Knight-Swift Transportation Holdings Inc. - FORM 10-Q - November 9, 2017

Attached files

file filename
EX-31.2 - EX 31.2 CFO CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13A-14(A) OR 15D-14 - Knight-Swift Transportation Holdings Inc.knx-ex312x9302017.htm
EX-32.2 - EX 32.2 CFO CERTIFICATION PURSUANT TO 18 USC, SEC 1350 - Knight-Swift Transportation Holdings Inc.knx-ex322x9302017.htm
EX-32.1 - EX 32.1 CEO CERTIFICATION PURSUANT TO 18 USC, SEC 1350 - Knight-Swift Transportation Holdings Inc.knx-ex321x9302017.htm
EX-31.1 - EX 31.1 CEO CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13A-14(A) OR 15D-14(A) - Knight-Swift Transportation Holdings Inc.knx-ex311x9302017.htm
EX-10.1 - EXHIBIT 10.1 - Knight-Swift Transportation Holdings Inc.knx-ex101x9302017.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________________________________________________________
FORM 10-Q
___________________________________________________________________________________________________________________

ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-35007
___________________________________________________________________________________________________________________
knightswift01.jpg
 Knight-Swift Transportation Holdings Inc.
(Exact name of registrant as specified in its charter)
___________________________________________________________________________________________________________________
Delaware
 
20-5589597
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
20002 North 19th Avenue
Phoenix, Arizona 85027
(Address of principal executive offices and zip code)
(602) 269-2000
(Registrant’s telephone number, including area code)
 
Swift Transportation Company, 2200 South 75th Avenue, Phoenix, Arizona 85043
(Former name, former address and former fiscal year, if changed since last report)
___________________________________________________________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
o
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No  ý 
There were 177,933,640 shares of the registrant's Class A Common Stock and 0 shares of the registrant's Class B Common Stock outstanding as of November 1, 2017.
 
 
 
 
 



KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.


QUARTERLY REPORT ON FORM 10-Q
 
 
TABLE OF CONTENTS
 
 
PART I FINANCIAL INFORMATION
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

QUARTERLY REPORT ON FORM 10-Q
 
GLOSSARY OF TERMS
The following glossary provides definitions for certain acronyms and terms used in this Quarterly Report on Form 10-Q. These acronyms and terms are specific to our company, commonly used in our industry, or are otherwise frequently used throughout our document.
 
Term
 
Definition
Knight-Swift/the Company/Management/We/Us/Our
 
Unless otherwise indicated or the context otherwise requires, these terms represent Knight-Swift Transportation Holdings Inc. and its subsidiaries.
2017 Merger
 
See complete description of the 2017 Merger included in Note 1 of the footnotes to the condensed consolidated unaudited financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
2015 RSA
 
Amended and Restated Receivables Sale Agreement, as amended, entered into in 2015 by SRCII (defined below), with unrelated financial entities, "the Purchasers" (defined below)
2013 Agreement
 
Knight's unsecured credit facility
2015 Agreement
 
Swift's Fourth Amended and Restated Credit Agreement, entered into on July 25, 2015
2017 Agreement
 
The Company's Credit Agreement, entered into on September 29, 2017
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
Board
 
Knight-Swift's Board of Directors
CSA
 
Compliance Safety Accountability
EPS
 
Earnings Per Share
FASB
 
Financial Accounting Standards Board
FLSA
 
Fair Labor Standards Act
FMCSA
 
Federal Motor Carrier Safety Administration
GAAP
 
United States Generally Accepted Accounting Principles
Knight
 
Unless otherwise indicated or the context otherwise requires, this term represents Knight Transportation, Inc. and its subsidiaries prior to the 2017 Merger
Knight Revolver
 
Revolving line of credit under the 2013 Agreement
LIBOR
 
London InterBank Offered Rate
Revolver
 
Revolving line of credit under the 2017 Agreement
Swift Revolver
 
Revolving line of credit under the 2015 Agreement
SEC
 
United States Securities and Exchange Commission
SRCII
 
Swift Receivables Company II, LLC
Swift
 
Unless otherwise indicated or the context otherwise requires, this term represents Swift Transportation Company and its subsidiaries prior to the 2017 Merger.
Term Loan A
 
