Knight-Swift Transportation Holdings Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report contains certain statements that may be considered "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 27A of the Securities Act of 1933, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: • any projections of or guidance regarding earnings, earnings per share, revenues, cash flows, dividends, capital expenditures, or other financial items, • any statement of plans, strategies, and objectives of management for future operations, • any statements concerning proposed acquisition plans, new services, or developments, • any statements regarding future economic conditions or performance, and • any statements of belief and any statements of assumptions underlying any of the foregoing. In this Quarterly Report, forward-looking statements include, but are not limited to, statements we make concerning: • the ability of our infrastructure to support future growth, whether we grow organically or through potential acquisitions, • the impacts of the COVID-19 global pandemic, • the future impact of acquisitions, including achievement of anticipated synergies, • the flexibility of our model to adapt to market conditions, • our ability to recruit and retain qualified driving associates, • future safety performance, • future performance of our segments or businesses, • our ability to gain market share, • the ability, desire, and effects of expanding our logistics, brokerage, and intermodal operations, • future equipment prices, our equipment purchasing or leasing plans, and our equipment turnover (including expected tractor trade-ins), • our ability to sublease equipment to independent contractors, • the impact of pending legal proceedings, • the expected freight environment, including freight demand and volumes, • economic conditions and growth, including future inflation, consumer spending, supply chain conditions, and US Gross Domestic Product ("GDP") changes, • future pricing terms from vendors and suppliers, • expected liquidity and methods for achieving sufficient liquidity, • future fuel prices and the expected impact of fuel efficiency initiatives, • future expenses and our ability to control costs, • future operating profitability, • future third-party service provider relationships and availability, • future contracted pay rates with independent contractors and compensation arrangements with driving associates, • our expected need or desire to incur indebtedness, 27 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED • future capital expenditures and expected sources of liquidity, capital allocation, capital structure, capital requirements, and growth strategies and opportunities, • expected capital expenditures, • future mix of owned versus leased revenue equipment, • future asset utilization, • future return on capital, • future share repurchases and dividends, • future tax rates, • future trucking industry capacity and balance between industry demand and capacity, • future rates, • future depreciation and amortization, • expected tractor and trailer fleet age, • future investment in and deployment of new or updated technology, • political conditions and regulations, including trade regulation, quotas, duties, or tariffs, and any future changes to the foregoing, • future insurance claims, premiums, and retention limits, • future purchased transportation expense, and • others. Such statements may be identified by their use of terms or phrases such as "believe," "may," "could," "will," "would," "should," "expects," "estimates," "designed," "likely," "foresee," "goals," "seek," "target," "forecast," "projects," "anticipates," "plans," "intends," "hopes," "strategy," "potential," "objective," "mission," "continue," "outlook," and similar terms and phrases. Forward-looking statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to materially differ from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A "Risk Factors" in our 2020 Annual Report and various disclosures in our press releases, stockholder reports, and other filings with the SEC. All such forward-looking statements speak only as of the date of this Quarterly Report. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein, to reflect any change in our expectations with regard thereto, or any change in the events, conditions, or circumstances on which any such statement is based. Reference to Glossary of Terms Certain acronyms and terms used throughout this Quarterly Report are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document. Reference to Annual Report The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements (unaudited) and footnotes included in this Quarterly Report, as well as the consolidated financial statements and footnotes included in our 2020 Annual Report. 28 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Executive Summary Company Overview Knight-Swift Transportation Holdings Inc. is North America's largest truckload carrier and a provider of transportation solutions, headquartered in Phoenix, Arizona. The Company provides multiple truckload transportation, intermodal, and logistics services using a nationwide network of business units and terminals in the US and Mexico to serve customers throughout North America. In addition to its truckload services, Knight-Swift also contracts with third-party capacity providers to provide a broad range of shipping solutions to its customers while creating quality driving jobs for our driving associates and successful business opportunities for independent contractors. Our three reportable segments are Trucking, Logistics, and Intermodal. Additionally, we have various non-reportable segments. Refer to Note 14 in Part I, Item 1 of this Quarterly Report for descriptions of our segments. Our objective is to operate our business with industry-leading margins and growth while providing safe, high-quality, cost-effective solutions for our customers. Revenue • Our trucking services include irregular route and dedicated, refrigerated, expedited, flatbed, and cross-border transportation of various products, goods, and materials for our diverse customer base. We primarily generate revenue by transporting freight for our customers through our Trucking segment. • Our logistics and intermodal operations provide a multitude of shipping solutions, including additional sources of truckload capacity and alternative transportation modes, by utilizing our vast network of third-party capacity providers and rail providers, as well as certain logistics and freight management services. Revenue in our logistics and intermodal operations is generated through our Logistics and Intermodal segments. • Our non-reportable segments include support services provided to our customers and independent contractors (including repair and maintenance shop services, equipment leasing, warranty services, and insurance), trailer parts manufacturing, warehousing, and certain driving academy activities, as well as certain corporate expenses (such as legal settlements and accruals, certain impairments, and amortization of intangibles related to the 2017 Merger and various acquisitions). • In addition to the revenues earned from our customers for the trucking and non-trucking services discussed above, we also earn fuel surcharge revenue from our customers through our fuel surcharge program, which serves to recover a majority of our fuel costs. This applies only to loaded miles and typically does not offset non-paid empty miles, idle time, and out-of-route miles driven. Fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly, but typically require a specified minimum change in fuel cost to prompt a change in fuel surcharge revenue. