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, continued organic growth, and growth through acquisitions while providing safe, high-quality, and 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 other operating segments, included within our All Other Segments. Key Financial Highlights During 2023, consolidated total revenue was $7.1 billion, which is a 3.9% decrease over 2022. Consolidated operating income was $338.2 million in 2023, reflecting a decrease of 69.0% from 2022. Consolidated net income attributable to Knight-Swift decreased by 71.8% from 2022 to $217.1 million. • Truckload — 93.7% operating ratio during 2023, with a 5.8% increase in revenue, excluding fuel surcharge and intersegment transactions, compared to 2022. • LTL — 89.0% operating ratio during 2023 with a 5.5% increase in revenue, excluding fuel surcharge. • Logistics — 92.5% operating ratio during 2023. Load count reduced by 17.5%, leading to a 36.6% decrease in revenue, excluding intersegment transactions. • Intermodal — 102.6% operating ratio during 2023, a 15.5% decrease in revenue, excluding intersegment transactions leading to a 121.8% decrease in operating income. • All Other Segments — Operating loss was $111.6 million during 2023 compared to operating income of $36.5 million in 2022 primarily due to the $125.5 million operating loss of our third-party insurance business. Based on the recent results, including the continued unfavorable development of insurance reserves, the Company decided to initiate exiting this business during the fourth quarter of 2023 and expects to cease all third-party insurance operations and cancel any remaining policies by the end of the first quarter of 2024. We do not expect this business to have a material impact to our results in 2024. • Acquisition of U.S. Xpress — Having closed on July 1, 2023, our synergy teams, composed of leaders from Knight, Swift, and U.S. Xpress have been sharing information, best practices, and further defining opportunities for improvement and action plans to execute on those plans. In the first two quarters of ownership, we have made significant cost improvement and even some rate improvement, leading to slight profitability in the fourth quarter of 2023. 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 • Liquidity and Capital — During 2023, we generated $1.2 billion in operating cash flows. Our Free Cash Flow 1 was $382.7 million. We paid down $59.3 million in long-term debt, $60.9 million in finance lease liabilities, and $120.6 million on our operating lease liabilities. We obtained financing of $250.0 million in new long-term debt and $108.0 million from net borrowings on our accounts receivable securitization and assumed $337.9 million in debt and finance lease liabilities related to the U.S. Xpress Acquisition. In 2023, we issued $91.1 million in dividends to our stockholders. Gain on sale of revenue equipment decreased to $64.7 million in 2023, compared to $92.9 million in 2022. We ended 2023 with $168.5 million in unrestricted cash and cash equivalents, $67.0 million outstanding on the 2021 Revolver, $1.3 billion face value outstanding on the 2023 Term Loan and the 2021 Term Loans, and $7.1 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. Key Financial Data and Operating Metrics 2023 2022 GAAP financial data: (Dollars in thousands, except per share data) Total revenue $ 7,141,766 $ 7,428,582 Revenue, excluding truckload and LTL fuel surcharge $ 6,308,169 $ 6,508,165 Net income attributable to Knight-Swift $ 217,149 $ 771,325 Earnings per diluted share $ 1.34 $ 4.73 Operating ratio 95.3 % 85.3 % Non-GAAP financial data: Adjusted Net Income Attributable to Knight-Swift 1 $ 278,739 $ 821,196 Adjusted EPS 1 $ 1.72 $ 5.03 Adjusted Operating Ratio 1 93.1 % 82.2 % Revenue equipment statistics by segment: Truckload Average tractors 2 20,948 18,110 Average trailers 3 87,865 74,779 LTL Average tractors 4 3,201 3,176 Average trailers 5 8,482 8,431 Intermodal Average tractors 639 613 Average containers 12,730 11,786 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 2.5 years and 2.7 years as of December 31, 2023 and 2022, respectively. 3 Note that average trailers includes 8,724 and 8,249 trailers within our All Other Segment. Our trailer fleet within the Truckload segment had a weighted average age of 8.9 years and 9.9 years as of December 31, 2023 and 2022, respectively. 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 4 Our LTL tractor fleet had a weighted average age of 4.4 years and 4.3 years as of December 31, 2023 and 2022, respectively, and includes 611 and 711 tractors from ACT's and MME's dedicated and other businesses for 2023 and 2022, respectively. 5 Our LTL trailer fleet had a weighted average age of 8.6 years and 8.1 years as of December 31, 2023 and 2022, respectively, and includes 723 and 968 trailers from ACT's and MME's dedicated and other businesses for 2023 and 2022, respectively. 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 2.5% 1 in 2023, as compared to a 1.9% 1 increase in 2022. The year-over-year improvement primarily reflects increases in consumer spending, nonresidential fixed investments, state and local government spending, exports, and federal government spending that were partly offset by decreases in residential fixed investment and inventory investment. The national unemployment rate was 3.7% 2 as of December 31, 2023, as compared to 3.5% 2 as of December 31, 2022. Early estimates of the full-year 2023 US employment cost index indicate a year-over-year increase of 0.9% 2 and a sequential increase of 0.7% 2 . The freight market outlook for the first half of 2024 includes the following: • LTL demand remains strong; • LTL improvement in revenue (excluding fuel) per hundredweight year-over-year; • Truckload freight demand softness anticipated to continue into the first quarter of 2024, with modest seasonality in the second quarter of 2024; • Truckload - contract rate sequentially stable; • Cost inflation continues to be a challenge, though pace eases; • Labor alternatives in the general economy remain attractive, providing a headwind to retention and utilization until freight conditions improve; • Demand in the used equipment market weakens further as small carriers struggle. _________ 1 bea.gov 2 bls.gov 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 Results of Operations — Summary Notes regarding presentation: A discussion of changes in our results of operations from 2021 to 2022 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 2022 Annual Report filed with the SEC on February 23, 2023. 