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 other complementary services. Our objective is to operate our business with industry-leading margins and continued organic growth and growth through acquisitions while providing safe, high-quality, cost-effective solutions for our customers. 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, LTL, Logistics, and Intermodal. Additionally, we have various non-reportable segments. Key Financial Highlights During 2022, consolidated total revenue was $7.4 billion, which is a 23.9% increase over 2021. Consolidated operating income was $1.1 billion in 2022, reflecting an increase of 13.1% from 2021. Consolidated net income attributable to Knight-Swift increased by 3.8% from 2021 to $771.3 million. • Truckload — 83.5% operating ratio during 2022, with a 3.5% increase in revenue, excluding fuel surcharge and intersegment transactions, compared to 2021. • LTL — 88.2% operating ratio during 2022 as a result of continued improvements in yields and efficiencies. • Logistics — 85.5% operating ratio during 2022. Operating income improved by 42.6%. Load count grew by 24.0%, leading to a 14.0% increase in revenue, excluding intersegment transactions. • Intermodal — 90.1% operating ratio during 2022, a 70 basis point improvement compared to 2021, leading to a 14.5% increase in operating income with revenue growth of 5.9%, excluding intersegment transactions. • Non-reportable Segments — Revenue growth of 68.6% was supported by the activities within our operating segments of insurance, equipment maintenance, equipment leasing, and warehousing, leading to a 158.9% improvement in operating income to $36.5 million during 2022, compared to 2021. • Embark — The value of our 2021 initial investment in Embark declined, resulting in an unrealized loss that negatively impacted earnings per diluted share and Adjusted EPS 1 by $0.25 during 2022. • Liquidity and Capital — During 2022, we generated $1.4 billion in operating cash flows. Our Free Cash Flow 1 was $818.7 million. We paid down $212.7 million in long-term debt, $62.1 million in finance lease liabilities, and $42.9 million in cash on our operating lease liabilities, and reduced the outstanding net balances on our revolving credit facilities by $77.0 million. In 2022, we repurchased approximately $300 million worth of shares, and issued $78.3 million in dividends to our stockholders. Gain on sale of revenue equipment increased to $92.9 million in 2022, compared to $74.8 million in 2021. We ended 2022 with $196.8 million in unrestricted cash and cash equivalents, $43.0 million outstanding on the 2021 Revolver, $1.0 billion face value outstanding on the 2021 Term Loans, and $7.0 billion of stockholders' equity. 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. ________ 1 Refer to "Non-GAAP Financial Measures" below. 40 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Key Financial Data and Operating Metrics 2022 2021 GAAP financial data: (Dollars in thousands, except per share data) Total revenue $ 7,428,582 $ 5,998,019 Revenue, excluding truckload and LTL fuel surcharge $ 6,508,165 $ 5,531,890 Net income attributable to Knight-Swift $ 771,325 $ 743,388 Earnings per diluted share $ 4.73 $ 4.45 Operating ratio 85.3 % 83.9 % Non-GAAP financial data: Adjusted Net Income Attributable to Knight-Swift 1 $ 821,196 $ 788,181 Adjusted EPS 1 $ 5.03 $ 4.72 Adjusted Operating Ratio 1 82.2 % 81.5 % Revenue equipment statistics by segment: Truckload Average tractors 2 18,110 18,019 Average trailers 3 74,779 67,606 LTL Average tractors 4 3,176 2,735 Average trailers 5 8,431 7,413 Intermodal Average tractors 613 597 Average containers 11,786 10,847 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 Our tractor fleet within the Truckload segment had a weighted average age of 2.7 years and 2.5 years as of December 31, 2022 and 2021, respectively. 3 Note that average trailers includes 8,249 and 6,388 trailers within our non-reportable operating segments. Our trailer fleet within the Truckload segment had a weighted average age of 9.9 years and 8.3 years as of December 31, 2022 and 2021, respectively. 4 Our LTL tractor fleet had a weighted average age of 4.3 years as of December 31, 2022, and includes 711 and 667 tractors from ACT's and MME's dedicated and other businesses for 2022 and 2021, respectively. 5 Our LTL trailer fleet had a weighted average age of 8.1 years as of December 31, 2022, and includes 968 and 860 trailers from ACT's and MME's dedicated and other businesses for 2022 and 2021, respectively. 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 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 2.1% 1 in 2022, as compared to a 5.7% 1 decrease in 2021. The year-over-year improvement primarily reflects increases in consumer spending, exports, and inventory investment that were partly offset by a decrease in housing investment. The national unemployment rate was 3.5% 2 as of December 31, 2022, as compared to 3.9% 2 as of December 31, 2021. Early estimates of the full-year 2022 US employment cost index indicate a year-over-year increase of 5.1% 2 and a sequential increase of 1.0% 2 . The freight market outlook for 2023 includes the following: • Continued softness in freight demand with few non-contract opportunities through the first half of 2023 as shippers work through higher inventory levels; • Freight volumes improve in the second half of the year with a more typical peak season; • Spot pricing troughs in the first quarter of 2023 and builds throughout the year; • Demand continues for trailer pools; • Small carriers continue to exit as a result of lower spot rates and significantly higher operating costs; • LTL demand pressured but remains more stable than truckload; • LTL year-over-year improvement in revenue, excluding fuel surcharge, per hundredweight; • Inflationary pressures ease in many cost areas but remain elevated on a year-over-year basis; • Demand in the used equipment market weakens as small carriers struggle; • We expect the driver market to remain competitive throughout 2023. _________ 1 bea.gov 2 bls.gov 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 Results of Operations — Summary Notes regarding presentation: A discussion of changes in our results of operations from 2020 to 2021 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 2021 Annual Report filed with the SEC on February 24, 2022. 