Swift's first lien term loan A under the 2015 Agreement
Term Loan
 
The Company's term loan under the 2017 Agreement
The Purchasers
 
Unrelated financial entities in the and 2015 RSA, which were accounts receivable securitization agreements entered into by SRCII

3

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

PART I FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
September 30, 2017
 
December 31, 2016
 
(In thousands, except per share data)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
136,422

 
$
8,021

Cash and cash equivalents - restricted
62,685

 
—

Restricted investments, held to maturity, amortized cost
22,303

 
—

Trade receivables, net of allowance for doubtful accounts of $15,811 and $2,727, respectively
545,588

 
133,846

Equipment sales receivables
709

 
8,321

Notes receivable, net
5,984

 
560

Prepaid expenses
65,004

 
13,244

Assets held for sale
24,891

 
9,634

Income tax receivable
39,850

 
8,406

Other current assets
24,419

 
8,159

Total current assets
927,855

 
190,191

Property and equipment:
 
 
 
Revenue equipment
2,050,343

 
910,042

Land and land improvements
216,509

 
54,106

Buildings and building improvements
357,357

 
145,866

Furniture and fixtures
40,093

 
20,241

Shop and service equipment
22,437

 
16,859

Leasehold improvements
9,529

 
4,735

Total property and equipment
2,696,268

 
1,151,849

Less: accumulated depreciation and amortization
(399,681
)
 
(348,991
)
Property and equipment, net
2,296,587

 
802,858

Notes receivable, long-term
12,659

 
3,047

Goodwill
2,989,270

 
47,031

Intangible assets, net
1,285,571

 
2,575

Other long-term assets, restricted cash and investments
35,866

 
32,823

Total assets
$
7,547,808

 
$
1,078,525

Liabilities and Stockholders' Equity:
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
198,168

 
$
18,006

Accrued payroll and purchased transportation
86,213

 
25,017

Accrued liabilities
213,313

 
16,722

Claims accruals – current portion
147,922

 
18,633

Long-term debt – current portion
30

 
—

Capital lease obligations – current portion
54,561

 
—

Dividend payable – current portion
299

 
272

Total current liabilities
700,506

 
78,650

Revolving line of credit
85,000

 
18,000

Long-term debt – less current portion
399,719

 
—

Capital lease obligations – less current portion
135,540

 
—

Accounts receivable securitization
285,000

 
—

Claims accruals – less current portion
204,203

 
13,290

Deferred tax liabilities
909,941

 
178,000

Long-term dividend payable and other long-term liabilities
29,643

 
1,854

Total liabilities
2,749,552

 
289,794

Commitments and contingencies (Note 18)


 


Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01 per share; authorized 10,000; none issued
—

 
—

Class A common stock, par value $0.01 per share; authorized 500,000 shares; 177,880 and 80,229 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
1,779

 
802

Class B common stock, par value $0.01 per share; authorized 250,000 shares; none issued
—

 
—

Additional paid-in capital
4,212,609

 
223,267

Retained earnings
581,382

 
562,404

Total Knight-Swift stockholders' equity
4,795,770

 
786,473

Noncontrolling interest
2,486

 
2,258

Total stockholders’ equity
4,798,256

 
788,731

Total liabilities and stockholders’ equity
$
7,547,808

 
$
1,078,525

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements

4



KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.


CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
Quarter Ended September 30,
 
Year-to-Date September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
Revenue, before fuel surcharge
$
469,683

 
$
256,243

 
$
961,685

 
$
763,684

Fuel surcharge
51,925

 
24,287

 
104,348

 
65,252

Total revenue
521,608

 
280,530

 
1,066,033

 
828,936

Operating expenses:
 
 
 
 
 
 
 
Salaries, wages and benefits
154,390

 
82,688

 
316,844

 
250,732

Fuel
62,300

 
34,616

 
131,252

 
94,815

Operations and maintenance
37,267

 
19,781

 
78,516

 
56,886

Insurance and claims
21,117

 
9,251

 
37,982

 
26,330

Operating taxes and licenses
8,793

 
4,546

 
17,839

 
14,645

Communications
1,921

 
976

 
4,125

 
3,224

Depreciation and amortization of property and equipment
43,477

 
29,004

 
102,280

 
86,111

Amortization of intangibles
2,654

 
125

 
2,904

 
375

Rental expense
15,388

 
1,279

 
17,939

 
3,724

Purchased transportation
127,434

 
57,069

 
244,358

 
168,772

Impairments
16,746

 
—

 
16,746

 
—

Miscellaneous operating expenses, net
11,972

 
4,261

 
21,873

 
9,580

Merger-related costs
12,338

 
—

 
16,516

 
—

Total operating expenses
515,797

 
243,596

 
1,009,174

 
715,194

Operating income
5,811

 
36,934

 
56,859

 
113,742

Other income (expense):
 
 
 
 
 
 
 
Interest income
370

 
83

 
559

 
259

Interest expense
(1,812
)
 
(182
)
 
(1,948
)
 
(742
)
Other (expense) income, net
(1,442
)
 
1,389

 
(120
)
 
4,602

Total other (expense) income
(2,884
)
 
1,290

 
(1,509
)
 
4,119

Income before income taxes
2,927

 
38,224

 
55,350

 
117,861

Income taxes (benefit) expense
(1,272
)
 
14,141

 
17,786

 
45,095

Net income
4,199

 
24,083

 
37,564

 
72,766

Net income attributable to noncontrolling interest
(318
)
 
(316
)
 
(836
)
 
(1,064
)
Net income attributable to Knight-Swift
$
3,881

 
$
23,767

 
$
36,728

 
$
71,702

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.04

 
$
0.30

 
$
0.42

 
$
0.89

Diluted
$
0.04

 
$
0.29

 
$
0.41

 
$
0.88

 
 
 
 
 
 
 
 
Dividends declared per share:
$
0.06

 
$
0.06

 
$
0.18

 
$
0.18

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
102,846

 
80,040

 
87,978

 
80,284

Diluted
103,752

 
80,949

 
88,847

 
81,112

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements


5



KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 
Quarter Ended September 30,
 
Year-to-Date September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Net income
$
4,199

 
$
24,083

 
$
37,564

 
$
72,766

Other comprehensive income, net of income taxes:
 
 
 
 
 
 
 
Realized gains from available-for-sale securities reclassified to net income (1)
—

 
(878
)
 
—

 
(2,771
)
Unrealized gain from changes in fair value of available-for-sale securities (2)
—

 
145

 
—

 
198

Other comprehensive income, net of income taxes:
—

 
(733
)
 
—

 
(2,573
)
Comprehensive income, net of income taxes
4,199

 
23,350

 
37,564

 
70,193

Comprehensive income attributable to noncontrolling
interest
(318
)
 
(316
)
 
(836
)
 
(1,064
)
Comprehensive income attributable to Knight-Swift
$
3,881

 
$
23,034

 
$
36,728

 
$
69,129

____________
(1)
Net of current income tax expense of $546 and $1,723 for the quarter ended and year-to-date September 30, 2016, respectively.
(2)
Net of deferred income tax expense of $85 and $104 for the quarter ended and year-to-date September 30, 2016, respectively.
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements



6
KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)


 
Class A Common Stock
 
Additional
Paid-in Capital
 
Retained Earnings
 
Total Knight-Swift Equity
 
Noncontrolling Interest
 
Total
Stockholders’ Equity
 
Shares
 
Par Value
 
 
 
 
 
