Knight-Swift Transportation Holdings Inc. 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain acronyms and terms used throughout this Annual Report are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document. Management's discussion and analysis of financial condition and results of operations should be read together with "Business" in Part I, Item 1 of this Annual Report, as well as the consolidated financial statements and accompanying footnotes in Part II, Item 8 of this Annual Report. This discussion contains forward-looking statements as a result of many factors, including those set forth under Part I, Item 1A. "Risk Factors" and Part I "Cautionary Note Regarding Forward-looking Statements" of this Annual Report, and elsewhere in this report. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those discussed. Executive Summary Company Overview Knight-Swift Transportation Holdings Inc. is one of North America's largest and most diversified freight transportation companies, providing multiple full truckload, LTL, intermodal, and logistics services. Knight-Swift uses a nationwide network of business units and terminals in the US and Mexico to serve customers throughout North America. In addition to operating one of the country's largest truckload fleets, Knight-Swift also contracts with third-party equipment providers to provide a broad range of transportation services to our customers while creating quality driving jobs for our driving associates and successful business opportunities for independent contractors. Our four reportable segments are Truckload, Logistics, LTL, and Intermodal. Additionally, we have various non-reportable segments. Refer to Note 1 and Note 25 in Part II, Item 8 of this Annual Report for descriptions of our segments. Our objective is to operate our business with industry-leading margins and growth while providing safe, high-quality, cost-effective solutions for our customers. We continue to grow our company organically and through acquisitions. Refer to Note 1 and Note 4 in Part II, Item 8 of this Annual Report for details regarding our recent acquisitions. Revenue • Our truckload 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 Truckload 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 brokerage and intermodal operations is generated through our Logistics and Intermodal segments. • Our LTL business, established in 2021 through the ACT and MME acquisitions, provides our customers regional LTL transportation service through our network of approximately 100 service centers in our geographical footprint. Our LTL service also provides national coverage to our customers by utilizing partner carriers for areas outside of our direct network. • Our non-reportable segments include Iron Truck Services , (which offers 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. 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 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 Truckload and LTL segments. Expenses — Our most significant expenses vary with miles traveled and include fuel, driving associate-related expenses (such as wages and benefits), and services purchased from independent contractors and other transportation providers (such as railroads, drayage providers, and other trucking companies). Maintenance and tire expenses, as well as the cost of insurance and claims generally vary with the miles we travel, but also have a controllable component based on safety improvements, fleet age, efficiency, and other factors. Our primary fixed costs are depreciation and lease expense for revenue equipment and terminals, amortization of intangibles, interest expense, and non-driver employee compensation. Operating Statistics — We measure our consolidated and segment results through certain operating statistics, which are discussed under "Results of Operations — Segment Review — Operating Statistics," below. Our results are affected by various economic, industry, operational, regulatory, and other factors, which are discussed in detail in "Part I, Item 1A. Risk Factors," as well as in various disclosures in our press releases, stockholder reports, and other filings with the SEC. Key Financial Highlights and Operating Metrics 2021 2020 GAAP financial data: (Dollars in thousands, except per share data) Total revenue $ 5,998,019 $ 4,673,863 Revenue, excluding truckload and LTL fuel surcharge $ 5,531,890 $ 4,369,207 Net income attributable to Knight-Swift $ 743,388 $ 410,002 Diluted EPS $ 4.45 $ 2.40 Operating ratio 83.9 % 87.9 % Non-GAAP financial data: Adjusted Net Income Attributable to Knight-Swift 1 $ 788,181 $ 466,147 Adjusted EPS 1 $ 4.72 $ 2.73 Adjusted Operating Ratio 1 81.5 % 85.3 % Revenue equipment statistics by segment: 2 Truckload Average tractors 3 18,019 18,448 Average trailers 4 67,606 57,722 LTL Average tractors 5 2,735 N/A Average trailers 6 7,413 N/A Intermodal Average containers 10,847 10,604 1 Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, and Adjusted Operating Ratio are non-GAAP financial measures and should not be considered alternatives, or superior, to the most directly comparable GAAP financial measures. However, management believes that presentation of these non-GAAP financial measures provides useful information to investors regarding the Company's results of operations. Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, and Adjusted Operating Ratio are reconciled to the most directly comparable GAAP financial measures under "Non-GAAP Financial Measures," below . 2 See "Results of Operations — Segment Review — Operating Statistics" in Part II, Item 7 of this Annual Report regarding definitions of these operating data. 3 Our Truckload tractor fleet had a weighted average age of 2.5 years and 2.2 years for 2021 and 2020, respectively. Average tractors within our Truckload segment includes 16,166 and 16,379 company-owned tractors for 2021 and 2020, respectively. 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 4 Note that average trailers includes 6,388 trailers related to leasing activities recorded within our non-reportable segments in 2021. Our Truckload trailer fleet had a weighted average age of 8.4 years and 7.8 years for 2021 and 2020, respectively. 5 Our LTL tractor fleet had a weighted average age of 4.2 years for 2021. 6 Our LTL trailer fleet had a weighted average age of 7.9 years for 2021. Market Trends and Company Performance Our Company Trends and Outlook — During 2021, each reportable segment grew revenue while improving margins, leading to consolidated revenue growth of 26.6%, excluding truckload and LTL fuel surcharge. This contributed to a 71.1% improvement in consolidated operating income to $965.7 million in 2021, as compared to $564.4 million last year. Net Income Attributable to Knight-Swift increased by 81.3% to $743.4 million. • Truckload — 80.9% operating ratio within our Truckload segment for the year, a 380 basis point improvement, supported by continued year-over-year revenue growth, with six consecutive quarters of revenue growth year-over-year. • Logistic s — 88.5% operating ratio within our Logistics segment this year. Load count grew by 51.5% , leading to a 118.8 % increase in revenue, excluding intersegment transactions. • LTL — 92.1% operating ratio, which includes the results of ACT, from July 5, 2021 through December 31, 2021, as well as the results of MME from December 6, 2021 through December 31, 2021. On a proforma annualized basis, the LTL segment represents approximately 14% of consolidated revenue, excluding truckload and LTL fuel surcharge. • Intermodal — 90.8% operating ratio within our Intermodal segment, a 940 basis point improvement with year-over-year revenue growth of 17.2%. We anticipate that depreciation and amortization expense will increase and rental expense will correspondingly decrease, as a percentage of revenue excluding truckload and LTL fuel surcharge, as we intend to purchase, rather than enter into operating leases, for a majority of our revenue equipment in 2022. With significant tightening in the insurance markets, we may also experience changes in premiums, retention limits, and excess coverage limits in the remainder of 2022. While fuel expense is generally offset by fuel surcharge revenue, our fuel expense, net of fuel surcharge revenue may increase in the future. We expect that our acquisitions of ACT and MME will have a significant impact on future financial results, including an overall increase in operating revenues and expenses. Market Trends and Outlook — On a year-over-year basis, the US gross domestic product, which is the broadest measure of goods and services produced across the economy, increased by 5.7% 1 in 2021, as compared to a 3.4% 1 decrease in 2020. The year-over-year improvement was primarily driven by an increase in consumer spending, as the economic impacts of the pandemic began to subside and the economy showed signs of recovery. The national unemployment rate was 3.9% 2 as of December 31, 2021, as compared to 6.7% 2 as of December 31, 2020. Early estimates of the full-year 2021 US employment cost index indicate a year-over-year