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue for our Trucking segment. Expenses — Our most significant expenses vary with miles traveled and include fuel, driving associate-related expenses (such as wages and benefits), and services purchased from independent contractors and other transportation providers (such as railroads, drayage providers, and other trucking companies). Maintenance and tire expenses, as well as the cost of insurance and claims generally vary with the miles we travel, but also have a controllable component based on safety improvements, fleet age, efficiency, and other factors. Our primary fixed costs are depreciation and lease expense for revenue equipment and terminals, amortization of intangible assets, interest expense, and non-driver employee compensation. Operating Statistics — We measure our consolidated and segment results through certain operating statistics, which are discussed under "Results of Operations — Segment Review — Operating Statistics," below. Our results are affected by various economic, industry, operational, regulatory, and other factors, which are set forth in Part I, Item 1A "Risk Factors" in our 2020 Annual Report, and various disclosures in our press releases, stockholder reports, and other filings with the SEC. 29 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Consolidated Key Financial Highlights and Operating Metrics Quarter Ended March 31, 2021 2020 GAAP financial data: (Dollars in thousands, except per share data) Total revenue $ 1,223,014 $ 1,124,798 Revenue, excluding trucking fuel surcharge $ 1,133,105 $ 1,027,095 Net income attributable to Knight-Swift $ 129,790 $ 65,426 Earnings per diluted share $ 0.77 $ 0.38 Operating ratio 86.7 % 90.9 % Non-GAAP financial data: Adjusted Net Income Attributable to Knight-Swift 1 $ 139,433 $ 76,205 Adjusted EPS 1 $ 0.83 $ 0.44 Adjusted Operating Ratio 1 84.5 % 88.6 % Revenue equipment: Average tractors (Trucking segment only) 2 18,224 18,462 Average trailers 3 59,797 57,716 Average containers 10,846 9,856 1 Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, and Adjusted Operating Ratio are non-GAAP financial measures and should not be considered alternatives, or superior to, the most directly comparable GAAP financial measures. However, management believes that presentation of these non-GAAP financial measures provides useful information to investors regarding the Company's results of operations. Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, and Adjusted Operating Ratio are reconciled to the most directly comparable GAAP financial measures under "Non-GAAP Financial Measures," below. 2 The average age of our company-owned tractor fleet was 2.3 years and 2.0 years as of March 31, 2021 and 2020, respectively. 3 The average age of our trailer fleet was 8.2 years and 7.6 years as of March 31, 2021 and 2020, respectively . 30 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Market Trends and Company Performance Trends and Outlook — Our consolidated revenue, excluding trucking fuel surcharge, grew by 10.3% during the first quarter of 2021, as a result of revenue growth across all of our reportable segments. We generated consolidated Adjusted Net Income Attributable to Knight-Swift of $139.4 million, which represents an 83.0% increase from $76.2 million during the first quarter of 2020. Our Trucking segment overcame inclement weather conditions and driver sourcing challenges during the quarter and improved average revenue per tractor by 7.7%, which resulted in a 470 basis point improvement in the Adjusted Operating Ratio to 81.8% in the first quarter of 2021 from 86.5% in the first quarter of 2020. Our Logistics segment grew revenue by more than 50% and more than doubled operating income year-over-year. Despite weather and service disruptions during the first quarter of 2021, our Intermodal segment achieved year-over-year improvements in operating results, and we anticipate ongoing improvement in the coming quarters. The national unemployment rate was 6.0% 1 as of March 31, 2021, reflecting the continued resumption of economic activity that had been curtailed due to the pandemic. During the first quarter of 2021, the US gross domestic product, which is the broadest measure of goods and services produced across the economy, increased by 6.4% 2 per preliminary third-party forecasts. Third-party forecasts are predicting a continued economic rebound in 2021. The first quarter 2021 US employment cost index rose 2.6% 1 and 0.9% 1 on a year-over-year and sequential basis, respectively. From a freight market perspective, we are encouraged by the continued strength in freight demand; however, demand may be difficult to predict for the rest of 2021. The 2021 market outlook includes the following: • over-the-road truckload demand has been strong and we expect this to continue throughout the remainder of the year and into 2022, • capacity expansion may be limited as there has been some constraint by parts availability with respect to new tractor builds, • rates may continue to be favorable in the coming year, as a result of inventory restocking and strong demand, • sourcing and retaining drivers is likely to contribute to additional driver wage inflation, • there has been an increased demand for power-only services, and • there may be continuing non-contract freight opportunities with more challenging year-over-year comparisons in the back half of the year. We anticipate that depreciation and amortization expense will increase and rental expense will correspondingly decrease, as a percentage of revenue excluding trucking fuel surcharge, as we intend to purchase, rather than enter into operating leases, for a majority of our revenue equipment in 2021. With significant tightening in the insurance markets, we may also experience changes in premiums, retention limits, and excess coverage limits in the remainder of 2021. While fuel expense is generally offset by fuel surcharge revenue, our fuel expense, net of fuel surcharge revenue may increase in the future. We continue to manage our leverage ratio relative to our targeted range and remain committed to a strong capital structure, which we believe will position us for long-term success and enable us to pursue further opportunities for organic growth, growth through acquisitions, and other capital allocation opportunities. We do not foresee material liquidity constraints or any issues with our ongoing ability to meet our debt covenants. ________ 1 Source: bls.gov 2 Source: bea.gov 31 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Comparison Between the Quarters Ended March 31, 2021 and 2020 — The $64.4 million increase in net income attributable to Knight-Swift to $129.8 million during the quarter ended March 31, 2021 from $65.4 million during the same period last year includes the following: • Contributor — $51.1 million increase in operating income within our Trucking segment. Average revenue per tractor increased by 7.7%, driven by a 16.1% increase in revenue per loaded mile, excluding fuel surcharge and intersegment transactions. • Contributor — $6.2 million improvement in operating income (loss) within our Intermodal segment. Revenue per load increased 10.2% and load counts increased 2.6%. • Contributor — $22.6 million improvement in "Other income (expenses), net," primarily related to gains recognized within our portfolio of investments. • Offset — $20.8 million increase in consolidated income tax expense was primarily due to an increase in income before income taxes, partially offset by a reduction of the unfavorable impacts from foreign currency fluctuations in the quarter ended March 31, 2021 compared to the same period last year. All of these factors resulted in an effective tax rate of 25.9% for the first quarter of 2021 and 27.2% for the first quarter of 2020. See additional discussion of our operating results within "Results of Operations — Consolidated Operating and Other Expenses" below. Liquidity and Capital — During the quarter ended March 31, 2021, we generated $306.1 million in operating cash flows, reduced our operating lease liabilities by $15.2 million, used $43.8 million for capital expenditures (net of disposal proceeds), spent $39.3 million on acquisitions, and returned $67.3 million to our stockholders in the form of quarterly dividends and repurchases of our common stock. We ended the quarter with $194.7 million in unrestricted cash and cash equivalents, $115.0 million outstanding on the Revolver, $300.0 million face value outstanding on the Term Loan, and $5.9 billion of stockholders' equity. We continue to manage our leverage ratio relative to our targeted range and remain committed to a strong capital structure, which we believe will position us for long-term success and enable us to pursue further opportunities for organic growth, growth through acquisitions, and other capital allocation opportunities. We do not foresee material liquidity constraints or any issues with our ongoing ability to meet our debt covenants. See discussion under "Liquidity and Capital Resources" for additional information. Results of Operations — Segment Review The Company has three reportable segments: Trucking, Logistics, and Intermodal, as well as certain non-reportable segments. Refer to Note 14 to the condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report for descriptions of the operations of these reportable segments. Consolidating Tables for Total Revenue and Operating Income (Loss) Quarter Ended March 31, 2021 2020 Revenue: (In thousands) Trucking $ 962,947 $ 919,061 Logistics 118,887 79,198 Intermodal 107,066 94,731 Subtotal $ 1,188,900 $ 1,092,990 Non-reportable segments 50,669 46,242 Intersegment eliminations (16,555) (14,434) Total revenue $ 1,223,014 $ 1,124,798 32 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Quarter Ended March 31, 2021 2020 Operating income (loss): (In thousands) Trucking $ 158,483 $ 107,334 Logistics 7,577 3,719 Intermodal 3,457 (2,737) Subtotal $ 169,517 $ 108,316 Non-reportable segments (7,258) (6,197) Operating income $ 162,259 $ 102,119 Operating Statistics Our chief operating decision makers monitor the GAAP results of our reportable segments, as supplemented by certain non-GAAP information. Refer to "Non-GAAP Financial Measures" below for more details. Additionally, we use a number of primary indicators to monitor our revenue and expense performance and efficiency. Operating Statistic Relevant Segment(s) Description Average Revenue per Tractor Trucking Measures productivity and represents revenue (excluding fuel surcharge and intersegment transactions) divided by average tractor count Total Miles per Tractor Trucking Total miles (including loaded and empty miles) a tractor travels on average Average Length of Haul Trucking Average miles traveled with loaded trailer cargo per order Non-paid Empty Miles Percentage Trucking Percentage of miles without trailer cargo Average Tractors Trucking, Intermodal Average tractors in operation during the period including company tractors and tractors provided by independent contractors Average Trailers Trucking Average trailers in operation during the period Average Revenue per Load Logistics, Intermodal Total revenue (excluding intersegment transactions) divided by load count Gross Margin Percentage Logistics (Brokerage) Brokerage gross margin (revenue, excluding intersegment transactions, less purchased transportation expense, excluding intersegment transactions) as a percentage of brokerage revenue, excluding intersegment transactions Average Containers Intermodal Average containers in operation during the period GAAP Operating Ratio Trucking, Logistics, Intermodal Measures operating efficiency and is widely used in our industry as an assessment of management's effectiveness in controlling all categories of operating expenses. Calculated as operating expenses as a percentage of total revenue, or the inverse of operating margin. Non-GAAP Adjusted Operating Ratio Trucking, Logistics, Intermodal Measures operating efficiency and is widely used in our industry as an assessment of management's effectiveness in controlling all categories of operating expenses. Consolidated and segment Adjusted Operating Ratios are reconciled to their corresponding GAAP operating ratios under "Non-GAAP Financial Measures," below. 33 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Segment Review Trucking Segment We generate revenue in the Trucking segment primarily through irregular route, dedicated, refrigerated, flatbed, expedited, and cross-border service offerings with 13,130 irregular route tractors and 5,094 dedicated route tractors. Generally, we are paid a predetermined rate per mile or per load for our trucking services. Additional revenues are generated by charging for tractor and trailer detention, loading and unloading activities, dedicated services, and other specialized services, as well as through the collection of fuel surcharge revenue to mitigate the impact of increases in the cost of fuel. The main factors that affect the revenue generated by our Trucking segment are rate per mile from our customers, the percentage of miles for which we are compensated, and the number of loaded miles we generate with our equipment. The most significant expenses in the Trucking segment are primarily variable and include fuel and fuel taxes, driving associate-related expenses (such as wages, benefits, training, and recruitment), and costs associated with independent contractors primarily included in "Purchased transportation" in the condensed consolidated statements of comprehensive income. Maintenance expense (which includes costs for replacement tires for our revenue equipment) and insurance and claims expenses have both fixed and variable components. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. The main fixed costs in the Trucking segment are depreciation and rent expenses from leasing and acquiring revenue equipment and terminals, as well as compensating our non-driver employees. Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands, except per tractor data) Total revenue $ 962,947 $ 919,061 4.8 % Revenue, excluding fuel surcharge and intersegment transactions $ 872,814 $ 821,084 6.3 % GAAP: Operating income $ 158,483 $ 107,334 47.7 % Non-GAAP: Adjusted Operating Income 1 $ 158,807 $ 110,805 43.3 % Average revenue per tractor 2 $ 47,894 $ 44,474 7.7 % GAAP: Operating ratio 2 83.5 % 88.3 % (480 bps) Non-GAAP: Adjusted Operating Ratio 1 2 81.8 % 86.5 % (470 bps) Non-paid empty miles percentage 2 12.8 % 12.8 % — bps Average length of haul (miles) 2 412 428 (3.7 %) Total miles per tractor 2 20,928 22,568 (7.3 %) Average tractors 2 3 18,224 18,462 (1.3 %) Average trailers 2 59,797 57,716 3.6 % 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined under "Operating Statistics," above. 3 Includes 16,305 and 16,339 average company-owned tractors for the first quarter of 2021 and 2020, respectivel y. Comparison Between the Quarters Ended March 31, 2021 and 2020 — We grew revenue, excluding fuel surcharge and intersegment transactions, by 6.3% within the Trucking segment. Average revenue per tractor increased by 7.7%, driven by a 16.1% increase in revenue per loaded mile, excluding fuel surcharge and intersegment transactions. The rate improvement was partially offset by an increase in driver-related sourcing and other expenses during the quarter and a 7.3% decline in miles per tractor due to inclement weather and an increase in unseated tractors. 