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 2022 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: 2022 Compared to 2021 — The $27.9 million increase in net income attributable to Knight-Swift to $771.3 million in 2022 from $743.4 million in 2021, includes the following: • Contributor — $95.4 million increase in operating income from our LTL segment representing ACT's and MME's full year 2022 results, compared to the portion of 2021 following the respective acquisition dates. • Contributor — $40.0 million increase in operating income within our Logistics segment driven by a 24.0% increase in load count. • Contributor — $6.1 million increase in operating income within our Intermodal segment driven by a 24.3% increase in revenue per load, partially offset by a 14.8% decrease in load count. • Contributor — $22.4 million improvement in operating results within our non-reportable segments, driven by revenue growth of 68.6% related to our expanded services to third-party carriers. • Offset — $37.9 million decrease in operating income within our Truckload segment as a result of a 6.3% decrease in total miles per tractor. • Offset — $54.9 million decrease in "Other (expenses) income, net," primarily due to unrealized losses recognized from our investment in Embark, compared to a gain during 2021. • Offset — $18.5 million increase in consolidated income tax expense, primarily due to an increase in income before income taxes. This resulted in a 2022 effective tax rate of 24.4% and a 2021 effective tax rate of 23.7%. See additional discussion of our operating results within "Results of Operations — Consolidated Operating and Other Expenses" below. Results of Operations — Segment Review The Company has four reportable segments: Truckload, LTL, Logistics, and Intermodal, as well as certain non-reportable segments. Refer to Note 25 in Part II, Item 8 of this Annual Report for descriptions of our segments. Refer to Part I, Item 1, "Business – Our Mission and Company Strategy" of this Annual Report for discussion related to our segment operating strategies. Consolidating Tables for Total Revenue and Operating Income 2022 2021 Revenue: (Dollars in thousands) Truckload $ 4,531,115 61.0 % $ 4,098,005 68.3 % LTL $ 1,069,554 14.4 % $ 396,308 6.6 % Logistics $ 920,707 12.4 % $ 817,003 13.6 % Intermodal $ 485,786 6.5 % $ 458,867 7.7 % Subtotal $ 7,007,162 94.3 % $ 5,770,183 96.2 % Non-reportable segments $ 516,735 7.0 % $ 306,414 5.1 % Intersegment eliminations $ (95,315) (1.3 %) $ (78,578) (1.3 %) Total revenue $ 7,428,582 100.0 % $ 5,998,019 100.0 % 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 2022 2021 Operating income (Dollars in thousands) Truckload $ 746,581 68.4 % $ 784,436 81.2 % LTL $ 126,609 11.6 % $ 31,169 3.2 % Logistics $ 133,942 12.3 % $ 93,920 9.7 % Intermodal $ 48,167 4.4 % $ 42,060 4.4 % Subtotal $ 1,055,299 96.7 % $ 951,585 98.5 % Non-reportable segments $ 36,529 3.3 % $ 14,112 1.5 % Operating income $ 1,091,828 100.0 % $ 965,697 100.0 % 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 with approximately 13,400 irregular route and 4,700 dedicated tractors. • Our LTL business, which was initially established in 2021 through the ACT Acquisition and later the MME acquisition, provides our customers with regional LTL transportation service through our growing network of approximately 110 facilities and a door count of approximately 4,400. Our LTL segment operates approximately 3,200 tractors and approximately 8,400 trailers, including equipment used for ACT's and MME's dedicated and other businesses. The LTL segment also provides national coverage to our customers by utilizing partner carriers for areas outside of our direct network. • Our Logistics and Intermodal segments 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. We continue to offer power-only services through our Logistics segment by leveraging our fleet of over 79,000 trailers as of December 31, 2022. • Our non-reportable segments include support services provided to our customers and third-party carriers including insurance, equipment maintenance, equipment leasing, warehousing, trailer parts manufacturing, and warranty services. Our non-reportable segments also include 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 programs, which serve to recover a majority of our fuel costs. This generally applies only to loaded miles for our Truckload and LTL segments 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 Truckload and LTL segments. Expenses Our most significant expenses typically vary with miles traveled and include fuel, driving associate-related expenses (such as wages and benefits), and services purchased from third-party service providers (including other trucking companies, railroad and drayage providers, and independent contractors). 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 performance, fleet age, operating efficiency, and other factors. Our primary fixed costs are depreciation and lease expense for revenue equipment and terminals, non-driver employee compensation, amortization of intangible assets, and interest expenses. 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 Operating Statistics We measure our consolidated and segment results through the operating statistics listed in the table below. Our chief operating decision makers monitor the GAAP results of our reportable segments, supplemented by certain non-GAAP information. Refer to "Non-GAAP Financial Measures" 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 For our Truckload segment this is calculated as average miles traveled with loaded trailer cargo per order. For our LTL segment this is calculated as average miles traveled from the origin service center to the destination service center. 