 
(In thousands)
Balances, December 31, 2016
80,229

 
$
802

 
$
223,267

 
$
562,404

 
$
786,473

 
$
2,258

 
$
788,731

2017 Merger Reverse Split of Swift shares
97,043

 
971

 
3,975,832

 
—

 
3,976,803

 
102

 
3,976,905

Exercise of stock options and RSUs
596

 
6

—

9,720

 
—

 
9,726

 
—

 
9,726

Issuance of common stock
12

 
—

 
397

 
—

 
397

 
—

 
397

Shares withheld from RSU settlement
—

 
—

 
—

 
(3,215
)
 
(3,215
)
 
—

 
(3,215
)
Employee stock-based compensation expense
—

 
—

 
3,393

 
—

 
3,393

 
—

 
3,393

Cash dividends paid and dividends accrued
—

 
—

 
—

 
(14,535
)
 
(14,535
)
 
—

 
(14,535
)
Net income attributable to Knight-Swift
—

 
—

 
—

 
36,728

 
36,728

 
—

 
36,728

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

Distribution to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
(710
)
 
(710
)
Net income attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
836

 
836

Balances, September 30, 2017
177,880

 
$
1,779

 
$
4,212,609

 
$
581,382

 
$
4,795,770

 
$
2,486

 
$
4,798,256

See accompanying notes to consolidated financial statements.


7



KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


 
Year-to-Date September 30,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
37,564

 
$
72,766

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of property, equipment and intangibles
105,184

 
86,486

Amortization of debt issuance costs, and other
15

 
—

Gain on sale of equipment
(2,465
)
 
(7,451
)
Gain from available-for-sale securities
—

 
(4,494
)
Impairments
16,746

 
—

Deferred income taxes
(9,467
)
 
4,655

Provision for doubtful accounts and notes receivable
831

 
594

Non-cash compensation expense for issuance of common stock to certain members of the Board of Directors
398

 
398

Stock-based compensation expense
3,393

 
3,126

Income from investment in TRP partnerships
(1,660
)
 
(177
)
Transportation Resource Partners impairment
56

 
67

Increase (decrease) in cash resulting from changes in:
 
 
 
Trade receivables and equipment sales receivable
(6,027
)
 
(133
)
Other current assets
(215
)
 
5,707

Prepaid expenses
(7,641
)
 
649

Income tax receivable
(23,859
)
 
33,122

Other long-term assets
126

 
547

Accounts payable
(4,447
)
 
1,869

Accrued liabilities and claims accrual
23,791

 
(6,040
)
Net cash provided by operating activities
132,323

 
191,691

Cash flows from investing activities:
 
 
 
Decrease (increase) in cash and cash equivalents – restricted
745

 
(19
)
Proceeds from maturities of held-to-maturity investments
2,835

 
—

Purchases of held-to maturity investments
(3,015
)
 
—

Proceeds from sale of available-for-sale securities
—

 
7,403

Proceeds from sale of property and equipment/assets held for sale
29,490

 
49,972

Purchases of property and equipment
(91,925
)
 
(126,028
)
Proceeds from notes receivable
1,826

 
1,348

Expenditures on assets held for sale
(720
)
 
—

Payments received on equipment sale receivables
1,067

 
—

Cash payments to Transportation Resource Partners
(1,166
)
 
(21,778
)
Cash proceeds from Transportation Resource Partners
9,775

 
423

Cash and cash equivalents received with 2017 Merger
28,493

 
—

Net cash used in investing activities
(22,595
)
 
(88,679
)

8



KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)


 
Year-to-Date September 30,
 
2017
 
2016
 
(In thousands)
Cash flows from financing activities:
 
 
 
Repayment of long-term debt and capital leases
(454,148
)
 
—

Proceeds from long-term debt
400,000

 
—

Repayments on Knight Revolver, net
(18,000
)
 
(60,000
)
Borrowings on Revolver
85,000

 
—

Borrowings under accounts receivable securitization
20,000

 
—

Payment of deferred loan costs
(2,312
)
 
—

Proceeds from exercise of stock options
9,726

 
9,321

Share withholding for taxes due on equity awards
(6,114
)
 
