Knight-Swift Transportation Holdings Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019, and 2018, together with related notes and the report of Grant Thornton LLP, independent registered public accountants, are set forth on the following pages. Other required financial information set forth herein is more fully described in Item 15 of this Annual Report. Audited Financial Statements of Knight-Swift Transportation Holdings Inc. Index to Consolidated Financial Statements Consolidated Financial Statements Page Report of independent registered public accounting firm 62 Consolidated balance sheets as of December 31, 2020 and 2019 65 Consolidated statements of comprehensive income for the years ended December 31, 2020, 2019, and 2018 66 Consolidated statements of stockholders’ equity for the years ended December 31, 2020, 2019, and 2018 67 Consolidated statements of cash flows for the years ended December 31, 2020, 2019, and 2018 68 Notes to Consolidated Financial Statements Note 1 Introduction and Basis of Presentation 70 Note 2 Summary of Significant Accounting Policies 72 Note 3 Recently Adopted Accounting Pronouncements 79 Note 4 Recently Issued Accounting Pronouncements 81 Note 5 Acquisitions 82 Note 6 Restricted Investments, Held-to-Maturity 85 Note 7 Equity Investments 85 Note 8 Trade Receivables, net 87 Note 9 Notes Receivable, net 87 Note 10 Assets Held for Sale 88 Note 11 Goodwill and Other Intangible Assets 88 Note 12 Accrued Payroll and Purchased Transportation and Accrued Liabilities 90 Note 13 Claims Accruals 90 Note 14 Income Taxes 91 Note 15 Accounts Receivable Securitization 93 Note 16 Debt and Financing 94 Note 17 Leases 96 Note 18 Purchase Commitments 98 Note 19 Contingencies and Legal Proceedings 99 Note 20 Share Repurchase Plans 101 Note 21 Stock-based Compensation 102 Note 22 Weighted Average Shares Outstanding 106 Note 23 Fair Value Measurement 106 Note 24 Related Party Transactions 109 Note 25 Information by Segment, Geography, and Customer Concentration 110 61 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Knight-Swift Transportation Holdings Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Knight-Swift Transportation Holdings Inc. (an Arizona corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 25, 2021 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Goodwill impairment assessment As described further in Notes 2 and 11 to the consolidated financial statements, management evaluates goodwill on an annual basis as of June 30, or more frequently if impairment indicators exist, at the reporting unit level. Management estimates the fair values of its reporting units using a combination of the income and market approaches. The determination of the fair value of the reporting units requires management to make significant estimates and assumptions related to forecasts of future revenues and operating expenses and discount rates. Changes in these assumptions could materially affect the determination of the fair value of the reporting units, the amount of any goodwill impairment charge, or both. We identified the goodwill impairment assessment of certain reporting units as a critical audit matter. The principal consideration for this determination is that management utilized significant judgment when estimating the fair value of these reporting units. In turn, auditing management’s judgments regarding forecasts of future revenues and operating expenses, and the discount rates applied, involved a high degree of subjectivity due to the estimation uncertainty of management’s significant judgments. 62 Our audit procedures related to the goodwill impairment assessment included the following, among others: • We tested the effectiveness of controls relating to the goodwill impairment assessment, including the determination of the fair value of the reporting units. • We tested management’s process for determining the fair value of the reporting units. This included evaluating the appropriateness of the valuation methods, testing the completeness, accuracy and relevance of data used by management, and evaluating the reasonableness of management’s significant assumptions, which included forecasted revenues, operating expenses, and net capital expenditures. We tested whether these forecasts were reasonable and consistent with historical performance, third-party market data, and other evidence obtained in other areas of the audit. • We tested the Company’s discounted cash flow models for the reporting units with the assistance of valuation specialists, including the reasonableness of the utilized discount rates. • We tested the Company’s use of the market approach with the assistance of valuation specialists, including the reasonableness of selected multiples . Indefinite-lived intangible asset impairment assessment - trade names As described further in Notes 2 and 11 to the consolidated financial statements, management evaluates trade names for impairment on an annual basis as of June 30, unless events occur or circumstances change between annual tests that would more likely than not reduce the fair value. The impairment test 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. We identified the trade names impairment assessment as a critical audit matter. The principal consideration for this determination is that management used significant judgment when estimating the fair value of the trade names. In turn, auditing management’s judgments regarding forecasts of future revenue, the discount rates applied, and the royalty rates, involved a high degree of subjectivity due to the estimation uncertainty of management’s significant judgments. Our audit procedures related to the trade names indefinite-lived intangible asset impairment assessment included the following, among others: • We tested the effectiveness of controls relating to the trade names’ impairment assessment, including the determination of the fair value of the trade names. • We tested management’s process for determining the fair value of the trade names. This included evaluating the appropriateness of the valuation method, testing the completeness, accuracy and relevance of data used by management, and evaluating the reasonableness of management’s significant assumptions, which included forecasted revenues. We tested whether these forecasts were reasonable and consistent with historical performance, third-party market data, and other evidence obtained in other areas of the audit. • We tested the reasonableness of the Company’s discount rates and royalty rates with the assistance of valuation specialists. Auto liability and workers’ compensation claims accrual As described further in Notes 2 and 13 to the consolidated financial statements, the Company is self-insured for a portion of its risk related to auto liability and workers’ compensation. The Company accrues for the cost of the self-insured portion of unpaid claims by evaluating the nature and severity of individual claims and by estimating future claims development based upon historical development trends. The actual cost to settle self-insured claim liabilities may differ from the Company’s reserve estimates due to legal costs, claims that have been incurred but not reported, and various other uncertainties. We identified the estimation of Swift’s auto liability and workers’ compensation claims accruals, subject to certain self-insured retention, as a critical audit matter. Auto liability and workers’ compensation unpaid claim liabilities are determined by projecting the estimated ultimate loss related to a claim, less actual costs paid to date. These estimates rely on the assumption that historical claim patterns are an accurate representation for future claims that have been incurred but not completely paid. The principal considerations for assessing auto liability and workers’ compensation claims as a critical audit matter are the high level of estimation uncertainty related to determining the 63 severity of these types of claims, as well as the inherent subjectivity in management’s judgment in estimating the total costs to settle or dispose of these claims. Our audit procedures related to the auto liability and workers' compensation claims accrual included the following, among others: • We tested the effectiveness of controls over auto liability and workers’ compensation claims, including the completeness and accuracy of claim expenses and payments. • We tested management’s process for determining the auto liability and workers’ compensation accrual, including evaluating the reasonableness of the methods and assumptions used in estimating the ultimate claim losses with the assistance of an actuarial specialist. • We tested the claims data used in the claims liability calculation by inspecting source documents to test key attributes of the claims data. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2011. Phoenix, Arizona February 25, 2021 64 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Consolidated Balance Sheets December 31, 2020 2019 ASSETS (In thousands, except per share data) Current assets: Cash and cash equivalents $ 156,699 $ 159,722 Cash and cash equivalents – restricted 39,328 41,331 Restricted investments, held-to-maturity, amortized cost 9,001 8,912 Trade receivables, net of allowance for doubtful accounts of $ 22,093 and $ 18,178 , respectively 578,479 518,547 Contract balance – revenue in transit 14,560 12,696 Prepaid expenses 71,649 62,160 Assets held for sale 29,756 41,786 Income tax receivable 2,903 17,026 Other current assets 20,988 27,848 Total current assets 923,363 890,028 Property and equipment: Revenue equipment 3,417,194 3,007,774 Land and land improvements 236,517 228,546 Buildings and building improvements 458,464 406,105 Furniture and fixtures 69,250 61,567 Shop and service equipment 29,033 26,417 Leasehold improvements 12,890 12,330 Total property and equipment 4,223,348 3,742,739 Less: accumulated depreciation and amortization ( 1,230,696 ) ( 892,019 ) Property and equipment, net 2,992,652 2,850,720 Operating lease right-of-use-assets 113,296 169,425 Goodwill 2,922,964 2,918,992 Intangible assets, net 1,389,245 1,379,459 Other long-term assets 126,482 73,108 Total assets $ 8,468,002 $ 8,281,732 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 101,001 $ 99,194 Accrued payroll and purchased transportation 160,888 110,065 Accrued liabilities 88,894 175,222 Claims accruals – current portion 174,928 150,805 Finance lease liabilities and long-term debt – current portion 52,583 377,651 Operating lease liabilities – current portion 47,496 80,101 Accounts receivable securitization – current portion 213,918 — Total current liabilities 839,708 993,038 Revolving line of credit 210,000 279,000 Long-term debt – less current portion 298,907 — Finance lease liabilities – less current portion 138,243 57,383 Operating lease liabilities – less current portion 69,852 96,160 Accounts receivable securitization – less current portion — 204,762 Claims accruals – less current portion 174,814 196,912 Deferred tax liabilities 815,941 771,719 Other long-term liabilities 48,497 14,455 Total liabilities 2,595,962 2,613,429 Commitments and contingencies (notes 5, 18, and 19) Stockholders’ equity: Preferred stock, par value $ 0.01 per share; 10,000 shares authorized; none issued — — Common stock, par value $ 0.01 per share; 500,000 shares authorized; 166,553 and 170,688 shares issued and outstanding as of December 31, 2020 and 2019, respectively. 1,665 1,707 Additional paid-in capital 4,301,424 4,269,043 Retained earnings 1,566,759 1,395,465 Total Knight-Swift stockholders' equity 5,869,848 5,666,215 Noncontrolling interest 2,192 2,088 Total stockholders’ equity 5,872,040 5,668,303 Total liabilities and stockholders’ equity $ 8,468,002 $ 8,281,732 See accompanying notes to consolidated financial statements. 65 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Consolidated Statements of Comprehensive Income 2020 2019 2018 (In thousands, except per share data) Revenue: Revenue, excluding trucking fuel surcharge $ 4,369,207 $ 4,395,332 $ 4,809,668 Trucking fuel surcharge 304,656 448,618 534,398 Total revenue 4,673,863 4,843,950 5,344,066 Operating expenses: Salaries, wages, and benefits 1,483,188 1,474,073 1,495,126 Fuel 416,307 583,123 621,997 Operations and maintenance 275,290 322,188 340,627 Insurance and claims 192,840 194,336 215,362 Operating taxes and licenses 87,422 88,481 90,778 Communications 19,596 19,520 20,911 Depreciation and amortization of property and equipment 460,775 420,082 387,505 Amortization of intangibles 45,895 42,876 42,584 Rental expense 86,640 122,738 177,406 Purchased transportation 936,649 1,035,969 1,318,303 Impairments 5,335 3,486 2,798 Miscellaneous operating expenses 99,488 109,640 61,626 Total operating expenses 4,109,425 4,416,512 4,775,023 Operating income 564,438 427,438 569,043 Other (expenses) income: Interest income 1,928 3,834 3,200 Interest expense ( 17,309 ) ( 29,433 ) ( 30,170 ) Other income, net 11,254 12,137 9,965 Total other (expenses) income, net ( 4,127 ) ( 13,462 ) ( 17,005 ) Income before income taxes 560,311 413,976 552,038 Income tax expense 149,676 103,798 131,389 Net income 410,635 310,178 420,649 Net income attributable to noncontrolling interest ( 633 ) ( 972 ) ( 1,385 ) Net income attributable to Knight-Swift $ 410,002 $ 309,206 $ 419,264 Earnings per share: Basic $ 2.42 $ 1.80 $ 2.37 Diluted $ 2.40 $ 1.80 $ 2.36 Dividends declared per share: $ 0.32 $ 0.24 $ 0.24 Weighted average shares outstanding: Basic 169,711 171,541 177,018 Diluted 170,549 172,142 177,999 See accompanying notes to consolidated financial statements. 66 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Consolidated Statements of Stockholders' Equity Common Stock Additional Paid-in Capital Retained Earnings Total Knight-Swift Stockholders' Equity Noncontrolling Interest Total Stockholders' Equity Shares Par Value (In thousands) Balances, December 31, 2017 177,998 $ 1,780 $ 4,219,214 $ 1,016,738 $ 5,237,732 $ 2,638 $ 5,240,370 Common stock issued to employees 670 6 10,944 10,950 10,950 Common stock issued to the board of directors 19 — 774 774 774 Common stock issued under employee stock purchase plan 49 1 1,822 1,823 1,823 Company shares repurchased ( 5,892 ) ( 59 ) ( 179,259 ) ( 179,318 ) ( 179,318 ) Shares withheld – restricted stock unit settlement ( 2,550 ) ( 2,550 ) ( 2,550 ) Employee stock-based compensation expense 11,488 11,488 11,488 Cash dividends paid and dividends accrued ($0.24 per share) ( 42,642 ) ( 42,642 ) ( 42,642 ) Net income attributable to Knight-Swift 419,264 419,264 419,264 Distribution to noncontrolling interest ( 2,253 ) ( 2,253 ) Net income attributable to noncontrolling interest 1,385 1,385 Net acquisition of remaining ownership interest, previously noncontrolling ( 1,873 ) ( 1,873 ) ( 1,873 ) Net cumulative-effect adjustment from adopting ASC Topic 606 5,301 5,301 5,301 Balances, December 31, 2018 172,844 $ 1,728 $ 4,242,369 $ 1,216,852 $ 5,460,949 $ 1,770 $ 5,462,719 Common stock issued to employees 621 7 10,471 10,478 10,478 Common stock issued to the board of directors 19 — 531 531 531 Common stock issued under employee stock purchase plan 78 1 2,297 2,298 2,298 Company shares repurchased ( 2,874 ) ( 29 ) ( 86,863 ) ( 86,892 ) ( 86,892 ) Shares withheld – restricted stock unit settlement ( 2,330 ) ( 2,330 ) ( 2,330 ) Employee stock-based compensation expense 13,375 13,375 13,375 Cash dividends paid and dividends accrued ($0.24 per share) ( 41,400 ) ( 41,400 ) ( 41,400 ) Net income attributable to Knight-Swift 309,206 309,206 309,206 Distribution to noncontrolling interest ( 654 ) ( 654 ) Net income attributable to noncontrolling interest 972 972 Balances, December 31, 2019 170,688 $ 1,707 $ 4,269,043 $ 1,395,465 $ 5,666,215 $ 2,088 $ 5,668,303 Common stock issued to employees 631 6 10,007 10,013 10,013 Common stock issued to the board of directors 13 — 515 515 515 Common stock issued under employee stock purchase plan 62 — 2,220 2,220 2,220 Company shares repurchased ( 4,841 ) ( 48 ) ( 179,537 ) ( 179,585 ) ( 179,585 ) Shares withheld – restricted stock unit settlement ( 4,510 ) ( 4,510 ) ( 4,510 ) Employee stock-based compensation expense 19,639 19,639 19,639 Cash dividends paid and dividends accrued ($0.32 per share) ( 54,661 ) ( 54,661 ) ( 54,661 ) Net income attributable to Knight-Swift 410,002 410,002 410,002 Distribution to noncontrolling interest ( 529 ) ( 529 ) Net income attributable to noncontrolling interest 633 633 Balances, December 31, 2020 166,553 $ 1,665 $ 4,301,424 $ 1,566,759 $ 5,869,848 $ 2,192 $ 5,872,040 See accompanying notes to consolidated financial statements. 67 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Consolidated Statements of Cash Flows 2020 2019 2018 (In thousands) Cash flows from operating activities: Net income $ 410,635 $ 310,178 $ 420,649 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, equipment, and intangibles 506,670 462,958 430,089 Gain on sale of property and equipment ( 9,706 ) ( 32,935 ) ( 36,236 ) Impairments 5,335 3,486 2,798 Deferred income taxes 46,214 30,731 62,469 Non-cash lease expense 80,891 120,769 — Other adjustments to reconcile net income to net cash provided by operating activities 43,682 24,156 4,617 Increase (decrease) in cash resulting from changes in: Trade receivables ( 75,521 ) 70,106 ( 9,375 ) Income tax receivable 14,123 ( 10,069 ) 48,171 Accounts payable 7,500 ( 13,180 ) ( 18,033 ) Accrued liabilities and claims accrual ( 31,210 ) ( 919 ) ( 14,367 ) Operating lease liabilities ( 83,675 ) ( 121,737 ) — Other assets and liabilities 4,707 ( 3,950 ) ( 8,805 ) Net cash provided by operating activities 919,645 839,594 881,977 Cash flows from investing activities: Proceeds from maturities of held-to-maturity investments 13,675 22,695 26,970 Purchases of held-to-maturity investments ( 16,936 ) ( 14,302 ) ( 22,156 ) Proceeds from sale of property and equipment, including assets held for sale 133,230 260,140 225,821 Purchases of property and equipment ( 521,067 ) ( 829,977 ) ( 755,997 ) Expenditures on assets held for sale ( 483 ) ( 16,093 ) ( 30,322 ) Net cash, restricted cash, and equivalents invested in acquisitions ( 46,811 ) ( 1,885 ) ( 101,693 ) Other cash flows from investing activities ( 42,320 ) ( 4,284 ) 10,085 Net cash used in investing activities ( 480,712 ) ( 583,706 ) ( 647,292 ) Cash flows from financing activities: Repayment of finance leases and long-term debt ( 148,910 ) ( 115,642 ) ( 46,630 ) (Repayments) borrowings on revolving lines of credit, net ( 69,000 ) 84,000 70,000 Borrowings under accounts receivable securitization 61,000 150,000 70,000 Repayment of accounts receivable securitization ( 52,000 ) ( 185,000 ) ( 135,000 ) Proceeds from common stock issued 12,748 13,307 13,547 Repurchases of the Company's common stock ( 179,585 ) ( 86,892 ) ( 179,318 ) Dividends paid ( 54,620 ) ( 41,425 ) ( 42,770 ) Other cash flows from financing activities ( 13,517 ) ( 2,984 ) ( 5,271 ) Net cash used in financing activities ( 443,884 ) ( 184,636 ) ( 255,442 ) Net (decrease) increase in cash, restricted cash, and equivalents ( 4,951 ) 71,252 ( 20,757 ) Cash, restricted cash, and equivalents at beginning of period 202,228 130,976 151,733 Cash, restricted cash, and equivalents at end of period $ 197,277 $ 202,228 $ 130,976 68 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Consolidated Statements of Cash Flows — Continued 2020 2019 2018 (In thousands) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 17,396 $ 28,916 $ 28,723 Income taxes 80,006 78,658 16,106 Non-cash investing and financing activities: Equipment acquired included in accounts payable $ 651 $ 6,748 $ 11,931 Equipment sales receivables 223 1,333 5,565 Financing provided to independent contractors for equipment sold 5,428 5,288 1,742 Transfer from property and equipment to assets held for sale 75,292 137,391 133,434 Contingent consideration associated with acquisition 16,200 — — Right-of-use assets obtained in exchange for new operating lease liabilities 12,406 9,803 — Right-of-use assets obtained in exchange for new operating lease liabilities through acquisitions 12,356 — — Property and equipment obtained in exchange for new finance lease liabilities 137,097 — — Property and equipment obtained in exchange for finance lease liabilities reclassified from operating lease liabilities 67,430 56,352 — Reconciliation of Cash, Restricted Cash, and Equivalents: 2020 2019 2018 (In thousands) Consolidated Balance Sheets Cash and cash equivalents $ 156,699 $ 159,722 $ 82,486 Cash and cash equivalents – restricted 1 39,328 41,331 46,888 Other long-term assets 1 1,250 1,175 1,602 Consolidated Statements of Cash Flows Cash, restricted cash, and equivalents $ 197,277 $ 202,228 $ 130,976 ________ 1 Reflects cash and cash equivalents that are primarily restricted for claims payments See accompanying notes to consolidated financial statements. 