2020, impairments related to investments in certain alternative fuel technology (within the non-reportable segments), certain tractors (within the Trucking segment), certain legacy trailers (within the non-reportable segments) as a result of a softer used equipment market, and trailer tracking equipment (within the Trucking segment). • During 2019, impairments related to certain revenue equipment technology, warehousing equipment no longer in use, certain Swift legacy trailer models as a result of a softer used equipment market, as well as $2.2 million related to certain leasehold improvements from an early termination of a lease of one of our operating properties. The impairments were recorded across various segments, depending on the nature of the impairment. 4 "Legal accruals" are included in "Miscellaneous operating expenses" in the consolidated statements of comprehensive income and reflect the following: • 2020 costs related to certain class action lawsuits involving certain pre-merger employment-related claims that were previously disclosed by Swift, • 2019 legal costs reflecting revised estimates for various pre-2017 merger legal matters within the non-reportable segments, and costs associated with an issued jury verdict. 5 "COVID-19 incremental costs" reflects costs incurred during the first half of 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 driving associates 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. 6 For 2019, an effective tax rate of 24.6% was applied in our 2019 Adjusted EPS calculation to normalize permanent differences pertaining to a Value Added Tax ("VAT") adjustment within Swift's Mexico operations. The adjustment pertains to pre-2017 Merger VAT receivables from 2016 and prior years that have been deemed unrecoverable as of December 31, 2019. 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 2020 2019 GAAP Presentation (Dollars in thousands) Total revenue $ 4,673,863 $ 4,843,950 Total operating expenses (4,109,425) (4,416,512) Operating income $ 564,438 $ 427,438 Operating ratio 87.9 % 91.2 % Non-GAAP Presentation Total revenue $ 4,673,863 $ 4,843,950 Trucking fuel surcharge (304,656) (448,618) Revenue, excluding trucking fuel surcharge 4,369,207 4,395,332 Total operating expenses 4,109,425 4,416,512 Adjusted for: Trucking fuel surcharge (304,656) (448,618) Amortization of intangibles 1 (45,895) (42,876) Change in fair value of deferred earnout 2 (6,730) — Impairments 3 (5,335) (3,486) Legal accruals 4 (6,160) (35,840) COVID-19 incremental costs 5 (12,259) — Adjusted Operating Expenses 3,728,390 3,885,692 Adjusted Operating Income $ 640,817 $ 509,640 Adjusted Operating Ratio 85.3 % 88.4 % 1 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 1. 2 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 2. 3 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 3. 4 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 4. 5 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 5. 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 2020 2019 GAAP Presentation (Dollars in thousands) Total revenue $ 3,786,030 $ 3,952,866 Total operating expenses (3,207,518) (3,484,117) Operating income $ 578,512 $ 468,749 Operating ratio 84.7 % 88.1 % Non-GAAP Presentation Total revenue $ 3,786,030 $ 3,952,866 Fuel surcharge (304,656) (448,618) Intersegment transactions (753) (157) Revenue, excluding fuel surcharge and intersegment transactions 3,480,621 3,504,091 Total operating expenses 3,207,518 3,484,117 Adjusted for: Fuel surcharge (304,656) (448,618) Intersegment transactions (753) (157) Amortization of intangibles 1 (1,296) (1,371) Impairments 2 (1,131) (2,417) COVID-19 incremental costs 3 (12,146) — Adjusted Operating Expenses 2,887,536 3,031,554 Adjusted Operating Income $ 593,085 $ 472,537 Adjusted Operating Ratio 83.0 % 86.5 % 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 and Adjusted EPS footnote 3. 3 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 5 . 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 2020 2019 GAAP Presentation (Dollars in thousands) Total revenue $ 375,841 $ 352,988 Total operating expenses (355,596) (331,119) Operating income $ 20,245 $ 21,869 Operating ratio 94.6 % 93.8 % Non-GAAP Presentation Total revenue $ 375,841 $ 352,988 Intersegment transactions (10,742) (9,105) Revenue, excluding intersegment transactions 365,099 343,883 Total operating expenses 355,596 331,119 Adjusted for: Intersegment transactions (10,742) (9,105) Impairments 1 — (621) Adjusted Operating Expenses 344,854 321,393 Adjusted Operating Income $ 20,245 $ 22,490 Adjusted Operating Ratio 94.5 % 93.5 % 1 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 3. Intermodal Segment 2020 2019 GAAP Presentation (Dollars in thousands) Total revenue $ 391,462 $ 455,466 Total operating expenses (392,405) (450,965) Operating (loss) income $ (943) $ 4,501 Operating ratio 100.2 % 99.0 % Non-GAAP Presentation Total revenue $ 391,462 $ 455,466 Intersegment transactions (364) (1,488) Revenue, excluding intersegment transactions 391,098 453,978 Total operating expenses 392,405 450,965 Adjusted for: Intersegment transactions (364) (1,488) COVID-19 incremental costs 1 (113) — Adjusted Operating Expenses 391,928 449,477 Adjusted Operating (Loss) Income $ (830) $ 4,501 Adjusted Operating Ratio 100.2 % 99.0 % 1 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 5. 