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, LTL, 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 Truckload, LTL, 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 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 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 approximately 13,400 irregular route tractors and approximately 4,700 dedicated route tractors in use during 2022. Generally, we are paid a predetermined rate per mile or per load for our truckload 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 tractors, trailers, and terminals, as well as compensating our non-driver employees. 2022 2021 2022 vs. 2021 (Dollars in thousands, except per tractor data) Increase (decrease) Total revenue $ 4,531,115 $ 4,098,005 10.6 % Revenue, excluding fuel surcharge and intersegment transactions $ 3,811,599 $ 3,681,271 3.5 % GAAP: Operating income $ 746,581 $ 784,436 (4.8 %) Non-GAAP: Adjusted Operating Income 1 $ 747,906 $ 785,772 (4.8 %) Average revenue per tractor 2 $ 210,469 $ 204,299 3.0 % GAAP: Operating ratio 2 83.5 % 80.9 % 260 bps Non-GAAP: Adjusted Operating Ratio 1 2 80.4 % 78.7 % 170 bps Non-paid empty miles percentage 2 14.6 % 13.4 % 120 bps Average length of haul (miles) 2 395 403 (2.0 %) Total miles per tractor 2 76,502 81,629 (6.3 %) Average tractors 2 3 18,110 18,019 0.5 % Average trailers 2 4 74,779 67,606 10.6 % 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined within "Operating Statistics" above. 3 Includes 16,228 and 16,166 company-owned tractors for 2022 and 2021, respectively. 4 Average trailers includes 8,249 and 6,388 trailers from our non-reportable operating segments for 2022 and 2021, respectively. 2022 Compared to 2021 — The Truckload segment's Adjusted Operating Ratio increased by 170 basis points to 80.4% in 2022, as compared to 2021. Revenue, excluding fuel surcharge and intersegment transactions was $3.8 billion, a year-over-year increase of 3.5%. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions, increased 11.4% year-over-year, while total miles decreased 5.8%, reflecting softer freight demand. These factors ultimately led to a 3.0% increase in average revenue per tractor. We continue to add scale by increasing our trailer count, which has grown to approximately 79,000 trailers as of the end of 2022. We believe this positions us to provide valuable capacity to our customers through our Truckload and Logistics segments. We remain focused on managing costs and improving utilization, as we expect inflationary pressures in driver-related costs, equipment maintenance, and insurance to continue to affect the freight market in the first half of 2023. 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 LTL Segment Dothan, Alabama-based ACT and Bismarck, North Dakota-based MME, both acquired in 2021, comprise our LTL segment. 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. Fluctuations within each of these metrics are 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. 2022 2021 2022 vs. 2021 (Dollars in thousands, except per shipment and per hundredweight data) Increase (decrease) Total revenue $ 1,069,554 $ 396,308 169.9 % Revenue, excluding fuel surcharge and intersegment transactions $ 867,292 $ 345,785 150.8 % GAAP: Operating income $ 126,609 $ 31,169 306.2 % Non-GAAP: Adjusted Operating Income 1 $ 142,539 $ 38,293 272.2 % GAAP: Operating ratio 2 88.2 % 92.1 % (390 bps) Non-GAAP: Adjusted Operating Ratio 1 2 83.6 % 88.9 % (530 bps) LTL shipments per day 2 18,642 16,438 13.4 % LTL weight per shipment 2 1,068 1,111 (3.9) % LTL average length of haul (miles) 2 520 518 0.4 % LTL revenue per shipment 2 $ 188.03 $ 161.66 16.3 % LTL revenue xFSR per shipment 2 $ 152.15 $ 141.57 7.5 % LTL revenue per hundredweight 2 $ 17.61 $ 14.55 21.0 % LTL revenue xFSR per hundredweight 2 $ 14.25 $ 12.75 11.8 % LTL average tractors 2 3 3,176 2,735 16.1 % LTL average trailers 2 4 8,431 7,413 13.7 % 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined under "Operating Statistics," above. 3 Includes 711 and 667 tractors from ACT's and MME's dedicated and other businesses for 2022 and 2021, respectively. 4 Includes 968 and 860 trailers from ACT's and MME's dedicated and other businesses for 2022 and 2021, respectively. 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 Our LTL segment operates across approximately 110 facilities with a door count of over 4,400. We generated $867 million in revenue, excluding fuel surcharge and an 83.6% Adjusted Operating Ratio during 2022 in the LTL segment. Revenue, excluding fuel surcharge, per hundredweight was $14.25, while revenue per shipment, excluding fuel surcharge, was $152.15. The ACT and MME teams continue to achieve both customer and cost synergies. Also, during the fourth quarter, the operational systems were converted to allow freight movement through one connected network across both LTL brands. While the system conversion impacted volumes at MME for a period of time, we believe we are well-positioned to leverage the freight opportunities across the connected network with existing and new customers. We expect that our connected LTL network will provide additional opportunities for revenue growth. During 2022, we increased our door count by over 180 and we expect door capacity to continue to grow in 2023. We remain encouraged by the strong performance within our LTL segment, and we continue to look for both organic and inorganic opportunities to geographically expand our footprint within the LTL market. 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. 2022 2021 2022 vs. 2021 (Dollars in thousands, except per load data) Increase (decrease) Total revenue $ 920,707 $ 817,003 12.7 % Revenue, excluding intersegment transactions $ 910,609 $ 798,689 14.0 % GAAP: Operating income $ 133,942 $ 93,920 42.6 % Non-GAAP: Adjusted Operating Income 1 2 $ 135,278 $ 94,685 42.9 % Revenue per load 2 $ 2,242 $ 2,439 (8.1 %) Gross margin percentage 2 21.9 % 18.1 % 380 bps GAAP: Operating ratio 2 85.5 % 88.5 % (300 bps) Non-GAAP: Adjusted Operating Ratio 1 2 85.1 % 88.1 % (300 bps) 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined under "Operating Statistics" above. 