69 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. Notes to Consolidated Financial Statements Note 1 — Introduction and Basis of Presentation Certain acronyms and terms used throughout this Annual Report are specific to Knight-Swift, commonly used in the trucking industry, or are otherwise frequently used throughout this document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document. Description of Business Knight-Swift is a transportation solutions provider, headquartered in Phoenix, Arizona. During 2020, the Trucking segment operated an average of 18,448 tractors (comprised of 16,379 company tractors and 2,069 independent contractor tractors) and 57,722 trailers. Additionally, the Intermodal segment operated an average of 577 tractors and 10,604 intermodal cont ainers. The Company's three reportable segments are Trucking, Logistics, and Intermodal. Segment Realignment During the first quarter of 2019, the Company reorganized its operating segments to reflect management’s revised reporting structure which is based around the transportation service offerings provided to our customers, as well as the equipment utilized. The Company aggregated these various operating segments into three reportable segments based on similarities with both their qualitative and economic characteristics. Under this revised structure, the Company's three reportable segments are as follows: • The Trucking segment now includes the results of the previously-reported Knight Trucking, Swift Truckload, Swift Dedicated, and Swift Refrigerated segments. • The Logistics segment now includes the results of the Knight brokerage and Swift logistics businesses which were previously included within the Knight Logistics and Swift non-reportable segments, respectively. • The Intermodal segment now includes the results of the previously-reported Swift Intermodal segment and the results of the Knight intermodal business, which was previously included in the Knight Logistics segment. The non-reportable segments include support services that Swift's subsidiaries provide to customers and independent contractors (including repair and maintenance shop services, equipment leasing, and insurance), certain driving academy activities, as well as certain legal settlements and accruals, amortization of intangibles related to the 2017 Merger and select acquisitions, and other corporate expenses. Additionally, the non-reportable segments now include Knight's equipment leasing and warranty services to independent contractors and trailer parts manufacturing, which were previously reported within the Knight Logistics segment. 2017 Merger On September 8, 2017, the Company 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. The 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. Abilene Acquisition On March 16, 2018, the Company acquired all of the issued and outstanding equity interests of Abilene. Abilene's trucking and logistics businesses are included under the respective segments. Please refer to Note 5 for more information about the Abilene Acquisition. Other Acquisitions On January 1, 2020 the Company acquired a warehousing company to complement its suite of services. Please refer to Note 5 of this Annual Report for more information about this acquisition. 70 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Basis of Presentation The consolidated financial statements include the accounts of Knight-Swift Transportation Holdings Inc. and its subsidiaries. In management's opinion, these consolidated financial statements were prepared in accordance with GAAP and include all adjustments necessary (consisting of normal recurring adjustments) for the fair presentation of the periods presented. With respect to transactional/durational data, references to "years", including "2020", "2019", and "2018" pertain to calendar years. Similarly, references to "quarters", including "first", "second", "third", and "fourth" pertain to calendar quarters. Note regarding comparability — The reported results do not include the results of operations of Abilene and its subsidiaries on and prior to its acquisition by the Company on March 16, 2018 in accordance with the accounting treatment applicable to the transaction. Additionally, the reported results do not include the results of operations of the warehousing company prior to its acquisition by the Company on January 1, 2020 in accordance with the accounting treatment applicable to the transaction. Accordingly, comparisons between the Company's 2020 results and prior periods may not be meaningful. Joint ventures — The financial activities of the following entities with which the Company has joint ventures are consolidated. The noncontrolling interest for these entities is presented as a separate component of the consolidated financial statements. • In 2014, Knight formed an Arizona limited liability company, now known as Kold Trans, LLC, for the purpose of expanding its refrigerated trucking business. Knight was entitled to 80.0 % of the profits of the entity and has effective control over the management of the entity. During 2018, the Company purchased the remaining 20.0% of the joint venture, eliminating the related noncontrolling interest. • In 2010, Knight partnered with a non-related investor to form an Arizona limited liability company for the purpose of sourcing commercial vehicle parts. Knight acquired a 52.0 % ownership interest in this entity. Equity method and other equity investments — Refer to Note 7 for basis of presentation disclosures regarding the Company's equity method and other equity investments. Changes in Presentation Changes in presentation associated with adopting accounting pronouncements are included in Note 3. Statement of Comprehensive Income — Beginning in the second quarter of 2019, the Company presents fuel surcharge revenue generated within only its Trucking segment within "Trucking fuel surcharge" in the consolidated statements of comprehensive income. Fuel surcharge revenue generated within the remaining segments is included in "Revenue, excluding trucking fuel surcharge." Prior period amounts have been reclassified to align with the current period presentation. Seasonality In the transportation industry, results of operations generally follow a seasonal pattern. Freight volumes in the first quarter are typically lower due to less consumer demand, customers reducing shipments following the holiday season, and inclement weather. At the same time, operating expenses generally increase, and tractor productivity of the Company's fleet, independent contractors, and third-party carriers decreases during the winter months due to decreased fuel efficiency, increased cold-weather-related equipment maintenance and repairs, and increased insurance claims and costs attributed to higher accident frequency from harsh weather. These factors typically lead to lower operating profitability, as compared to other parts of the year. Additionally, beginning in the latter half of the third quarter and continuing into the fourth quarter, the Company typically experiences surges pertaining to holiday shopping trends toward delivery of gifts purchased over the Internet as well as the length of the holiday season (consumer shopping days between Thanksgiving and Christmas). However, cyclical changes in the trucking industry, including imbalances in supply and demand, can override the seasonality faced in the industry. 71 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Impact of COVID-19 COVID-19 became a global pandemic in 2020, which triggered a significant downturn in the global economy. The Company continues to operate its business through the COVID-19 pandemic and has taken additional precautions to ensure the safety of its employees, customers, vendors, and the communities in which it operates. During 2020, the Company incurred $ 12.3 million of expenses (all within the first half of the year) directly attributable to the pandemic, which were incremental to those incurred prior to the outbreak. These primarily pertained to payroll premiums paid to driving associates and shop technicians, additional disinfectants and cleaning supplies, and various other pandemic-specific items. The costs are clearly separable from normal business operations and are not expected to recur once the pandemic subsides. Note 2 — Summary of Significant Accounting Policies Use of Estimates — The preparation of the consolidated financial statements, in accordance with GAAP, requires management to make estimates and assumptions about future events that affect the amounts reported in the Company's consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates and periodically adjusts its estimates and assumptions, based on historical experience, the impact of the current economic environment, and other key factors. Volatile energy markets, as well as changes in consumer spending have increased the inherent uncertainty in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Significant items subject to such estimates and assumptions include: • carrying amount of property and equipment; • carrying amount of goodwill and intangible assets; • leases; • estimates of claims accruals; • contingent obligations; • calculation of stock-based compensation; • valuation allowance for deferred income tax assets; • valuation allowances for receivables; • valuation allowances for inventories; and • valuation of financial instruments. Segments — The Company uses the "management approach" to determine its reportable segments, as well as to determine the basis of reporting the operating segment information. Certain of the Company's operating segments have been aggregated into reportable segments. The management approach focuses on financial information that management uses to make operating decisions. The Company's chief operating decision makers use total revenue, operating expense categories, operating ratios, operating income, and key operating statistics to evaluate performance and allocate resources to the Company's operations and is based around the transportation service offerings provided to our customers, as well as the equipment utilized. Operating income is the measure that management uses to evaluate segment performance and allocate resources. Operating income should not be viewed as a substitute for GAAP net income (loss). Management believes the presentation of operating income enhances the understanding of the Company's performance by highlighting the results of operations and the underlying profitability drivers of the business segments. Operating income is defined as "Total revenue" less "Total operating expenses." Based on the unique nature of the Company's operating structure, certain revenue-generating assets are interchangeable between segments. Additionally, the Company's chief operating decision makers do not review assets or liabilities by segment to make operating decisions. The Company allocates depreciation and amortization expense of its property and equipment to the segments based on the actual utilization of the asset by the segment during the period. See Note 25 for additional disclosures regarding the Company's segments. Cash and Cash Equivalents — Cash and cash equivalents are comprised of cash, money market funds, and highly liquid instruments with insignificant interest rate risk and original maturities of three months or less. Cash 72 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED balances with institutions may be in excess of Federal Deposit Insurance Corporation ("FDIC") limits or may be invested in sweep accounts that are not insured by the institution, the FDIC, or any other government agency. Restricted Cash and Equivalents — The Company's wholly-owned captive insurance companies, Red Rock and Mohave, maintain certain operating bank accounts, working trust accounts, and investment accounts. The cash and cash equivalents within these accounts are restricted by insurance regulations to fund the insurance claim losses to be paid by the captive insurance companies, and therefore, are classified as "Cash and cash equivalents – restricted" in the consolidated balance sheets. Restricted Investments — The Company's investments are restricted by insurance regulations to fund the insurance claim losses to be paid by the captive insurance companies. The Company accounts for its investments in accordance with ASC Topic 320, Investments – Debt Securities . Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates the determination on a quarterly basis. As of December 31, 2020, all of the Company's investments in fixed-maturity securities were classified as held-to-maturity, as the Company has the positive intent and ability to hold these securities to maturity. Held-to-maturity securities are carried at amortized cost. The amortized cost of debt securities is adjusted using the effective interest rate method for amortization of premiums and accretion of discounts. Amortization and accretion are reported in "Other income, net" in the consolidated statements of comprehensive income. Management periodically evaluates restricted investments for impairment. The assessment of whether impairments have occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in estimated fair value. Management accounts for other-than-temporary impairments of debt securities in accordance with ASC Topic 320. This guidance requires the Company to evaluate whether it intends to sell an impaired debt security or whether it is more likely than not that it will be required to sell an impaired debt security before recovery of the amortized cost basis. If either of these criteria are met, an impairment loss equal to the difference between the debt security's amortized cost and its estimated fair value is recognized in earnings. For impaired debt securities that do not meet these criteria, the Company determines if a credit loss exists with respect to the impaired security. If a credit loss exists, the credit loss component of the impairment (i.e., the difference between the security's amortized cost and the present value of projected future cash flows expected to be collected) is recognized in earnings and the remaining portion of the impairment is recognized as a component of accumulated other comprehensive income. See Note 6 for additional disclosures regarding the Company's restricted investments. Inventories and Supplies — Inventories and supplies, which are included in "Other current assets" in the consolidated balance sheets, primarily consist of spare parts, tires, fuel, and supplies and are stated at lower of cost or net realizable value. Depending on the class of inventory, cost is determined using the first-in, first-out method or average cost. Replacement tires held in the shops are classified as inventory and expensed when placed in service. Replacement tire costs incurred over the road are immediately expensed. Property and Equipment — Property and equipment is stated at cost less accumulated depreciation. Costs to construct significant assets include capitalized interest incurred during the construction and development period. Expenditures for replacements and improvements are capitalized. Maintenance and repairs are expensed as incurred. Net gains on the disposal of property and equipment are presented in the consolidated statements of comprehensive income within "Miscellaneous operating expenses." Tires on purchased revenue equipment are capitalized along with the related equipment cost when the vehicle is placed in service, and are depreciated over the life of the vehicle. Depreciation of property and equipment is calculated on a straight-line basis down to the salvage value, as applicable, over the following estimated useful lives: 73 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Category: Range (in years) Revenue equipment * 3 — 20 Shop and service equipment 2 — 10 Land improvements 5 — 15 Buildings and building improvements 10 — 40 Furniture and fixtures 3 — 10 Leasehold improvements Life of the lease *For finance leases involving revenue equipment, the depreciation period is equal to the term of the lease agreement. Management believes that these methods properly spread the costs over the useful lives of the assets. Management judgment is involved when determining estimated useful lives of the Company's long-lived assets. Useful lives of the Company's long-lived assets are determined based on historical experience, as well as future expectations regarding the period the Company expects 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. Management evaluates its property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC Topic 360, Property, Plant and Equipment . When such events or changes in circumstances occur, management performs a recoverability test that compares the carrying amount with the projected undiscounted cash flows from the use and eventual disposition of the asset or asset group. An impairment is recorded for any excess of the carrying amount over the estimated fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered 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. Goodwill — Management evaluates goodwill on an annual basis as of June 30 th , or more frequently if indicators of impairment exist. The Company performs a quantitative analysis on an annual basis, in accordance with ASC Topic 350, Goodwill and Other Intangible Assets . Management estimates the fair values of its reporting units using a combination of the income and market approaches. If the carrying amount of a reporting unit exceeds the fair value, then management recognizes an impairment loss of the same amount. This loss is only limited to the total amount of goodwill allocated to that reporting unit. Refer to Note 11 for discussion of the results of the Company's annual evaluation as of June 30, 2020. On a periodic basis, the Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company conducts a quantitative goodwill impairment test. See Notes 5 and 11 for additional disclosures regarding the Company's goodwill. Intangible Assets other than Goodwill — The Company's intangible assets other than goodwill primarily consist of acquired customer relationships and a trade name from the 2017 Merger, as well as intangibles from other acquisitions. Amortization of acquired customer relationships and other intangibles is calculated on a straight-line basis over the estimated useful life, which ranges from 3 years to 20 years. The trade names have indefinite useful lives and are not amortized, but are tested for impairment at least annually, unless events occur or circumstances change between annual tests that would more likely than not reduce the fair value. Management reviews its intangible assets for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable, in accordance with ASC Topic 350, Intangibles – Goodwill and Other. When such events or changes in circumstances occur, management performs a recoverability test that compares the carrying amount with the projected discounted cash flows from the use and eventual disposition of the asset or asset group. An impairment is recorded for any excess of the carrying amount over the estimated fair value, which is generally determined using discounted future cash flows. 