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 The following table presents our available sources of liquidity as of December 31, 2020: Source: Amount (In thousands) Cash and cash equivalents, excluding restricted cash $ 156,699 Availability under Revolver, due October 2022 1 560,656 Availability under 2018 RSA, due July 2021 2 21,419 Total unrestricted liquidity $ 738,774 Cash and cash equivalents – restricted 3 40,578 Restricted investments, held-to-maturity, amortized cost 3 9,001 Total liquidity, including restricted cash and restricted investments $ 788,353 1 As of December 31, 2020, we had $210.0 million in borrowings under our $800.0 million Revolver. We additionally had $29.3 million in outstanding letters of credit (discussed below), leaving $560.7 million available under the Revolver. 2 Based on eligible receivables at December 31, 2020, our borrowing base for the 2018 RSA was $302.7 million, while outstanding borrowings were $214.0 million. We additionally had $67.3 million in outstanding letters of credit (discussed below), leaving $21.4 million available under the 2018 RSA. The Company intends to refinance prior to the maturity date. 3 Restricted cash and restricted investments are primarily held by our captive insurance companies for claims payments. "Cash and cash equivalents – restricted" consists of $39.3 million, which is included in "Cash and cash equivalents — restricted" in the consolidated balance sheet and is held by Mohave and Red Rock for claims payments. The remaining $1.3 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, maintain and improve our driving associate facing shop and office facilities, invest in technology, and fund replacement in our revenue equipment fleet. We expect net cash capital expenditures to be in the range of $450.0 to $500.0 million in 2021, but intend to keep this range as flexible as possible to appropriately respond to pending business opportunities and the overall market environment. 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 capital 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. Refer to Note 18 in Part II, Item 8 of this Annual Report for additional discussion of our short-term and long-term contractual payment obligations related to purchase commitments. 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 December 31, 2020, we had material debt and finance lease obligations of $914.8 million (gross of deferred loan costs) which are discussed under "Material Debt Agreements," below. A modest portion of our cash flows from operations are committed to minimum payments of principal and interest on our debt facilities and lease obligations. Additionally, when our financial position allows, we periodically make voluntary prepayments on our outstanding debt balances. Following the 2017 Merger, the combined company carries substantially more debt than Knight has historically carried and the combined company has significantly higher interest expense and exposure to interest rate fluctuations than Knight historically had. Prior to the maturity of our 2018 RSA, Term Loan, and Revolver, we expect to be contractually obligated to make interest payments of approximately $1.2 million, $7.4 million, and $4.3 million, respectively. Refer to Notes 15 and 16 in Part II, Item 8 of this Annual Report for additional discussion of the principal payment obligations related to the 2018 RSA and 2017 Debt Agreement. Refer to Note 17 in Part II, Item 8 of this Annual Report for additional discussion on our contractual principal and interest payment obligations for finance leases. Letters of Credit — Pursuant to the terms of the 2017 Debt Agreement and our 2018 RSA, our lenders may issue standby letters of credit on our behalf. When we have letters of credit outstanding, it reduces the availability under our $800.0 million Revolver or 2018 RSA. 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, stock prices, general economic and market conditions, as well as Board approval, we may repurchase shares of our outstanding common stock. In November 2020, the Board authorized $250.0 million in share repurchases, replacing the previous plan which had approximately $ 54.1 million of authorized purchases remaining. The 2020 Knight-Swift Repurchase Plan had $250.0 million available as of December 31, 2020. See further details regarding our share repurchases under Note 20 in Part II, Item 8 of this Annual Report. Working Capital As of December 31, 2020 and December 31, 2019, we had a working capital surplus of $83.7 million and a working capital deficit of $103.0 million, respectively. The change was primarily due to reclassification of the Term Loan from "Finance lease liabilities and long-term debt – current portion" to "Long-term debt – less current portion" due to the 2020 amendment