increase of 4.0% 2 and a sequential increase of 1.0% 2 . From a freight market perspective, we are encouraged by the continued strength in freight demand; however, demand may be difficult to predict for full-year 2022. Our expectations for the 2022 market include the following: • Within the full truckload and LTL markets, we expect strong demand and constrained capacity throughout the year. • Industry capacity expansion continues to be limited by manufacturing constraints. • Sourcing and retaining drivers will remain challenging and lead to additional driver wage inflation. • Inflationary pressure on equipment, maintenance, labor and other cost items. • The above factors should continue to support a favorable rate environment, which we expect will result in double-digit full truckload contract rate increases. • Strong demand for power-only opportunities. • Strong used equipment market. _________ 1 bea.gov 2 bls.gov 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 Notes regarding presentation: A discussion of changes in our results of operations from 2019 to 2020 has been omitted from this Annual Report, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Annual Report filed with the SEC on February 25, 2021. In accordance with accounting treatment applicable to each of our recent acquisitions, Knight-Swift's reported results do not include the operating results of the acquired entities prior to the respective acquisition dates. Accordingly, comparisons between the Company's 2021 results and prior periods may not be meaningful. Refer to Note 1 in Part II, Item 8 of this Annual Report for a list of our recent acquisitions. Operating Results: 2021 Compared to 2020 — The $333.4 million increase in net income attributable to Knight-Swift to $743.4 million in 2021 from $410.0 million in 2020, includes the following: • Contributor — $205.9 million increase in operating income within our Truckload segment driven by a 21.1% increase in revenue per loaded mile, excluding fuel surcharge and intersegment transactions, partially offset by a 10.3% decrease in total miles per tractor. • Contributor — $73.7 million increase in operating income within our Logistics segment driven by a 51.5% increase in load counts, and a 44.4% increase in revenue per load. • Contributor — $31.2 million of operating income through ACT and MME activities, recognized within our LTL segment in 2021. • Contributor — $43.0 million increase in operating income within our Intermodal segment driven by a 21.8% increase in revenue per load, partially offset by a 3.7% decrease in load count. • Contributor — $47.5 million improvement in operating results within our non-reportable segments, driven by revenue growth of 62.2% related to our expanded services to third-party carriers. • Contributor — $17.7 million improvement in "Other income, net," primarily due to unrealized gains recognized from our investment in Embark and an increase in unrealized gains recognized from other investments within our portfolio. • Offset — $81.2 million increase in consolidated income tax expense, primarily due to an increase in income before income taxes which was partially offset by a reduction in the state deferred tax liability due to our recent acquisitions and adjustments to state tax rates and apportionment. All these factors resulted in a 2021 effective tax rate of 23.7% and a 2020 effective tax rate of 26.7%. See additional discussion of our operating results within "Results of Operations — Consolidated Operating and Other Expenses" below. 2021 Liquidity and Capital — During 2021, we generated $1.2 billion in operating cash flows, we paid down $48.2 million in cash on our operating lease liabilities (gross of $73.8 million of lease modifications and leases obtained through acquisitions), paid down our finance lease liabilities by $108.2 million, used $282.0 million for capital expenditures (net of equipment sales proceeds), spent $1.5 billion on four acquisitions (net of cash balances acquired), and returned $57.2 million in share repurchases and $63.5 million in dividends to our stockholders. We ended the year with $261.0 million in unrestricted cash and cash equivalents, $260.0 million outstanding on the 2021 Revolver, $1.2 billion outstanding on the 2021 Term Loans, and $6.5 billion of stockholders' equity. We remain committed to a strong capital structure. 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. 41 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Results of Operations — Segment Review The Company has four reportable segments: Truckload, Logistics, LTL, and Intermodal, as well as certain non-reportable segments. Refer to Note 25 in Part II, Item 8 of this Annual Report for descriptions of our segments. Refer to Part I, Item 1, "Business – Our Mission and Company Strategy" of this Annual Report for discussion related to our segment operating strategies. Consolidating Tables for Total Revenue and Operating Income (Loss) 2021 2020 Revenue: (Dollars in thousands) Truckload $ 4,098,005 68.3 % $ 3,786,030 81.0 % Logistics $ 817,003 13.6 % $ 375,841 8.0 % LTL $ 396,308 6.6 % $ — — % Intermodal $ 458,867 7.7 % $ 391,462 8.4 % Subtotal $ 5,770,183 96.2 % $ 4,553,333 97.4 % Non-reportable segments $ 306,414 5.1 % $ 188,882 4.0 % Intersegment eliminations $ (78,578) (1.3 %) $ (68,352) (1.4 %) Total revenue $ 5,998,019 100.0 % $ 4,673,863 100.0 % 2021 2020 Operating income (loss): (Dollars in thousands) Truckload $ 784,436 81.2 % $ 578,512 102.5 % Logistics $ 93,920 9.7 % $ 20,245 3.6 % LTL $ 31,169 3.2 % $ — — % Intermodal $ 42,060 4.4 % $ (943) (0.2 %) Subtotal $ 951,585 98.5 % $ 597,814 105.9 % Non-reportable segments $ 14,112 1.5 % $ (33,376) (5.9 %) Operating income $ 965,697 100.0 % $ 564,438 100.0 % 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 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 Truckload Measures productivity and represents revenue (excluding fuel surcharge and intersegment transactions) divided by average tractor count Total Miles per Tractor Truckload Total miles (including loaded and empty miles) a tractor travels on average Average Length of Haul Truckload, LTL Average miles traveled with loaded trailer cargo per order Non-paid Empty Miles Percentage Truckload Percentage of miles without trailer cargo Shipments per Day LTL Average number of shipments completed each business day Weight per Shipment LTL Total weight (in pounds) divided by total shipments Revenue per shipment LTL Total revenue divided by total shipments Revenue xFSR per shipment LTL Total revenue, excluding fuel surcharge, divided by total shipments Revenue per hundredweight LTL Measures yield and is calculated as total revenue divided by total weight (in pounds) times 100 Revenue xFSR per hundredweight LTL Total revenue, excluding fuel surcharge, divided by total weight (in pounds) times 100 Average Tractors Truckload, LTL, Intermodal Average tractors in operation during the period, including company tractors and tractors provided by independent contractors Average Trailers Truckload, LTL 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 Logistics gross margin (revenue, excluding intersegment transactions, less purchased transportation expense, excluding intersegment transactions) as a percentage of logistics revenue, excluding intersegment transactions Average Containers Intermodal Average containers in operation during the period GAAP Operating Ratio Truckload, Logistics, LTL, 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 Truckload, Logistics, LTL, 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 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 Segment Review Truckload Segment We generate revenue in the Truckload segment primarily through irregular route, dedicated, refrigerated, flatbed, expedited, and cross-border service offerings, with 13,058 irregular route tractors and 4,961 dedicated route tractors in use during 2021. 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 Truckload 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 Truckload segment are primarily variable and include fuel and fuel taxes, driving associate-related expenses (such as wages, benefits, training, and recruitment), and costs associated with independent contractors primarily included in "Purchased transportation" in the consolidated statements of comprehensive income. Maintenance expense (which includes costs for replacement tires for our revenue equipment) and insurance and claims expenses have both fixed and variable components. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. The main fixed costs in the Truckload segment are depreciation and rent expenses from leasing and acquiring revenue equipment and terminals, as well as compensating our non-driver employees. 