2022 Compared to 2021 — Logistics Adjusted Operating Ratio was 85.1%, with a gross margin of 21.9% in 2022, compared to 18.1% in 2021. Logistics load volumes increased by 24.0% as we continue to leverage our consolidated fleet of approximately 79,000 trailers as we build out our power-only service. We continue to innovate with technology designed to remove friction and allow seamless connectivity, leading to services that we expect will capture new opportunities for revenue growth. 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 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. While rail pricing is determined on an annual basis, 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. 2022 2021 2022 vs. 2021 (Dollars in thousands, except per load data) Increase (decrease) Total revenue $ 485,786 $ 458,867 5.9 % Revenue, excluding intersegment transactions $ 485,739 $ 458,583 5.9 % GAAP: Operating income $ 48,167 $ 42,060 14.5 % Average revenue per load 1 $ 3,546 $ 2,852 24.3 % GAAP: Operating ratio 1 90.1 % 90.8 % (70 bps) Load count 136,967 160,774 (14.8 %) Average tractors 2 3 613 597 2.7 % Average containers 2 11,786 10,847 8.7 % 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined within "Operating Statistics" above. 3 Includes 544 and 543 c ompany-owned tractors for 2022 and 2021, respectively. 2022 Compared to 2021 — Revenue grew by 5.9% while the operating ratio improved from 90.8% in 2021 to 90.1% in 2022, resulting in a $6.1 million increase in operating income. Intermodal experienced a 24.3% increase in revenue per load, which was partially offset by a decrease in load count due to softer freight demand and labor challenges across the rail industry. As a result of our network and improved service offerings, we expect to continue to grow with new customers and expand with existing customers. To position Intermodal for continued growth, we increased our average container count by approximately 1,600 in 2022. We remain focused on growing our load count and improving the efficiency of our assets as Intermodal continues to provide value to our customers and is complementary to the many services we offer. Non-reportable Segments Our non-reportable segments include support services provided to our customers and third-party carriers including insurance, equipment maintenance, equipment leasing, warehousing, trailer parts manufacturing, and warranty services. Our non-reportable segments also include certain corporate expenses (such as legal settlements and accruals, certain impairments, and $46.4 million in annual amortization of intangibles related to the 2017 Merger and various acquisitions). 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Total revenue $ 516,735 $ 306,414 68.6 % Operating income $ 36,529 $ 14,112 158.9 % 2022 Compared to 2021 — Operating income improved by 158.9% as a result of a 68.6% increase in revenue. 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. 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 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 the 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 2022 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. 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Salaries, wages, and benefits $ 2,173,933 $ 1,771,772 22.7 % % of total revenue 29.3 % 29.5 % (20 bps) % of revenue, excluding truckload and LTL fuel surcharge 33.4 % 32.0 % 140 bps Salaries, wages, and benefits expense is primarily affected by the total number of miles driven by and rates we pay to our company driving associates, and employee benefits including healthcare, workers' compensation, and other benefits. To a lesser extent, non-driver employee headcount, compensation, and benefits affect this expense. Driving associate wages represent the largest component of salaries, wages, and benefits expense. Several ongoing market factors have reduced the pool of available driving associates, contributing to a challenging driver sourcing market, which we believe will continue. Having a sufficient number of qualified driving associates is a significant headwind, although we continue to seek ways to attract and retain qualified driving associates, including heavily investing in our recruiting efforts, our driving academies, technology, our equipment, and our terminals that improve the experience of driving associates. We expect labor costs (related to both driving associates and non-driver employees) to remain inflationary, which we expect will result in additional pay increases in the future, thereby increasing our salaries, wages, and benefits expense. 2022 Compared to 2021 — The increase in consolidated salaries, wages, and benefits includes a $309.6 million increase from the results of ACT and MME for the full year 2022, compared to the portion of 2021 following the respective acquisition dates. The remaining increase pertained to driving associate pay rates, and an increase in non-driver headcount, resulting in higher non-driver salaries, wages, and benefits. These increases were partially offset by a 6.2% reduction in miles driven by company driving associates, excluding ACT and MME. 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Fuel $ 895,603 $ 546,256 64.0 % % of total revenue 12.1 % 9.1 % 300 bps % of revenue, excluding truckload and LTL fuel surcharge 13.8 % 9.9 % 390 bps Fuel expense consists primarily of diesel fuel expense for our company-owned tractors. 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. 