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 2023 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: 2023 Compared to 2022 — The $554.2 million decrease in net income attributable to Knight-Swift to $217.1 million in 2023 from $771.3 million in 2022, includes the following: • Contributor — $448.6 million decrease in operating income within our Truckload segment was primarily due to a 0.6% decrease in average revenue per tractor, which includes the results of U.S. Xpress. Excluding U.S. Xpress, revenue, excluding fuel surcharge, per tractor decreased 10.2% year-over-year. • Contributor — $90.5 million decrease in operating income within our Logistics segment driven by a 17.5% decrease in load count. • Contributor — $58.7 million decrease in operating income within our Intermodal segment driven by a 19.9% decrease in revenue per load, partially offset by a 5.5% increase in load count. • Contributor — $7.7 million decrease in operating income from our LTL segment as a result of a 1.9% decrease in weight per shipment and other costs related to expanding our service area and transitioning our operational systems on one network. • Contributor — $148.1 million decrease in operating results within our All Other Segments, primarily due to the $125.5 million operating loss in the third-party insurance business, including additional costs incurred in the fourth quarter of 2023 as we prepare to exit the business in the first quarter of 2024. • Contributor — $60.2 million increase in net interest expense primarily due to an increase in interest rates. • Offset — $63.6 million increase in "Other income (expenses), net," primarily driven by an unrealized loss on our investment in Embark recorded in 2022. • Offset — $194.6 million decrease in consolidated income tax expense, primarily due to a decrease in income before income taxes and a release of a valuation allowance in the third quarter of 2023. This resulted in a 2023 effective tax rate of 20.3% and a 2022 effective tax rate of 24.4%. See additional discussion of our operating results within "Results of Operations — Consolidated Operating and Other Expenses" below. 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 Results of Operations — Segment Review The Company has four reportable segments: Truckload, LTL, Logistics, and Intermodal, as well as certain other operating segments included within our All Other 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 2023 2022 Revenue: (Dollars in thousands) Truckload $ 4,698,655 65.8 % $ 4,531,115 61.0 % LTL $ 1,082,454 15.2 % $ 1,069,554 14.4 % Logistics $ 582,250 8.2 % $ 920,707 12.4 % Intermodal $ 410,549 5.7 % $ 485,786 6.5 % Subtotal $ 6,773,908 94.9 % $ 7,007,162 94.3 % All Other Segments $ 462,061 6.5 % $ 516,735 7.0 % Intersegment eliminations $ (94,203) (1.4 %) $ (95,315) (1.3 %) Total revenue $ 7,141,766 100.0 % $ 7,428,582 100.0 % 2023 2022 Operating income (loss): (Dollars in thousands) Truckload $ 297,977 88.1 % $ 746,581 68.4 % LTL $ 118,880 35.2 % $ 126,609 11.6 % Logistics $ 43,418 12.8 % $ 133,942 12.3 % Intermodal $ (10,507) (3.1 %) $ 48,167 4.4 % Subtotal $ 449,768 133.0 % $ 1,055,299 96.7 % All Other Segments $ (111,615) (33.0 %) $ 36,529 3.3 % Operating income $ 338,153 100.0 % $ 1,091,828 100.0 % 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 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 15,100 irregular route and 5,900 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 120 facilities and a door count of approximately 4,550. Our LTL segment operates approximately 3,200 tractors and approximately 8,500 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 96,000 trailers as of December 31, 2023. • All Other 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. All Other 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, nor 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. 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 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 xFSC 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 xFSC 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 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 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 15,100 irregular route tractors and approximately 5,900 dedicated route tractors in use during 2023. 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, other specialized services, and 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. 2023 2022 2023 vs. 2022 (Dollars in thousands, except per tractor data) Increase (decrease) Total revenue $ 4,698,655 $ 4,531,115 3.7 % Revenue, excluding fuel surcharge and intersegment transactions $ 4,031,054 $ 3,811,599 5.8 % GAAP: Operating income $ 297,977 $ 746,581 (60.1 %) Non-GAAP: Adjusted Operating Income 1 $ 314,542 $ 747,906 (57.9 %) Average revenue per tractor 2 $ 209,258 $ 210,469 (0.6 %) GAAP: Operating ratio 2 93.7 % 83.5 % 1,020 bps Non-GAAP: Adjusted Operating Ratio 1 2 92.2 % 80.4 % 1,180 bps Non-paid empty miles percentage 2 14.3 % 14.6 % (30 bps) Average length of haul (miles) 2 393 395 (0.5 %) Total miles per tractor 2 85,233 76,502 11.4 % Average tractors 2 3 20,948 18,110 15.7 % Average trailers 2 4 87,865 74,779 17.5 % 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined within "Operating Statistics" above. 3 Includes 18,821 and 16,228 company-owned tractors for 2023 and 2022, respectively. 