2021 2020 2021 vs. 2020 (Dollars in thousands, except per tractor data) Increase (decrease) Total revenue $ 4,098,005 $ 3,786,030 8.2 % Revenue, excluding fuel surcharge and intersegment transactions $ 3,681,271 $ 3,480,621 5.8 % GAAP: Operating income $ 784,436 $ 578,512 35.6 % Non-GAAP: Adjusted Operating Income 1 $ 785,772 $ 593,085 32.5 % Average revenue per tractor 2 $ 204,299 $ 188,672 8.3 % GAAP: Operating ratio 2 80.9 % 84.7 % (380 bps) Non-GAAP: Adjusted Operating Ratio 1 2 78.7 % 83.0 % (430 bps) Non-paid empty miles percentage 2 13.4 % 13.1 % 30 bps Average length of haul (miles) 2 403 425 (5.2 %) Total miles per tractor 2 81,629 90,993 (10.3 %) Average tractors 2 3 18,019 18,448 (2.3 %) Average trailers 2 4 67,606 57,722 17.1 % 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined within "Operating Statistics" above. 3 Includes 16,166 and 16,379 company-owned tractors for 2021 and 2020, respectively. 4 Includes 6,388 trailers related to our leasing activities recognized within the non-reportable segments for 2021. 2021 Compared to 2020 — The Adjusted Operating Ratio improved by 430 basis points to 78.7% in 2021, leading to a 32.5% improvement in Adjusted Operating Income. We grew revenue, excluding fuel surcharge and intersegment transactions by 5.8% in 2021. Shipping demand remains strong, leading to more project business opportunities this year, which contributed to a 21.1% increase in revenue per loaded mile, excluding fuel surcharge and intersegment transactions. Total miles per tractor decreased by 10.3%, due in part to a 5.2% shorter length of haul. 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 Logistics Segment The Logistics segment is less asset-intensive than the Truckload and LTL segments 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 a primarily variable cost, and is included in "Purchased transportation" in the consolidated statements of comprehensive income. Variability in this expense depends on truckload capacity, availability of third-party capacity providers, rates charged to customers, current freight demand, and customer shipping needs. Fixed Logistics operating expenses primarily include non-driver employee compensation and benefits recorded in "Salaries, wages, and benefits" and depreciation and amortization expense recorded in "Depreciation and amortization of property and equipment" in the consolidated statements of comprehensive income. 2021 2020 2021 vs. 2020 (Dollars in thousands, except per load data) Increase (decrease) Total revenue $ 817,003 $ 375,841 117.4 % Revenue, excluding intersegment transactions $ 798,689 $ 365,099 118.8 % GAAP: Operating income $ 93,920 $ 20,245 363.9 % Non-GAAP: Adjusted Operating Income 1 2 $ 94,685 $ 20,245 367.7 % Revenue per load 2 $ 2,439 $ 1,689 44.4 % Gross margin percentage 2 18.1 % 14.5 % 360 bps GAAP: Operating ratio 2 88.5 % 94.6 % (610 bps) Non-GAAP: Adjusted Operating Ratio 1 2 88.1 % 94.5 % (640 bps) 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined under "Operating Statistics" above. 2021 Compared to 2020 — Demand for our logistics service offering continued to grow throughout the year, as we continue to leverage our fleet of approximately 70,000 trailers for our Power-only service offering. Logistics revenue, excluding intersegment transactions increased 118.8% as we grew load count by 51.5%, while increasing revenue per load by 44.4%. The Adjusted Operating Ratio improved to 88.1%, resulting in a 367.7% increase in Adjusted Operating Income. Gross margin was 18.1% in 2021, compared to 14.5% in 2020. Within our Power-only service offering, which excludes the operations of our intermodal, drayage, and port services, revenue grew by 314.3% as a result of a 104.2% increase in load volumes. Our Power-only service offering represented approximately 32.8% of brokerage load volumes during 2021. During 2021, through our Select platform, we digitally matched an average of approximately 5,500 carriers per quarter to available loads. 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 LTL Segment Our LTL segment was established in 2021 by the ACT and MME acquisitions and consists of regional motor carriers headquartered in Dothan, Alabama and Bismarck, North Dakota. We provide regional direct service and serve our customers' national transportation needs by utilizing key partner carriers for coverage areas outside of our network. We primarily generate revenue by transporting freight for our customers through our core LTL services. Our revenues are impacted by shipment volume and tonnage levels that flow through our network. Additional revenues are generated through fuel surcharges and accessorial services provided during transit from shipment origin to destination. We focus on the following multiple revenue generation factors when reviewing revenue yield: revenue per hundredweight, revenue per shipment, weight per shipment, and length of haul. Fluctuation within each of these metrics is analyzed when determining the revenue quality of our customers' shipment density. Our most significant expense is related to direct costs associated with the transportation of our freight moves including; direct salary, wage and benefit costs, fuel expense, and depreciation expense associated with revenue equipment costs. Other expenses associated with revenue generation that can fluctuate and impact operating results are insurance and claims expense as well as maintenance costs of our revenue equipment. These expenses can be influenced by multiple factors including our safety performance, equipment age, and other factors. A key component to lowering our operating costs is labor efficiency within our network. We continue to focus on technological advances to improve the customer experience and reduce our operating costs. Note: In accordance with the accounting treatment applicable to the ACT and MME acquisitions, the LTL segment's reported results do not include the operating results of the acquired entities prior to the respective acquisition dates. 2021 (Dollars in thousands, except per shipment and per hundredweight data) Total revenue $ 396,308 Revenue, excluding fuel surcharge $ 345,785 GAAP: Operating income $ 31,169 Non-GAAP: Adjusted Operating Income 1 $ 38,293 GAAP: Operating ratio 2 92.1 % Non-GAAP: Adjusted Operating Ratio 1 2 88.9 % Shipments per day 2 16,438 Weight per shipment 2 1,111 Average length of haul (miles) 2 518 Revenue per shipment 2 $ 161.66 Revenue xFSR per shipment 2 $ 141.57 Revenue per hundredweight 2 $ 14.55 Revenue xFSR per hundredweight 2 $ 12.75 Average tractors 2 3 2,735 Average trailers 2 4 7,413 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined under "Operating Statistics," above. 3 Includes 667 tractors from ACT's and MME's dedicated and other businesses for 2021. 4 Includes 860 trailers from ACT's and MME's dedicated and other businesses for 2021. Our LTL segment operates across approximately 100 facilities with a door count of over 4,200. We generated $345.8 million in revenue, excluding fuel surcharge and an 88.9% Adjusted Operating Ratio during 2021 within the LTL segment. Revenue, excluding fuel surcharge, per hundredweight was $12.75, while revenue per shipment, excluding fuel surcharge, was $141.57. 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 Intermodal Segment The Intermodal segment complements our regional operating model, allows us to better serve customers in longer haul lanes, and reduces our investment in fixed assets. Through the Intermodal segment, we generate revenue by moving freight over the rail in our containers and other trailing equipment, combined with revenue for drayage to transport loads between railheads and customer locations. The most significant expense in the Intermodal segment is the cost of purchased transportation that we pay to third-party capacity providers (including rail providers), which is primarily variable and included in "Purchased transportation" in the consolidated statements of comprehensive income. Purchased transportation varies as it relates to rail capacity, freight demand, and customer shipping needs. The main fixed costs in the Intermodal segment are depreciation of our company tractors related to drayage, containers, and chassis, as well as non-driver employee compensation and benefits. 2021 2020 2021 vs. 2020 (Dollars in thousands, except per load data) Increase (decrease) Total revenue $ 458,867 $ 391,462 17.2 % Revenue, excluding intersegment transactions $ 458,583 $ 391,098 17.3 % GAAP: Operating income (loss) $ 42,060 $ (943) 4,560.2 % Non-GAAP: Adjusted Operating Income (Loss) 1 2 $ 42,060 $ (830) 5,167.5 % Average revenue per load 2 $ 2,852 $ 2,342 21.8 % GAAP: Operating ratio 2 90.8 % 100.2 % (940 bps) Non-GAAP: Adjusted Operating Ratio 1 2 90.8 % 100.2 % (940 bps) Load count 160,774 166,977 (3.7 %) Average tractors 2 3 597 577 3.5 % Average containers 2 10,847 10,604 2.3 % 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined within "Operating Statistics" above. 3 Includes 543 and 518 c ompany-owned tractors for 2021 and 2020, respectively. 