74 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED 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, royalty 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. See Notes 5 and 11 for additional disclosures regarding the Company's intangible assets. Claims Accruals — The Company is self-insured for a portion of its risk related to auto liability, workers' compensation, property damage, and cargo damage. Self-insurance results from buying insurance coverage that applies in excess of a retained portion of risk for each respective line of coverage. The Company accrues for the cost of the uninsured portion of pending claims by evaluating the nature and severity of individual claims and by estimating future claims development based upon historical claims development trends. The actual cost to settle self-insured claim liabilities may differ from the Company's 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 claims and the potential judgment or settlement amount to dispose of the claim. See Notes 13 and 19 for additional disclosures regarding the Company's claims accruals. Leases — Management evaluates the Company’s leases based on the underlying asset groups. The assets currently underlying the Company’s leases include revenue equipment (primarily tractors and trailers), real estate (primarily buildings, office space, land, and drop yards), as well as technology and other equipment that supports business operations. Management’s significant assumptions and judgments include the determination of the discount rate (discussed below), as well as the determination of whether a contract contains a lease. • Lease Term — The Company’s leases generally have lease terms corresponding to the useful lives of the underlying assets. Revenue equipment leases have fixed payment terms based on the passage of time, which is typically three to five years for tractors and five to seven years for trailers. Certain finance leases for revenue equipment contain renewal or fixed price purchase options. Real estate leases, excluding drop yards, generally have varying lease terms between five and fifteen years and may include renewal options. Drop yards include month-to-month leases, as well as leases with varying lease terms generally ranging from two to five years. Options to renew or purchase the underlying assets are considered in the determination of the right-of-use asset and lease liability once reasonably certain of exercise. • Portfolio Approach — The Company typically leases its revenue equipment under master lease agreements, which contain general terms, conditions, definitions, representations, warranties and other general language, while the specific contract provisions are contained within the various individual lease schedules that fall under a master lease agreement. Each individual leased asset within a lease schedule is similar in nature (i.e. all tractors or all trailers) and has identical contract provisions to all of the other individual leased assets within the same lease schedule (such as the contract provisions discussed above). Management has elected to apply the portfolio approach to its revenue equipment leases, as accounting for its revenue equipment under the portfolio approach would not be materially different from separately accounting for each individual underlying asset as a lease. Each individual real estate and other lease is accounted for at the individual asset level. • Nonlease Components — Management has elected to combine its nonlease components (such as fixed charges for common area maintenance, real estate taxes, utilities, and insurance) with lease components for each class of underlying asset, as applicable, as the nonlease components in the Company’s lease contracts typically are not material. These nonlease components are usually present within the Company’s real estate leases. The Company’s assets are generally insured by umbrella policies, in which the premiums change from one policy period to the next, making them variable in nature. Accordingly, these insurance costs are excluded from the Company’s calculation of right-of-use assets and corresponding lease liabilities. • Short-Term Lease Exemption — Management has elected to apply the short-term lease exemption to all asset groups. Accordingly, leases with terms of twelve months or less are not capitalized and continue to be expensed on a straight-line basis over the term of the lease. This primarily affects the Company’s drop yards and corresponding temporary structures on those drop yards. To a lesser extent, certain short-term leases for revenue equipment, technology, and other assets are affected. 75 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED • Discount Rate — The Company uses the rate implicit in the lease, when readily determinable. Otherwise the Company’s incremental borrowing rate is applied. Due to the unique structure of the Company’s revenue equipment leases, management believes that the rate implicit in the lease is readily determinable for such leases and the implicit rate is used. The Company’s use of the implicit rate (rather than the incremental borrowing rate) for its revenue equipment leases does not materially change the Company’s financial position or financial results either by financial statement caption or in total. The implicit interest rate is not readily determinable for the Company’s real estate and other leases. As such, management applies the Company’s incremental borrowing rate, which is defined by GAAP as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company's incremental borrowing rate is based on the results of an independent third-party valuation. • Residual Values — The Company's finance leases are typically structured with balloon payments at the end of the lease term equal to the residual value the Company is contracted to receive from certain equipment manufacturers upon sale or trade back to the manufacturers. If the Company does not receive proceeds of the contracted residual value from the manufacturer, the Company is still obligated to make the balloon payment at the end of the lease term. In connection with certain revenue equipment operating leases, the Company issues residual value guarantees, which provide that if the Company does not purchase the leased equipment from the lessor at the end of the lease term, then the Company is 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 management believes any manufacturer will refuse or be unable to meet its obligation, the Company recognizes additional rental expense to the extent the fair market value at the lease termination is expected to be less than the obligation to the lessor. Proceeds from the sale of equipment under the Company’s operating leases generally exceed the payment obligation on substantially all operating leases. Although the Company typically owes certain amounts to its lessors at the end of its revenue equipment leases, the Company’s equipment manufacturers have corresponding guarantees back to the Company as to the buyback value of the units. See Note 17 for additional disclosures regarding the Company's operating leases. Fair Value Measurements — See Note 23 for accounting policies and financial information relating to fair value measurements. Contingencies — See Note 19 for accounting policies and financial information related to contingencies. Revenue Recognition — Management applies the five-step analysis to the Company's three reportable segments (Trucking, Intermodal, and Logistics). The Company's other streams of revenue within the non-reportable segments (specifically its leasing and captive insurance subsidiaries) were determined to be out of the scope of ASC Topic 606, Revenue from Contracts with Customers . • Step 1: Contract Identification — Management has identified that a legally enforceable contract with its customers is executed by both parties at the point of pickup at the shipper's location, as evidenced by the bill of lading. Although the Company may have master agreements with its customers, these master agreements only establish general terms. There is no financial obligation to the shipper until the load is tendered/accepted and the Company takes possession of the load. • Step 2: Performance Obligations — The Company's only performance obligation is transportation services. The Company's delivery, accessorial, and dedicated operations truck capacity in its dedicated operations represent a bundle of services that are highly interdependent and have the same pattern of transfer to the customer. These services are not capable of being distinct from one another. For example, the Company generally would not provide accessorial services or truck capacity without providing delivery services. • Step 3: Transaction Price — Depending on the contract, the total transaction price may consist of mileage revenue, fuel surcharge revenue, accessorial fees, truck capacity, and/or non-cash consideration. Non-cash consideration is measured by the estimated fair value of the non-cash consideration at contract inception. There is no significant financing component in the transaction price, as the Company's customers generally pay within the contractual payment terms of 30 to 60 days. 76 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED • Step 4: Allocating Transaction Price to Performance Obligations — The transaction price is entirely allocated to the only performance obligation: transportation services. • Step 5: Revenue Recognition — The performance obligation of providing transportation services is satisfied over time. Accordingly, revenue is recognized over time. Management estimates the amount of revenue in transit at period end based on the number of days completed of the dispatch (which is generally one to three days for the trucking segments, but can be longer for intermodal operations). Management believes this to be a faithful depiction of the transfer of services because if a load is dispatched, but terminates mid-route and the load is picked up by another carrier, then that carrier would not need to re-perform the services for the days already traveled. The Company outsources the transportation of loads to third-party carriers through its logistics operations. Management has determined that the Company is a principal in these arrangements, and therefore records revenue associated with these contracts on a gross basis. The Company has the primary responsibility to meet the customers' requirements. The Company invoices and collects from its customers and maintains discretion over pricing. Additionally, the Company is responsible for the selection of third-party transportation providers to the extent used to satisfy customer freight requirements. Significant judgments involved in the Company's revenue recognition and corresponding accounts receivable balances include: • Measuring in-transit revenue at period end (discussed above). • Estimating the allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on historical experience and any known trends or uncertainties related to customer billing and account collectability. Management reviews the adequacy of its allowance for doubtful accounts on a quarterly basis. Uncollectible accounts are written off when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts. • Contract Balances — In-transit revenue balances are included in "Contract balance – revenue in transit" in the consolidated balance sheets. The Company's contract liability balances are typically immaterial. • Revenue Disaggregation — In considering the level at which the Company should disaggregate revenues pertaining to contracts with customers, management determined that there are no significant differences between segments in how the nature, amount, timing, and uncertainty of revenue or cash flows are affected by economic factors. Additionally, management considered how and where the Company has communicated information about revenue for various purposes, including disclosures outside of the financial statements and how information is regularly reviewed by the Company's chief operating decision makers for evaluating financial performance of the Company's segments, among others. Based on these considerations, management determined that revenues should be disaggregated by reportable segment. The Company recognizes operating lease revenue from leasing tractors and related equipment to independent contractors. Operating lease revenue from rental operations is recognized as earned, which is straight-lined per the rent schedules in the lease agreements. Losses from lease defaults are recognized as offsets to revenue. Stock-based Compensation — The Company accounts for stock-based compensation expense in accordance with ASC Topic 718, Compensation – Stock Compensation. ASC Topic 718 requires that all share-based payments to employees and non-employee directors, including grants of employee stock options, be recognized in the financial statements based upon a grant-date fair value of an award. Equity awards settled in cash are remeasured at each reporting period and are recognized as a liability in the consolidated balance sheets during the vesting period until settlement. • Fair Value — The fair value of performance units is estimated using the Monte Carlo Simulation valuation model. The fair value of stock options is estimated using the Black-Scholes option-valuation model. The fair value of restricted stock units is the closing stock price on the grant date. • Vesting — The requisite service period is the specified vesting date in the grant agreement or the date that the employee becomes retirement-eligible, based on the terms of the grant agreement. The Company calculates 77 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED the number of awards expected to vest as awards granted, less expected forfeitures over the life of the award (estimated at grant date). All awards require future service and thus forfeitures are estimated based on historical forfeitures and the remaining term until the related award vests. Performance-based awards vest contingent upon meeting certain performance criteria established by the Company's compensation committee. • Expense — Awards that are only subject to time-vesting provisions are amortized using the straight-line method, by amortizing the grant-date fair value over the requisite service period of the entire award. Awards subject to time-based vesting and performance conditions are amortized using the individual vesting tranches. Unless a material deviation from the assumed forfeiture rate is observed during the term in which the awards are expensed, any adjustment necessary to reflect differences in actual experience is recognized in the period the award becomes payable or exercisable. 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. See Note 21 for additional information relating to the Company's stock compensation plan. Income Taxes — Management accounts for income taxes under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences of events that have been included in the consolidated financial statements. Additionally, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and respective tax bases of assets and liabilities (using enacted tax rates in effect for the year in which the differences are expected to reverse). The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. Net deferred incomes taxes are classified as noncurrent in the consolidated balance sheets. A valuation allowance is provided against deferred tax assets if the Company determines it is more likely than not that such assets will not ultimately be realized. In making such determinations, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial operations. To the extent management believes 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 the need for a valuation allowance is assessed, the accounting period in which to establish the valuation allowance, as well as the amount of the valuation allowance. Unrecognized tax benefits are defined as the difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to ASC Topic 740, Income Taxes . The Company does not recognize a tax benefit for uncertain tax positions unless it concludes that it is more likely than not that the benefit will be sustained on audit (including resolutions of any related appeals or litigation processes) by the taxing authority, based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in management's judgment, is greater than 50 % likely to be realized. The Company records expected incurred interest and penalties related to unrecognized tax positions in "Income tax expense" in the consolidated income statements. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. Significant management judgment is required in determining the provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. Management periodically assesses the likelihood that all or some portion of deferred tax assets will be recovered from future taxable income. Management judgment is also required regarding a variety of other factors including the appropriateness of tax strategies. The Company utilizes certain income tax planning strategies to reduce its 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 the Company's expectations could adversely affect its results of operations. 