of the 2017 Debt agreement. This was partially offset by the 2018 RSA maturing on July 9, 2021, resulting in a $213.9 million reclassification from "Accounts receivable securitization – less current portion" to "Accounts receivable securitization – current portion" on the consolidated balance sheet as of December 31, 2020. We intend to refinance the 2018 RSA prior to its maturity. Material Debt Agreements As of December 31, 2020, we had $913.6 million in material debt obligations at the following carrying values: • $298.9 million: Term Loan, due October 2022, net of $1.1 million in deferred loan costs • $213.9 million: 2018 RSA outstanding borrowings, due July 2021, net of $0.1 million in deferred loan costs • $190.8 million: Finance lease obligations • $210.0 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 Key terms and other details regarding our material debt and finance leases are discussed in Notes 15, 16, and 17 in Part II, Item 8 of this Annual Report, and is incorporated by reference herein. 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 2020 2019 Change (In thousands) Net cash provided by operating activities $ 919,645 $ 839,594 $ 80,051 Net cash used in investing activities (480,712) (583,706) 102,994 Net cash used in financing activities (443,884) (184,636) (259,248) Net Cash Provided by Operating Activities 2020 Compared to 2019 — The $80.1 million increase in net cash provided by operating activities was primarily due to a $137.0 million increase in operating income and an $11.5 million decrease in interest payments on our long-term debt and finance leases. This was partially offset by a $93.4 million cash settlement paid during 2020, associated with a pre-2017 Merger legal matter that was previously accrued and disclosed by Swift. Net Cash Used in Investing Activities 2020 Compared to 2019 — The $103.0 million decrease in net cash used in investing activities was primarily due to a $182.0 million decrease in net cash capital expenditures, which was partially offset by a $44.9 million in crease in net cash used for acquisitions and a $40.9 million increase in cash invested in equity method investments, which included a $39.6 million investment in a transportation-related company . Net Cash Used in Financing Activities 2020 Compared to 2019 — We used $259.2 million more cash for financing activities, primarily as a result of a $142.3 million net increase in repayments of our debt and finance lease obligations, increasing our repurchases of our common stock by $92.7 million, and increasing dividends paid by $13.2 million. 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 have recently experienced inflationary pressures with respect to driver wages, as compared to prior years. Critical Accounting Estimates The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that impact the amounts reported in our consolidated financial statements and accompanying notes. Therefore, the reported amounts of assets, liabilities, revenue, expenses, and associated disclosures of contingent assets and liabilities are affected by these estimates and assumptions. We evaluate these estimates and assumptions on an ongoing basis, utilizing historical experience, consultation with experts, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates and assumptions, and it is possible that materially different amounts could be reported using differing estimates or assumptions. We consider our critical accounting estimates to be those that require us to make more significant judgments and estimates when we prepare our financial statements. Note 2 in Part II, Item 8 of this Annual Report describes the Company's accounting policies. The following discussion should be read in conjunction with Note 2, as it presents uncertainties involved in applying the accounting policies, and provides insight into the quality of management's estimates and variability in the amounts recorded for these critical accounting estimates. Our critical accounting estimates include the following: Claims Accruals — Insurance and claims expense varies as a percentage of total revenue, based on the frequency and severity of claims incurred in a given period, as well as changes in claims development trends. The actual cost to settle our self-insured claim liabilities may differ from our reserve estimates due to legal costs, claims that have been incurred but not reported, and various other uncertainties, including the inherent difficulty in estimating the severity of the claim and the potential judgment or settlement amount to dispose of the claim. If 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 claims development factors that are based upon historical experience had increased by 10%, our claims accrual as of December 31, 2020 would have potentially increased by $20.4 million. Refer to Note 13, in Part II, Item 8 of this Annual Report for discussion about the changes in the claims accrual balance. Goodwill and Indefinite-lived Intangible Assets — The test of goodwill requires judgment, including the identification of reporting units, assigning assets (including goodwill) and liabilities to reporting units and determining the fair value of each reporting unit. Fair value of the reporting unit is determined using a combination of comparative valuation multiples of publicly traded companies, internal transaction methods, and discounted cash flow models. Estimating the fair value of reporting units includes several significant assumptions, including future cash flow estimates, determination of appropriate discount rates, and other assumptions that management believed reasonable under the circumstances. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. Knight-Swift evaluated its goodwill associated with the 2017 Merger and other acquisitions as of June 30, 2020 and 2019. The evaluations were completed using fair value measurement guidance prescribed in ASC Topic 350, Intangibles – Goodwill and Other. The fair value of the goodwill was established using an equal weighting of both the income and market approaches. In evaluating this quantitative analysis, the Company determined that it was more likely than not that fair value exceeded carrying value for the Company's reporting units as of June 30, 2020 and 2019. The test of indefinite-lived intangible assets consists of a comparison of the estimated fair value of the trade names to their carrying values. The determination of the fair value of the trade names requires management to make significant estimates and assumptions related to forecasts of future revenues, discount rates, and royalty rates. Changes in these assumptions could materially affect the determination of the fair value of the trade names, the amount of any trade names impairment charge, or both. M anagement evaluated trade names for impairment as of June 30, 2020, and 2019 noting that the fair value exceeded carrying value for the trade name. Refer to Note 11, in Part II, Item 8 of this Annual Report for discussion about the changes in the goodwill and indefinite-lived intangible asset balances. Depreciation and Amortization — Selecting the appropriate accounting method requires management judgment, as there are multiple acceptable methods that are in accordance with GAAP, including straight-line, declining-balance, and sum-of-the-years' digits. As discussed in Note 2 included in Part II, Item 8 of this Annual Report, property and equipment is depreciated on a straight-line basis and intangible customer relationships are amortized on a straight-line basis over the estimated useful lives of the assets. We believe that these methods properly spread the costs over the useful lives of the assets. Management judgment is also involved when determining estimated useful lives of the Company's long-lived assets. We determine useful lives of our long-lived assets, based on historical experience, as well as future expectations regarding the period we expect to benefit from the asset. Factors affecting estimated useful lives of property and equipment may include estimating loss, damage, obsolescence, and company policies around maintenance and asset replacement. Factors affecting estimated useful lives of long-lived intangible assets may include legal, contractual, or other provisions that limit useful lives, historical experience with similar assets, future expectations of customer relationships, among others. Refer to Note 11, in Part II, Item 8 of this Annual Report for discussion about the impact of the amortization of definite-lived intangibles on our results for 2020 and 2019. Impairments of Long-lived Assets — Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals, as necessary. Estimating fair value includes several significant assumptions, including future cash flow estimates, determination of appropriate discount rates, and other assumptions that management believed reasonable under the circumstances. Changes in these estimates and assumptions could materially affect the determination of fair value and/or impairment. Refer to Note 23, in Part II, Item 8 of this Annual Report for discussion about the changes in long-lived assets and the impact on our results for 2020 and 2019. 58 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 Taxes — Significant management judgment is required in determining our provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. We periodically assess the likelihood that all or some portion of deferred tax assets will be recovered from future taxable income. To the extent we believe the likelihood of recovery is not sufficient, a valuation allowance is established for the amount determined not to be realizable. Management judgment is necessary in determining the frequency at which we assess the need for a valuation allowance, the accounting period in which to establish the valuation allowance, as well as the amount of the valuation allowance. We believe that we have adequately provided for our future tax consequences based upon current facts and circumstances and current tax law. However, should our tax positions be challenged, different outcomes could result and have a significant impact on the amounts