4 Average trailers includes 8,724 and 8,249 trailers from our All Other Segments for 2023 and 2022, respectively. 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 2023 Compared to 2022 — The Truckload segment continues to experience an extremely difficult environment, operating with an Adjusted Operating Ratio of 92.2% in 2023, as compared to 80.4% in 2022. The Adjusted Operating Ratio of the truckload business, excluding U.S. Xpress that was acquired in the third quarter of 2023, was 90.3% in 2023. The inclusion of U.S. Xpress negatively impacted the Adjusted Operating Ratio by 190 basis points. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions, decreased 10.9% year-over-year, while total miles increased 18.5% (before including the U.S. Xpress business, total miles decreased 2.9%). Miles per tractor increased 11.4% year-over-year (0.2% before including U.S. Xpress). Revenue, excluding fuel surcharge and intersegment transactions was $4.0 billion, an increase of 5.8% year-over-year, reflecting a 12.9% decline in the existing truckload business prior to the inclusion of U.S. Xpress. Excluding U.S. Xpress, revenue, excluding fuel surcharge, per tractor decreased 10.2% year-over-year as the decline in rates outweighed the improvement in miles per tractor. We believe our extensive trailer fleet, which has grown to approximately 96,000 trailers as of the end of 2023, positions us to provide valuable capacity, flexibility, and efficiency 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 2024. 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 expenses are 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. 2023 2022 2023 vs. 2022 (Dollars in thousands, except per shipment and per hundredweight data) Increase (decrease) Total revenue $ 1,082,454 $ 1,069,554 1.2 % Revenue, excluding fuel surcharge $ 914,568 $ 867,292 5.5 % GAAP: Operating income $ 118,880 $ 126,609 (6.1) % Non-GAAP: Adjusted Operating Income 1 $ 134,560 $ 142,539 (5.6) % GAAP: Operating ratio 2 89.0 % 88.2 % 80 bps Non-GAAP: Adjusted Operating Ratio 1 2 85.3 % 83.6 % 170 bps LTL shipments per day 2 18,899 18,642 1.4 % LTL weight per shipment 2 1,048 1,068 (1.9) % LTL average length of haul (miles) 2 553 520 6.3 % LTL revenue per shipment 2 $ 193.32 $ 188.03 2.8 % LTL revenue xFSC per shipment 2 $ 163.10 $ 152.15 7.2 % LTL revenue per hundredweight 2 $ 18.44 $ 17.61 4.7 % LTL revenue xFSC per hundredweight 2 $ 15.56 $ 14.25 9.2 % LTL average tractors 2 3 3,201 3,176 0.8 % LTL average trailers 2 4 8,482 8,431 0.6 % 1 Refer to "Non-GAAP Financial Measures" below. 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 2 Defined under "Operating Statistics," above. 3 Includes 611 and 711 tractors from ACT's and MME's dedicated and other businesses for 2023 and 2022, respectively. 4 Includes 723 and 968 trailers from ACT's and MME's dedicated and other businesses for 2023 and 2022, respectively. 2023 Compared to 2022 — Our LTL segment operates across approximately 120 facilities with a door count of over 4,550. LTL operated well, producing an 85.3% Adjusted Operating Ratio during 2023, as revenue, excluding fuel surcharge, grew 5.5% but Adjusted Operating Income decreased 5.6% year-over-year. Volumes were strong with shipments per day for the year increasing 1.4% year-over-year. Revenue per hundredweight, excluding fuel surcharge, increased 9.2%, while revenue per shipment, excluding fuel surcharge, increased by 7.2%, reflecting a 1.9% decrease in weight per shipment. We expect that our connected LTL network will provide additional opportunities for revenue growth. During 2023, we increased our door count by over 260 and we expect door capacity to continue to grow in 2024. 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 primarily a 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," as well as depreciation and amortization expense recorded in "Depreciation and amortization of property and equipment" in the consolidated statements of comprehensive income. 2023 2022 2023 vs. 2022 (Dollars in thousands, except per load data) Increase (decrease) Total revenue $ 582,250 $ 920,707 (36.8 %) Revenue, excluding intersegment transactions $ 577,695 $ 910,609 (36.6 %) GAAP: Operating income $ 43,418 $ 133,942 (67.6 %) Non-GAAP: Adjusted Operating Income 1 2 $ 45,031 $ 135,278 (66.7 %) Revenue per load 2 $ 1,724 $ 2,242 (23.1 %) Gross margin percentage 2 18.7 % 21.9 % (320 bps) GAAP: Operating ratio 2 92.5 % 85.5 % 700 bps Non-GAAP: Adjusted Operating Ratio 1 2 92.2 % 85.1 % 710 bps 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined under "Operating Statistics" above. 2023 Compared to 2022 — Logistics Adjusted Operating Ratio was 92.2%, with a gross margin of 18.7% in 2023, compared to 21.9% in 2022. Our existing logistics load count declined by 28.0% year-over-year, prior to the addition of U.S. Xpress logistics. With the inclusion of U.S. Xpress logistics volumes, the load count declined by 17.5% year-over-year. Revenue per load decreased by 23.1% year-over-year. 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. 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 Intermodal Segment The Intermodal segment complements our regional operating model, while also allowing 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 primarily 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. 2023 2022 2023 vs. 2022 (Dollars in thousands, except per load data) Increase (decrease) Total revenue $ 410,549 $ 485,786 (15.5 %) Revenue, excluding intersegment transactions $ 410,549 $ 485,739 (15.5 %) GAAP: Operating (loss) income $ (10,507) $ 48,167 (121.8 %) Average revenue per load 1 $ 2,842 $ 3,546 (19.9 %) GAAP: Operating ratio 1 102.6 % 90.1 % 1,250 bps Load count 144,471 136,967 5.5 % Average tractors 2 3 639 613 4.2 % Average containers 2 12,730 11,786 8.0 % 1 Refer to "Non-GAAP Financial Measures" below. 2 Defined within "Operating Statistics" above. 3 Includes 577 and 544 c ompany-owned tractors for 2023 and 2022, respectively. 