(1,421
)
Payments to repurchase company's common stock
—

 
(39,873
)
Dividends paid
(14,769
)
 
(14,753
)
Cash distribution to noncontrolling interest holder
(710
)
 
(1,091
)
Net cash provided by (used) in financing activities
18,673

 
(107,817
)
Net increase (decrease) in cash and cash equivalents
128,401

 
(4,805
)
Cash and cash equivalents at beginning of period
8,021

 
8,691

Cash and cash equivalents at end of period
$
136,422

 
$
3,886


Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2,924

 
$
782

Income taxes
50,709

 
7,238

Non-cash investing and financing transactions:
 
 
 
Equipment acquired included in accounts payable
$
16,557

 
$
6,436

Equipment sales receivables
954

 
—

Financing provided to independent contractors for equipment sold
1,801

 
1,024

Transfer from property and equipment to assets held for sale
26,180

 
25,035

Capital lease additions
15,020

 
—

Net dividend accrued for restricted stock units
38

 
69

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements



9



KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.


Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Note 1 — Introduction and Basis of Presentation
Certain acronyms and terms used throughout this Quarterly Report on Form 10-Q 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.
Merger
On September 8, 2017, pursuant to the Agreement and Plan of Merger, dated as of April 9, 2017, by Swift Transportation Company, Bishop Merger Sub, Inc., a direct wholly owned subsidiary of Swift (“Merger Sub”), and Knight Transportation, Inc., Merger Sub merged with and into Knight, with Knight surviving as a direct wholly owned subsidiary of Swift (the “2017 Merger”). Immediately prior to the effective time of the 2017 Merger (the “Effective Time”), the certificate of incorporation of the Company was amended and restated (the “Amended Company Charter”) to reflect, among other things, that:
(i)the Company’s corporate name changed from “Swift Transportation Company” to “Knight-Swift Transportation Holdings Inc.”; and
(ii)each issued and outstanding share of Class B common stock, par value $0.01 per share, of Swift (the "Swift Class B Common Stock”) was converted (the “Class B Conversion”) into one share of Class A common stock, par value $0.01 per share, of Swift (the "Swift Class A Common Stock”) and immediately thereafter, each issued and outstanding share of Swift Class A Common Stock (including each share of Swift Class A Common Stock into which the shares Swift Class B Common Stock was converted pursuant to the Class B Conversion) was, by means of a reverse stock split (the “Reverse Split”), consolidated into 0.72 of a share of Class A Common Stock of the Company (the "Class A Common Stock"). No fractional shares of Class A Common Stock were issued in the Reverse Split, and, in connection with the Reverse Split, holders of Class A Common Stock became entitled to receive cash in lieu of any fractional shares in accordance with the Amended Company Charter.
At the Effective Time, each share of common stock, par value $0.01 per share, of Knight (“Knight Common Stock”) issued and outstanding immediately prior to the Effective Time (other than shares held in the treasury of Knight or owned or held, directly or indirectly, by Swift or any wholly owned subsidiary of Swift or Knight, in each case not held in a fiduciary capacity on behalf of a third-party) was converted into the right to receive one share of Class A Common Stock.
Upon the closing of the 2017 Merger, the shares of Knight Common Stock that previously traded under the ticker symbol “KNX” on the New York Stock Exchange (the “NYSE”) ceased trading on, and were delisted from, the NYSE. Shares of Class A Common Stock commenced trading on the NYSE, on a post-Reverse Split basis, under the ticker symbol “KNX” on September 11, 2017.
For the year-to-date period ended September 30, 2017, we recorded $16.5 million of direct and incremental costs associated with 2017 Merger-related activities, primarily incurred for legal and professional fees, which were recorded in the ”Merger-related costs” line in the accompanying condensed consolidated statements of income. In association with the 2017 Merger, we incurred merger-related bonuses and accelerated stock compensation expense totaling $5.6 million, which is recorded in the "Salaries, wages and benefits" line in the accompanying condensed consolidated statements of income. Additionally, we incurred $0.9 million in merger-related statutory filing fees and $0.1 million in driver-retention expenses recorded within the "Miscellaneous operating expenses" and "Purchased transportation" lines in the accompanying condensed consolidated statements of income.
Description of Business
Knight-Swift is a transportation solutions provider, headquartered in Phoenix, Arizona. As of September 30, 2017, the Company's fleet of revenue equipment included 23,107 tractors (comprised of 18,099 company tractors and 5,008 independent contractor tractors), 75,715 trailers, and 9,122 intermodal containers. The Company’s six reportable segments are Knight Trucking, Knight Logistics, Swift Truckload, Swift Dedicated, Swift Refrigerated, and Swift Intermodal.
Seasonality
In the transportation industry, results of operations generally follow a seasonal pattern. Freight volumes in the first quarter are typically lower due to less consumer demand, customers reducing shipments following the holiday season, and inclement weather impeding operations. At the same time, operating expenses generally increase, and tractor productivity of our fleet, independent contractors, and third-party carriers decreases during the winter months due to decreased fuel efficiency, increased cold-weather-related equipment maintenance and repairs, and increased insurance claims and costs attributed to higher accident frequency from harsh weather. During this period, the profitability of our operations is generally lower than during other parts of the year. Additionally, we have seen surges between Thanksgiving and Christmas resulting from holiday shopping trends toward delivery of gifts purchased over the Internet, as well as the impact of shorter holiday seasons.