78 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED See Note 14 for additional disclosures regarding the Company's income taxes. Note 3 — Recently Adopted Accounting Pronouncements ASU 2016-13: Financial Instruments – Credit Losses (Topic 326) — Measurements of Credit Losses on Financial Instruments Summary of the Standard — In June 2016, the FASB issued ASU 2016-13, which, in addition to several clarifying ASUs, established the new ASC Topic 326, Financial Instruments — Credit Losses ("CECL"). The new CECL standard amends the FASB's guidance on the impairment of financial instruments. Specifically, it adds the CECL impairment model to GAAP which is based on expected losses rather than incurred losses. This is intended to result in more timely recognition of such losses. Under the new CECL standard, an entity recognizes as an allowance its estimate of lifetime expected credit losses. The new CECL standard is also intended to reduce the complexity of GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. Further, the new CECL standard makes targeted changes to the impairment model for available-for-sale debt securities and moves the guidance from ASC Topic 320, Investments — Debt Securities, to ASC Subtopic 326-30. For public business entities, the new standard was effective for annual and interim reporting periods beginning after December 15, 2019. For most debt instruments, entities are required to adopt the new CECL standard using a modified retrospective approach, meaning that entities should record a cumulative-effect adjustment to equity as of the beginning of the first reporting period in which the guidance is effective. Practical Expedient — As permitted under ASU 2016-13 (and related ASUs), management elected to apply the collateral-dependent financial asset practical expedient which allows entities to measure the expected credit losses for the financial asset by comparing the amortized cost basis with the fair value of the collateral at the reporting date, rather than using the fair value of the financial asset. Current Period Impact of Adoption — The Company adopted ASC Topic 326 on January 1, 2020 using the modified retrospective approach. Upon adoption of the standard management assessed the potential impact of the CECL model on each type of the Company's financial assets and determined that there was no material impact on the Company's financial statements or accounting policies. ASU 2018-15: Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract Summary of the Standard — In August 2018, the FASB issued ASU 2018-15, which amended ASC Subtopic 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract ("Service CCA"). The amendments in ASU 2018-15 align the accounting for costs incurred to implement a Service CCA with previously codified guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC Subtopic 350-40 to include in its scope implementation costs incurred with a Service CCA. This addition clarifies that a customer should apply the guidance from ASC Paragraph 350-40-25 to determine which stage the project is in before assessing whether implementation costs should be capitalized in a Service CCA that is considered a service contract. These capitalized items should be recorded within the same balance sheet line item as a prepayment for any fees. Any capitalized costs from the Service CCA should be expensed over the term of the hosting arrangement, which includes the noncancelable period and any options to extend that are reasonably certain to be exercised and recorded in the same line item as fees associated with the hosting element of the arrangement. The amendments in this ASU were effective for public business entities for fiscal years beginning after December 15, 2019 and could be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Current Period Impact of Adoption — The Company adopted the amendments in ASU 2018-15 on January 1, 2020 and elected to apply the amendments on a prospective basis to implementation costs incurred after the date of adoption. Upon review of the Service CCA's entered into subsequent to the implementation date, management has determined that adoption of the amendments has not had a material impact on the Company's financial statements and related accounting policies. 79 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED ASU 2017-04: Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment Summary of the Standard — In January 2017, the FASB issued ASU 2017-04, which amends ASC Topic 350 by simplifying the goodwill impairment test. The amendments in this ASU are intended to simplify subsequent measurement of goodwill. The key amendment in the ASU eliminates Step 2 from the goodwill impairment test, in which entities measured a goodwill impairment loss by comparing the implied fair value to the carrying amount of a reporting unit's goodwill. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with the carrying amount of a reporting unit and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments also require companies to disclose the amounts of goodwill allocated to each reporting unit with a zero or negative carrying amount of assets. The amendments were effective for public business entities for fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Current Period Impact of Adoption — The Company adopted the amendments in ASU 2017-14 on January 1, 2020 on a prospective basis. Management has updated the Company's accounting policy to incorporate the amendments in the ASU and has included the revised disclosure requirements in Note 2. Refer to Note 11 for disclosures about the Company's goodwill balances. Other ASUs There were various other ASUs that became effective during 2020, which did not have a material impact on the Company's results of operations, financial position, cash flows, or disclosures. 80 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Note 4 — Recently Issued Accounting Pronouncements Date Issued Reference Description Expected Adoption Date and Method Financial Statement Impact August 2020 ASU No. 2020-06: Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible Instruments and contracts in an Entity's Own Equity The amendments in this ASU add disclosure requirements to convertible debt instruments and convertible preferred stock, require convertible instruments to be disclosed at fair value, and update the calculation requirements for diluted EPS. The amendments in this ASU can be applied on a modified or fully retrospective basis and are effective for public entities for years beginning after December 15, 2021. January 2022, Modified retrospective or fully retrospective No material impact March 2020 2020-04: Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting 1 The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The amendments in this ASU are effective for any interim period after March 12, 2020 and should be applied on a prospective basis. March 2020, Prospective No material impact 2 March 2020 2020-03: Codification Improvements to Financial Instruments 1 The amendments within this ASU updated several sections of the Codification and how various topics and subtopics interacted due to new guidance on financial instruments. This includes addressing issues related to fair value option disclosures, line-of-credit or revolving-debt arrangements and leases among others. The amendments should be applied prospectively and have varying effective dates, which were all in effect for public business entities prior to issuance of the ASU. March 2020, Prospective No material impact February 2020 2020-02: Financial Instruments – Credit Losses (Topic 326), Leases – (Topic 842) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) 1 The amendments in this ASU incorporate discussion from SEC Staff Accounting Bulletin No. 119 about expected implementation practices related to ASC Topic 326. The amendments also codify SEC Staff announcement that it would not object to the FASB's update to effective dates for major updates which were amended within ASU 2019-10. January 2021, Adoption method varies by amendment No material impact January 2020 2020-01: Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) The amendments clarify that an entity should consider observable transactions when determining to apply or discontinue the equity method for the purposes of applying the measurement alternative. The amendments also clarify that an entity would not consider whether a purchased option would be accounted for under the equity method when applying ASC 815-10-15-141(a). January 2021, Prospective Currently under evaluation, but not expected to be material 81 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Date Issued Reference Description Expected Adoption Date and Method Financial Statement Impact December 2019 2019-12: Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes The amendments in this update intend to reduce the complexity in accounting standards related to ASC Topic 740. These changes include removing several exceptions such as requirements related to intraperiod tax allocations, requirements related to foreign subsidiary equity method investments, and changes to interim period income tax calculations. Additionally, the amendments intend to simplify income tax accounting by updating areas, including but not limited to, franchise taxes, evaluation of goodwill, allocation of current and deferred tax expenses, and various other areas. January 2021, Adoption method varies by amendment Currently under evaluation, but not expected to be material 1 Adopted during the first quarter 2020. 2 As identified within the 2018 RSA, the lender can trigger an amendment by identifying and deciding upon a replacement for LIBOR. Since management is continuing to evaluate the impacts of the above standards, disclosures around these preliminary assessments are subject to change. Note 5 — Acquisitions Abilene Acquisition On March 16, 2018 , the Company purchased 100.0 % of the equity interests of Abilene. Abilene is a diversified truckload carrier located in Richmond, Virginia operating throughout the US and Canada. The total consideration of $ 103.3 million consisted of approximately $ 80.5 million in cash consideration to the sellers, plus approximately $ 22.8 million for debt payoffs. The Company funded the Abilene Acquisition through cash-on-hand and borrowing on the Revolver on the date of the transaction. At closing, $ 7.0 million of the purchase price was placed in escrow to secure the sellers' indemnification obligations and an additional $ 4.5 million of the purchase price was placed in escrow in respect of certain tax obligations of the sellers and remains subject to further adjustments. The equity purchase agreement included an election under the Internal Revenue Code Section 338(h)(10). Accordingly, the book and tax basis of the acquired assets and liabilities are the same as of the purchase date. The equity purchase agreement contains customary representations, warranties, covenants, and indemnification provisions. The results of the acquired business have been included in the consolidated financial statements since the date of acquisition and represent 2.2 % in 2020, 2.0 % in 2019, and 1.6 % in 2018 of consolidated total revenue, and 2.8 % in 2020, 2.3 % in 2019, and 2.1 % in 2018 of consolidated net income attributable to Knight-Swift . The acquired business also represented 1.8 % and 1.6 % of consolidated total assets as of December 31, 2020 and 2019, respectively. The goodwill recognized represents expected synergies from combining the operations of Abilene with the Company, including enhanced service offerings and sharing best practices in terms of driver recruiting and retention, as well as other intangible assets that did not meet the criteria for separate recognition. The goodwill is expected to be deductible for tax purposes. The purchase price was allocated based on estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The purchase price allocation was open for adjustments through the end of the measurement period, which closed one year from the March 16, 2018 acquisition date. 82 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED The following table summarizes the fair value of the consideration transferred as of the acquisition date, including any adjustments during the measurement period: March 16, 2018 Opening Balance Sheet Adjustments Adjusted March 16, 2018 Opening Balance Sheet (in thousands) Fair value of the consideration transferred $ 103,223 $ 124 $ 103,347 Cash 1,654 — 1,654 Trade receivables 11,745 1,265 13,010 Other assets 7,785 842 8,627 Property and equipment 41,403 ( 41 ) 41,362 Identifiable intangible assets ¹ 23,000 ( 400 ) 22,600 Total assets 85,587 1,666 87,253 Accounts payable 1,959 1,577 3,536 Accrued liabilities 2,419 4,942 7,361 Claims accruals 230 179 409 Total liabilities 4,608 6,698 11,306 Goodwill $ 22,244 $ 5,156 $ 27,400 1 Includes $ 17.9 million in customer relationships and a $ 4.7 million trade name. The above adjustments were related to the completion of an independent valuation of certain acquired intangible assets, the identification of liabilities associated with capital expenditures incurred prior to the acquisition, adjustments for Abilene’s adoption of ASC Topic 606, and the associated deferred tax asset impact of these adjustments. No material statement of comprehensive income effects were identified with these adjustments. Other Acquisition On January 1, 2020 , pursuant to a stock purchase agreement (the "SPA") the Company acquired 100.0 % of the equity interests of a warehousing-related company (the "Warehousing Co.") with locations throughout the Central US. The total purchase price consideration of $ 66.9 million included $ 48.2 million in cash to the sellers at closing, which was funded through cash-on-hand and borrowing on the Revolver on the transaction date. At closing, $ 6.8 million of the cash consideration was placed in escrow to secure certain of the sellers' indemnification obligations. During the third quarter of 2020, the escrow proceeds were released to the sellers pursuant to the SPA. The purchase price also included contingent consideration consisting of three additional annual payments of up to $ 8.1 million each (or $ 24.3 million in total), representing the maximum possible annual deferred payments to the sellers based on Warehousing Co.'s earnings before interest and taxes ("EBIT") for each of the calendar years ending December 31, 2020, December 31, 2021, and the annualized six-month period ending June 30, 2022. In order to estimate Warehousing Co.'s future performance, the Company utilized the Monte Carlo simulation method using certain inputs, including Warehousing Co.'s forecasted EBIT, discount rate, dividend yields, expected volatility, and expected stock returns during the above measurement periods. Based on the above inputs, the present value of the total contingent consideration, along with the estimated net working capital adjustment equaled $ 18.7 million as of January 1, 2020. During the measurement period, the net working capital adjustment was reduced by $ 0.4 million based on the actual versus estimated net working capital adjustment as of the transaction date. This adjustment resulted in the total estimated contingent consideration and net working capital adjustment decreasing to $ 18.3 million. The total purchase price consideration, as if adjusted at the January 1, 2020 transaction date, is identified in the table below. During the fourth quarter of 2020, the Company paid the first annual payment of $ 8.1 million as a result of the achievement of Warehousing Co.’s EBIT performance target for the calendar year December 31, 2020. Additionally, during the fourth quarter of 2020, the Company increased the estimated fair value of the remaining contingent consideration representing the final two annual payments, resulting in a $ 6.7 million fair value adjustment 83 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED of the deferred earnout, which was recorded in “Miscellaneous operating expenses” in the consolidated statement of comprehensive income. As such, as of December 31, 2020, the remaining estimated contingent consideration was $ 16.2 million representing the fair value of the remaining annual deferred payments for the calendar year December 31, 2021 and the annualized six-month period ending June 30, 2022. The SPA included an election under the Internal Revenue Code Section 338(h)(10). Accordingly, the book and tax basis of the acquired assets and liabilities are the same as of the purchase date. The SPA contains customary representations, warranties, covenants, and indemnification provisions. The goodwill recognized represents expected synergies from combining the operations of Warehousing Co. with the Company, including enhanced service offerings, as well as other intangible assets that did not meet the criteria for separate recognition. The goodwill is expected to be deductible for tax purposes. The purchase price was allocated based on estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The purchase price allocation was open for adjustments through the end of the measurement period, which closed one year from the January 1, 2020 acquisition date. The following table summarizes the fair value of the consideration transferred as of the acquisition date: January 1, 2020 Opening Balance Sheet as Reported at March 31, 2020 Adjustments January 1, 2020 Opening Balance Sheet as Reported at December 31, 2020 (in thousands) Fair value of the consideration transferred $ 66,854 $ ( 410 ) $ 66,444 Cash and cash equivalents 1,388 — 1,388 Trade and other receivables 3,301 — 3,301 Prepaid expenses 608 — 608 Other current assets 78 — 78 Property and equipment 1,938 — 1,938 Operating lease right-of-use assets 12,356 — 12,356 Identifiable intangible assets 1 55,681 — 55,681 Deferred tax assets 54 — 54 Other noncurrent assets 404 — 404 Total assets 75,808 — 75,808 Accounts payable ( 347 ) — ( 347 ) Accrued liabilities ( 644 ) — ( 644 ) Operating lease liabilities – current portion ( 4,451 ) — ( 4,451 ) Operating lease liabilities – less current portion ( 7,905 ) — ( 7,905 ) Total liabilities ( 13,347 ) — ( 13,347 ) Goodwill $ 4,393 $ ( 410 ) $ 3,983 1 Includes $ 53.8 million in customer relationships, $ 0.7 million in noncompete agreements, $ 0.6 million in internally developed software, and a $ 0.6 million trade name. Other On February 1, 2021 , the Company used $ 41.3 million in cash to acquire 79.4 % of the equity interest in Eleos, a Greenville, South Carolina based software provider, specializing in mobile driving workflow platforms to help complement its suite of services. The acquisition is not considered significant and does not require separate reporting. 84 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Note 6 — Restricted Investments, Held-to-Maturity The following table presents the cost or amortized cost, gross unrealized gains and temporary losses, and estimated fair value of the Company's restricted investments: December 31, 2020 Gross Unrealized Cost or Amortized Cost Gains Temporary Losses Estimated Fair Value (In thousands) US corporate securities $ 9,001 $ 2 $ ( 8 ) $ 8,995 Restricted investments, held-to-maturity $ 9,001 $ 2 $ ( 8 ) $ 8,995 December 31, 2019 Gross Unrealized Cost or Amortized Cost Gains Temporary Losses Estimated Fair Value (In thousands) US corporate securities $ 8,912 $ 4 $ ( 1 ) $ 8,915 Restricted investments, held-to-maturity $ 8,912 $ 4 $ ( 1 ) $ 8,915 As of December 31, 2020, the contractual maturities of the restricted investments were one year or less. There were sixteen and seven securities that were in an unrealized loss position, all for less than twelve months as of December 31, 2020 and 2019, respectively. The Company did no t recognize any impairment losses related to restricted investments during 2020, 2019, or 2018. Refer to Note 2 for accounting policy and Note 23 for additional information regarding fair value measurements of restricted investments. Note 7 — Equity Investments Transportation Resource Partners Since 2003, Knight has entered into partnership agreements with entities that make privately-negotiated equity investments, including Transportation Resource Partners III, LP ("TRP III"), TRP Capital Partners, LP ("TRP IV"), TRP Capital Partners V, LP ("TRP V"), TRP CoInvest Partners, (NTI) I, LP ("TRP IV Coinvestment NTI"), TRP CoInvest Partners, (QLS) I, LP ("TRP IV Coinvestment QLS"), TRP Coinvest Partners, FFR I, LP ("TRP IV Coinvestment FFR"), and TRP Coinvest Partners V (PW) I, LP ("TRP V Coinvest"). In these agreements, Knight committed to invest in return for an ownership percentage. The following table presents ownership and commitment information for Knight's investments in TRP partnerships: December 31, 2020 Knight's Ownership Interest 1 Total Commitment (All Partners) Knight's Contracted Commitment Knight's Remaining Commitment (Dollars in thousands) TRP III – equity method investment 3 5 4.8 % $ 245,000 $ 15,000 $ 1,709 TRP IV – equity investment 2 4 3.6 % $ 116,065 $ 4,900 $ 692 TRP IV Coinvestment NTI – equity method investment 5 8.3 % $ 120,000 $ 10,000 $ — TRP IV Coinvestment QLS – equity method investment 25.0 % $ 39,000 $ 9,735 $ — TRP IV Coinvestment FFR – equity method investment 5 7.4 % $ 66,555 $ 4,950 $ — TRP V - equity method investment 6 7 20.0 % $ 124,800 $ 20,000 $ 16,545 TRP V Coinvest - equity method investment 5 6 18.2 % $ 22,000 $ 4,000 $ — 1 The Company's share of the results is included within "Other income, net" in the consolidated statements of comprehensive income. 