2023 Compared to 2022 — Intermodal operated with a 102.6% operating ratio. While load count increased year-over-year by 5.5%, total revenue decreased 15.5% year-over-year to $410.5 million as revenue per load declined 19.9%, resulting from soft demand and competitive truck capacity. 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. Results can be impacted by the cost of alternative truck capacity. All Other Segments Our All Other 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 All Other Segments also include certain corporate expenses (such as legal settlements and accruals, certain impairments, and $47.3 million in annual amortization of intangibles related to the 2017 Merger and various acquisitions). 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Total revenue $ 462,061 $ 516,735 (10.6 %) Operating (loss) income $ (111,615) $ 36,529 (405.6 %) 2023 Compared to 2022 — Revenue declined 10.6% year-over-year, largely as a result of our actions to address the challenges within our third-party insurance program, including significantly reducing exposures. The $111.6 million operating loss within our All Other Segments is primarily driven by the $125.5 million operating loss in the third-party insurance business. Based on recent results, including the continued unfavorable development of insurance reserves, the Company decided to initiate exiting this business during the fourth quarter of 2023 and expects to cease all third-party insurance operations and cancel any remaining policies by the end of the first quarter of 2024. We do not expect this business to have a material impact to our results in 2024. 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 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. 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Salaries, wages, and benefits $ 2,479,759 $ 2,173,933 14.1 % % of total revenue 34.7 % 29.3 % 540 bps % of revenue, excluding truckload and LTL fuel surcharge 39.3 % 33.4 % 590 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. 2023 Compared to 2022 — The increase in consolidated salaries, wages, and benefits includes a $344.2 million increase from the results of U.S. Xpress. This was partially offset by decreases in non-driver salaries and wages and driving associate wages due to a 1.7% reduction in miles driven by company driving associates, excluding U.S. Xpress. 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Fuel $ 878,407 $ 895,603 (1.9 %) % of total revenue 12.3 % 12.1 % 20 bps % of revenue, excluding truckload and LTL fuel surcharge 13.9 % 13.8 % 10 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. 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. 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 2023 Compared to 2022 — The decrease in consolidated fuel expense includes $139.6 million from the results of U.S. Xpress. The inclusion of U.S. Xpress's fuel expense was offset by lower average weekly DOE fuel prices of $4.20 per gallon in 2023 compared to $5.01 per gallon in 2022. It was also offset by a 1.7% reduction in the total miles driven by company driving associates, excluding U.S. Xpress. 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Operations and maintenance $ 473,491 $ 422,872 12.0 % % of total revenue 6.6 % 5.7 % 90 bps % of revenue, excluding truckload and LTL fuel surcharge 7.5 % 6.5 % 100 bps Operations and maintenance expense consists of direct operating expenses, such as driving associate hiring and recruiting expenses, equipment maintenance, and tire expense. Operations and maintenance expenses are 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 the average age of our equipment. 2023 Compar ed to 2022 — The increase in consolidated operations and maintenance expense includes a $79.5 million increase from the results of U.S. Xpress, partially offset by lower hiring and labor expense, as well as lower road expense. 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Insurance and claims $ 609,536 $ 455,918 33.7 % % of total revenue 8.5 % 6.1 % 240 bps % of revenue, excluding truckload and LTL fuel surcharge 9.7 % 7.0 % 270 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. 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 addition, our Iron Insurance line of business offers insurance products to third-party carriers, earning additional premium revenues, which are partially offset by increased insurance reserves, but does increase our exposure to claims and inability to collect premiums. 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 and lower excess coverage limits may cause increased volatility in our consolidated insurance and claims expense. 2023 Compared to 2022 — Consolidated insurance and claims expense increased primarily due to increased frequency and unfavorable claim development during the periods within our Iron Insurance line of business. This was included in the $125.5 million operating loss of our third-party insurance business in 2023. The increase also includes unfavorable developments within our self-insured retention limits and $55.8 million of insurance and claims expense from the results of U.S. Xpress. Based on recent results, including the continued unfavorable development of insurance reserves, the Company decided to initiate exiting the third-party insurance business during the fourth quarter of 2023 and expects to cease all third-party insurance operations and cancel any remaining policies by the end of the first quarter of 2024. We do not expect this business to have a material impact to our results in 2024. 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 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Operating taxes and licenses $ 117,024 $ 111,197 5.2 % % of total revenue 1.6 % 1.5 % 10 bps % of revenue, excluding truckload and LTL fuel surcharge 1.9 % 1.7 % 20 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. 