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 Our fuel surcharge programs help to offset increases in fuel prices, but generally apply only to loaded miles for our Truckload and LTL segments 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 Truckload and LTL segments. Therefore, many of these programs have a time lag between when fuel costs change and when the change is reflected in fuel surcharge revenue. Due to this time lag, our fuel expense, net of fuel surcharge, negatively impacts our operating income during periods of sharply rising fuel costs and positively impacts our operating income during periods of falling fuel costs. We continue to utilize our fuel efficiency initiatives such as trailer blades, idle-control, 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. 2022 Compared to 2021 — The increase in consolidated fuel expense includes a $71.8 million increase from the results of ACT for the full year 2022, compared to the portion of 2021 following the acquisition date. The remaining difference is primarily due to an increase in the average DOE fuel price to $5.01 per gallon in 2022 from $3.29 per gallon in 2021, partially offset by a 6.2% reduction in the total miles driven by company driving associates, excluding ACT. 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Operations and maintenance $ 422,872 $ 313,505 34.9 % % of total revenue 5.7 % 5.2 % 50 bps % of revenue, excluding truckload and LTL fuel surcharge 6.5 % 5.7 % 80 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 typically 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 2023, which could increase future driving associate development and recruiting costs and negatively affect our operations and maintenance expense. We expect to continue refreshing our tractor fleet in the coming quarters, subject to availability of new revenue equipment, to maintain or improve the average age of our equipment. 2022 Compared to 2021 — The increase in consolidated operations and maintenance expense includes a $29.3 million increase from the results of ACT for the full year 2022, compared to the portion of 2021 following the acquisition date. The remaining increase was attributed to higher maintenance expenses due to an increase in the average age of our fleet, higher port per diem expenses as we navigate a backlog of shipping containers at ports, and increased hiring expenses as we work to improve our seated truck count. 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 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Insurance and claims $ 455,918 $ 275,378 65.6 % % of total revenue 6.1 % 4.6 % 150 bps % of revenue, excluding truckload and LTL fuel surcharge 7.0 % 5.0 % 200 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. 2022 Compared to 2021 — Consolidated insurance and claims expense increased partially due to the inclusion of $18.4 million of insurance and claims expense from the results of ACT for the full year 2022, compared to the portion of 2021 following the acquisition date. The remaining increase was primarily due to insurance reserves incurred through our expanded third-party carrier insurance program in 2022. 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Operating taxes and licenses $ 111,197 $ 98,784 12.6 % % of total revenue 1.5 % 1.6 % (10 bps) % of revenue, excluding truckload and LTL fuel surcharge 1.7 % 1.8 % (10 bps) Operating taxes and licenses include state franchise taxes, state and federal highway use taxes, property taxes, vehicle license and registration fees, and 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. 2022 Compared to 2021 — The increase in consolidated operating taxes and licenses expense is primarily due to the inclusion of operating taxes and licenses expense from ACT's and MME's results for the full year 2022, compared to the portion of 2021 following the respective acquisition dates. 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Communications $ 23,656 $ 22,486 5.2 % % of total revenue 0.3 % 0.4 % (10 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. 2022 Compared to 2021 — The increase in consolidated communications expense is primarily due to the inclusion of $2.2 million of communications expense from ACT's and MME's results for the full year 2022, compared to the portion of 2021 following the respective acquisition dates. This increase was partially offset by the implementation of new technology on our revenue 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 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Depreciation and amortization of property and equipment $ 594,981 $ 522,596 13.9 % % of total revenue 8.0 % 8.7 % (70 bps) % of revenue, excluding truckload and LTL fuel surcharge 9.1 % 9.4 % (30 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. 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 practices. 2022 Compared to 2021 — The increase in consolidated depreciation and amortization of property and equipment includes a $34.7 million increase of expense from ACT's results for the full year 2022, compared to the portion of 2021 following the acquisition date. The remaining increase is primarily due to an increase in owned versus leased equipment and higher depreciation for capital improvements made to our terminals. 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, terminal improvements, or terminal expansions in 2023. 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Amortization of intangibles $ 64,843 $ 55,299 17.3 % % of total revenue 0.9 % 0.9 % — bps % of revenue, excluding truckload and LTL fuel surcharge 1.0 % 1.0 % — 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. 2022 Compared to 2021 — The increase in consolidated amortization of intangibles for 2022 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. 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 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Rental expense $ 56,856 $ 55,161 3.1 % % of total revenue 0.8 % 0.9 % (10 bps) % of revenue, excluding truckload and LTL fuel surcharge 0.9 % 1.0 % (10 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. 2022 Compa red to 2021 — The increase in consolidated rental expense was primarily due to a $4.7 million increase in expense from ACT's and MME's results for the full year 2022, compared to the portion of 2021 following the respective acquisition dates. This increase was partially offset by 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 2023. 