85 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED 2 In accordance with ASC Topic 321, Investments – Equity Securities , these investments are recorded at cost minus impairment. 3 Management anticipates that $ 1.7 million will be due in 2021. 4 Management anticipates that the following amounts will be due: $ 0.1 million in 2021, $ 0.2 million from 2022 through 2023, $ 0.4 million from 2024 through 2025, and none thereafter . 5 The TRP III, TRP IV Coinvestments, and TRP V Coinvest are unconsolidated majority interests. Management considered the criteria set forth in ASC Topic 323, Investments – Equity Method and Joint Ventures , to establish the appropriate accounting treatment for these investments. This guidance requires the use of the equity method for recording investments in limited partnerships where the "so minor" interest is not met. As such, the investments are being accounted for under the equity method. Knight's ownership interest reflects its ultimate ownership of the portfolio companies underlying the TRP III, TRP IV Coinvestment NTI, TRP IV Coinvestment FFR, TRP V, and TRP V Coninvest legal entities. 6 The Company entered into the agreement in 2020. 7 Management anticipates that the following amounts will be due: $ 5.4 million in 2021, $ 7.8 million from 2022 through 2023, $ 1.7 million from 2024 through 2025, and $ 1.6 million thereafter. Other Equity Method Investments On October 1, 2020, the Company used approximately $ 39.6 million in cash to purchase 21.0 % of the equity interests of a transportation-related company ("Holdings Co."), complementary to its suite of services. Based on Holdings Co.'s board of directors and the Company's minority rights, the Company has concluded that its investment allows it to exercise significant influence over the operational and financial decisions of Holdings Co. and therefore has recorded the transaction as an equity method investment. The carrying amount of the Company's initial investment in Holdings Co. was approximately $ 36.6 million in excess of the Company's initial underlying equity interest in the net assets in Holdings Co. This basis difference represents the Company's proportionate share of the fair value of Holdings Co.'s net tangible assets and its identified intangible assets, with the remaining excess recognized as equity method goodwill. The Company's proportionate share of certain identified definite-lived intangibles are amortized over their estimated useful lives and accreted against the earnings recognized from the Company's interest in Holdings Co. Net Investment Balances Net investment balances included in "Other long-term assets" in the consolidated balance sheets were as follows: December 31, 2020 2019 (in thousands) TRP III – equity method investment $ 217 $ 252 TRP IV – equity investment 1 2,952 3,068 TRP IV Coinvestment NTI – equity method investment 5,609 6,225 TRP IV Coinvestment QLS – equity method investment 16,240 16,383 TRP IV Coinvestment FFR – equity method investment 4,905 4,950 TRP V – equity method investment 3,304 — TRP V Coinvest – equity method investment 4,000 — Holdings Co. – equity method investment 2 40,335 — Total carrying value $ 77,562 $ 30,878 1 In accordance with ASC Topic 321, Investments – Equity Securities , these investments are recorded at cost minus impairment. 2 In accordance with ASC Topic 323, Investments – Equity Method and Joint Ventures, the net investment balance includes accretion of amortization of certain definite-lived intangibles. 86 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Note 8 — Trade Receivables, net Trade receivables balances were as follows: December 31, 2020 2019 (In thousands) Trade customers $ 570,611 $ 511,487 Equipment manufacturers 5,680 5,146 Other 24,281 20,092 Trade receivables 600,572 536,725 Less: Allowance for doubtful accounts ( 22,093 ) ( 18,178 ) Trade receivables, net $ 578,479 $ 518,547 The following is a rollforward of the allowance for doubtful accounts for trade receivables: 2020 2019 2018 (In thousands) Beginning balance $ 18,178 $ 16,355 $ 14,829 Provision (reduction) 17,267 16,925 ( 3,092 ) Write-offs directly against the reserve ( 902 ) ( 2,652 ) ( 1,362 ) Write-offs for revenue adjustments ( 12,450 ) ( 12,450 ) 5,861 Other 1 — — 119 Ending balance $ 22,093 $ 18,178 $ 16,355 1 Represents allowance for doubtful trade accounts receivables assumed in 2018 from the Abilene Acquisition. See Note 5 for further details regarding this transaction. See Note 15 for a discussion of the Company's accounts receivable securitization program and the related accounting treatment. Note 9 — Notes Receivable, net The Company provides financing to independent contractors and other third-parties on equipment sold or leased. Most of the notes are collateralized and are due in weekly installments, including principal and interest payments, ranging from 8 % to 15 %. Notes receivable are included in "Other current assets" and "Other long-term assets" in the consolidated balance sheets and were comprised of: December 31, 2020 2019 (In thousands) Notes receivable from independent contractors $ 7,291 $ 9,167 Notes receivable from third parties 3,034 6,164 Gross notes receivable 10,325 15,331 Allowance for doubtful notes receivable ( 602 ) ( 503 ) Total notes receivable, net of allowance $ 9,723 $ 14,828 Current portion, net of allowance 2,846 4,163 Long-term portion $ 6,877 $ 10,665 87 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED The following is a rollforward of the allowance for doubtful notes receivable: 2020 2019 2018 (In thousands) Beginning balance $ 503 $ 1,051 $ 1,040 Provision (reduction) 464 ( 137 ) ( 100 ) Write-offs ( 365 ) ( 411 ) ( 103 ) Other 1 — — 214 Ending balance $ 602 $ 503 $ 1,051 1 Represents allowance for doubtful notes receivable assumed in 2018 from the Abilene Acquisition. See Note 5 for further details regarding this transaction. Note 10 — Assets Held for Sale The Company expects to sell its assets held for sale within the next twelve months . Revenue equipment held for sale totaled $ 29.8 million and $ 41.8 million as of December 31, 2020 and 2019, respectively. Net gains on disposals, including disposals of property and equipment classified as assets held for sale, reported in "Miscellaneous operating expenses" in the consolidated statements of comprehensive income were $ 9.7 million during 2020, $ 32.9 million during 2019, and $ 37.0 million during 2018. The Company's net carrying value of land and facilities classified as held for sale in the consolidated balance sheets as of December 31, 2020 and December 31, 2019 was zero . During 2020, t he Company incurred impairment losses of $ 0.5 million primarily related to certain tractors and trailers as a result of a softer used equipment market. During 2019, the Company incurred impairment losses of $ 0.4 million primarily related to certain Swift legacy trailer models as a result of a softer used equipment market. The Company did no t recognize any impairment losses related to assets held for sale during 2018. Note 11 — Goodwill and Other Intangible Assets Goodwill The changes in the carrying amounts of goodwill were as follows: 2020 2019 2018 (In thousands) Goodwill at beginning of period $ 2,918,992 $ 2,919,176 $ 2,887,867 Amortization relating to deferred tax assets ( 11 ) ( 232 ) ( 17 ) Acquisitions 1 3,983 48 27,352 Goodwill related to 2017 Merger 2 — — 3,974 Goodwill at end of period $ 2,922,964 $ 2,918,992 $ 2,919,176 1 The goodwill associated with the Warehousing Co. acquisition and Abilene Acquisition was allocated to the non-reportable and Trucking segments, respectively. See Note 5 regarding the amount attributed to adjustments to the opening balance sheets. 2 The goodwill adjustment associated with the 2017 Merger was allocated to the Trucking segment. 88 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED The following presents the components of goodwill by reportable segment as of December 31, 2020 and 2019: December 31, 2020 2019 Net Carrying Amount 1 Net Carrying Amount 1 (In thousands) Trucking $ 2,658,095 $ 2,658,106 Intermodal 175,594 175,594 Logistics 42,512 42,512 Non-reportable 46,763 42,780 Goodwill $ 2,922,964 $ 2,918,992 1 Except for the net accumulated amortization related to deferred tax assets in the Trucking segment, the net carrying amount and gross carrying amount are equal since there are no accumulated impairment losses. There were no impairments identified during annual goodwill impairment testing in 2020, 2019, or 2018. Other Intangible Assets Other intangible asset balances were as follows: December 31, 2020 2019 (In thousands) Definite-lived intangible assets: 1 Gross carrying amount $ 894,597 $ 839,516 Accumulated amortization ( 145,852 ) ( 99,957 ) Definite-lived intangible assets, net 748,745 739,559 Trade names: Gross carrying amount 640,500 639,900 Intangible assets, net $ 1,389,245 $ 1,379,459 1 The major categories of the Company's definite-lived intangible assets include customer relationships, non-compete agreements, internally-developed software, and others. The following table presents amortization of intangible assets related to the 2017 Merger and intangible assets related to various acquisitions: 2020 2019 2018 (In thousands) Amortization of intangible assets related to the 2017 Merger $ 41,375 $ 41,375 $ 41,375 Amortization related to other intangible assets 4,520 1,501 1,209 Amortization of intangibles $ 45,895 $ 42,876 $ 42,584 Identifiable intangible assets subject to amortization have been recorded at fair value. Intangible assets related to acquisitions other than the 2017 Merger are amortized over a weighted-average amortization period of 18.9 years. The Company's customer relationship intangible assets related to the 2017 Merger are being amortized over a weighted average amortization period of 19.9 years. As of December 31, 2020, management anticipates that the composition and amount of amortization associated with intangible assets will be $ 45.9 million in 2021, $ 45.8 million in 2022, $ 45.2 million for each of the years 2023 and 2024, and $ 45.1 million in 2025. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets, and other events. See Note 2 for accounting policies regarding goodwill and other intangible assets. 89 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Note 12 — Accrued Payroll and Purchased Transportation and Accrued Liabilities The following table presents the composition of accrued payroll and purchased transportation: December 31, 2020 2019 (In thousands) Accrued payroll 1 $ 114,835 $ 70,534 Accrued purchased transportation 46,053 39,531 Accrued payroll and purchased transportation $ 160,888 $ 110,065 1 Accrued payroll includes accruals related to the various 401(k) plans the Company offers to its employees. In order to qualify for these plans, employees must meet the minimum age requirement ( 18 years) and have completed ninety days of service with the Company. Employees' rights to employer contributions are fully vested after five years from their date of employment. The plans offer discretionary matching contributions of the greater of 100% up to 3.0 % of an employee's eligible compensation or $ 2,000 . The Company's employee benefits expense for matching contributions related to the 401(k) plans was approximately $ 13.6 million, $ 8.8 million, and $ 8.7 million in 2020, 2019, and 2018, respectively. This expense was included in "Salaries, wages, and benefits" in the consolidated statements of comprehensive income. As of December 31, 2020 and 2019, the balance above in accrued payroll included $ 12.8 million and $ 9.1 million, respectively, in matching contributions for the 401(k) plans. The following table presents the composition of accrued liabilities: December 31, 2020 2019 (In thousands) Accrued legal 1 $ 20,206 $ 121,312 Other 68,688 53,910 Accrued liabilities $ 88,894 $ 175,222 1 See Note 19 for details regarding the Company's legal accruals. Note 13 — Claims Accruals Claims accruals represent the uninsured portion of outstanding claims at year-end. The current portion reflects the amount of claims expected to be paid in the following year. The Company's insurance program for workers' compensation, auto and collision liability, physical damage, independent contractor claims, cargo damage, and medical involves self-insurance with varying risk retention levels. Claims accruals were comprised of the following: December 31, 2020 2019 (In thousands) Auto reserves $ 231,875 $ 224,541 Workers’ compensation reserves 94,609 108,035 Independent contractor claims reserves 7,152 8,044 Cargo damage reserves 2,494 2,818 Employee medical reserves 13,612 4,279 Claims accruals 349,742 347,717 Less: current portion of claims accruals ( 174,928 ) ( 150,805 ) Claims accruals, less current portion $ 174,814 $ 196,912 90 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Self Insurance Automobile Liability, General Liability, and Excess Liability — Effective November 1, 2020, the Company has $ 100.0 million in excess auto liability ("AL") coverage. Effective November 1, 2019, the Company had $ 130.0 million in excess AL coverage. For prior years, Swift and Knight separately maintained varying excess AL and general liability limits. During prior policy periods, Swift AL claims were subject to a $ 10.0 million self-insured retention ("SIR") per occurrence and Knight AL claims were subject to a $ 1.0 million to $ 3.0 million SIR per occurrence. Additionally, Knight carried a $ 2.5 million aggregate deductible for any loss or losses within the $ 5.0 million excess of $ 5.0 million layer of coverage. Effective March 1, 2020, Knight and Swift retain the same $ 10.0 million SIR per occurrence. Cargo Damage and Loss — The Company is insured against cargo damage and loss with liability limits of $ 1.0 million per truck or trailer with a $ 10.0 million limit per occurrence. Workers' Compensation and Employers' Liability — The Company is self-insured for workers' compensation coverage. Swift maintains statutory coverage limits, subject to a $ 5.0 million SIR for each accident or disease. Effective March 1, 2019, Knight maintains statutory coverage limits, subject to a $ 2.0 million SIR for each accident or disease. Prior to March 1, 2019, the Knight SIR was $ 1.0 million per each accident or disease. Medical — Knight maintains primary and excess coverage for employee medical expenses, with a $ 0.3 million SIR per claimant. Through December 31, 2019, Swift was fully insured on its medical benefits (subject to contributed premiums). Effective January 1, 2020, Swift provides primary and excess coverage for employee medical expenses, with an SIR of $ 0.5 million per claimant to all employees. See Note 2 for accounting policy regarding the Company's claims accruals. Note 14 — Income Taxes The following table presents the Company's income tax expense: 2020 2019 2018 (In thousands) Current expense: Federal $ 80,060 $ 50,703 $ 44,357 State 19,153 16,616 22,300 Foreign 4,248 5,526 3,124 103,461 72,845 69,781 Deferred expense (benefit): Federal 29,640 28,618 59,508 State 7,292 3,712 1,639 Foreign 9,283 ( 1,377 ) 461 46,215 30,953 61,608 Income tax expense $ 149,676 $ 103,798 $ 131,389 Rate Reconciliation — Expected tax expense is computed by applying the US federal corporate income tax rate of 21.0 % to earnings before income taxes for 2020, 2019 and 2018. Actual tax expense differs from expected tax expense as follows: 2020 2019 2018 (In thousands) Computed "expected" tax expense $ 117,665 $ 86,935 $ 117,478 Increase (decrease) in income taxes resulting from: State income taxes, net of federal income tax benefit 22,423 17,803 19,256 Statutory rate change effect on deferred taxes — — 452 Other 9,588 ( 940 ) ( 5,797 ) Income tax expense $ 149,676 $ 103,798 $ 131,389 91 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Deferred Income Taxes — The components of the net deferred tax asset (liability) included in "Deferred tax liabilities" in the consolidated balance sheets were: December 31, 2020 2019 (In thousands) Deferred tax assets: Claims accrual $ 81,426 $ 80,019 Allowance for doubtful accounts 5,727 5,478 Amortization of stock options 7,712 5,769 Accrued liabilities 17,941 32,284 Operating lease liabilities 1 29,278 44,231 Other 1 10,687 8,762 Total deferred tax assets 1 152,771 176,543 Valuation allowance — — Total deferred tax assets, net 1 152,771 176,543 Deferred tax liabilities: Property and equipment, principally due to differences in depreciation ( 586,349 ) ( 550,521 ) Prepaid taxes, licenses, and permits deducted for tax purposes ( 12,629 ) ( 11,168 ) Intangible assets ( 334,618 ) ( 345,555 ) Operating lease right-of-use assets 1 ( 28,259 ) ( 41,018 ) Other ( 6,857 ) — Total deferred tax liabilities 1 ( 968,712 ) ( 948,262 ) Deferred income taxes $ ( 815,941 ) $ ( 771,719 ) 1 Prior year amounts within the table above have been reclassified to conform to current year presentation. Valuation Allowance — The Company has not established a valuation allowance as it has been determined that, based upon available evidence, a valuation allowance is no t required. Management believes that it is more like ly than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. All other deferred tax assets are expected to be realized and utilized by continued profitability in future periods. Cumulative Undistributed Foreign Earnings — As of December 31, 2020, foreign withholding taxes have not been provided on approximately $ 82.1 million of cumulative undistributed earnings of foreign subsidiaries. The earnings are considered to be permanently reinvested outside the US. As such, the Company is not required to provide withholding taxes on these earnings until they are repatriated in the form of dividends or otherwise. During the fourth quarter of 2020 our Mexico subsidiary distributed/repatriated $ 23.0 million to the US company. The taxes that resulted were insignificant. Unrecognized Tax Benefits — The Company's unrecognized tax benefits as of December 31, 2020 would favorably impact the Company's effective tax rate if subsequently recognized. See Note 2 for accounting policy related to the Company's income taxes. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2020, 2019, and 2018 is below: 2020 2019 2018 (In thousands) Unrecognized tax benefits at beginning of year $ 4,083 $ 7,423 $ 7,096 Increases for tax positions taken prior to beginning of year — 38 1,056 Decreases for tax positions taken prior to beginning of year ( 1,133 ) ( 3,378 ) ( 729 ) Unrecognized tax benefits at end of year $ 2,950 $ 4,083 $ 7,423 92 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Increases for tax positions are related to the benefit received for federal deductions taken on the Company's subsidiary amended returns. Decreases for tax positions are related to federal deductions, which were reserved according to ASC 740-10. Management does not expect a decrease in unrecognized tax benefits during the next twelve months. Interest and Penalties — Accrued interest and penalties was approximately $ 0.3 million and $ 0.4 million for the years ended December 31, 2020 and December 31, 2019, respectively. Tax Examinations — Certain of the Company's subsidiaries are currently under examination by various state jurisdictions for tax years ranging from 2013 to 2019 . At the completion of these examinations, management does not expect any adjustments that would have a material impact on the Company's effective tax rate. Years subsequent to 2015 remain subject to examination. Note 15 — Accounts Receivable Securitization The 2018 RSA is a secured borrowing that is collateralized by the Company's eligible receivables, for which the Company is the servicing agent. The Company's receivable originator subsidiaries sell, on a revolving basis, undivided interests in all of their eligible accounts receivable to Swift Receivables Company II, LLC ("SRCII") who in turn sells a variable percentage ownership in those receivables to the various purchasers. The Company's eligible receivables are included in "Trade receivables, net of allowance for doubtful accounts" in the consolidated balance sheets. As of December 31, 2020, the Company's eligible receivables generally have high credit quality, as determined by the obligor's corporate credit rating. The 2018 RSA is subject to fees, various affirmative and negative covenants, representations and warranties, and default and termination provisions customary for facilities of this type. The Company was in compliance with these covenants as of December 31, 2020. Collections on the underlying receivables by the Company are held for the benefit of SRCII and the various purchasers and are unavailable to satisfy claims of the Company and its subsidiaries. The following table summarizes the key terms of the 2018 RSA (dollars in thousands): Effective July 11, 2018 Final maturity date 1 July 9, 2021 Borrowing capacity $ 325,000 Accordion option 2 $ 175,000 Unused commitment fee rate 3 20 to 40 basis points Program fees on outstanding balances 4 one month LIBOR + 80 to 100 basis points 1 The Company intends to refinance prior to the maturity date. 2 The accordion option increases the maximum borrowing capacity, subject to participation by the purchasers. 3 The 2018 RSA commitment fee rate is based on the percentage of the maximum borrowing capacity utilized. 4 The 2018 RSA program fee is based on the Company's consolidated total net leverage ratio. As identified within the 2018 RSA, the lender can trigger an amendment by identifying and deciding upon a replacement index for LIBOR. Availability under the 2018 RSA is calculated as follows: December 31, 2020 2019 (In thousands) Borrowing base, based on eligible receivables $ 302,700 $ 299,100 Less: outstanding borrowings 1 ( 214,000 ) ( 205,000 ) Less: outstanding letters of credit ( 67,281 ) ( 70,841 ) Availability under accounts receivable securitization facilities $ 21,419 $ 23,259 1 Outstanding borrowings are included in "Accounts receivable securitization – current portion" at December 31, 2020 and in "Accounts receivable securitization – less current portion" at December 31, 2019. Interest accrued on the aggregate principal balance at a rate of 1.0 % and 2.6 %, as of December 31, 2020 and 2019, respectively. 93 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Program fees and unused commitment fees are recorded in "Interest expense" in the consolidated statements of comprehensive income. The Company's accounts receivable securitization incurred program fees of $ 3.5 million in 2020, $ 7.2 million in 2019, and $ 8.1 million in 2018. Refer to Note 23 for information regarding the fair value of the 2018 RSA. Note 16 — Debt and Financing Other than the Company's accounts receivable securitization as discussed in Note 15 and its outstanding finance lease obligations as discussed in Note 17, the Company's long-term debt consisted of the following: December 31, 2020 2019 (In thousands) Term Loan, due October 2022, net 1 2 $ 298,907 $ 364,825 Total long-term debt, including current portion 298,907 364,825 Less: current portion of long-term debt — ( 364,825 ) Long-term debt, less current portion $ 298,907 $ — December 31, 2020 2019 (In thousands) Total long-term debt, including current portion $ 298,907 $ 364,825 Revolver, due October 2022 1 3 210,000 279,000 Long-term debt, including revolving line of credit $ 508,907 $ 643,825 1 Refer to Note 23 for information regarding the fair value of debt. 2 Net of $ 1.1 million and $ 0.2 million deferred loan costs at December 31, 2020 and 2019, respectively. 3 The Company also had outstanding letters of credit under the Revolver, primarily related to workers' compensation and self-insurance liabilities of $ 29.3 million and $ 28.3 million at December 31, 2020 and 2019, respectively. Credit Agreements 2017 Debt Agreement — On September 29, 2017, Knight-Swift entered into the $ 1.2 billion 2017 Debt Agreement (which is an unsecured credit facility), with a group of banks, replacing Swift's previous secured Fourth Amended and Restated Credit Agreement, and Knight's unsecured credit facility. The 2017 Debt Agreement included an $ 800.0 million Revolver maturing October 2022, $ 85.0 million of which was drawn at closing, and a $ 400.0 million Term Loan which matured on October 2, 2020. On October 2, 2020 , Knight-Swift amended t he 2017 Debt Agreement to extend the maturity date of the Term Loan, incorporate language regarding the transition away from LIBOR, and update other regulatory and technical provisions customary for facilities of this type. Just prior to this extension, the Company paid $ 65.0 million on the outstanding balance of the Term Loan, leaving $ 300.0 million face value outstanding. There are no scheduled principal payments on the Term Loan until its maturity. 94 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED The following table presents the key terms of the 2017 Debt Agreement (as amended): Term Loan Revolver 3 2017 Debt Agreement Terms (as amended): (Dollars in thousands) Maximum borrowing capacity $ 300,000 $ 800,000 Final maturity date October 3, 2022 October 3, 2022 Interest rate minimum margin 1 LIBOR LIBOR Interest rate minimum margin 2 1.13 % 0.88 % Interest rate maximum margin 2 1.75 % 1.50 % Minimum principal payment — amount $ — $ — Minimum principal payment — frequency Once Once Minimum principal payment — commencement date October 3, 2022 October 3, 2022 1 The 2020 Amendment allows the lender to trigger an amendment after identifying and deciding upon a replacement index for LIBOR. 2 The interest rate margin for the Term Loan and Revolver is based on the Company's consolidated leverage ratio. As of December 31, 2020, interest accrued at 1.277 % on the Term Loan and 1.026 % on the Revolver. As of December 31, 2019, interested accrued at 2.792 % on the Term Loan and 2.770 % on the Revolver. 3 The commitment fee for the unused portion of the Revolver is based on the Company's consolidated leverage ratio, and ranges from 0.07 % to 0.20 %. As of December 31, 2020 and 2019, commitment fees on the unused portion of the Revolver accrued at 0.100 % and outstanding letter of credit fees accrued at 1.000 %. Pursuant to the 2017 Debt Agreement, the Revolver and the Term Loan contain certain financial covenants with respect to a maximum net leverage ratio and a minimum consolidated interest coverage ratio. The 2017 Debt Agreement provides flexibility regarding the use of proceeds from asset sales, payment of dividends, stock repurchases, and equipment financing. In addition to the financial covenants, the 2017 Debt Agreement includes usual and customary events of default for a facility of this nature and provides that, upon the occurrence and continuation of an event of default, payment of all amounts payable under the 2017 Debt Agreement may be accelerated, and the lenders' commitments may be terminated. The 2017 Debt Agreement contains certain usual and customary restrictions and covenants relating to, among other things, dividends (which would be restricted only if a default or event of default had occurred and was continuing or would result therefrom), liens, affiliate transactions, and other indebtedness. As of December 31, 2020 and 2019, the Company was in compliance with the debt covenants that the 2017 Debt Agreement was subject to. Borrowings under the 2017 Debt Agreement are guaranteed by Knight-Swift Transportation Holdings Inc., and certain of the Company's domestic subsidiaries (other than its captive insurance subsidiaries, driving academy subsidiary, and bankruptcy-remote special purpose subsidiary). See Note 23 for fair value disclosures regarding the Company's debt instruments. 95 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Note 17 — Leases Lessee Disclosures Lease Cost — The components of the Company's lease cost were as follows: 2020 2019 (in thousands) Operating lease cost: Operating lease costs $ 80,456 $ 120,201 Short-term lease cost ¹ 6,544 2,897 Sublease income ( 360 ) ( 360 ) Rental expense 86,640 122,738 Finance lease cost: Amortization of property and equipment 16,638 19,878 Interest expense 2,896 3,048 Total finance lease cost 19,534 22,926 Total operating and finance lease costs $ 106,174 $ 145,664 1 Short-term lease cost includes leases with a term of twelve months or less, as well as month-to-month leases and variable lease costs. Lease Liability Calculation Assumptions — The assumptions underlying the calculation of the Company's right-of-use assets and lease liabilities are disclosed below. December 31, 2020 2019 Operating Finance Operating Finance Revenue equipment leases Weighted average remaining lease term 2.0 years 3.6 years 2.4 years 2.3 years Weighted average discount rate 2.4 % 2.4 % 2.6 % 3.3 % Real estate and other leases Weighted average remaining lease term 10.6 years — 13.3 years — Weighted average discount rate 3.7 % — % 4.3 % — % Maturity Analysis of Lease Liabilities (as Lessee) — Future minimum lease payments for all noncancelable leases were: December 31, 2020 Operating Finance (In thousands) 2021 $ 49,986 $ 56,699 2022 31,632 32,894 2023 18,589 21,542 2024 7,024 64,121 2025 3,491 3,487 Thereafter 22,810 23,708 Future minimum lease payments 133,532 202,451 Less: amounts representing interest ( 16,184 ) ( 11,625 ) Present value of minimum lease payments 117,348 190,826 Less: current portion ( 47,496 ) ( 52,583 ) Lease liabilities – less current portion $ 69,852 $ 138,243 96 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Supplemental Cash Flow Lease Disclosures — The following table sets forth cash paid for amounts included in the measurement of lease liabilities: 2020 2019 (in thousands) Operating cash flows for operating leases $ 83,675 $ 121,737 Operating cash flows for finance leases 2,896 3,048 Financing cash flows for finance leases 83,910 115,642 Refer to Note 24 for information regarding the leasing transactions between the Company and its related parties. Lessor Disclosures The Company's wholly-owned financing subsidiaries lease revenue equipment to the Company's independent contractors under operating leases, which generally have terms between three and four years, and include renewal and purchase options. These leases also include variable charges associated with miles driven in excess of the stipulated allowable miles in the contract, which are accounted for separately and presented in the table below. Lease classification is determined based on minimum rental receipts per the agreement, including residual value guarantees, when applicable, as well as receivables due to the Company upon default or cross-default. When independent contractors default on their leases, the Company typically re-leases the equipment to other independent contractors. As such, future lease receipts reflect original leases and re-leases. The owned assets underlying the Company's leases as lessor primarily consist of revenue equipment. As of December 31, 2020 and 2019, the gross carrying value of such revenue equipment underlying these leases was $ 103.1 million and $ 91.6 million, respectively, and accumulated depreciation was $ 29.7 million and $ 18.6 million, respectively. Depreciation is calculated on a straight-line basis down to the residual value, as applicable, over the estimated useful life of the equipment. Depreciation expense for these assets was $ 20.6 million and $ 16.4 million for 2020 and 2019, respectively. Additionally, the Company periodically leases out real estate for use by third parties, some of which are subleases. These leases have varying terms, and may include renewal options. Management’s significant assumptions and judgments include the determination of the amount the Company expects to derive from the underlying asset at the end of the lease term, as well as whether a contract contains a lease. Lease Revenue and Rental Income — The components of the Company's lease revenue are included in "Revenue, excluding trucking fuel surcharge" and the Company's rental income is included in "Other income, net" in the consolidated statements of comprehensive income. These amounts are disclosed in the table below. 2020 2019 (in thousands) Operating lease revenue $ 45,698 $ 46,858 Variable lease revenue 1,691 2,169 Total lease revenue 1 $ 47,389 $ 49,027 Rental income 2 $ 10,365 $ 9,982 1 Primarily represents operating revenue earned by the Company's financing subsidiaries for leasing equipment to third-party independent contractors. 2 Represents non-operating income earned from leasing real estate to third parties. 97 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Maturity Analysis of Future Lease Revenues (as Lessor) — Future minimum lease revenues for all noncancelable leases were: December 31, 2020 (In thousands) 2021 $ 41,602 2022 28,596 2023 15,418 2024 3,103 2025 587 Thereafter 373 Future minimum lease revenues $ 89,679 Refer to Note 24 for information regarding the leasing transactions between the Company and related parties. Note 18 — Purchase Commitments As of December 31, 2020, the Company had outstanding commitments to acquire revenue equipment of $ 704.0 million in 2021 ($ 455.3 million of which were tractor commitments) and none thereafter. These purchases may be financed through any combination of operating leases, finance leases, debt, proceeds from sales of existing equipment, and cash flows from operations. As of December 31, 2020, the Company had outstanding purchase commitments to acquire facilities and non-revenue equipment of $ 25.9 million in 2021, $ 2.0 million in the two-year period 2022 through 2023 , and $ 0.5 million in the two-year period 2024 though 2025, and none thereafter. Factors such as costs and opportunities for future terminal expansions may change the amount of such expenditures. As of December 31, 2020, the Company had outstanding commitments for fuel purchases of $ 35.4 million in 2021 and no ne thereafter. 98 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Note 19 — Contingencies and Legal Proceedings Accounting Policy The Company is involved in certain claims and pending litigation primarily arising in the normal course of business. The majority of these claims relate to workers' compensation, auto collision and liability, physical damage, and cargo damage, as well as certain class action litigation in which plaintiffs allege failure to provide meal and rest breaks, unpaid wages, unauthorized deductions, and other items. The Company accrues for the uninsured portion of claims losses and the gross amount of other losses when the likelihood of the loss is probable and the amount of the loss is reasonably estimable. These accruals are based on management's best estimate within a possible range of loss. When there is no amount within the range of loss that appears to be a better estimate than any other amount, then management accrues to the low end of the range. Legal fees are expensed as incurred. When it is reasonably possible that exposure exists in excess of the related accrual (which could be no accrual), management discloses an estimate of the possible loss or range of loss, unless an estimate cannot be determined (because, among other reasons, (1) the proceedings are in various stages that do not allow for assessment; (2) damages have not been sought; (3) damages are unsupported and/or exaggerated; (4) there is uncertainty as to the outcome of pending appeals; and/or (5) there are significant factual issues to be resolved). If the likelihood of a loss is remote, the Company does not accrue for the loss. However, if the likelihood of a loss is remote, but it is at least reasonably possible that one or more future confirming events may materially change management's estimate within twelve months from the date of the financial statements, management discloses an estimate of the possible loss or range of loss, unless an estimate cannot be determined. Legal Proceedings Information is provided below regarding the nature, status, and contingent loss amounts, if any, associated with the Company's pending legal matters. There are inherent uncertainties in these legal matters, some of which are beyond management's control, making the ultimate outcomes difficult to predict. Moreover, management's views and estimates related to these matters may change in the future, as new events and circumstances arise and the matters continue to develop. The Company has made accruals with respect to its legal matters where appropriate, which are included in "Accrued liabilities" in the consolidated balance sheets. The Company has recorded an aggregate accrual of approximately $ 20.2 million and $ 121.3 million relating to the Company's outstanding legal proceedings as of December 31, 2020 and 2019, respectively. Based on management's present knowledge of the facts and (in certain cases) advice of outside counsel, management does not believe that loss contingencies arising from pending matters are likely to have a material adverse effect on the Company's overall financial position, operating results, or cash flows after taking into account any existing accruals. However, actual outcomes could be material to the Company's financial position, operating results, or cash flows for any particular period. 