2023 Compared to 2022 — The increase in consolidated operating taxes and licenses expense is primarily due to the inclusion of operating taxes and licenses expense from the results of U.S Xpress during 2023. 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Communications $ 29,661 $ 23,656 25.4 % % of total revenue 0.4 % 0.3 % 10 bps % of revenue, excluding truckload and LTL fuel surcharge 0.5 % 0.4 % 10 bps Communications expense is comprised of costs associated with our tractor and trailer tracking systems, information technology systems, and phone systems. 2023 Compared to 2022 — The increase in consolidated communications expense is primarily due to the inclusion of $6.3 million of communications expense from the results of U.S. Xpress. This increase was partially offset by the implementation of new technology on our revenue equipment. 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Depreciation and amortization of property and equipment $ 664,962 $ 594,981 11.8 % % of total revenue 9.3 % 8.0 % 130 bps % of revenue, excluding truckload and LTL fuel surcharge 10.5 % 9.1 % 140 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 in 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. 2023 Compared to 2022 — The increase in consolidated depreciation and amortization of property and equipment includes a $41.2 million increase of expense from the results of U.S. Xpress. 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 anticipate that depreciation and amortization expense will increase, 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, terminal improvements, or terminal expansions in 2024. 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 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Amortization of intangibles $ 70,138 $ 64,843 8.2 % % of total revenue 1.0 % 0.9 % 10 bps % of revenue, excluding truckload and LTL fuel surcharge 1.1 % 1.0 % 10 bps Amortization of intangibles relates to intangible assets identified with the 2017 Merger, ACT Acquisition, U.S. Xpress 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. 2023 Compared to 2022 — The increase in consolidated amortization of intangibles for 2023 is primarily attributed to the U.S. Xpress Acquisition. See Note 4 in Part II, Item 8, of this Annual Report for more details regarding our acquisitions. 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Rental expense $ 130,269 $ 56,856 129.1 % % of total revenue 1.8 % 0.8 % 100 bps % of revenue, excluding truckload and LTL fuel surcharge 2.1 % 0.9 % 120 bps Rental expense consists primarily of payments for our terminals and other real estate leases and, to a lesser extent, payments for revenue equipment from operating leases. The primary factors affecting the expense are the size and location of our leased properties. 2023 Compared to 2022 — The increase in consolidated rental expense is primarily related to the inclusion of $67.3 million from the results of U.S. Xpress. Additional increases relate to the incorporation of new facilities as we expand our network and were partially offset by a decrease in the rental expense for revenue equipment. 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Purchased transportation $ 1,190,836 $ 1,444,937 (17.6 %) % of total revenue 16.7 % 19.5 % (280 bps) % of revenue, excluding truckload and LTL fuel surcharge 18.9 % 22.2 % (330 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. 2023 Compared to 2022 — The decrease in consolidated purchased transportation expense is primarily due to decreased load volume within our logistics and intermodal businesses and lower miles driven by independent contractors, partially offset by $160.6 million of additional purchased transportation expense from the results of U.S. Xpress. 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. 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 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Impairments $ 2,236 $ 810 176.0 % 2023 Compared to 2022 — In 2023, we incurred impairment charges related to certain revenue equipment held for sale (within the Truckload segment) and terminated software projects (recorded within our All Other Segments, specifically related to our third-party insurance business). In 2022, we incurred impairment charges associated with building improvements (within our All Other Segments). 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Miscellaneous operating expenses $ 157,294 $ 91,148 72.6 % 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. 2023 Compared to 2022 — The increase in net consolidated miscellaneous operating expenses is primarily due to a $28.2 million decrease in gain on sales of equipment, as well as the inclusion of $22.3 million from the results of U.S. Xpress and $5.6 million in transaction fees related to the U.S. Xpress Acquisition. Consolidated Other Expenses, net The following table summarizes fluctuations in certain non-operating expenses included in our consolidated statements of comprehensive income: 2023 2022 2023 vs. 2022 (Dollars in thousands) Increase (decrease) Interest income $ (21,577) $ (5,439) 296.7 % Interest expense $ 127,100 $ 50,803 150.2 % Other (income) expenses, net $ (37,659) $ 25,958 (245.1 %) Income tax (benefit) expense $ 54,768 $ 249,388 (78.0 %) Interest income — Interest income includes interest earned from financing revenue equipment to independent contractors, as well as interest earned from our investments. 2023 Compared to 2022 — 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 2023. Interest expense — Interest expense is comprised of debt and finance lease interest expense, as well as amortization of deferred loan costs. 2023 Compared to 2022 — Consolidated interest expense increased due to an increase in interest rates during 2023. Additional details regarding our debt are discussed in Note 15 in Part II, Item 8 of this Annual Report. Other (income) expenses, net — Other (income) expenses, net is primarily comprised of (gains) and losses 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. 