34 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Logistics Segment The Logistics segment is less asset-intensive than the Trucking segment and is dependent upon capable non-driver employees, modern and effective information technology, and third-party capacity providers. Logistics revenue is generated by its brokerage operations. We generate additional revenue by offering specialized logistics solutions (including, but not limited to, trailing equipment, origin management, surge volume, disaster relief, special projects, and other logistic needs). Logistics revenue is mainly affected by the rates we obtain from customers, the freight volumes we ship through third-party capacity providers, and our ability to secure third-party capacity providers to transport customer freight. The most significant expense in the Logistics segment is purchased transportation that we pay to third-party capacity providers, which is primarily a variable cost and is included in "Purchased transportation" in the condensed consolidated statements of comprehensive income. Variability in this expense depends on truckload capacity, availability of third-party capacity providers, rates charged to customers, current freight demand, and customer shipping needs. Fixed Logistics operating expenses primarily include non-driver employee compensation and benefits recorded in "Salaries, wages, and benefits" and depreciation and amortization expense recorded in "Depreciation and amortization of property and equipment" in the condensed consolidated statements of comprehensive income. Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands, except per load data) Total revenue $ 118,887 $ 79,198 50.1 % Revenue, excluding intersegment transactions $ 115,722 $ 76,757 50.8 % Operating income $ 7,577 $ 3,719 103.7 % Revenue per load – Brokerage 1 $ 1,971 $ 1,378 43.0 % Gross margin percentage – Brokerage 1 14.4 % 14.7 % (30 bps) GAAP: Operating ratio 1 93.6 % 95.3 % (170 bps) Non-GAAP: Adjusted Operating Ratio 1 2 93.5 % 95.2 % (170 bps) 1 Defined under "Operating Statistics," above. 2 Refer to "Non-GAAP Financial Measures" below. Comparison Between the Quarters Ended March 31, 2021 and 2020 — Revenue, excluding intersegment transactions, increased by 50.8% within our Logistics segment, as brokerage revenue per load increased by 43.0% and load volumes grew by 5.4%. Brokerage gross margin was 14.4% in the first quarter of 2021 and 14.7% in the first quarter of 2020. The operating ratio improved by 170 basis points to 93.6% for the first quarter of 2021, compared to 95.3% for the first quarter of 2020. Within our power-only service offering, load volumes grew 56.2%, contributing to 161.6% revenue growth and representing over 25% of our total first quarter 2021 brokerage load volumes. During 2020, we introduced our Select platform, which digitally matches shippers with available capacity across our brands through frictionless transactions. During the first quarter of 2021, approximately 4,500 carriers were digitally matched with loads through our Select platform, representing approximately 20% of our brokerage load volume. 35 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Intermodal Segment The Intermodal segment complements our regional operating model, allows us to better serve customers in longer haul lanes, and reduces our investment in fixed assets. Through the Intermodal segment, we generate revenue by moving freight over the rail in our containers and other trailing equipment, combined with revenue for drayage to transport loads between railheads and customer locations. The most significant expense in the Intermodal segment is the cost of purchased transportation that we pay to third-party capacity providers (including rail providers), which is primarily variable and included in "Purchased transportation" in the condensed consolidated statements of comprehensive income. Purchased transportation varies as it relates to rail capacity, freight demand, and customer shipping needs. The main fixed costs in the Intermodal segment are depreciation of our company tractors related to drayage, containers, and chassis, as well as non-driver employee compensation and benefits. Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands, except per load data) Total revenue $ 107,066 $ 94,731 13.0 % Revenue, excluding intersegment transactions $ 106,971 $ 94,622 13.1 % GAAP: Operating income (loss) $ 3,457 $ (2,737) 226.3 % Non-GAAP: Adjusted Operating Income (Loss) 1 $ 3,457 $ (2,689) 228.6 % Average revenue per load 2 $ 2,549 $ 2,314 10.2 % GAAP: Operating ratio 2 96.8 % 102.9 % (610 bps) Non-GAAP: Adjusted Operating Ratio 1 2 96.8 % 102.8 % (600 bps) Load count 41,968 40,889 2.6 % Average tractors 2 3 597 601 (0.7 %) Average containers 2 10,846 9,856 10.0 % 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined under "Operating Statistics," above. 3 Includes 542 and 536 company-owned tractors for the first quarter of 2021 and 2020 , respectively. Comparison Between the Quarters Ended March 31, 2021 and 2020 — Revenue, excluding intersegment transactions within our Intermodal segment increased 13.1%, as revenue per load increased 10.2% and load counts increased 2.6%. We improved the operating ratio within the Intermodal segment to 96.8%, compared to 102.9% during the first quarter of 2020, despite weather and service disruptions. Operating results within the Intermodal segment improved toward the end of the quarter. We anticipate sequential improvements in operating results in the coming quarters, as we focus on growing load counts and improving revenue per load. Non-reportable Segments The non-reportable segments include support services provided to our customers and independent contractors (including repair and maintenance shop services, equipment leasing, warranty services, and insurance), trailer parts manufacturing, warehousing, and certain driving academy activities, as well as certain corporate expenses (such as legal settlements and accruals, certain impairments, and $11.4 million in quarterly amortization of intangibles related to the 2017 Merger and various acquisitions). Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Total revenue $ 50,669 $ 46,242 9.6 % Operating loss $ (7,258) $ (6,197) 17.1 % Comparison Between the Quarters Ended March 31, 2021 and 2020 — A $1.2 million increase in legal expenses resulted in a year-over-year increase in operating loss within the non-reportable segments. 36 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Results of Operations — Consolidated Operating and Other Expenses Consolidated Operating Expenses The following tables present certain operating expenses from our condensed consolidated statements of comprehensive income, including each operating expense as a percentage of total revenue and as a percentage of revenue, excluding trucking fuel surcharge. Trucking fuel surcharge revenue can be volatile and is primarily dependent upon the cost of fuel, rather than operating expenses unrelated to fuel. Therefore, we believe that revenue, excluding trucking fuel surcharge is a better measure for analyzing many of our expenses and operating metrics. Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Salaries, wages, and benefits $ 370,370 $ 354,833 4.4 % % of total revenue 30.3 % 31.5 % (120 bps) % of revenue, excluding fuel surcharge 32.7 % 34.5 % (180 bps) Salaries, wages, and benefits expense is primarily affected by the total number of miles driven by company driving associates, the rate per mile we pay our company driving associates, and employee benefits, including healthcare, workers' compensation, and other benefits. To a lesser extent, non-driver employee headcount, compensation, and benefits affect this expense. Driving associate wages represent the largest component of salaries, wages, and benefits expense. Several ongoing market factors have reduced the pool of available driving associates, contributing to a challenging driver sourcing market, which we believe will continue. Having a sufficient number of qualified driving associates is a our biggest headwind, although we continue to seek ways to attract and retain qualified driving associates, including heavily investing in our recruiting efforts, our driving academies, technology, and terminals that improve the experience of driving associates. We expect driving associate pay to remain inflationary, which we expect will result in additional driving associate pay increases in the future, thereby increasing our salaries, wages, and benefits expense. The $15.5 million increase in consolidated salaries, wages and benefits was primarily due to an increase in driving associate pay rates, partially offset by a decrease in miles driven by company driving associates and lower medical insurance costs. Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Fuel $ 118,236 $ 121,855 (3.0 %) % of total revenue 9.7 % 10.8 % (110 bps) % of revenue, excluding trucking fuel surcharge 10.4 % 11.9 % (150 bps) Fuel expense consists primarily of diesel fuel expense for our company-owned tractors and fuel taxes. The primary factors affecting our fuel expense are the cost of diesel fuel, the fuel economy of our equipment, and the miles driven by company driving associates. Our fuel surcharge programs help to offset increases in fuel prices, but apply only to loaded miles and typically do not offset non-paid empty miles, idle time, or out-of-route miles driven. Typical fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly, but typically require a specified minimum change in fuel cost to prompt a change in fuel surcharge revenue for our Trucking segment. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue. Due to this time lag, our fuel expense, net of fuel surcharge, negatively impacts our operating income during periods of sharply rising fuel costs and positively impacts our 37 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED operating income during periods of falling fuel costs. We continue to utilize our fuel efficiency initiatives such as trailer blades, idle-control, management of tractor speeds, fleet updates for more fuel-efficient engines, management of fuel procurement, and driving associate training programs that we believe contribute to controlling our fuel expense. The $3.6 million decrease in consolidated fuel expense is primarily due to a 7.7% decrease in the total miles driven by company driving associates. Average DOE fuel prices were $2.91 per gallon for the first quarter of 2021 and $2.92 per gallon for the first quarter of 2020. Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Operations and maintenance $ 68,070 $ 68,404 (0.5 %) % of total revenue 5.6 % 6.1 % (50 bps) % of revenue, excluding trucking fuel surcharge 6.0 % 6.7 % (70 bps) Operations and maintenance expense consists of direct operating expenses, such as driving associate hiring and recruiting expenses, equipment maintenance, and tire expense. Operations and maintenance expenses are primarily affected by the age of our company-owned fleet of tractors and trailers and the miles driven. We expect the driver market to remain competitive throughout 2021, which could increase future driving associate development and recruiting costs and negatively affect our operations and maintenance expense. We expect to continue refreshing our tractor and trailer fleet in the coming quarters to maintain or improve the average age of our equipment. The first quarter decrease of $0.3 million in consolidated operations and maintenance expense was attributed to reduced maintenance expense associated with refreshing our fleet with newer equipment and the decrease in miles driven by company driving associates noted above. Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Insurance and claims $ 55,643 $ 54,280 2.5 % % of total revenue 4.5 % 4.8 % (30 bps) % of revenue, excluding trucking fuel surcharge 4.9 % 5.3 % (40 bps) Insurance and claims expense consists of premiums for liability, physical damage, and cargo, and will vary based upon the frequency and severity of claims, as well as our level of self-insurance, and premium expense. In recent years, insurance carriers have raised premiums for many businesses, including transportation companies, and as a result, our insurance and claims expense could increase in the future, or we could raise our self-insured retention limits or reduce excess coverage limits when our policies are renewed or replaced. Insurance and claims expense also varies based on the number of miles driven by company driving associates and independent contractors, the frequency and severity of accidents, trends in development factors used in actuarial accruals, and developments in large, prior-year claims. In future periods, our higher self-insured retention limits or lower excess coverage limits may cause increased volatility in our consolidated insurance and claims expense. Consolidated insurance and claims expense increased by $1.4 million for the quarter ended March 31, 2021, as compared to the same period last year. This increase was primarily due to negative development within certain prior year claims. 38 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Operating taxes and licenses $ 22,048 $ 22,169 (0.5 %) % of total revenue 1.8 % 2.0 % (20 bps) % of revenue, excluding trucking fuel surcharge 1.9 % 2.2 % (30 bps) Operating taxes and licenses include state franchise taxes, state and federal highway use taxes, property taxes, vehicle license and registration fees, fuel and mileage taxes, among others. The expense is impacted by changes in the tax rates and registration fees associated with our tractor fleet and regional operating facilities. Operating taxes and licenses decreased by $0.1 million for the quarter ended March 31, 2021 and remained relatively flat as a percentage of revenue, excluding trucking fuel surcharge, as compared to the same periods last year. Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Communications $ 5,037 $ 4,874 3.3 % % of total revenue 0.4 % 0.4 % — bps % of revenue, excluding trucking fuel surcharge 0.4 % 0.5 % (10 bps) Communications expense is comprised of costs associated with our tractor and trailer tracking systems, information technology systems, and phone systems. Consolidated communications expense remained relatively flat as a percentage of revenue, excluding trucking fuel surcharge for the quarter ended March 31, 2021, as compared to the same period last year. Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Depreciation and amortization of property and equipment $ 119,915 $ 110,221 8.8 % % of total revenue 9.8 % 9.8 % — bps % of revenue, excluding trucking fuel surcharge 10.6 % 10.7 % (10 bps) Depreciation relates primarily to our owned tractors, trailers, buildings, electronic logging devices, other communication units, and other similar assets. Changes to this fixed cost are generally attributed to increases or decreases to company-owned equipment, the relative percentage of owned versus leased equipment, and fluctuations in new equipment purchase prices, which have historically been precipitated in part by new or proposed federal and state regulations. Depreciation can also be affected by the cost of used equipment that we sell or trade and the replacement of older used equipment. Management periodically reviews the condition, average age, and reasonableness of estimated useful lives and salvage values of our equipment and considers such factors in light of our experience with similar assets, used equipment market conditions, and prevailing industry practice. Consolidated depreciation and amortization of property and equipment increased by $9.7 million for the quarter ended March 31, 2021, when compared to the same period last year. The increase was primarily related to an increase in owned versus leased equipment. We expect consolidated depreciation and amortization of property and equipment to increase both in total and as a percentage of consolidated revenue, excluding trucking fuel surcharge , as we currently do not plan to use operating leases as a primary means of funding our equipment purchases in the remainder of 2021. 