99 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED EMPLOYEE COMPENSATION AND PAY PRACTICES MATTERS CRST Expedited Plaintiff alleges tortious interference with contract and unjust enrichment related to non-competition agreements entered into with certain of its drivers. Plaintiff(s) Defendant(s) Date instituted Court or agency currently pending in CRST Expedited, Inc. Swift Transportation Co. of Arizona LLC. March 20, 2017 United States District Court for the Northern District of Iowa Recent Developments and Current Status In July 2019, a jury issued an adverse verdict in this lawsuit. The court issued a decision granting in part and denying in part certain motions related to the jury’s verdict. Both parties have appealed the court’s decision. The likelihood that a loss has been incurred is probable and estimable, and the loss has accordingly been accrued as of December 31, 2020. California Wage, Meal, and Rest Class Actions The plaintiffs generally allege one or more of the following: that the Company 1) failed to pay the California minimum wage; 2) failed to provide proper meal and rest periods; 3) failed to timely pay wages upon separation from employment; 4) failed to pay for all hours worked; 5) failed to pay overtime; 6) failed to properly reimburse work-related expenses; and 7) failed to provide accurate wage statements. Plaintiff(s) Defendant(s) Date instituted Court or agency currently pending in John Burnell 1 Swift Transportation Co., Inc March 22, 2010 United States District Court for the Central District of California James R. Rudsell 1 Swift Transportation Co. of Arizona, LLC and Swift Transportation Company April 5, 2012 United States District Court for the Central District of California Recent Developments and Current Status In April 2019, the parties reached settlement of this matter. In January 2020, the Court granted final approval of the settlement. The Court order granting final approval of the settlement has been appealed to the 9 th Circuit. The likelihood that a loss has been incurred is probable and estimable, and the loss has accordingly been accrued as of December 31, 2020. Arizona Minimum Wage Class Action The plaintiffs generally allege one or more of the following: 1) failure to minimum wage for the first day of orientation; 2) failure to pay minimum wage for time spent studying; 3) failure to pay minimum wage for 16 hours per day; and 4) failure to pay minimum wage for the first eight hours of sleeper berth time. Plaintiff(s) Defendant(s) Date instituted Court or agency currently pending in Pamela Julian 1 Swift Transportation Co., Inc. and Swift Transportation Co. of Arizona LLC December 29, 2015 United States District Court for the District of Arizona Recent Developments and Current Status In December 2019, the court awarded damages for failure to pay minimum wage for 16 hours per day. In August 2020, the parties reached a settlement in this matter. In November 2020, the Company paid the settlement amount approved by the court. INDEPENDENT CONTRACTOR MATTERS Ninth Circuit Independent Contractors Misclassification Class Action The putative class alleges that Swift misclassified independent contractors as independent contractors, instead of employees, in violation of the FLSA and various state laws. The lawsuit also raises certain related issues with respect to the lease agreements that certain independent contractors have entered into with Interstate Equipment Leasing, LLC. The putative class seeks unpaid wages, liquidated damages, interest, other costs, and attorneys' fees. Plaintiff(s) Defendant(s) Date instituted Court or agency currently pending in Joseph Sheer, Virginia Van Dusen, Jose Motolinia, Vickii Schwalm, Peter Wood 1 Swift Transportation Co., Inc., Interstate Equipment Leasing, Inc., Jerry Moyes, and Chad Killebrew December 22, 2009 Unites States District Court of Arizona and Ninth Circuit Court of Appeals Recent Developments and Current Status In January 2020, the court granted final approval of the settlement in this matter. In March 2020, the Company paid the settlement amount approved by the court. As of December 31, 2020 the Company has a reserve accrued for anticipated cost associated with finalizing this matter. 1 Individually and on behalf of all others similarly situated. 100 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Note 20 — Share Repurchase Plans On June 1, 2018, the Board approved the repurchase of up to $ 250.0 million of the Company's outstanding common stock (the "2018 Knight-Swift Share Repurchase Plan"). With the adoption of the 2018 Knight-Swift Share Repurchase Plan, the Company terminated the previous share repurchase plan (the "Swift Share Repurchase Plan"). This Swift Share Repurchase Plan was authorized in February 2016, by Swift's board of directors for the repurchase of up to $ 150.0 million of Swift common stock. When terminated, the Swift Share Repurchase Plan had approximately $ 62.9 million in remaining authorized purchases. On May 31, 2019, the Company announced that the Board approved the repurchase of up to $ 250.0 million worth of the Company's outstanding common stock (the "2019 Knight-Swift Share Repurchase Plan"). With the adoption of the 2019 Knight-Swift Share Repurchase Plan, the Company terminated the 2018 Knight-Swift Share Repurchase Plan. There was approximately $ 0.2 million of authorized purchases remaining under the 2018 Knight-Swift Share Repurchase Plan upon termination. On November 30, 2020, the Company announced that the Board approved the repurchase of up to $ 250.0 million worth of the Company's outstanding common stock (the "2020 Knight-Swift Share Repurchase Plan"). With the adoption of the 2020 Knight-Swift Share Repurchase Plan, the Company terminated the 2019 Knight-Swift Share Repurchase Plan. There was approximately $ 54.1 million of authorized purchases remaining under the 2019 Knight-Swift Share Repurchase Plan upon termination. The following table presents the Company's repurchases of its common stock under the respective share repurchase plans, excluding advisory fees: Share Repurchase Plan 2020 2019 Board Approval Date Authorized Amount Shares Amount Shares Amount (in thousands) June 1, 2018 $ 250,000 — $ — 2,315 $ 70,500 May 30, 2019 1 $ 250,000 4,841 179,585 559 16,392 November 24, 2020 2 $ 250,000 — — — — 4,841 $ 179,585 2,874 $ 86,892 1 As of December 31, 2019, $ 233.6 million remained available under the 2019 Knight-Swift Share Repurchase Plan. 2 As of December 31, 2020, $ 250.0 million remained available under the 2020 Knight-Swift Share Repurchase Plan. Subsequent to December 31, 2020, the Company repurchased 1.2 million shares for $ 50.3 million under the 2020 Knight-Swift Share Repurchase Plan, leaving $ 199.7 million available as of February 23, 2021. Refer to Note 24 for a discussion of share repurchase transactions conducted with related parties. 101 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Note 21 — Stock-based Compensation Compensatory Stock Plans Before the 2017 Merger, Knight and Swift granted stock-based awards under their respective stock-based compensation plans, discussed below. 2014 Stock Plan — Currently, the 2014 Stock Plan, as amended and restated, is the Company’s only compensatory stock-based incentive plan. The previous 2014 stock plan replaced Swift's 2007 Omnibus Incentive Plan when it was adopted by Swift's board of directors in March 2014 and then approved by the Swift stockholders in May 2014. The previous 2014 stock plan was amended and restated to rename the plan and for other administrative changes relating to the 2017 Merger. The 2014 Stock Plan was again amended and restated in 2020 to increase the number of shares of common stock available for issuance and extended the term of the 2014 Stock Plan, as well as to amend certain provisions to comply with best practices. Other terms of the 2014 Stock Plan, as amended and restated, remain substantially the same as the previous 2014 stock plan and first amended and restated stock plan. The 2014 Stock Plan, as amended and restated, permits the payment of cash incentive compensation and authorizes the granting of stock options, stock appreciation rights, restricted stock and restricted stock units, performance shares and performance units, cash-based awards, and stock-based awards to the Company's employees and non-employee directors. As of December 31, 2020, the aggregate number of shares remaining available under the 2014 Stock Plan was approximately 5.6 million. Legacy Plans — In connection with the 2017 Merger, the registered securities under the Knight Amended and Restated 2003 Stock Option Plan, the Knight 2012 Equity Compensation Plan, the Knight Amended and Restated 2015 Omnibus Incentive Plan, and the Swift 2007 Omnibus Incentive Plan (collectively, the "Legacy Plans") were deregistered. As such, no future awards may be granted under these Legacy Plans. Outstanding awards granted under the Legacy Plans were assumed by the combined company and continue to be governed by such Legacy Plans until such awards have been exercised, forfeited, canceled, or have otherwise expired or terminated. See Note 2 regarding the Company's accounting policy for stock-based compensation. Stock-based Compensation Expense Stock-based compensation expense, net of forfeitures, which is included in "Salaries, wages, and benefits" in the consolidated statements of comprehensive income is comprised of the following: 2020 2019 2018 (In thousands) Stock options $ 567 $ 1,149 $ 1,678 Restricted stock units and restricted stock awards 13,496 9,734 8,019 Performance units 5,576 2,492 1,791 Stock-based compensation expense – equity awards $ 19,639 $ 13,375 $ 11,488 Stock-based compensation expense – liability awards 1 6,955 2,663 899 Total stock-based compensation expense, net of forfeitures $ 26,594 $ 16,038 $ 12,387 Income tax benefit 2 $ 4,949 $ 3,344 $ 3,097 1 Includes awards granted to executive management in November of 2019 and 2018 that ultimately settle in cash upon fulfilling a requisite service period (for restricted stock units) and fulfilling a requisite service period and achieving performance targets (for performance units) . 2 The income tax benefit is calculated by applying the effective tax rate to stock-based compensation expense for equity awards, as the expense associated with liability awards is not tax deductible. 102 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Unrecognized Stock-based Compensation Expense The following table presents the total unrecognized stock-based compensation expense and the expected weighted average period over which these expenses will be recognized: December 31, 2020 Expense Weighted Average Period (In thousands) (In years) Equity awards – Stock options $ 230 0.4 Equity awards – Restricted stock units and restricted stock awards 41,782 2.4 Equity awards – Performance units 11,149 2.6 Liability awards – Restricted stock units and performance units 3,181 1.3 Total unrecognized stock-based compensation expense $ 56,342 2.3 Stock Award Grants 2020 2019 2018 Restricted stock units and restricted stock awards 722,499 588,819 420,014 Performance units 146,036 102,776 106,785 Equity awards granted 868,535 691,595 526,799 Liability awards granted 1 2 — 80,927 91,268 Total stock awards granted 868,535 772,522 618,067 1 Includes 48,556 , and 54,761 performance units in 2019 and 2018, respectively. 2 Includes 32,371 , and 36,507 restricted stock units in 2019 and 2018, respectively. Stock Options Stock options are the contingent right of award holders to purchase shares of the Company's common stock at a stated price for a limited time. The exercise price of options granted equals the fair value of the Company's common stock determined by the closing price of the Company's common stock quoted on the NYSE on the grant date. Most stock options granted by the Company cannot be exercised until at least one year after the grant date and have a five to ten-year contractual term. Stock options are forfeited upon termination of employment for reasons other than death, disability, or retirement. A summary of 2020 stock option activity follows: Stock options outstanding: Shares Under Option Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value 1 (In years) (In thousands) Stock options outstanding at December 31, 2019 700,673 $ 27.90 1.7 $ 5,563 Granted — — Exercised 2 ( 382,254 ) 26.67 Expired ( 5,150 ) 18.89 Forfeited ( 10,293 ) 32.37 Stock options outstanding at December 31, 2020 302,976 $ 29.45 1.2 $ 3,748 Aggregate number of stock options expected to vest at a future date as of December 31, 2020 3 86,409 $ 33.35 1.4 $ 732 Exercisable at December 31, 2020 216,197 $ 27.89 1.1 $ 3,012 1 The aggregate intrinsic value was computed using the closing share price on December 31, 2020 of $ 41.82 and on December 31, 2019 of $ 35.84 , as applicable. 2 Includes 4,223 swapped shares which were excluded from the "Common stock issued to employees" activity on the Consolidated Statements of Stockholders' Equity. 3 Net of the applied, estimated forfeiture rate. 103 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED The following table summarizes stock option exercise information for the years presented: Stock option exercises 2020 2019 2018 (In thousands, except share data) Number of stock options exercised 382,254 443,288 533,226 Intrinsic value of stock options exercised $ 4,929 $ 5,183 $ 11,745 Cash received upon exercise of stock options $ 10,199 $ 10,478 $ 10,815 Income tax benefit $ 1,029 $ 221 $ 1,685 The following table is a rollforward of the Company's unvested stock options: Unvested stock options: Shares Weighted Average Fair Value Unvested stock options at December 31, 2019 275,583 $ 5.97 Vested ( 178,511 ) 5.55 Forfeited and canceled ( 10,293 ) 6.51 Unvested stock options at December 31, 2020 86,779 $ 6.78 The total fair value of the shares vested during 2020, 2019, and 2018 was $ 1.0 million, $ 1.5 million, and $ 2.0 million, respectively. Restricted Stock Units A restricted stock unit represents a right to receive a common share of stock when the unit vests. Restricted stock unit recipients do not have voting rights with respect to the shares underlying unvested awards. Employees forfeit their units if their employment terminates before the vesting date. The following table is a rollforward of unvested restricted stock units, including restricted stock units classified as equity and those classified as liabilities: Unvested restricted stock units: Number of Awards Weighted Average Fair Value 1 Unvested restricted stock units at December 31, 2019 1,448,195 $ 29.78 Granted 722,499 40.27 Vested 2 ( 386,698 ) 30.91 Forfeited ( 60,158 ) 31.34 Unvested restricted stock units at December 31, 2020 1,723,838 $ 34.07 1 The fair value of each restricted stock unit is based on the closing market price on the grant date. 2 Includes 123,069 shares withheld for taxes and 13,039 net units settled in cash which were excluded from the "Common stock issued to employees" activity on the Consolidated Statements of Stockholders' Equity. Performance Units The Company issues performance units to selected key employees, that may be earned based on achieving performance targets approved by the compensation committee annually. The initial award is subject to an adjustment determined by the Company's performance achieved over a three-year performance period when compared to the objective performance standards adopted by the compensation committee. Furthermore, the performance units have additional service requirements subsequent to the achievement of the performance targets. Performance units do not earn dividend equivalents. The following table is a rollforward of unvested performance units, including performance units classified as equity and those classified as liabilities: Unvested performance units: Shares Weighted Average Fair Value Unvested performance units at December 31, 2019 403,694 $ 35.53 Granted 146,036 $ 42.41 Unvested performance units at December 31, 2020 1 549,730 $ 39.50 1 The performance measurement period for performance units granted in 2018 is January 1, 2019 to December 31, 2021 (three full calendar years). The performance measurement period for performance units granted in 2019 is January 1, 2020 to December 31, 2022 (three full calendar years). The performance measurement period for performance units granted in 104 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED 2020 is January 1, 2021 to December 31, 2023 (three full calendar years). All performance units will vest one month following the expiration of the performance measurement period. The following table presents the weighted average assumptions used in the fair value computation for performance units, including performance units classified as equity and those classified as liabilities: Performance unit fair value assumptions: 2020 2019 2018 Dividend yield 1 0.78 % 0.66 % 0.81 % Expected volatility 2 37.99 % 34.88 % 32.30 % Average peer volatility 2 35.62 % 27.96 % 28.61 % Average peer correlation coefficient 3 0.59 0.60 0.58 Risk-free interest rate 4 0.20 % 1.60 % 2.80 % Expected term (in years) 5 3.1 3.1 3.1 Weighted-average fair value of performance units granted $ 42.41 $ 37.24 $ 34.34 1 The dividend yield, used to project stock price to the end of the performance period, is based on the Company's historical experience and future expectation of dividend payouts. Total stockholder return is determined assuming that dividends are reinvested in the issuing entity over the performance period, which is mathematically equivalent to utilizing a 0% dividend yield. 2 Management (or peer company) estimated volatility using the Company's (or peer company's) historical share price performance over the remaining performance period as of the grant date. 3 The correlation coefficients are used to model the way in which each entity tends to move in relation to each other; the correlation assumptions were developed using the same stock price data as the volatility assumptions. 4 The risk-free interest rate assumption is based on US Treasury securities at a constant maturity with a maturity period that most closely resembles the expected term of the performance award. 5 Since the Monte Carlo Simulation valuation is an open form model that uses an expected life commensurate with the performance period, the expected life of the performance units was assumed to be the period from the grant date to the end of the performance period. Non-compensatory Stock Plan: ESPP In 2012, Swift's board of directors adopted, and its stockholders approved, the 2012 ESPP. The 2012 ESPP continues to be administered by the Company following the 2017 Merger, is intended to qualify under Section 423 of the Internal Revenue Code, and is considered noncompensatory. Pursuant to the 2012 ESPP, the Co mpany is authorized to issue up to 1.4 million shares of its common stock to eligible employees who participate in the plan. Employees are eligible to participate in the 2012 ESPP following at least 90 days of employment with the Company or any of its participating subsidiaries. Under the terms of the 2012 ESPP, eligible employees may elect to purchase common stock through payroll deductions, not to exceed 15 % of their gross cash compensation. The purchase price of the common stock is 95 % of the common stock's fair market value quoted on the NYSE on the last trading day of each offering period. There are four three-month offering periods corresponding to the calendar quarters. Each eligible employee is restricted to purchasing a maximum of $ 6,250 of common stock during an offering period, determined by the fair market value of the common stock as of the first day of the offering period, and $ 25,000 of common stock during a calendar year. Officers or employees who own 5 % or more of the total voting power or value of common stock are restricted from participating in the 2012 ESPP. The 2012 ESPP was amended and restated in January 2018 to be a Knight-Swift plan, thus permitting Knight employees to participate in the plan in addition to Swift employees. The terms and definitions of the amended and restated 2012 ESPP remain substantially the same as the original 2012 ESPP. The plan was amended effective January 1, 2019 to align with new federal tax legislation that lifted the restriction on contributing to the ESPP if the participant had a hardship withdrawal on the 401(k) plan. In 2020, the Company issued approximately 62,000 shares under the 2012 ESPP at a weighted average discounted price per share of $ 35.69 . As of December 31, 2020, the Company is authorized to issue an additional 1.0 million shares under the 2012 ESPP. 105 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Note 22 — Weighted Average Shares Outstanding Earnings per share, basic and diluted, as presented in the consolidated statements of comprehensive income, are calculated by dividing net income attributable to Knight-Swift by the respective weighted average common shares outstanding during the period. The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding: 2020 2019 2018 (In thousands) Basic weighted average common shares outstanding 169,711 171,541 177,018 Dilutive effect of equity awards 838 601 981 Diluted weighted average common shares outstanding 170,549 172,142 177,999 Anti-dilutive shares excluded from earnings per diluted share 1 63 603 47 1 Shares were excluded from the dilutive-effect calculation because the outstanding awards' exercise prices were greater than the average market price of the Company's common stock. Note 23 — Fair Value Measurement ASC Topic 820, Fair Value Measurements and Disclosures, requires that the Company disclose estimated fair values for its financial instruments. The estimated fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for the asset or liability. Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Changes in assumptions could significantly affect these estimates. Because the fair value is estimated as of December 31, 2020 and 2019, the amounts that will actually be realized or paid at settlement or maturity of the instruments in the future could be significantly different. The estimated fair values of the Company's financial instruments represent management's best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. The estimated fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the estimated fair value measurement reflects management's own judgments about the assumptions that market participants would use in pricing the asset or liability. These judgments are developed by the Company based on the best information available under the circumstances. The following summary presents a description of the methods and assumptions used to estimate the fair value of each class of financial instrument. Restricted Investments, Held-to-Maturity — The estimated fair value of the Company's restricted investments is based on quoted prices in active markets that are readily and regularly obtainable. See Note 6 for additional investments disclosures regarding restricted investments, held-to-maturity. Equity Method Investments — The estimated fair value of the Company's equity method investments are privately negotiated investments. The carrying amount of these investments approximates the fair value. Equity Securities — The estimated fair value of the Company's investments in equity securities is based on quoted prices in active markets that are readily and regularly obtainable. 106 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Debt Instruments and Leases — For notes payable under the Revolver and the Term Loan, fair value approximates the carrying value due to the variable interest rate. The carrying value of the 2018 RSA approximates fair value, as the underlying receivables are short-term in nature and only eligible receivables (such as those with high credit ratings) are qualified to secure the borrowed amounts. For finance and operating leases, the carrying value approximates the fair value, as the Company's finance and operating leases are structured to amortize in a manner similar to the depreciation of the underlying assets. Contingent Consideration — The estimated fair value of the Company's contingent consideration owed to Warehousing Co.'s seller is calculated using a Monte Carlo simulation model based on the acquiree's earnings before interest and taxes. Other — Cash and cash equivalents, restricted cash, net accounts receivable, income tax refund receivable, and accounts payable represent financial instruments for which the carrying amount approximates fair value, as they are short-term in nature. These instruments are accordingly excluded from the disclosures below. All remaining balance sheet amounts excluded from the below are not considered financial instruments, subject to this disclosure. Fair Value Hierarchy — ASC Topic 820 establishes a framework for measuring fair value in accordance with GAAP and expands financial statement disclosure requirements for fair value measurements. ASC Topic 820 further specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy follows: • Level 1 — Valuation techniques in which all significant inputs are quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured. • Level 2 — Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices from markets that are not active for assets or liabilities that are identical or similar to the assets or liabilities being measured. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques. • Level 3 — Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability. The following table presents the carrying amounts and estimated fair values of the Company's major categories of financial assets and liabilities: December 31, 2020 December 31, 2019 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value (In thousands) Financial Assets: Restricted investments, held-to-maturity 1 $ 9,001 $ 8,995 $ 8,912 $ 8,915 Equity method investments 2 77,562 77,562 30,878 30,878 Investments in equity securities 3 18,675 18,675 8,722 8,722 Financial Liabilities: Term Loan, due October 2022 4 $ 298,907 $ 300,000 $ 364,825 $ 365,000 2018 RSA, due July 2021 5 213,918 214,000 204,762 205,000 Revolver, due October 2022 210,000 210,000 279,000 279,000 Contingent consideration associated with acquisition 6 16,200 16,200 — — 1 Refer to Note 6 for the differences between the carrying amounts and estimated fair values of the Company's restricted investments, held-to-maturity. 2 Refer to Note 7 for more discussion about the Company's equity method investments. 3 The investments are carried at fair value and are included in "Other long-term assets" on the consolidated balance sheets. 4 The carrying amount of the Term Loan is included in "Finance lease liabilities and long-term debt – less current portion" and is net of $ 1.1 million of deferred loan costs as of December 31, 2020. The carrying amount of the Term Loan is included in "Long-term debt – current portion" and is net of $ 0.2 million of deferred loan costs as of December 31, 2019. 107 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED 5 The carrying amount of the 2018 RSA is included in "Accounts receivable securitization – current portion" and is net of $ 0.1 million in deferred loan costs as of December 31, 2020. The carrying amount of the 2018 RSA is included in "Accounts receivable securitization – less current portion" and is net of $ 0.2 million in deferred loan costs as of December 31, 2019. 6 The carrying amount of the contingent consideration associated with the acquisition is included in both the "Accrued liabilities" and "Other long-term liabilities" line items on the consolidated balance sheets based on the due date of the payments. Recurring Fair Value Measurements (Assets) — The following table depicts the level in the fair value hierarchy of the inputs used to estimate fair value of assets measured on a recurring basis as of December 31, 2020 and 2019: Fair Value Measurements at Reporting Date Using Estimated Fair Value Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Gain (Loss) (In thousands) As of December 31, 2020 Investments in equity securities 1 $ 18,675 $ 18,675 $ — $ — $ 3,553 As of December 31, 2019 Investments in equity securities 1 8,722 8,722 — — ( 184 ) 1 Total unrealized gains (losses) for these investments are included within "Other income, net" within the consolidated statements of comprehensive income. The Company did not sell any equity investments during 2020 or 2019 and therefore did not realize any gains or losses on these investments. Recurring Fair Value Measurements (Liabilities) — The following table depicts the level in the fair value hierarchy of the inputs used to estimate the fair value of liabilities measured on a recurring basis as of December 31, 2020. Fair Value Measurements at Reporting Date Using Estimated Fair Value Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Gain (Loss) (In thousands) As of December 31, 2020 Contingent consideration associated with acquisition 1 $ 16,200 $ — $ — $ 16,200 $ ( 6,730 ) 1 Refer to Note 5 for information regarding the adjustments made to the contingent consideration associated with the acquisition. As of December 31, 2019, there were no major categories of liabilities on the consolidated balance sheets estimated at fair value that were measured on a recurring basis. Nonrecurring Fair Value Measurements (Assets) — The following table depicts the level in the fair value hierarchy of the inputs used to estimate fair value of assets measured on a nonrecurring basis as of December 31, 2020 and 2019: Fair Value Measurements at Reporting Date Using Estimated Fair Value Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Loss (In thousands) As of December 31, 2020 Equipment 1 $ 5,851 $ — $ 5,851 $ — $ ( 5,335 ) As of December 31, 2019 Leasehold improvements 2 $ — $ — $ — $ — $ ( 2,182 ) Equipment 3 1,380 — 1,380 — ( 870 ) Software 4 — — — — ( 434 ) 1 Reflects the non-cash impairment of certain alternative fuel technology (within the non-reportable segments) and certain revenue equipment held for sale (within the Trucking segment). 2 During the second quarter of 2019, the Company incurred an impairment of leasehold improvements related to the early termination of a lease on one of its operating properties. This impairment was recorded in the Trucking segment. 108 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED 3 During the fourth quarter of 2019, the Company incurred impairment charges which were associated with certain revenue equipment technology, warehousing equipment no longer in use, and certain Swift legacy trailer models as a result of a softer used equipment market. These impairments were allocated between the Logistics and non-reportable segments based on each segment’s use of the assets. 4 During the fourth quarter of 2019, the Company incurred impairment charges related to discontinued use of software systems. These impairments were allocated between the Trucking and Logistics segments based on each segment’s use of the assets. Nonrecurring Fair Value Measurements (Liabilities) — As of December 31, 2020 and 2019 there were no liabilities included in the Company's consolidated balance sheets at estimated fair value that were measured on a nonrecurring basis. Note 24 — Related Party Transactions The following table presents Knight-Swift's transactions with companies controlled by and/or affiliated with its related parties: 2020 2019 2018 Provided by Knight-Swift Received by Knight-Swift Provided by Knight-Swift Received by Knight-Swift Provided by Knight-Swift Received by Knight-Swift (In thousands) Freight Services: Central Freight Lines 1 $ 7,837 $ — $ 19,651 $ — $ 681 $ — SME Industries 1 56 — 345 — 698 — Total $ 7,893 $ — $ 19,996 $ — $ 1,379 $ — Facility and Equipment Leases: Central Freight Lines 1 $ 48 $ 277 $ 322 $ 369 $ 916 $ 370 Other Affiliates 1 11 229 18 — 19 — Total $ 59 $ 506 $ 340 $ 369 $ 935 $ 370 Other Services: Central Freight Lines 1 $ 427 $ — $ 1,834 $ — $ — $ — DPF Mobile 1 — 33 — 220 — 308 Other Affiliates 1 15 35 39 2,432 589 2,282 Total $ 442 $ 68 $ 1,873 $ 2,652 $ 589 $ 2,590 1 Entities affiliated with former Board member Jerry Moyes include Central Freight Lines, SME Industries, Compensi Services, and DPF Mobile. "Other affiliates" includes entities that are associated with various board members and executives and require approval by the Board prior to completing transactions. Transactions with these entities generally include freight services, facility and equipment leases, equipment sales, and other services. • Freight Services Provided by Knight-Swift — The Company charges each of these companies for transportation services. • Freight Services Received by Knight-Swift — Transportation services received from Central Freight represent less-than-truckload freight services rendered to haul parts and equipment to Company shop locations. • Other Services Provided by Knight-Swift — Other services provided by the Company to the identified related parties include equipment sales and miscellaneous services. • Other Services Received by Knight-Swift — Consulting fees, diesel particulate filter cleaning, sales of various parts and tractor accessories, and certain third-party payroll and employee benefits administration services from the identified related parties are included in other services received by the Company. During the quarter ended September 30, 2020, the ownership percentage of Jerry Moyes and related affiliates fell below the threshold requiring related party disclosure. The amounts included in this Note 24 pertain to transactions that occurred prior to the date that the ownership percentage changed. 109 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Receivables and payables pertaining to related party transactions were: December 31, 2020 2019 Receivable Payable Receivable Payable (In thousands) Central Freight Lines $ 133 $ — $ 2,872 $ — SME Industries — — 17 — DPF Mobile — 41 — 2 Other Affiliates 2 10 — — Total $ 135 $ 51 $ 2,889 $ 2 Land Purchase — In November 2018, the Company purchased land in Perris, California for $ 7.7 million from former Board member Jerry Moyes. Share Repurchase — On December 27, 2018, the Company purchased 1,173,680 shares of the Company’s common stock from an entity controlled by Jerry Moyes, a former Board member of the Company. The shares were purchased for an aggregate purchase price of $ 29.3 million, or $24.98 per share. The per share purchase price represents a three cent per share discount from the closing price of the Company’s common stock on December 26, 2018. The Company purchased the shares under the 2018 Knight-Swift Share Repurchase Plan. Note 25 — Information by Segment, Geography, and Customer Concentration Segment Information The Company has three reportable segments: Trucking, Logistics, and Intermodal, as well as the non-reportable segments, discussed below. Based on how economic factors affect the nature, amount, timing, and uncertainty of revenue or cash flows, the Company disaggregates revenues by reportable segment for the purposes of applying the ASC Topic 606 guidance. The Company's twenty operating segments are structured around the types of transportation service offerings provided to our customers, as well as the equipment utilized. In addition, the operating segments may be further distinguished by the Company’s respective brands. The Company aggregated these various operating segments into the three reportable segments discussed below based on similarities with both their qualitative and economic characteristics. Trucking The Trucking reportable segment is comprised of nine trucking operating segments that provide similar transportation services to our customers utilizing similar transportation equipment over both irregular (one-way movement) and/or dedicated routes. The Trucking reportable segment consists of irregular route and dedicated, refrigerated, expedited, flatbed, and cross-border operations. Logistics The Logistics reportable segment is comprised of five logistics operating segments that provide similar transportation services to our customers and primarily consist of brokerage and other freight management services utilizing third-party transportation providers and their equipment. Intermodal The Intermodal reportable segment is comprised of two intermodal operating segments that provide similar transportation services to our customers. These transportation services include arranging the movement of customers' freight through third-party intermodal rail services on the Company’s trailing equipment (trailers on flat cars and rail containers), as well as drayage services to transport loads between the railheads and customer locations. 110 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Non-reportable The non-reportable segments include four operating segments that consist of support services provided to the Company's customers and independent contractors (including repair and maintenance shop services, equipment leasing, warranty services, and insurance), trailer parts manufacturing, warehousing, and certain driving academy activities, as well as certain corporate expenses (such as legal settlements and accruals, certain impairments, and amortization of intangibles related to the 2017 Merger and various acquisitions). Intersegment Eliminations Certain operating segments provide transportation and related services for other affiliates outside their reportable segment. For certain operating segments, such services are billed at cost, and no profit is earned. For the other operating segments, revenues for such services are based on negotiated rates, and are reflected as revenues of the billing segment. These rates are adjusted from time to time, based on market conditions. Such intersegment revenues and expenses are eliminated in Knight-Swift's consolidated results. The following tables present the Company's financial information by segment: 2020 2019 2018 (recast) Total revenue: (Dollars in thousands) Trucking $ 3,786,030 81.0 % $ 3,952,866 81.6 % $ 4,290,254 80.3 % Logistics $ 375,841 8.0 % $ 352,988 7.3 % $ 436,044 8.2 % Intermodal $ 391,462 8.4 % $ 455,466 9.4 % $ 498,821 9.3 % Subtotal $ 4,553,333 97.4 % $ 4,761,320 98.3 % $ 5,225,119 97.8 % Non-reportable segments $ 188,882 4.0 % $ 130,782 2.7 % $ 184,140 3.4 % Intersegment eliminations $ ( 68,352 ) ( 1.4 %) $ ( 48,152 ) ( 1.0 %) $ ( 65,193 ) ( 1.2 %) Total revenue $ 4,673,863 100.0 % $ 4,843,950 100.0 % $ 5,344,066 100.0 % 2020 2019 2018 (recast) Operating income (loss): (Dollars in thousands) Trucking $ 578,512 102.5 % $ 468,749 109.7 % $ 550,818 96.8 % Logistics $ 20,245 3.6 % $ 21,869 5.1 % $ 31,991 5.6 % Intermodal $ ( 943 ) ( 0.2 %) $ 4,501 1.1 % $ 31,272 5.5 % Subtotal $ 597,814 105.9 % $ 495,119 115.9 % $ 614,081 107.9 % Non-reportable segments $ ( 33,376 ) ( 5.9 %) $ ( 67,681 ) ( 15.9 %) $ ( 45,038 ) ( 7.9 %) Operating income $ 564,438 100.0 % $ 427,438 100.0 % $ 569,043 100.0 % 2020 2019 2018 (recast) Depreciation and amortization of property and equipment: (Dollars in thousands) Trucking $ 390,417 84.7 % $ 355,270 84.6 % $ 319,210 82.4 % Logistics $ 829 0.2 % $ 728 0.2 % $ 607 0.2 % Intermodal $ 14,377 3.1 % $ 13,506 3.2 % $ 12,044 3.1 % Subtotal $ 405,623 88.0 % $ 369,504 88.0 % $ 331,861 85.7 % Non-reportable segments $ 55,152 12.0 % $ 50,578 12.0 % $ 55,644 14.3 % Consolidated depreciation and amortization of property and equipment $ 460,775 100.0 % $ 420,082 100.0 % $ 387,505 100.0 % Geographical Information In aggregate, operating revenue from the Company's foreign operations was less than 5.0 % of consolidated total revenue for each of 2020, 2019, and 2018. Additionally, long-lived assets on the balance sheets of the Company's foreign subsidiaries were less than 5.0 % of consolidated "Total assets" as of December 31, 2020 and 2019. 111 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Customer Concentration Services provided to the Company's largest customer generated 16.8 %, 13.3 %, and 14.6 % of total revenue in 2020, 2019, and 2018, respectively. Revenue generated by the Company's largest customer is reported in each of our reportable operating segments. No other customer accounted for 10.0 % or more of total revenue in 2020, 2019 , or 2018 . ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.