2023 Compared to 2022 — The increased change in consolidated other (income) expenses, net is primarily due to unrealized losses recognized from our investment in Embark in 2022 and a net gain recorded within our portfolio of investments during 2023. 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. 2023 Compared to 2022 — The decrease in consolidated income tax expense was primarily due to a decrease in income before income taxes and a release of a valuation allowance in the third quarter of 2023. This resulted in a 2023 effective tax rate of 20.3% and a 2022 effective tax rate of 24.4%. 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 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 2022 to 2023 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 2022 Annual Report filed with the SEC on February 23, 2023 . 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 Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS 2023 2022 (Dollars in thousands) GAAP: Net income attributable to Knight-Swift $ 217,149 $ 771,325 Adjusted for: Income tax expense attributable to Knight-Swift 54,768 249,388 Income before income taxes attributable to Knight-Swift 271,917 1,020,713 Amortization of intangibles 1 70,138 64,843 Impairments 2 2,236 810 Legal accruals and loss contingencies 3 7,694 415 Transaction fees 4 6,868 — Other acquisition related expenses 5 7,697 — Severance expense 6 5,151 — Change in fair value of deferred earnout 7 (3,359) — Adjusted income before income taxes 368,342 1,086,781 Provision for income tax expense at effective rate 8 (89,603) (265,585) Non-GAAP: Adjusted Net Income Attributable to Knight-Swift $ 278,739 $ 821,196 Note: Since the numbers reflected in the table below are calculated on a per share basis, they may not foot due to rounding. 2023 2022 GAAP: Earnings per diluted share $ 1.34 $ 4.73 Adjusted for: Income tax expense attributable to Knight-Swift 0.34 1.53 Income before income taxes attributable to Knight-Swift 1.68 6.25 Amortization of intangibles 1 0.43 0.40 Impairments 2 0.01 — Legal accruals and loss contingencies 3 0.05 — Transaction fees 4 0.04 — Other acquisition related expenses 5 0.05 — Severance expense 6 0.03 — Change in fair value of deferred earnout 7 (0.02) — Adjusted income before income taxes 2.28 6.66 Provision for income tax expense at effective rate 8 (0.55) (1.63) Non-GAAP: Adjusted EPS $ 1.72 $ 5.03 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in the 2017 Merger, the ACT Acquisition, the U.S. Xpress Acquisition and other acquisitions. 2 "Impairments" reflects the non-cash impairments: • 2023 impairments related to certain revenue equipment held for sale (within the Truckload segment) and terminated software projects (recorded within our All Other Segments, specifically related to our third-party insurance business). • 2022 impairment of building improvements (within our All Other Segments). 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 3 "Legal accruals and loss contingencies" are included in "Insurance and claims" and "Miscellaneous operating expenses" in the consolidated statements of comprehensive income and reflect the following: • During the fourth quarter of 2023, the Company recorded estimated exposure for various legal matters. Additionally, the Company identified a probable loss contingency related to our third-party carrier insurance business included within our All Other segments. During the second and third quarters of 2023, legal expense reflects the increased estimated exposures for various accrued legal matters based on recent settlement agreements. First quarter 2023 legal expense reflects a decrease in the estimated exposure related to an accrued legal matter previously identified as probable and estimable in prior periods based on a recent settlement agreement. • 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. 4 "Transaction fees" consists of legal and professional fees associated with the July 1, 2023 acquisition of U.S. Xpress. The transaction fees are included within "Miscellaneous operating expenses" and "Salaries, Wages, and benefits" and with small amounts included in other line items in the consolidated statements of comprehensive income. 5 "Other acquisition related expenses" represents one-time expenses associated with the U.S. Xpress acquisition, including certain severance expense, including the acceleration of stock compensation expense as well as other operating expenses. These are primarily included within "Salaries, wages, and benefits" in the condensed statements of comprehensive income. 6 "Severance expense" is included within "Salaries, wages, and benefits" in the condensed statements of comprehensive income. 7 " Change in fair value of deferred earnout" reflects the benefit for the change in fair value of a deferred earnout related to various acquisitions, which is recorded in "Miscellaneous operating expenses." 8 For 2023, an effective tax rate of 24.3% was applied in our Adjusted EPS calculation. The change in the effective tax rate was primarily impacted by the change in pre-tax income based on the adjustments presented in Adjusted Net Income Attributable to Knight-Swift. Additionally, the effective tax rate was normalized to exclude the third quarter 2023 tax benefit from the partial release of the pre-acquisition allowance associated with the U.S. Xpress net operating loss and tax credit carryforward benefits. 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 Non-GAAP Reconciliation: Consolidated Adjusted Operating Income and Adjusted Operating Ratio 2023 2022 GAAP Presentation (Dollars in thousands) Total revenue $ 7,141,766 $ 7,428,582 Total operating expenses (6,803,613) (6,336,754) Operating income $ 338,153 $ 1,091,828 Operating ratio 95.3 % 85.3 % Non-GAAP Presentation Total revenue $ 7,141,766 $ 7,428,582 Truckload and LTL fuel surcharge (833,597) (920,417) Revenue, excluding truckload and LTL fuel surcharge 6,308,169 6,508,165 Total operating expenses 6,803,613 6,336,754 Adjusted for: Truckload and LTL fuel surcharge (833,597) (920,417) Amortization of intangibles 1 (70,138) (64,843) Impairments 2 (2,236) (810) Legal accruals and loss contingencies 3 (7,694) (415) Transaction fees 4 (6,868) — Other acquisition related expenses 5 (7,697) — Severance expense 6 (5,151) — Change in fair value of deferred earnout 7 3,359 — Adjusted Operating Expenses 5,873,591 5,350,269 Adjusted Operating Income $ 434,578 $ 1,157,896 Adjusted Operating Ratio 93.1 % 82.2 % 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. 