2021 Compared to 2020 — Revenue grew by 17.2% while the Adjusted Operating Ratio improved from 100.2% in 2020 to 90.8% in 2021, resulting in a $42.9 million increase in Adjusted Operating Income. Continued rail congestion and rail allocations resulted in a reduction of load count, but contributed to a 21.8% increase in revenue per load. We anticipate operational improvements in cost structure and network design as we continue to transition to a new western rail partner in the first quarter of 2022. To position Intermodal for continued growth, we are in the process of growing our container count and plan to add approximately 2,000 containers during the year. Our long-term structural improvements in the margins of our business are ultimately expected to lead to an Adjusted Operating Ratio in the high-80s to mid-90s. We expect load volumes to increase in the back half of the year. 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 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 $46.1 million in annual amortization of intangibles related to the 2017 Merger and various acquisitions). 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Total revenue $ 306,414 $ 188,882 62.2 % Operating income (loss) $ 14,112 $ (33,376) 142.3 % 2021 Compared to 2020 — Strong demand for the services within our non-reportable segments led to 62.2% revenue growth, which resulted in operating income improving by 142.3%. The revenue growth was primarily related to expanded services to third-party carriers (including insurance through Iron Truck Services ), increased demand for our equipment leasing services, and revenue improvement within our warehousing activities. In 2020, profitability was negatively impacted by the $6.7 million of expense associated with the change in fair value of a deferred earnout related to the 2020 acquisition of a warehousing company and a $4.0 million impairment of an investment related to alternative fuel technology. Results of Operations — Consolidated Operating and Other Expenses Consolidated Operating Expenses The following tables present certain operating expenses from our consolidated statements of comprehensive income, including each operating expense as a percentage of total revenue and as a percentage of revenue, excluding truckload and LTL fuel surcharge. Truckload and LTL 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 truckload and LTL fuel surcharge is a better measure for analyzing many of our expenses and operating metrics. Note: In accordance with accounting treatment applicable to each of our recent acquisitions, Knight-Swift's reported results do not include the operating results of the acquired entities prior to the respective acquisition dates. Accordingly, comparisons between the Company's 2021 results and prior periods may not be meaningful. Refer to Note 1 in Part II, Item 8 of this Annual Report for a list of our recent acquisitions. 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Salaries, wages, and benefits $ 1,771,772 $ 1,483,188 19.5 % % of total revenue 29.5 % 31.7 % (220 bps) % of revenue, excluding truckload and LTL fuel surcharge 32.0 % 33.9 % (190 bps) Salaries, wages, and benefits expense is primarily affected by the total number of miles driven by company driving associates, the rates we pay our company driving associates, and employee benefits, including healthcare, workers' compensation and other benefits. To a lesser extent, non-driver employee headcount, compensation, and benefits affect this expense. Driving associate wages represent the largest component of salaries, wages, and benefits expense. Several ongoing market factors have reduced the pool of available driving associates, contributing to a challenging driver sourcing market, which we believe will continue. Having a sufficient number of qualified driving associates is our biggest headwind, although we continue to seek ways to attract and retain qualified driving associates, including heavily investing in our recruiting efforts, our driving academies, technology, our equipment, 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. 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 2021 Compared to 2020 — The increase in consolidated salaries, wages, and benefits includes $222.8 million from the results of ACT. The remaining increase pertained to driving associate pay rates and non-driver salaries and wages, partially offset by an 11.6% decrease in miles driven by company driving associates, excluding ACT. 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Fuel $ 546,256 $ 416,307 31.2 % % of total revenue 9.1 % 8.9 % 20 bps % of revenue, excluding truckload and LTL fuel surcharge 9.9 % 9.5 % 40 bps Fuel expense consists primarily of diesel fuel expense for our company-owned tractors and fuel taxes. The primary factors affecting our fuel expense are the cost of diesel fuel, the fuel economy of our equipment, and the miles driven by company driving associates. Our fuel surcharge programs help to offset increases in fuel prices, but apply only to loaded miles and typically do not offset non-paid empty miles, idle time, and out-of-route miles driven. Typical fuel surcharge programs involve a computation based on the change in national or regional fuel prices. These programs may update as often as weekly, but typically require a specified minimum change in fuel cost to prompt a change in fuel surcharge revenue for our Truckload segment. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue. Due to this time lag, our fuel expense, net of fuel surcharge, negatively impacts our operating income during periods of sharply rising fuel costs and positively impacts our operating income during periods of falling fuel costs. We continue to utilize our fuel efficiency initiatives such as trailer blades, idle-control, management of tractor speeds, fleet updates for more fuel-efficient engines, management of fuel procurement, and driving associate training programs that we believe contribute to controlling our fuel expense. 2021 Compared to 2020 — The increase in consolidated fuel expense includes $33.7 million of fuel expense from ACT's results. The remaining difference is primarily due to an increase in the average DOE fuel price to $3.29 per gallon in 2021 from $2.56 per gallon in 2020, partially offset by an 11.6% reduction in the total miles driven by company driving associates, excluding ACT. 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Operations and maintenance $ 313,505 $ 275,290 13.9 % % of total revenue 5.2 % 5.9 % (70 bps) % of revenue, excluding truckload and LTL fuel surcharge 5.7 % 6.3 % (60 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 in 2022, which could increase future driving associate development and recruiting costs and negatively affect our operations and maintenance expense. We expect to continue refreshing our fleet in the coming quarters to maintain or improve the average age of our equipment. 2021 Compared to 2020 — The increase in consolidated operations and maintenance expense includes $18.8 million in operations and maintenance expense from ACT's results. The remaining increase was attributed to higher driving associate hiring expenses and was partially offset by the decrease in miles driven by company driving associates discussed above. 49 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Insurance and claims $ 275,378 $ 192,840 42.8 % % of total revenue 4.6 % 4.1 % 50 bps % of revenue, excluding truckload and LTL fuel surcharge 5.0 % 4.4 % 60 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, 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. In 2021, we expanded our insurance offerings to third-party carriers, earning additional premium revenues, which were partially offset by increased insurance reserves. 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. 2021 Compared to 2020 — Consolidated insurance and claims expense increased partially due to the inclusion of $15.8 million of insurance and claims expense from ACT's results. The remaining increase was primarily due to insurance reserves incurred through our third-party carrier insurance program. 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Operating taxes and licenses $ 98,784 $ 87,422 13.0 % % of total revenue 1.6 % 1.9 % (30 bps) % of revenue, excluding truckload and LTL fuel surcharge 1.8 % 2.0 % (20 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. 2021 Compared to 2020 — The increase in c onsolidated operating taxes and licenses expense is primarily due to the inclusion of $13.5 million of operating taxes and licenses expense from ACT's results. 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Communications $ 22,486 $ 19,596 14.7 % % of total revenue 0.4 % 0.4 % — bps % of revenue, excluding truckload and LTL fuel surcharge 0.4 % 0.4 % — bps Communications expense is comprised of costs associated with our tractor and trailer tracking systems, information technology systems, and phone systems. 2021 Compared to 2020 — The increase in c onsolidated communications expense is primarily due to the inclusion of $2.0 million of communications expense from ACT's results. 50 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Depreciation and amortization of property and equipment $ 522,596 $ 460,775 13.4 % % of total revenue 8.7 % 9.9 % (120 bps) % of revenue, excluding truckload and LTL fuel surcharge 9.4 % 10.5 % (110 bps) Depreciation relates primarily to our owned tractors, trailers, buildings, ELDs, 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. 