39 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Amortization of intangibles $ 11,749 $ 11,474 2.4 % % of total revenue 1.0 % 1.0 % — bps % of revenue, excluding trucking fuel surcharge 1.0 % 1.1 % (10 bps) Amortization of intangibles relates to intangible assets identified with the 2017 Merger and other acquisitions. See Note 6 in Part I, Item 1, of this Quarterly Report for further details regarding the Company's intangible assets. The increase of $0.3 million for the quarter ended March 31, 2021, when compared to the same period last year, was attributed to the Eleos acquisition completed on February 1, 2021. See Note 3 in Part I, Item 1, of this Quarterly Report for more details regarding details of our acquisitions. Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Rental expense $ 16,864 $ 25,375 (33.5 %) % of total revenue 1.4 % 2.3 % (90 bps) % of revenue, excluding trucking fuel surcharge 1.5 % 2.5 % (100 bps) Rental expense consists primarily of payments for tractors and trailers financed with operating leases. The primary factors affecting the expense are the size of our revenue equipment fleet and the relative percentage of owned versus leased equipment. Consolidated rental expense decreased by $8.5 million for the quarter ended March 31, 2021, as compared to the same period last year. This was primarily due to increasing our ratio of owned versus leased equipment. We expect consolidated rental expense to continue to decrease both in total and as a percentage of consolidated revenue, excluding trucking fuel surcharge, as we currently do not plan to use operating leases as a primary means of funding our equipment purchases in the remainder of 2021. Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Purchased transportation $ 258,230 $ 225,276 14.6 % % of total revenue 21.1 % 20.0 % 110 bps % of revenue, excluding trucking fuel surcharge 22.8 % 21.9 % 90 bps Purchased transportation expense is comprised of payments to independent contractors in our trucking operations, as well as payments to third-party capacity providers related to logistics, freight management, and non-trucking services in our logistics and intermodal businesses. Purchased transportation is generally affected by capacity in the market as well as changes in fuel prices. As capacity tightens, our payments to third-party capacity providers and to independent contractors tend to increase. Additionally, as fuel prices increase, payments to third-party capacity providers and independent contractors increase. We expect purchased transportation will increase as a percentage of revenue if we grow our logistics and intermodal businesses faster than our trucking business. The increase could be partially offset if independent contractors exit the market due to regulatory changes. Consolidated purchased transportation expense increased by $33.0 million for the quarter ended March 31, 2021, as compared to the same period last year. This increase was primarily due to expenses related to third-party carriers and was partially offset by a 12.9% decrease in miles driven by independent contractors for the quarter ended March 31, 2021. 40 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Impairments $ — $ 902 (100.0 %) In 2020, we incurred impairment charges associated with revenue equipment held for sale and trailer tracking systems (within our Trucking and non-reportable segments). Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Miscellaneous operating expenses $ 14,593 $ 23,016 (36.6 %) Miscellaneous operating expenses primarily consist of legal and professional services fees, general and administrative expenses, other costs, as well as net gain on sales of equipment. The $8.4 million decrease in net consolidated miscellaneous operating expenses was primarily due to a $7.5 million increase in gain on sales of equipment. Consolidated Other Expenses, net Quarter Ended March 31, Increase (Decrease) 2021 2020 (Dollars in thousands) Interest expense $ 3,486 $ 6,107 (42.9 %) Other (income) expenses, net (16,105) 6,507 (347.5 %) Income tax expense 45,329 24,554 84.6 % Interest expense — Interest expense is comprised of debt and finance lease interest expense as well as amortization of deferred loan costs. The decrease in interest expense for the quarter ended March 31, 2021 was primarily due to lower overall interest rates, as well as lower overall debt balances. Other (income) expenses, net — Other (income) expenses, net is primarily comprised of (gains) and losses from our various equity investments, including our TRP investments accounted for under the equity method, as well as certain other non-operating income and expense items that may arise outside of the normal course of business. The $22.6 million favorable change between the quarter ended March 31, 2021 compared to the same period last year is primarily driven by gains recognized within our portfolio of investments. Income tax expense — In addition to the discussion below, Note 7 in Part I, Item 1 of this Quarterly Report provides further analysis related to income taxes. The $20.8 million increase in consolidated income tax expense was primarily due to an increase in income before income taxes, partially offset by a reduction of the unfavorable impacts from foreign currency fluctuations in the quarter ended March 31, 2021 compared to the same period last year. All of these factors resulted in an effective tax rate of 25.9% for the first quarter of 2021 and 27.2% for the first quarter of 2020. 41 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Non-GAAP Financial Measures The terms "Adjusted Net Income Attributable to Knight-Swift," "Adjusted EPS," "Adjusted Operating Income," and "Adjusted Operating Ratio," as we define them, are not presented in accordance with GAAP. These financial measures supplement our GAAP results in evaluating certain aspects of our business. We believe that using these measures improves comparability in analyzing our performance because they remove the impact of items from our operating results that, in our opinion, do not reflect our core operating performance. Management and the Board focus on Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, Adjusted Operating Income, and Adjusted Operating Ratio as key measures of our performance, all of which are reconciled to the most comparable GAAP financial measures and further discussed below. We believe our presentation of these non-GAAP financial measures is useful because it provides investors and securities analysts the same information that we use internally for purposes of assessing our core operating performance. Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, Adjusted Operating Income, and Adjusted Operating Ratio are not substitutes for their comparable GAAP financial measures, such as net income, cash flows from operating activities, operating income, or other measures prescribed by GAAP. There are limitations to using non-GAAP financial measures. Although we believe that they improve comparability in analyzing our period to period performance, they could limit comparability to other companies in our industry if those companies define these measures differently. Because of these limitations, our non-GAAP financial measures should not be considered measures of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis. Pursuant to the requirements of Regulation G, the following tables reconcile GAAP consolidated net income attributable to Knight-Swift to non-GAAP consolidated Adjusted Net Income attributable to Knight-Swift, GAAP consolidated earnings per diluted share to non-GAAP consolidated Adjusted EPS, GAAP consolidated operating ratio to non-GAAP consolidated Adjusted Operating Ratio, GAAP reportable segment operating income to non-GAAP reportable segment Adjusted Operating Income, and GAAP reportable segment operating ratio to non-GAAP reportable segment Adjusted Operating Ratio. Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS Quarter Ended March 31, 2021 2020 (In thousands) GAAP: Net income attributable to Knight-Swift $ 129,790 $ 65,426 Adjusted for: Income tax expense attributable to Knight-Swift 45,329 24,554 Income before income taxes attributable to Knight-Swift 175,119 89,980 Amortization of intangibles 1 11,749 11,474 Impairments 2 — 902 Legal accruals 3 1,242 — COVID-19 incremental costs 4 — 2,293 Adjusted income before income taxes 188,110 104,649 Provision for income tax expense at effective rate (48,677) (28,444) Non-GAAP: Adjusted Net Income Attributable to Knight-Swift $ 139,433 $ 76,205 42 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Note: Since the numbers reflected in the table below are calculated on a per share basis, they may not foot due to rounding. Quarter Ended March 31, 2021 2020 GAAP: Earnings per diluted share $ 0.77 $ 0.38 Adjusted for: Income tax expense attributable to Knight-Swift 0.27 0.14 Income before income taxes attributable to Knight-Swift 1.04 0.53 Amortization of intangibles 1 0.07 0.07 Impairments 2 — 0.01 Legal accruals 3 0.01 — COVID-19 incremental costs 4 — 0.01 Adjusted income before income taxes 1.12 0.61 Provision for income tax expense at effective rate (0.29) (0.17) Non-GAAP: Adjusted EPS $ 0.83 $ 0.44 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in the 2017 Merger and other acquisitions. Refer to Note 3 in Part I, Item 1 of this Quarterly Report for additional details regarding the acquisition. 2 "Impairments" for the first quarter of 2020 reflect the impairment of trailer tracking equipment (within the Trucking segment). 3 "Legal accruals" are included in "Miscellaneous operating expenses" in the condensed consolidated statements of comprehensive income and reflect costs related to certain class action lawsuits arising from employee related matters. 4 "COVID-19 incremental costs" reflects costs incurred during 2020 that were directly attributable to the pandemic and were incremental to those incurred prior to the outbreak. These include payroll premiums paid to our driving associates and shop technicians, additional disinfectants and cleaning supplies, and various other pandemic-specific items. The costs are clearly separable from our normal business operations and are not expected to recur once the pandemic subsides. 43 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Non-GAAP Reconciliation: Consolidated Adjusted Operating Income and Adjusted Operating Ratio Quarter Ended March 31, 2021 2020 GAAP Presentation (Dollars in thousands) Total revenue $ 1,223,014 $ 1,124,798 Total operating expenses (1,060,755) (1,022,679) Operating income $ 162,259 $ 102,119 Operating ratio 86.7 % 90.9 % Non-GAAP Presentation Total revenue $ 1,223,014 $ 1,124,798 Trucking fuel surcharge (89,909) (97,703) Revenue, excluding trucking fuel surcharge 1,133,105 1,027,095 Total operating expenses 1,060,755 1,022,679 Adjusted for: Trucking fuel surcharge (89,909) (97,703) Amortization of intangibles 1 (11,749) (11,474) Impairments 2 — (902) Legal accruals 3 (1,242) — COVID-19 incremental costs 4 — (2,293) Adjusted Operating Expenses 957,855 910,307 Adjusted Operating Income $ 175,250 $ 116,788 Adjusted Operating Ratio 84.5 % 88.6 % 1 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 1 . 2 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 2. 3 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 3 . 4 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 4. 44 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Non-GAAP Reconciliation: Reportable Segment Adjusted Operating Income and Adjusted Operating Ratio Trucking Segment Quarter Ended March 31, 2021 2020 GAAP Presentation (Dollars in thousands) Total revenue $ 962,947 $ 919,061 Total operating expenses (804,464) (811,727) Operating income $ 158,483 $ 107,334 Operating ratio 83.5 % 88.3 % Non-GAAP Presentation Total revenue $ 962,947 $ 919,061 Fuel surcharge (89,909) (97,703) Intersegment transactions (224) (274) Revenue, excluding fuel surcharge and intersegment transactions 872,814 821,084 Total operating expenses 804,464 811,727 Adjusted for: Fuel surcharge (89,909) (97,703) Intersegment transactions (224) (274) Amortization of intangibles 1 (324) (324) Impairments 2 — (902) COVID-19 incremental costs 3 — (2,245) Adjusted Operating Expenses 714,007 710,279 Adjusted Operating Income $ 158,807 $ 110,805 Adjusted Operating Ratio 81.8 % 86.5 % 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in historical Knight acquisitions. 2 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 2. 3 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 4. 45 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Logistics Segment Quarter Ended March 31, 2021 2020 GAAP Presentation (Dollars in thousands) Total revenue $ 118,887 $ 79,198 Total operating expenses (111,310) (75,479) Operating income $ 7,577 $ 3,719 Operating ratio 93.6 % 95.3 % Non-GAAP Presentation Total revenue $ 118,887 $ 79,198 Intersegment transactions (3,165) (2,441) Revenue, excluding intersegment transactions 115,722 76,757 Total operating expenses 111,310 75,479 Adjusted for: Intersegment transactions (3,165) (2,441) Adjusted Operating Expenses 108,145 73,038 Adjusted Operating Income $ 7,577 $ 3,719 Adjusted Operating Ratio 93.5 % 95.2 % Intermodal Segment Quarter Ended March 31, 2021 2020 GAAP Presentation (Dollars in thousands) Total revenue $ 107,066 $ 94,731 Total operating expenses (103,609) (97,468) Operating income (loss) $ 3,457 $ (2,737) Operating ratio 96.8 % 102.9 % Non-GAAP Presentation Total revenue $ 107,066 $ 94,731 Intersegment transactions (95) (109) Revenue, excluding intersegment transactions 106,971 94,622 Total operating expenses 103,609 97,468 Adjusted for: Intersegment transactions (95) (109) COVID-19 incremental costs 1 — (48) Adjusted Operating Expenses 103,514 97,311 Adjusted Operating Income (Loss) $ 3,457 $ (2,689) Adjusted Operating Ratio 96.8 % 102.8 % 1 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift footnote 4. 46 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Liquidity and Capital Resources Sources of Liquidity Our primary sources of liquidity are funds provided by operations and the following: Source March 31, 2021 (In thousands) Cash and cash equivalents, excluding restricted cash $ 194,650 Availability under Revolver, due October 2022 1 655,656 Availability under 2018 RSA, due July 2021 2 2,919 Total unrestricted liquidity $ 853,225 Cash and cash equivalents – restricted 3 49,233 Restricted investments, held-to-maturity, amortized cost 3 8,954 Total liquidity, including restricted cash and restricted investments $ 911,412 1 As of March 31, 2021, we had $115.0 million in borrowings under our $800.0 million Revolver. We additionally had $29.3 million in outstanding letters of credit (discussed below), leaving $655.7 million available under the Revolver. 