7 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 7 . 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 Non-GAAP Reconciliation: Reportable Segment Adjusted Operating Income and Adjusted Operating Ratio Truckload Segment 2023 2022 GAAP Presentation (Dollars in thousands) Total revenue $ 4,698,655 $ 4,531,115 Total operating expenses (4,400,678) (3,784,534) Operating income $ 297,977 $ 746,581 Operating ratio 93.7 % 83.5 % Non-GAAP Presentation Total revenue $ 4,698,655 $ 4,531,115 Fuel surcharge (665,711) (718,155) Intersegment transactions (1,890) (1,361) Revenue, excluding fuel surcharge and intersegment transactions 4,031,054 3,811,599 Total operating expenses 4,400,678 3,784,534 Adjusted for: Fuel surcharge (665,711) (718,155) Intersegment transactions (1,890) (1,361) Amortization of intangibles 1 (5,576) (1,325) Impairments 2 (656) — Other acquisition related expenses 3 (7,697) — Severance expense 4 (2,636) — Adjusted Operating Expenses 3,716,512 3,063,693 Adjusted Operating Income $ 314,542 $ 747,906 Adjusted Operating Ratio 92.2 % 80.4 % 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in historical Knight acquisitions and the U.S. Xpress Acquisition. 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 5. 4 See Non-GAAP Reconciliation: Consolidated Adjusted Net Income Attributable to Knight-Swift and Adjusted EPS footnote 6. 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 LTL Segment 2023 2022 GAAP Presentation (Dollars in thousands) Total revenue $ 1,082,454 $ 1,069,554 Total operating expenses (963,574) (942,945) Operating income $ 118,880 $ 126,609 Operating ratio 89.0 % 88.2 % Non-GAAP Presentation Total revenue $ 1,082,454 $ 1,069,554 Fuel surcharge (167,886) (202,262) Revenue, excluding fuel surcharge 914,568 867,292 Total operating expenses 963,574 942,945 Adjusted for: Fuel surcharge (167,886) (202,262) Amortization of intangibles 1 (15,680) (15,930) Adjusted Operating Expenses 780,008 724,753 Adjusted Operating Income 134,560 142,539 Adjusted Operating Ratio 85.3 % 83.6 % 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified with the ACT Acquisition and MME Acquisition. Logistics Segment 2023 2022 GAAP Presentation (Dollars in thousands) Total revenue $ 582,250 $ 920,707 Total operating expenses (538,832) (786,765) Operating income $ 43,418 $ 133,942 Operating ratio 92.5 % 85.5 % Non-GAAP Presentation Total revenue $ 582,250 $ 920,707 Intersegment transactions (4,555) (10,098) Revenue, excluding intersegment transactions 577,695 910,609 Total operating expenses 538,832 786,765 Adjusted for: Intersegment transactions (4,555) (10,098) Amortization of intangibles 1 (1,613) (1,336) Adjusted Operating Expenses 532,664 775,331 Adjusted Operating Income $ 45,031 $ 135,278 Adjusted Operating Ratio 92.2 % 85.1 % 1 "Amortization of intangibles" reflects the non-cash amortization expense relating to intangible assets identified in the UTXL acquisition. 66 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 2023 2022 GAAP Presentation (Dollars in thousands) Total revenue $ 410,549 $ 485,786 Total operating expenses (421,056) (437,619) Operating (loss) income $ (10,507) $ 48,167 Operating ratio 102.6 % 90.1 % Non-GAAP Presentation Total revenue $ 410,549 $ 485,786 Intersegment transactions — (47) Revenue, excluding intersegment transactions 410,549 485,739 Total operating expenses 421,056 437,619 Adjusted for: Intersegment transactions — (47) Adjusted Operating Expenses 421,056 437,572 Adjusted Operating Income $ (10,507) $ 48,167 Adjusted Operating Ratio 102.6 % 90.1 % Non-GAAP Reconciliation: Free cash flow 2023 GAAP: Cash flows from operations $ 1,161,676 Adjusted for: Proceeds from sale of property and equipment, including assets held for sale 292,627 Purchases of property and equipment (1,071,611) Non-GAAP: Free Cash Flow $ 382,692 67 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, 2023: Source: Amount (In thousands) Cash and cash equivalents, excluding restricted cash $ 168,545 Availability under 2021 Revolver, due September 2026 1 1,015,007 Availability under 2023 RSA, due October 2025 2 600 Total unrestricted liquidity $ 1,184,152 Cash and cash equivalents – restricted 3 301,141 Restricted investments, held-to-maturity, amortized cost 3 530 Total liquidity, including restricted cash and restricted investments $ 1,485,823 1 As of December 31, 2023, we had $67.0 million in borrowings under our $1.1 billion 2021 Revolver. We additionally had $18.0 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, 2023, our borrowing base for the 2023 RSA was $527.6 million, while outstanding borrowings were $527.0 million, leaving $0.6 million available under the 2023 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 $297.3 million, which is included in "Cash and cash equivalents — restricted" in the consolidated balance sheets held by Mohave and Red Rock for claims payments. The remaining $3.9 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 and expand 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. In connection with our business strategy, we regularly evaluate acquisition and strategic partnership opportunities. We expect net cash capital expenditures, including net cash expenditures of our LTL segment, will be in the range of $625.0 to $675.0 million in 2024. This range excludes cash outlays for potential acquisitions. We believe we have ample flexibility in our trade cycle and purchase agreements to alter our current plans if economic and 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 2023 RSA, 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. 