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Purchased transportation $ 1,444,937 $ 1,320,888 9.4 % % of total revenue 19.5 % 22.0 % (250 bps) % of revenue, excluding truckload and LTL fuel surcharge 22.2 % 23.9 % (170 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. 2022 Compared to 2021 — The increase in consolidated purchased transportation expense is primarily due to increased load volumes within our logistics business and inflationary pressures related to services provided by our third party carriers. Purchased transportation expense also includes a $14.0 million increase in expense from ACT's and MME's results for the full year 2022, compared to the portion of 2021 following the respective acquisition dates. We expect that 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. 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Impairments $ 810 $ 299 170.9 % 2022 Compared to 2021 — In 2022, we incurred impairment charges associated with building improvements (within our non-reportable segments). In 2021, we incurred impairment charges associated with revenue equipment held for sale and trailer tracking systems (within our Truckload and non-reportable segments). 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 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Miscellaneous operating expenses $ 91,148 $ 49,898 82.7 % 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. 2022 Compared to 2021 — The increase in net consolidated miscellaneous operating expenses includes $20.7 million of additional expense in 2022 from ACT's and MME's results for the full year 2022, compared to the portion of 2021 following the respective acquisition dates. Net consolidated miscellaneous operating expenses also include a net increase in legal settlements expense of $3.3 million, and higher operating expense associated with increased travel time and return to work programs. These increases were partially offset by an $18.1 million year-over-year increase in gain on sales of equipment, including a $2.3 million increase from ACT reflected in the net increase noted above. Consolidated Other Expenses, net The following table summarizes fluctuations in certain non-operating expenses included in our consolidated statements of comprehensive income: 2022 2021 2022 vs. 2021 (Dollars in thousands) Increase (decrease) Interest income $ (5,439) $ (1,173) 363.7 % Interest expense $ 50,803 $ 21,140 140.3 % Other expenses (income), net $ 25,958 $ (28,905) (189.8 %) Income tax expense $ 249,388 $ 230,887 8.0 % Interest income — Interest income includes interest earned from financing revenue equipment to independent contractors, as well as interest earned from our investments. 2022 Compared to 2021 — The increase in consolidated interest income is primarily due to the higher balances in our interest yielding cash accounts, coupled with an increase in interest rates during 2022. Interest expense — Interest expense is comprised of debt and finance lease interest expense as well as amortization of deferred loan costs. 2022 Compared to 2021 — Consolidated interest expense increased due to higher overall debt balances and an increase in interest rates during 2022. 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 expenses (income), net — Other expenses (income), net is primarily comprised of losses and (gains) from our various equity investments, including our investment in Embark, as well as certain other non-operating income and expense items that may arise outside of the normal course of business. 2022 Compared to 2021 — The unfavorable change in consolidated other expenses (income), net is primarily due to unrealized losses recognized from our investment in Embark, compared to a gain during 2021. 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. 2022 Compared to 2021 — The increase in consolidated income tax expense was primarily due to an increase in income before income taxes. This resulted in a 2022 effective tax rate of 24.4% and a 2021 effective tax rate of 23.7%. 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 Financial Measures The terms "Adjusted Net Income Attributable to Knight-Swift," "Adjusted EPS," "Adjusted Operating Income," "Adjusted Operating Ratio," and "Free Cash Flow," 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. Management and the Board use Free Cash Flow as a key measure of our liquidity. Free Cash Flow does not represent residual cash flow available for discretionary expenditures. 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 Flow 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, GAAP reportable segment operating ratio to non-GAAP reportable segment Adjusted Operating Ratio, and GAAP cash flow from operations to non-GAAP Free Cash Flow. Note regarding presentation: A discussion of changes in our results of operations from 2020 to 2021 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 2021 Annual Report filed with the SEC on February 24, 2022 . Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS 2022 2021 (Dollars in thousands) GAAP: Net income attributable to Knight-Swift $ 771,325 $ 743,388 Adjusted for: Income tax expense attributable to Knight-Swift 249,388 230,887 Income before income taxes attributable to Knight-Swift 1,020,713 974,275 Amortization of intangibles 1 64,843 55,299 Impairments 2 810 299 Legal accruals 3 415 (2,481) Transaction fees 4 — 4,445 Write-off of deferred debt issuance costs 5 — 1,024 Adjusted income before income taxes 1,086,781 1,032,861 Provision for income tax expense at effective rate (265,585) (244,680) Non-GAAP: Adjusted Net Income Attributable to Knight-Swift $ 821,196 $ 788,181 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 Note: Since the numbers reflected in the table below are calculated on a per share basis, they may not foot due to rounding. 