2021 Compared to 2020 — The increase in consolidated depreciation and amortization of property and equipment includes $24.8 million of expense from ACT's results. The remaining increase is primarily due 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 truckload and LTL fuel surcharge, as we currently do not plan to use operating leases as a primary means of funding our equipment purchases in 2022. 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Amortization of intangibles $ 55,299 $ 45,895 20.5 % % of total revenue 0.9 % 1.0 % (10 bps) % of revenue, excluding truckload and LTL fuel surcharge 1.0 % 1.1 % (10 bps) Amortization of intangibles relates to intangible assets identified with the 2017 Merger, ACT Acquisition and other acquisitions. See Note 4 and Note 10 in Part II, Item 8, of this Annual Report for further details regarding the Company's intangible assets, historical amortization, and anticipated future amortization. 2021 Compared to 2020 — The increase in consolidated amortization of intangibles for 2021 is attributed to the ACT, MME, UTXL, and Eleos acquisitions in 2021. See Note 4 in Part II, Item 8, of this Annual Report for more details regarding our acquisitions. 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Rental expense $ 55,161 $ 86,640 (36.3 %) % of total revenue 0.9 % 1.9 % (100 bps) % of revenue, excluding truckload and LTL fuel surcharge 1.0 % 2.0 % (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. 2021 Compa red to 2020 — The decrease in consolidated rental expense was primarily due to increasing our ratio of owned versus leased equipment. We expect consolidated rental expense to continue to decrease both in total and as a percentage of consolidated revenue, excluding truckload and LTL fuel surcharge, as we currently do not plan to use operating leases as a primary means of funding our equipment purchases in 2022. 51 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Purchased transportation $ 1,320,888 $ 936,649 41.0 % % of total revenue 22.0 % 20.0 % 200 bps % of revenue, excluding truckload and LTL fuel surcharge 23.9 % 21.4 % 250 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. 2021 Compared to 2020 — The increase in consolidated purchased transportation expense is primarily due to payments made to third-party carriers, partially offset by a 14.0% decrease in miles driven by independent contractors. We expect consolidated purchased transportation will increase as a percentage of revenue if we grow our logistics and intermodal businesses faster than our full truckload and LTL businesses. The increase could be partially offset if independent contractors exit the market due to regulatory changes. 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Impairments $ 299 $ 5,335 (94.4 %) 2021 Compared to 2020 — In 2021, we incurred impairment charges associated with revenue equipment held for sale and trailer tracking systems (within our Truckload and non-reportable segments). During 2020, impairments were related to investments in certain alternative fuel technology (within the non-reportable segments), certain tractors (within the Truckload segment), certain legacy trailers (within the non-reportable segments) as a result of a softer used equipment market, and trailer tracking equipment (within the Truckload segment). 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Miscellaneous operating expenses $ 49,898 $ 99,488 (49.8 %) Miscellaneous operating expenses primarily consists of legal and professional services fees, general and administrative expenses, and other costs, net of gain on sales of equipment. 2021 Compared to 2020 — Net consolidated miscellaneous operating expenses includes $16.9 million of additional expense in 2021 from ACT's operating results. Excluding the results of ACT, the expense decreased by $66.5 million, primarily due to a year-over-year increase in gain on sales of equipment. 52 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Consolidated Other Expenses, net The following table summarizes fluctuations in certain non-operating expenses, included in our consolidated statements of comprehensive income: 2021 2020 2021 vs. 2020 (Dollars in thousands) Increase (decrease) Interest income $ (1,173) $ (1,928) (39.2 %) Interest expense $ 21,140 $ 17,309 22.1 % Other income, net $ (28,905) $ (11,254) 156.8 % Income tax expense $ 230,887 $ 149,676 54.3 % Interest income — Interest income includes interest earned from financing revenue equipment to independent contractors, as well as interest earned from our investments. 2021 Compared to 2020 — The decrease in consolidated interest income is primarily due to the rebalancing of our portfolio to cash and cash equivalents investments, due to lower yields from other types of short-term investments during 2021. Interest expense — Interest expense is comprised of debt and finance lease interest expense as well as amortization of deferred loan costs. 2021 Compared to 2020 — Consolidated interest expense increased due to higher overall debt balances from the 2021 Debt Agreement which was entered into on September 3, 2021 and replaced the July 2021 Term Loan and 2017 Debt Agreement. See Note 15 in Part II, Item 8 of this Annual Report for further information related to the 2021 Debt Agreement and related interest rates and deferred loan costs. Other income, net — Other income, net is primarily comprised of income from unrealized gains and (losses) from our various equity investments, including our Embark and TRP investments, as well as certain other non-operating income and expense items that may arise outside of the normal course of business. See Note 6 in Part II, Item 8, of this Annual Report. 2021 Compared to 2020 — The increase in consolidated other income is primarily due to unrealized gains recognized from our investment in Embark and an increase in unrealized gains recognized from other investments within our portfolio. Income tax expense — In addition to the discussion below, Note 13 in Part II, Item 8 of this Annual Report provides further analysis related to income taxes. 2021 Compared to 2020 — The increase in consolidated income tax expense was primarily due to an increase in income before income taxes which was partially offset by a reduction in the state deferred tax liability due to our recent acquisitions and adjustments to state tax rates and apportionment. All these factors resulted in a 2021 effective tax rate of 23.7% and a 2020 effective tax rate of 26.7%. 53 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Non-GAAP Financial Measures The terms "Adjusted Net Income Attributable to Knight-Swift," "Adjusted EPS," "Adjusted Operating Income," "Adjusted Operating Ratio", and "Free Cash Flows," as we define them, are not presented in accordance with GAAP. These financial measures supplement our GAAP results in evaluating certain aspects of our business. We believe that using these measures improves comparability in analyzing our performance because they remove the impact of items from our operating results that, in our opinion, do not reflect our core operating performance. Management and the Board focus on Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, Adjusted Operating Income, Adjusted Operating Ratio, and Free Cash Flows as key measures of our performance, all of which are reconciled to the most comparable GAAP financial measures and further discussed below. We believe our presentation of these non-GAAP financial measures is useful because it provides investors and securities analysts the same information that we use internally for purposes of assessing our core operating performance. Adjusted Net Income Attributable to Knight-Swift, Adjusted EPS, Adjusted Operating Income, Adjusted Operating Ratio, and Free Cash Flows are not substitutes for their comparable GAAP financial measures, such as net income, cash flows from operating activities, operating income, operating margin, or other measures prescribed by GAAP. There are limitations to using non-GAAP financial measures. Although we believe that they improve comparability in analyzing our period to period performance, they could limit comparability to other companies in our industry if those companies define these measures differently. Because of these limitations, our non-GAAP financial measures should not be considered measures of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis. Pursuant to the requirements of Regulation G, the following tables reconcile GAAP consolidated net income attributable to Knight-Swift to non-GAAP consolidated Adjusted Net Income attributable to Knight-Swift, GAAP consolidated earnings per diluted share to non-GAAP consolidated Adjusted Earnings per Diluted Share, GAAP consolidated operating ratio to non-GAAP consolidated Adjusted Operating Ratio, GAAP reportable segment operating income to non-GAAP reportable segment Adjusted Operating Income, and GAAP reportable segment operating ratio to non-GAAP reportable segment Adjusted Operating Ratio. Note regarding presentation: A discussion in changes in our results of operations from 2019 to 2020 has been omitted from this Annual Report, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Annual Report filed with the SEC on February 25, 2021. Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS 2021 2020 (Dollars in thousands) GAAP: Net income attributable to Knight-Swift $ 743,388 $ 410,002 Adjusted for: Income tax expense attributable to Knight-Swift 230,887 149,676 Income before income taxes attributable to Knight-Swift 974,275 559,678 Amortization of intangibles 1 55,299 45,895 Change in fair value of deferred earnout 2 — 6,730 Impairments 3 299 5,335 Legal accruals 4 (2,481) 6,160 COVID-19 incremental costs 5 — 12,259 Transaction fees 6 4,445 — Write-off of deferred debt issuance costs 7 1,024 — Adjusted income before income taxes 1,032,861 636,057 Provision for income tax expense at effective rate (244,680) (169,910) Non-GAAP: Adjusted Net Income Attributable to Knight-Swift $ 788,181 $ 466,147 54 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Note: Since the numbers reflected in the table below are calculated on a per share basis, they may not foot due to rounding. 2021 2020 GAAP: Earnings per diluted share $ 4.45 $ 2.40 Adjusted for: Income tax expense attributable to Knight-Swift 1.38 0.88 Income before income taxes attributable to Knight-Swift 5.83 3.28 Amortization of intangibles 1 0.33 0.27 Change in fair value of deferred earnout 2 — 0.04 Impairments 3 — 0.03 Legal accruals 4 (0.01) 0.04 COVID-19 incremental costs 5 — 0.07 Transaction fees 6 0.03 — Write-off of deferred debt issuance costs 7 0.01 — Adjusted income before income taxes 6.18 3.73 Provision for income tax expense at effective rate (1.46) (1.00) Non-GAAP: Adjusted EPS $ 4.72 $ 2.73 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in the 2017 Merger, the July 5, 2021 ACT Acquisition, and other acquisitions. 2 "Change in fair value of deferred earnout" reflects the expense for the change in fair value of a deferred earnout related to the acquisition of a warehousing company, which is recorded in "Miscellaneous operating expenses." 3 "Impairments" reflects the following non-cash impairments: • During 2021, impairments related to certain revenue equipment held for sale (within the non-reportable segments and the Truckload segment); • During 2020, impairments related to investments in certain alternative fuel technology (within the non-reportable segments), certain tractors (within the Truckload segment), certain legacy trailers (within the non-reportable segments) as a result of a softer used equipment market, and trailer tracking equipment (within the Truckload segment). 4 "Legal accruals" are included in "Miscellaneous operating expenses" in the consolidated statements of comprehensive income and reflect the following: • During 2021, the reversal of an accrued legal matter previously identified as probable in 2019 was based on a recent decision of the appellate court, resulting in a change to a remote likelihood that a loss was incurred. Additional 2021 legal costs relate to certain class action lawsuits arising from employee and contract related matters. • During 2020, costs related to certain class action lawsuits arising from employee and contract related matters. 5 "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 mechanics, additional disinfectants and cleaning supplies, and various other pandemic-specific items. The costs are clearly separable from our normal business operations and are not expected to recur once the pandemic subsides. 6 "Transaction fees" consisted of legal and professional fees associated with the acquisitions of UTXL, ACT, and MME. The transaction fees are included within "Miscellaneous operating expenses" in the consolidated statements of comprehensive income. 7 "Write-off of deferred debt issuance costs" was incurred from replacing the 2017 Debt Agreement with the 2021 Debt Agreement. 55 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Non-GAAP Reconciliation: Consolidated Adjusted Operating Income and Adjusted Operating Ratio 2021 2020 GAAP Presentation (Dollars in thousands) Total revenue $ 5,998,019 $ 4,673,863 Total operating expenses (5,032,322) (4,109,425) Operating income $ 965,697 $ 564,438 Operating ratio 83.9 % 87.9 % Non-GAAP Presentation Total revenue $ 5,998,019 $ 4,673,863 Truckload and LTL fuel surcharge (466,129) (304,656) Revenue, excluding truckload and LTL fuel surcharge 5,531,890 4,369,207 Total operating expenses 5,032,322 4,109,425 Adjusted for: Truckload and LTL fuel surcharge (466,129) (304,656) Amortization of intangibles 1 (55,299) (45,895) Change in fair value of deferred earnout 2 — (6,730) Impairments 3 (299) (5,335) Legal accruals 4 2,481 (6,160) COVID-19 incremental costs 5 — (12,259) Transaction fees 6 (4,445) — Adjusted Operating Expenses 4,508,631 3,728,390 Adjusted Operating Income $ 1,023,259 $ 640,817 Adjusted Operating Ratio 81.5 % 85.3 % 1 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 1. 2 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 2. 3 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 3. 4 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 4. 5 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 5. 6 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 6 . 56 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Non-GAAP Reconciliation: Reportable Segment Adjusted Operating Income and Adjusted Operating Ratio Truckload Segment 2021 2020 GAAP Presentation (Dollars in thousands) Total revenue $ 4,098,005 $ 3,786,030 Total operating expenses (3,313,569) (3,207,518) Operating income $ 784,436 $ 578,512 Operating ratio 80.9 % 84.7 % Non-GAAP Presentation Total revenue $ 4,098,005 $ 3,786,030 Fuel surcharge (415,606) (304,656) Intersegment transactions (1,128) (753) Revenue, excluding fuel surcharge and intersegment transactions 3,681,271 3,480,621 Total operating expenses 3,313,569 3,207,518 Adjusted for: Fuel surcharge (415,606) (304,656) Intersegment transactions (1,128) (753) Amortization of intangibles 1 (1,295) (1,296) Impairments 2 (41) (1,131) COVID-19 incremental costs 3 — (12,146) Adjusted Operating Expenses 2,895,499 2,887,536 Adjusted Operating Income $ 785,772 $ 593,085 Adjusted Operating Ratio 78.7 % 83.0 % 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in historical Knight acquisitions. 2 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 3. 3 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 5 . 57 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Logistics Segment 2021 2020 GAAP Presentation (Dollars in thousands) Total revenue $ 817,003 $ 375,841 Total operating expenses (723,083) (355,596) Operating income $ 93,920 $ 20,245 Operating ratio 88.5 % 94.6 % Non-GAAP Presentation Total revenue $ 817,003 $ 375,841 Intersegment transactions (18,314) (10,742) Revenue, excluding intersegment transactions 798,689 365,099 Total operating expenses 723,083 355,596 Adjusted for: Intersegment transactions (18,314) (10,742) Amortization of intangibles 1 (765) — Adjusted Operating Expenses 704,004 344,854 Adjusted Operating Income $ 94,685 $ 20,245 Adjusted Operating Ratio 88.1 % 94.5 % 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in the UTXL acquisition. LTL Segment 2021 GAAP Presentation (Dollars in thousands) Total revenue $ 396,308 Total operating expenses (365,139) Operating income $ 31,169 Operating ratio 92.1 % Non-GAAP Presentation Total revenue $ 396,308 Fuel surcharge (50,523) Revenue, excluding fuel surcharge and intersegment transactions 345,785 Total operating expenses 365,139 Adjusted for: Fuel surcharge (50,523) Amortization of intangibles 1 (7,124) Adjusted Operating Expenses 307,492 Adjusted Operating Income 38,293 Adjusted Operating Ratio 88.9 % 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified with the ACT Acquisition and MME Acquisition. 58 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Intermodal Segment 2021 2020 GAAP Presentation (Dollars in thousands) Total revenue $ 458,867 $ 391,462 Total operating expenses (416,807) (392,405) Operating income (loss) $ 42,060 $ (943) Operating ratio 90.8 % 100.2 % Non-GAAP Presentation Total revenue $ 458,867 $ 391,462 Intersegment transactions (284) (364) Revenue, excluding intersegment transactions 458,583 391,098 Total operating expenses 416,807 392,405 Adjusted for: Intersegment transactions (284) (364) COVID-19 incremental costs 1 — (113) Adjusted Operating Expenses 416,523 391,928 Adjusted Operating Income (Loss) $ 42,060 $ (830) Adjusted Operating Ratio 90.8 % 100.2 % 1 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 5. Non-GAAP Reconciliation: Free cash flow 2021 GAAP: Cash flows from operations $ 1,190,153 Adjusted for: Proceeds from sale of property and equipment, including assets held for sale 252,080 Purchases of property and equipment (534,096) Non-GAAP: Free cash flow $ 908,137 59 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Liquidity and Capital Resources Sources of Liquidity The following table presents our available sources of liquidity as of December 31, 2021: Source: Amount (In thousands) Cash and cash equivalents, excluding restricted cash $ 261,001 Availability under 2021 Revolver, due September 2026 1 775,969 Availability under 2021 RSA, due April 2024 2 55,700 Availability under 2021 Prudential Notes, issuance ending October 2023 3 80,000 Total unrestricted liquidity $ 1,172,670 Cash and cash equivalents – restricted 4 89,022 Restricted investments, held-to-maturity, amortized cost 4 5,866 Total liquidity, including restricted cash and restricted investments $ 1,267,558 1 As of December 31, 2021, we had $260.0 million in borrowings under our $1.1 billion 2021 Revolver. We additionally had $64.0 million in outstanding letters of credit (discussed below), leaving $776.0 million available under the 2021 Revolver. 