68 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, 2023, we had debt, accounts receivable securitization, and finance lease obligations of $2.7 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 2023 RSA, 2023 Term Loan, 2021 Term Loans, 2021 Revolver, Prudential Notes, revenue equipment installment notes, and other debt, we expect to be contractually obligated to make interest payments of approximately $58.6 million, $46.8 million, $150.5 million, $12.2 million, $1.6 million, $20.9 million and $1.8 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 2023 RSA, 2023 Term Loan, 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 2023 RSA, our lenders may issue standby letters of credit on our behalf. When we have certain letters of credit outstanding, the availability under the 2021 Revolver or 2023 RSA is reduced accordingly. As of December 31, 2023, we also had outstanding letters of credit of $264.3 million pursuant to a bilateral agreement which do not impact the availability of the 2021 Revolver and 2023 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 1 availability, debt levels, common stock prices, general economic and market conditions, as well as internal approval requirements, we may repurchase shares of our outstanding common stock. The 2022 Knight-Swift Repurchase Plan had $200.0 million available as of December 31, 2023. 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 deficit of $116.3 million as of December 31, 2023 and a working capital surplus of $599.6 million as of December 31, 2022. The $715.9 million decrease was primarily due to the assumption of liabilities from the U.S. Xpress Acquisition as well as the 2021 Term Loan A-2 maturing September 2024. ________ 1 Refer to "Non-GAAP Financial Measures." 69 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED Material Debt Agreements As of December 31, 2023, we had $2.7 billion in material debt obligations at the following carrying values: • $199.9 million: 2021 Term Loan A-2, due September 2024, net of $0.1 million in deferred loan costs • $799.1 million: 2021 Term Loan A-3, due September 2026, net of $0.9 million in deferred loan costs • $249.1 million: 2023 Term Loan, due September 2026, net of $0.9 million in deferred loan costs • $526.5 million: 2023 RSA outstanding borrowings, net of $0.5 million in deferred loan costs • $528.9 million: Finance lease obligations • $67.0 million: 2021 Revolver, due September 2026 • $279.3 million: Revenue equipment installment notes • $33.6 million: Other, net of approximately $22,000 in deferred loan costs 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, due April 2024, 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 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. Cash Flow Analysis 2023 2022 Change (In thousands) Net cash provided by operating activities $ 1,161,676 $ 1,435,853 $ (274,177) Net cash used in investing activities (1,228,025) (646,184) (581,841) Net cash provided by (used in) financing activities 150,690 (754,347) 905,037 Net Cash Provided by Operating Activities 2023 Compared to 2022 — The $274.2 million decrease in net cash provided by operating activities was primarily due to a $753.7 million decrease in operating income and a $69.2 million increase in cash paid for interest. These were partially offset by a $248.8 million decrease in cash paid for taxes and various changes in working capital. 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 2023 Compared to 2022 — The $0.6 billion increase in net cash used in investing activities was primarily due to a $0.4 billion increase in net cash invested in acquisitions and a $161.8 million increase in net cash capital expenditures. Net Cash Provided by (Used in) Financing Activities 2023 Compared to 2022 — Net cash provided by financing activities increased by $0.9 billion, primarily due to a $250.0 million increase in proceeds from long-term debt, a $154.6 million decrease in repayments on finance leases and long-term debt, a $241.0 million decrease in net repayments on our 2021 Revolver, and a $299.9 million decrease in repurchases of our common stock. 70 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED 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: 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, 2023 would have potentially increased by $61.5 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 December 31, 2023 and 2022. 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 December 31, 2023 and 2022. 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 71 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED 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 December 31, 2023 and 2022 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 2023 and 2022. 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 2023 and 2022. Fair Value of Net Assets Acquired in Business Combinations — Management performs fair value assessments in determining the fair value of the identifiable assets and liabilities acquired through the business combination as of the acquisition date. Management and third-party specialists use significant inputs and assumptions in the valuations of acquired net assets such as certain prospective information, discount rates, royalty rates, and market data. Changes in these estimates and assumptions could materially affect the determination of fair value. Refer to Note 4, in Part II, Item 8 of this Annual Report for discussion about the fair value of net assets acquired in business combinations and the impact on our results for 2023 and 2022. 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 72 Table of Contents Glossary of Terms KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — CONTINUED 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 2023 and 2022. 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.