2022 2021 GAAP: Earnings per diluted share $ 4.73 $ 4.45 Adjusted for: Income tax expense attributable to Knight-Swift 1.53 1.38 Income before income taxes attributable to Knight-Swift 6.25 5.83 Amortization of intangibles 1 0.40 0.33 Impairments 2 — — Legal accruals 3 — (0.01) Transaction fees 4 — 0.03 Write-off of deferred debt issuance costs 5 — 0.01 Adjusted income before income taxes 6.66 6.18 Provision for income tax expense at effective rate (1.63) (1.46) Non-GAAP: Adjusted EPS $ 5.03 $ 4.72 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 "Impairments" reflects the following non-cash impairments: • 2022 impairment of building improvements (within our non-reportable segments); • 2021 impairments related to certain revenue equipment held for sale (within the non-reportable segments and the Truckload segment). 3 "Legal accruals" are included in "Miscellaneous operating expenses" in the consolidated statements of comprehensive income and reflect the following: • During 2022, the Company decreased the estimated exposure related to certain accrued legal matters previously identified as probable and estimable in prior periods based on recent settlement agreements. Additional 2022 legal costs relate to certain lawsuits arising from employee and contract related matters. • 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. 4 "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. 5 "Write-off of deferred debt issuance costs" was incurred from replacing the 2017 Debt Agreement with the 2021 Debt Agreement. 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 Non-GAAP Reconciliation: Consolidated Adjusted Operating Income and Adjusted Operating Ratio 2022 2021 GAAP Presentation (Dollars in thousands) Total revenue $ 7,428,582 $ 5,998,019 Total operating expenses (6,336,754) (5,032,322) Operating income $ 1,091,828 $ 965,697 Operating ratio 85.3 % 83.9 % Non-GAAP Presentation Total revenue $ 7,428,582 $ 5,998,019 Truckload and LTL fuel surcharge (920,417) (466,129) Revenue, excluding truckload and LTL fuel surcharge 6,508,165 5,531,890 Total operating expenses 6,336,754 5,032,322 Adjusted for: Truckload and LTL fuel surcharge (920,417) (466,129) Amortization of intangibles 1 (64,843) (55,299) Impairments 2 (810) (299) Legal accruals 3 (415) 2,481 Transaction fees 4 — (4,445) Adjusted Operating Expenses 5,350,269 4,508,631 Adjusted Operating Income $ 1,157,896 $ 1,023,259 Adjusted Operating Ratio 82.2 % 81.5 % 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. 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 Non-GAAP Reconciliation: Reportable Segment Adjusted Operating Income and Adjusted Operating Ratio Truckload Segment 2022 2021 GAAP Presentation (Dollars in thousands) Total revenue $ 4,531,115 $ 4,098,005 Total operating expenses (3,784,534) (3,313,569) Operating income $ 746,581 $ 784,436 Operating ratio 83.5 % 80.9 % Non-GAAP Presentation Total revenue $ 4,531,115 $ 4,098,005 Fuel surcharge (718,155) (415,606) Intersegment transactions (1,361) (1,128) Revenue, excluding fuel surcharge and intersegment transactions 3,811,599 3,681,271 Total operating expenses 3,784,534 3,313,569 Adjusted for: Fuel surcharge (718,155) (415,606) Intersegment transactions (1,361) (1,128) Amortization of intangibles 1 (1,325) (1,295) Impairments 2 — (41) Adjusted Operating Expenses 3,063,693 2,895,499 Adjusted Operating Income $ 747,906 $ 785,772 Adjusted Operating Ratio 80.4 % 78.7 % 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 2. 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 LTL Segment 2022 2021 GAAP Presentation (Dollars in thousands) Total revenue $ 1,069,554 $ 396,308 Total operating expenses (942,945) (365,139) Operating income $ 126,609 $ 31,169 Operating ratio 88.2 % 92.1 % Non-GAAP Presentation Total revenue $ 1,069,554 $ 396,308 Fuel surcharge (202,262) (50,523) Revenue, excluding fuel surcharge and intersegment transactions 867,292 345,785 Total operating expenses 942,945 365,139 Adjusted for: Fuel surcharge (202,262) (50,523) Amortization of intangibles 1 (15,930) (7,124) Adjusted Operating Expenses 724,753 307,492 Adjusted Operating Income 142,539 38,293 Adjusted Operating Ratio 83.6 % 88.9 % 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified with the ACT Acquisition and MME Acquisition. Logistics Segment 2022 2021 GAAP Presentation (Dollars in thousands) Total revenue $ 920,707 $ 817,003 Total operating expenses (786,765) (723,083) Operating income $ 133,942 $ 93,920 Operating ratio 85.5 % 88.5 % Non-GAAP Presentation Total revenue $ 920,707 $ 817,003 Intersegment transactions (10,098) (18,314) Revenue, excluding intersegment transactions 910,609 798,689 Total operating expenses 786,765 723,083 Adjusted for: Intersegment transactions (10,098) (18,314) Amortization of intangibles 1 (1,336) (765) Adjusted Operating Expenses 775,331 704,004 Adjusted Operating Income $ 135,278 $ 94,685 Adjusted Operating Ratio 85.1 % 88.1 % 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in the UTXL acquisition. 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 Intermodal Segment 2022 2021 GAAP Presentation (Dollars in thousands) Total revenue $ 485,786 $ 458,867 Total operating expenses (437,619) (416,807) Operating income $ 48,167 $ 42,060 Operating ratio 90.1 % 90.8 % Non-GAAP Presentation Total revenue $ 485,786 $ 458,867 Intersegment transactions (47) (284) Revenue, excluding intersegment transactions 485,739 458,583 Total operating expenses 437,619 416,807 Adjusted for: Intersegment transactions (47) (284) Adjusted Operating Expenses 437,572 416,523 Adjusted Operating Income $ 48,167 $ 42,060 Adjusted Operating Ratio 90.1 % 90.8 % Non-GAAP Reconciliation: Free cash flow 2022 GAAP: Cash flows from operations $ 1,435,853 Adjusted for: Proceeds from sale of property and equipment, including assets held for sale 183,421 Purchases of property and equipment (800,563) Non-GAAP: Free Cash Flow $ 818,711 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 Liquidity and Capital Resources Sources of Liquidity The following table presents our available sources of liquidity as of December 31, 2022: Source: Amount (In thousands) Cash and cash equivalents, excluding restricted cash $ 196,770 Availability under 2021 Revolver, due September 2026 1 1,041,186 Availability under 2021 RSA, due April 2024 2 37,400 Total unrestricted liquidity $ 1,275,356 Cash and cash equivalents – restricted 3 188,575 Restricted investments, held-to-maturity, amortized cost 3 7,175 Total liquidity, including restricted cash and restricted investments $ 1,471,106 1 As of December 31, 2022, we had $43.0 million in borrowings under our $1.1 billion 2021 Revolver. We additionally had $15.8 million in outstanding letters of credit (discussed below) issued under the 2021 Revolver, leaving $1.0 billion available under the 2021 Revolver. 