10

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Basis of Presentation
We accounted for the 2017 Merger using the acquisition method of accounting in accordance with Topic 805, Business Combinations. GAAP requires that either Knight or Swift is designated as the acquirer for accounting and financial reporting purposes (“Accounting Acquirer”). Based on the evidence available, Knight was designated as the Accounting Acquirer. In identifying Knight as the Accounting Acquirer, we took into account the structure of the 2017 Merger, the composition of the combined company’s board of directors and the designation of certain senior management positions of the combined company, among other factors. Accordingly, the historical financial statements of Knight are the historical financial statements of the combined company. As such, information included within our condensed consolidated (unaudited) statements of income, comprehensive income and cash flows and their respective footnotes include the results of Swift from and after September 8, 2017 (the date of the closing of the 2017 Merger) to September 30, 2017. See Note 5 for the description of the purchase price allocation.
The condensed consolidated financial statements (unaudited) and footnotes included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes included in Knight's Annual Report on Form 10-K for the year ended December 31, 2016. The condensed consolidated financial statements (unaudited) include the accounts of Knight-Swift Transportation Holdings Inc. and its subsidiaries. In management's opinion, these condensed consolidated financial statements (unaudited) were prepared in accordance with GAAP and include all adjustments necessary (consisting of normal recurring adjustments) for the fair presentation of the periods presented.
Changes in Presentation
Recently Adopted Accounting Pronouncement — During the fourth quarter of 2016, Knight early adopted Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting (ASU 2016-09).  The standard  requires us to reflect any adoption adjustments as of the beginning of the annual period that includes the interim period of adoption. As such, our condensed consolidated statements of income, statements of comprehensive income and statements of cash flows for the quarter ended and year-to-date September 30, 2016, have been recast to include the impact of ASU 2016-09 adoption. See "Note 1-Significant Accounting Policies" in the notes to Knight's consolidated financial statements in Knight's Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for detailed adoption information.
Other Presentation Changes — Beginning in 2017, we made the following changes in presentation:
•
Equipment sales receivables are separately presented within "Total current assets" in the condensed consolidated unaudited balance sheets. The prior period presentation has been retrospectively adjusted to reclassify the amount out of "Trade receivables, net of allowance for doubtful accounts" and into the new line item "Equipment sales receivable." The change in presentation has no net impact on "Total current assets."
•
Rental expenses related to revenue equipment are separately presented within "Total operating expenses" in the condensed consolidated statements of income. The prior period presentation has been retrospectively adjusted to reclassify the amount out of "Miscellaneous operating expenses" and into the new line item "Rental expense." The change in presentation has no impact on "Total operating expenses."
•
Excess tax benefits within the condensed consolidated statement of cash flows should be classified along with other income tax cash flows as an operating activity. Application is permitted to be prospective or retrospective. GAAP previously required classification within cash flows from financing activities. We retrospectively adjusted the year-to-date September 30, 2016 condensed consolidated statement of cash flows to align with the current period presentation by increasing cash flows from operating activities by $1.1 million and correspondingly decreasing cash flows from financing activities by $1.1 million, reflecting the amount of excess tax benefits previously presented for that period.