2 Based on eligible receivables at December 31, 2021, our borrowing base for the 2021 RSA was $400.0 million, while outstanding borrowings were $279.0 million. We additionally had $65.3 million in outstanding letters of credit (discussed below), leaving $55.7 million available under the 2021 RSA. 3 As of December 31, 2021, we had $45.0 million outstanding principal on our shelf notes issued under our $125.0 million 2021 Prudential Notes, leaving $80.0 million available for issuance under the 2021 Prudential Notes. 4 Restricted cash and restricted investments are primarily held by our captive insurance companies for claims payments. "Cash and cash equivalents – restricted" consists of $87.2 million, which is included in "Cash and cash equivalents — restricted" in the consolidated balance sheets and is held by Mohave and Red Rock for claims payments. The remaining $1.8 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, expand our network of LTL service centers, and, to a lesser extent, fund upgrades to our terminals and technology in our various service offerings. We expect net cash capital expenditures, including net cash expenditures of our LTL segment, will be in the range of $550.0 to $600.0 million in 2022. The range provided excludes cash outlays for potential acquisitions. 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 2021 Revolver (if not then fully drawn), extend the maturity of then-outstanding debt, rely on alternative financing arrangements, engage in asset sales, limit our fleet size, or operate our revenue equipment for longer periods. There can be no assurance that we will be able to obtain additional debt under our existing financial arrangements to satisfy our ongoing capital requirements. However, we believe the combination of our expected cash flows, financing available through operating and finance leases, available funds under our accounts receivable securitization, and availability under the 2021 Revolver will be sufficient to fund our expected capital expenditures for at least the next twelve months. Refer to Note 18 in Part II, Item 8 of this Annual Report for additional discussion of our short-term and long-term 60 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED contractual payment obligations related to purchase commitments. Principal and Interest Payments — As of December 31, 2021, we had debt, accounts receivable securitization, and finance lease obligations of $2.1 billion, 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. Prior to the maturity of our 2021 RSA, 2021 Term Loans, 2021 Revolver, Prudential Notes, and other debt, we expect to be contractually obligated to make interest payments of approximately $7.5 million, $46.7 million, $13.0 million, $4.5 million, and $0.2 million, respectively. Refer to Notes 14 and 15 in Part II, Item 8 of this Annual Report for additional discussion of the principal payment obligations related to the 2021 RSA and 2021 Debt Agreement. Refer to Note 16 in Part II, Item 8 of this Annual Report for additional discussion on our contractual principal and interest payment obligations for finance leases. Letters of Credit — Pursuant to the terms of the 2021 Debt Agreement and the 2021 RSA, our lenders may issue standby letters of credit on our behalf. When we have letters of credit outstanding, it reduces the availability under our 2021 Revolver or 2021 RSA. Standby letters of credit are typically issued for the benefit of regulatory authorities, insurance companies and state departments of insurance for the purpose of satisfying certain collateral requirements, primarily related to our automobile, workers' compensation, and general insurance liabilities. Share Repurchases — From time to time, and depending on free cash flow availability, debt levels, stock prices, general economic and market conditions, as well as Board approval, we may repurchase shares of our outstanding common stock. The 2020 Knight-Swift Repurchase Plan had $192.8 million available as of December 31, 2021. See further details regarding our share repurchases under Note 20 in Part II, Item 8 of this Annual Report. Working Capital We had working capital surpluses of $339.5 million as of December 31, 2021 and $83.7 million as of December 31, 2020, due to an increase in trade receivables, the April 2021 refinance of our accounts receivable securitization (resulting in a reclassification to a noncurrent liability), partially offset by the reclassification of our 2021 Term Loan A-1 to a current liability (due December 2022). Material Debt Agreements As of December 31, 2021, we had $2.1 billion in material debt obligations at the following carrying values: • $199.7 million: 2021 Term Loan A-1, due December 2022, net of $0.3 million in deferred loan costs • $199.6 million: 2021 Term Loan A-2, due September 2024, net of $0.4 million in deferred loan costs • $798.4 million: 2021 Term Loan A-3, due September 2026, net of $1.6 million in deferred loan costs • $278.5 million: 2021 RSA outstanding borrowings, net of $0.5 million in deferred loan costs • $306.2 million: Finance lease obligations • $260.0 million: 2021 Revolver, due September 2026 • $52.3 million: Other, net of $0.1 million in deferred loan costs As of December 31, 2020, we had $913.6 million in material debt obligations at the following carrying values: • $298.9 million: 2017 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: 2017 Revolver, due October 2022 Key terms and other details regarding our material debt obligations and finance leases are discussed in Notes 14, 15, and 16 in Part II, Item 8 of this Annual Report, and are incorporated by reference herein. 61 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 2021 2020 Change (In thousands) Net cash provided by operating activities $ 1,190,153 $ 919,645 $ 270,508 Net cash used in investing activities (1,816,733) (480,712) (1,336,021) Net cash provided by (used in) financing activities 779,326 (443,884) 1,223,210 Net Cash Provided by Operating Activities 2021 Compared to 2020 — The $270.5 million increase in net cash provided by operating activities was primarily due to $214.0 million in additional net cash provided by ACT's operating activities in 2021. Net Cash Used in Investing Activities 2021 Compared to 2020 — Net cash used in investing activities increased by $1.3 billion, as we spent $1.5 billion on acquisitions in 2021, compared to $46.8 million in 2020. Net Cash Provided By (Used in) Financing Activities 2021 Compared to 2020 — Net cash related to financing activities increased by $1.2 billion, primarily due to the $1.2 billion in proceeds from the 2021 Debt Agreement. Inflation Most of our operating expenses are inflation-sensitive, with inflation generally leading to increased costs of operations. Price increases in manufacturer revenue equipment has impacted the cost for us to acquire new equipment. Cost increases have also impacted the cost of parts for equipment repairs and maintenance. The qualified driver shortage experienced by the trucking industry overall has had the effect of increasing compensation paid to our driving associates. We have also experienced inflation in insurance and claims cost related to health insurance and claims as well as auto liability insurance and claims. Prolonged periods of inflation could cause interest rates, fuel, wages, and other costs to increase as well. Any of these factors could adversely affect our results of operations unless freight rates correspondingly increase. Critical Accounting Estimates The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that impact the amounts reported in our consolidated financial statements and accompanying notes. Therefore, the reported amounts of assets, liabilities, revenue, expenses, and associated disclosures of contingent assets and liabilities are affected by these estimates and assumptions. We evaluate these estimates and assumptions on an ongoing basis, utilizing historical experience, consultation with experts, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates and assumptions, and it is possible that materially different amounts could be reported using differing estimates or assumptions. We consider our critical accounting estimates to be those that require us to make more significant judgments and estimates when we prepare our financial statements. Note 2 in Part II, Item 8 of this Annual Report describes the Company's accounting policies. The following