2 Based on eligible receivables at December 31, 2022, our borrowing base for the 2021 RSA was $456.4 million, while outstanding borrowings were $419.0 million, leaving $37.4 million available under the 2021 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 $185.8 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 $2.8 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 $640.0 to $690.0 million in 2023. 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 contractual payment obligations related to purchase commitments. 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 Principal and Interest Payments — As of December 31, 2022, we had debt, accounts receivable securitization, and finance lease obligations of $1.9 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 2022 RSA, 2021 Term Loans, 2021 Revolver, Prudential Notes, and other debt, we expect to be contractually obligated to make interest payments of approximately $58.8 million, $156.9 million, $8.5 million, $2.8 million, and $0.1 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 certain 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 2022 Knight-Swift Repurchase Plan had $200.0 million available as of December 31, 2022. 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 $599.6 million as of December 31, 2022 and $339.5 million as of December 31, 2021. The $260.1 million increase was primarily due to the maturity and repayment of our 2021 Term Loan A-1 in December 2022. Material Debt Agreements As of December 31, 2022, we had $1.9 billion in material debt obligations at the following carrying values: • $199.8 million: 2021 Term Loan A-2, due September 2024, net of $0.2 million in deferred loan costs • $798.7 million: 2021 Term Loan A-3, due September 2026, net of $1.3 million in deferred loan costs • $418.6 million: 2022 RSA outstanding borrowings, net of $0.4 million in deferred loan costs • $403.0 million: Finance lease obligations • $43.0 million: 2021 Revolver, due September 2026 • $39.0 million: Other, net of $0.1 million in deferred loan costs 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, due April 2024, 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 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. 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 Cash Flow Analysis 2022 2021 Change (In thousands) Net cash provided by operating activities $ 1,435,853 $ 1,190,153 $ 245,700 Net cash used in investing activities (646,184) (1,816,733) 1,170,549 Net cash (used in) provided by financing activities (754,347) 779,326 (1,533,673) Net Cash Provided by Operating Activities 2022 Compared to 2021 — The $245.7 million increase in net cash provided by operating activities was primarily due to a $126.1 million increase in operating income and a non-cash increase in depreciation and amortization of property and equipment of $81.9 million. These increases were related to the addition of ACT's and MME's results for the full year 2022, compared to the portion of 2021 following the respective acquisition dates. The remaining increase is due to various changes in working capital and was partially offset by a $122.1 million increase in taxes paid. Note: Factors affecting the increase in operating income are discussed in "Results of Operations — Consolidated Operating and Other Expenses." Net Cash Used in Investing Activities 2022 Compared to 2021 — The $1.2 billion decrease in net cash used in investing activities was primarily due to a $1.5 billion decrease in net cash invested in acquisitions and was partially offset by a $335.1 million increase in net cash capital expenditures, including 2022 investing activities of ACT and MME. Net Cash (Used in) Provided by Financing Activities 2022 Compared to 2021 — Net cash used in financing activities increased by $1.5 billion, primarily due to a $1.2 billion reduction in debt proceeds, a $267.0 million increase in net repayments on our 2021 Revolver, and a $242.8 million increase in repurchases of our common stock. 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 have recently and could continue to 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: 64 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 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, as well as our third-party 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 claims development factors that are based upon historical experience had increased by 10%, our claims accrual as of December 31, 2022 would have potentially increased by $70.1 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, 2022 and 2021. 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, 2022 and 2021. 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, 2022 and 2021 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 2022 and 2021. 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. 65 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED 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 2022 and 2021. 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, market performance, and other factors. 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 2022 and 2021. 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. 66 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.