reported in our consolidated statements of comprehensive income. Management judgment is also required regarding a variety of other factors including the appropriateness of tax strategies. We utilize certain income tax planning strategies to reduce our overall income taxes. It is possible that certain strategies might be disallowed, resulting in an increased liability for income taxes. Significant management judgments are involved in assessing the likelihood of sustaining the strategies and determining the likely range of defense and settlement costs, in the event that tax strategies are challenged by taxing authorities. An ultimate result worse than our expectations could adversely affect our results of operations. Refer to Note 14, in Part II, Item 8 of this Annual Report for discussion about the changes in the balances of deferred taxes assets and related valuation allowances. Leases — In accordance with ASC Topic 842, Leases , property and equipment held under operating leases are recorded as right-of-use assets, with a corresponding operating lease liability. Additionally, property and equipment held under finance leases are recorded as property and equipment with corresponding finance lease liabilities. All expenses related to operating leases are reflected in our consolidated statements of comprehensive income in "Rental expense." Expenses related to finance leases are reflected in our consolidated statements of comprehensive income in "Depreciation and amortization of property and equipment" and "Interest expense." At the inception of a lease, management judgment is involved in the determination of the discount rate, the determination of whether a contract contains a lease, classification of operating versus finance lease, assessment of useful lives, and estimation of residual values. Discounted future minimum lease payments are used in determining the lease classification represent the present value of minimum rental payments called for over the lease term, inclusive of residual value guarantees (if applicable) and amounts that would be required to be paid, if any, by the Company upon default for leases containing subjective acceleration or cross default clauses. In connection with various operating leases, we issued residual value guarantees, which provide that if we do not purchase the leased equipment from the lessor at the end of the lease term, we are liable to the lessor for an amount equal to the shortage (if any) between the proceeds from the sale of the equipment and an agreed value. To the extent we believe any manufacturer will refuse or be unable to meet its obligation, we recognize additional rental expense to the extent we believe the fair market value at the lease termination will be less than our obligation to the lessor. We believe that proceeds from the sale of equipment under operating leases would exceed the payment obligation on substantially all operating leases. Refer to Note 17, in Part II, Item 8 of this Annual Report for discussion about the changes in balance of operating leases. Stock-based Compensation — We issue several types of stock-based compensation, including awards that vest, based on service and performance conditions or a combination of service and performance conditions. Performance-based awards vest contingent upon meeting certain performance criteria established by our compensation committee. All awards require future service and thus forfeitures are estimated based on historical forfeitures and the remaining term until the related award vests. ASC Topic 718, Compensation – Stock Compensation , requires that all stock-based payments to employees, including grants of employee stock options, be recognized in the financial statements based upon a grant-date fair value of an award. Determining the appropriate amount to expense in each period is based on likelihood and timing of achievement of the stated targets for performance-based awards, and requires judgment, including forecasting future financial results and market performance. The estimates are revised periodically, based on the probability and timing of achieving the required performance targets, and adjustments are made as appropriate. Awards that are only subject to time-vesting provisions are amortized using the straight-line method. Awards subject to time-based vesting and performance conditions are amortized using the individual vesting tranches. 59 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Refer to Note 21, in Part II, Item 8 of this Annual Report for discussion about the assumptions related to these awards and the impact on our results for 2020 and 2019. Legal Settlements and Reserves — See Note 19 in Part II Item 8 of this Annual Report. Recently Issued Accounting Pronouncements See Part II Item 8 of this Annual Report, which is incorporated herein by reference, for the impact of recently issued accounting pronouncements on the Company's consolidated financial statements, as follows: • Note 3 for accounting pronouncements adopted during 2020. • Note 4 for recently issued accounting pronouncements.