2 Based on eligible receivables at March 31, 2021, our borrowing base for the 2018 RSA was $267.2 million, while outstanding borrowings were $ 199.0 million. We additionally had $65.3 million in outstanding letters of credit (discussed below), leaving $2.9 million available under the 2018 RSA. Refer to Note 8 in Part I, Item 1 of this Quarterly Report for more information regarding the 2018 RSA. 3 Restricted cash and restricted investments are primarily held by our captive insurance companies for claims payments. "Cash and cash equivalents – restricted" consists of $47.9 million, included in "Cash and cash equivalents — restricted" in the condensed consolidated balance sheet and held by Mohave and Red Rock for claims payments. The remaining $1.4 million is included in "Other long-term assets" and is held in escrow accounts to meet statutory requirements. Uses of Liquidity Our business requires substantial amounts of cash for operating activities, including salaries and wages paid to our employees, contract payments to independent contractors, insurance and claims payments, tax payments, and others. We also use large amounts of cash and credit for the following activities: Capital Expenditures — When justified by customer demand, as well as our liquidity and our ability to generate acceptable returns, we make substantial cash capital expenditures to maintain a modern company tractor fleet, refresh our trailer fleet, fund replacement of our revenue equipment fleet, and, to a lesser extent, fund upgrades to our terminals and technology in our various service offerings. We expect that net capital expenditures from the aforementioned projects will be in the range of $450.0 – $500.0 million for the full-year 2021. We believe we have ample flexibility with our trade cycle and purchase agreements to alter our current plans if economic or other conditions warrant. Over the long-term, we will continue to have significant capital requirements, which may require us to seek additional borrowing, lease financing, or equity capital. The availability of financing or equity capital will depend upon our financial condition and results of operations as well as prevailing market conditions. If such additional borrowing, lease financing, or equity capital is not available at the time we need it, then we may need to borrow more under the Revolver (if not then fully drawn), extend the maturity of then-outstanding debt, rely on alternative financing arrangements, engage in asset sales, limit our fleet size, or operate our revenue equipment for longer periods. 47 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED There can be no assurance that we will be able to obtain additional debt under our existing financial arrangements to satisfy our ongoing capital requirements. However, we believe the combination of our expected cash flows, financing available through operating and finance leases, available funds under our accounts receivable securitization, and availability under the Revolver will be sufficient to fund our expected capital expenditures for at least the next twelve months. Principal and Interest Payments — As of March 31, 2021, we had debt, accounts receivable securitization, and finance lease obligations of $825.5 million, which are discussed under "Material Debt Agreements," below. Certain cash flows from operations are committed to minimum payments of principal and interest on our debt and lease obligations. Additionally, when our financial position allows, we periodically make voluntary prepayments on our outstanding debt balances. Letters of Credit — Pursuant to the terms of the 2017 Debt Agreement and the 2018 RSA, our lenders may issue standby letters of credit on our behalf. When we have letters of credit outstanding, the availability under the Revolver or 2018 RSA is reduced accordingly. Standby letters of credit are typically issued for the benefit of regulatory authorities, insurance companies and state departments of insurance for the purpose of satisfying certain collateral requirements, primarily related to our automobile, workers' compensation, and general insurance liabilities. Share Repurchases — From time to time, and depending on free cash flow availability, debt levels, common stock prices, general economic and market conditions, as well as Board approval, we may repurchase shares of our outstanding common stock. As of March 31, 2021, the Company had $196.3 million remaining under the 2020 Knight-Swift Share Repurchase Plan . Additional details are discussed in Note 11 in Part I, Item 1 of this Quarterly Report. Working Capital We had a working capital surplus of $15.3 million as of March 31, 2021 and $83.7 million as of December 31, 2020. Our working capital surplus as of March 31, 2021 was negatively impacted by our 2018 RSA, which is included within current liabilities since it was scheduled to mature in July 2021. On April 23, 2021, we entered into the 2021 RSA, which amended the 2018 RSA extending the maturity to April 23, 2024. Additional details are discussed in Note 8 in Part I, Item 1 of this Quarterly Report. Material Debt Agreements As of March 31, 2021, we had $825.5 million in material debt obligations at the following carrying values: • $299.1 million: Term Loan, due October 2022, net of $0.9 million in deferred loan costs • $199.0 million: 2018 RSA outstanding borrowings, due July 2021 • $212.4 million: Finance lease obligations • $115.0 million: Revolver, due October 2022 As of December 31, 2020, we had $913.6 million in material debt obligations at the following carrying values: • $298.9 million : Term Loan, due October 2022 , net of $1.1 million in deferred loan costs • $213.9 million : 2018 RSA outstanding borrowings, due July 2021, net of $0.1 million in deferred loan costs • $190.8 million : Finance lease obligations • $210.0 million : Revolver, due October 2022 . 48 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Cash Flow Analysis Quarter Ended March 31, Change 2021 2020 (In thousands) Net cash provided by operating activities $ 306,113 $ 155,343 $ 150,770 Net cash used in investing activities (74,141) (125,582) 51,441 Net cash used in financing activities (185,366) (71,885) (113,481) Net Cash Provided by Operating Activities Comparison Between Quarter Ended March 31, 2021 and 2020 — The $150.8 million increase in net cash provided by operating activities was primarily due to less cash paid for legal settlements in the first quarter of 2021, as compared to the first quarter of 2020, when we paid $93.4 million associated with pre-2017 Merger legal matters that were previously accrued and disclosed by Swift. Net cash provided by operating activities was also favorably impacted by a $60.1 million increase in our operating income. Net Cash Used in Investing Activities Comparison Between Quarter Ended March 31, 2021 and 2020 — The $51.4 million decrease in net cash used in investing activities was primarily due to a $31.8 million decrease in net cash capital expenditures. Net Cash Used in Financing Activities Comparison Between Quarter Ended March 31, 2021 and 2020 — Net cash used in financing activities increased by $113.5 million, primarily due to a $110.0 million net increase in cash used for our Revolver, as we made net prepayments of $95.0 million during the first quarter of 2021, as compared to assuming net borrowings of $15.0 million during the first quarter of 2020. Seasonality Discussion regarding the impact of seasonality on our business is included in Note 1 in the notes to the condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report, incorporated by reference herein. Inflation Inflation can have an impact on our operating costs. A prolonged period of inflation could cause interest rates, fuel, wages, and other costs to increase, which would adversely affect our results of operations unless freight rates correspondingly increased. Consistent with trends in the trucking industry overall, we continue to experience inflationary pressures with respect to driver wages, as compared to prior years. Recently Issued Accounting Pronouncements See Note 2 in Part I, Item 1 of this Quarterly Report, which is incorporated herein by reference, for the impact of recently issued accounting pronouncements on the Company's condensed consolidated financial statements. 49 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.