discussion should be read in conjunction with Note 2, as it presents uncertainties involved in applying the accounting policies, and provides insight into the quality of management's estimates and variability in the amounts recorded for these critical accounting estimates. Our critical accounting estimates include the following: Claims Accruals — Insurance and claims expense varies as a percentage of total revenue, based on the frequency and severity of claims incurred in a given period, as well as changes in claims development trends. The actual cost to settle our self-insured claim liabilities may differ from our reserve estimates due to legal costs, claims that have been incurred but not reported, and various other uncertainties, including the inherent difficulty in estimating the severity of the claim and the potential judgment or settlement amount to dispose of the claim. If 62 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED claims development factors that are based upon historical experience had increased by 10%, our claims accrual as of December 31, 2021 would have potentially increased by $36.3 million. Refer to Note 12, in Part II, Item 8 of this Annual Report for discussion about the changes in the claims accrual balance. Goodwill and Indefinite-lived Intangible Assets — The test of goodwill requires judgment, including the identification of reporting units, assigning assets (including goodwill) and liabilities to reporting units and determining the fair value of each reporting unit. Fair value of the reporting unit is determined using a combination of comparative valuation multiples of publicly traded companies, internal transaction methods, and discounted cash flow models. Estimating the fair value of reporting units includes several significant assumptions, including future cash flow estimates, determination of appropriate discount rates, and other assumptions that management believed reasonable under the circumstances. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. Knight-Swift evaluated its goodwill associated with the 2017 Merger and various acquisitions as of June 30, 2021 and 2020. The evaluations were completed using fair value measurement guidance prescribed in ASC 350, Intangibles – Goodwill and Other. The fair value of the goodwill was established using an equal weighting of both the income and market approaches. In evaluating this quantitative analysis, the Company determined that it was more likely than not that fair value exceeded carrying value for the Company's reporting units as of June 30, 2021 and 2020. The test of indefinite-lived intangible assets consists of a comparison of the estimated fair value of certain trade names to their carrying values. The determination of the fair value of the trade names requires management to make significant estimates and assumptions related to forecasts of future revenues, discount rates, and royalty rates. Changes in these assumptions could materially affect the determination of the fair value of the trade names, the amount of any trade names impairment charge, or both. M anagement evaluated trade names for impairment as of June 30, 2021 and 2020 noting that the fair value exceeded carrying value for the trade name. Refer to Note 10, in Part II, Item 8 of this Annual Report for discussion about the changes in the goodwill and indefinite-lived intangible asset balances. Depreciation and Amortization — Selecting the appropriate accounting method requires management judgment, as there are multiple acceptable methods that are in accordance with GAAP, including straight-line, declining-balance, and sum-of-the-years' digits. As discussed in Note 2 included in Part II, Item 8 of this Annual Report, property and equipment is depreciated on a straight-line basis and intangible customer relationships are amortized on a straight-line basis over the estimated useful lives of the assets. We believe that these methods properly spread the costs over the useful lives of the assets. Management judgment is also involved when determining estimated useful lives of the Company's long-lived assets. We determine useful lives of our long-lived assets, based on historical experience, as well as future expectations regarding the period we expect to benefit from the asset. Factors affecting estimated useful lives of property and equipment may include estimating loss, damage, obsolescence, and company policies around maintenance and asset replacement. Factors affecting estimated useful lives of long-lived intangible assets may include legal, contractual, or other provisions that limit useful lives, historical experience with similar assets, future expectations of customer relationships, among others. Refer to Note 10, in Part II, Item 8 of this Annual Report for discussion about the impact of the amortization of definite-lived intangibles on our results for 2021 and 2020. Impairments of Long-lived Assets — Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals, as necessary. Estimating fair value includes several significant assumptions, including future cash flow estimates, determination of appropriate discount rates, and other assumptions that management believed reasonable under the circumstances. Changes in these estimates and assumptions could materially affect the determination of fair value and/or impairment. Refer to Note 23, in Part II, Item 8 of this Annual Report for discussion about the changes in long-lived assets and the impact on our results for 2021 and 2020. 63 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Income Taxes — Significant management judgment is required in determining our provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. We periodically assess the likelihood that all or some portion of deferred tax assets will be recovered from future taxable income. To the extent we believe the likelihood of recovery is not sufficient, a valuation allowance is established for the amount determined not to be realizable. Management judgment is necessary in determining the frequency at which we assess the need for a valuation allowance, the accounting period in which to establish the valuation allowance, as well as the amount of the valuation allowance. We believe that we have adequately provided for our future tax consequences based upon current facts and circumstances and current tax law. However, should our tax positions be challenged, different outcomes could result and have a significant impact on the amounts reported in our consolidated statements of comprehensive income. Management judgment is also required regarding a variety of other factors including the appropriateness of tax strategies. We utilize certain income tax planning strategies to reduce our overall income taxes. It is possible that certain strategies might be disallowed, resulting in an increased liability for income taxes. Significant management judgments are involved in assessing the likelihood of sustaining the strategies and determining the likely range of defense and settlement costs, in the event that tax strategies are challenged by taxing authorities. An ultimate result worse than our expectations could adversely affect our results of operations. Refer to Note 13, in Part II, Item 8 of this Annual Report for discussion about the changes in the balances of deferred taxes assets and related valuation allowances. Leases — At the inception of a lease, management judgment is involved in the determination of the discount rate, the determination of whether a contract contains a lease, classification of operating versus finance lease, assessment of useful lives, and estimation of residual values. Discounted future minimum lease payments are used in determining the lease classification represent the present value of minimum rental payments called for over the lease term, inclusive of residual value guarantees (if applicable) and amounts that would be required to be paid, if any, by the Company upon default for leases containing subjective acceleration or cross default clauses. Refer to Note 16, in Part II, Item 8 of this Annual Report for discussion about the changes in balance of operating leases. Stock-based Compensation — We issue several types of stock-based compensation, including awards that vest, based on service conditions, performance conditions, or a combination of service and performance conditions. 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. There is also some judgement involved with estimating expected forfeiture rates as we have opted to net the benefit of expected forfeitures against our stock-based compensation expense. Refer to Note 21, in Part II, Item 8 of this Annual Report for discussion about the assumptions related to these awards and the impact on our results for 2021 and 2020. Legal Settlements and Reserves — See Note 19 in Part II Item 8 of this Annual Report. Recently Issued Accounting Pronouncements See Note 3 in Part II, Item 8 of this Annual Report, which is incorporated herein by reference, for recently issued accounting pronouncements that could have an impact on our consolidated financial statements.