Summary of Significant Accounting Policies
In association with the 2017 Merger, we have the following additional significant accounting policies not previously disclosed within Knight's consolidated financial statements and footnotes included in Knight's Annual Report on Form 10-K for the year ended December 31, 2016.
Restricted Cash — Our wholly-owned captive insurance companies, Red Rock and Mohave, maintain certain operating bank accounts, working trust accounts, and investment accounts. The cash and short-term investments within the accounts are restricted by insurance regulations to fund the insurance claim losses to be paid by the captive insurance companies. Therefore, these cash and short-term investments are classified as "Cash and cash equivalents - restricted" in the condensed consolidated balance sheets.
Restricted Investments -— Our investments are restricted by insurance regulations to fund the insurance claim losses to be paid by the captive insurance companies. The Company accounts for its investments in accordance with ASC 320, Investments - Debt and Equity Securities. Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates the determination on a quarterly basis. As of September 30, 2017, all of our investments in fixed-maturity securities were classified as held-to-maturity, as we have the positive intent and ability to hold these securities to maturity. Held-to-maturity securities are carried at amortized cost. The amortized cost of debt securities is adjusted using the effective interest rate

11

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



method for amortization of premiums and accretion of discounts. Amortization and accretion are reported in "Other income, net" in the condensed consolidated statement of income (unaudited).
Management periodically evaluates restricted investments for impairment. The assessment of whether impairments have occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in estimated fair value. Management accounts for other-than-temporary impairments of debt securities in accordance with ASC 320, Investments - Debt and Equity Securities. This guidance requires the Company to evaluate whether it intends to sell an impaired debt security or whether it is more likely than not that it will be required to sell an impaired debt security before recovery of the amortized cost basis. If either of these criteria are met, an impairment loss equal to the difference between the debt security's amortized cost and its estimated fair value is recognized in earnings. For impaired debt securities that do not meet these criteria, we determine if a credit loss exists with respect to the impaired security. If a credit loss exists, the credit loss component of the impairment (i.e., the difference between the security's amortized cost and the present value of projected future cash flows expected to be collected) is recognized in earnings and the remaining portion of the impairment is recognized as a component of accumulated other comprehensive income.
Operating Leases — In accordance with ASC 840, Leases, property and equipment held under operating leases, and liabilities related thereto, are off-balance sheet. All expenses related to operating leases are reflected in our condensed consolidated statements of income (unaudited) in "Rental expense." At the inception of a lease, management judgment is involved in classification as an operating or capital lease, as well as determination of useful lives and estimation of residual values of the related equipment. Future minimum lease payments used in determining lease classification represent the 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.
We do not currently guarantee residual values under our operating lease agreements for revenue equipment. To the extent we believe any manufacturer will refuse or be unable to meet its obligation, we recognize additional rental expense to the extent we believe the fair market value at the lease termination will be less than our obligation to the lessor. We believe that proceeds from the sale of equipment under operating leases would exceed the payment obligation on substantially all operating leases.


12

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 2 — Recently Issued Accounting Pronouncements, Not Yet Adopted
Date Issued
 
Reference
 
Description
 
Expected Adoption Date and Method
 
Financial Statement Impact
January 2017
 
2014-04: Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment
 
This update simplifies how an entity is required to test goodwill for impairment. Under the new guidance, annual or interim goodwill impairment testing will be performed by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. Any impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
 
January 2020
 
Currently under evaluation
November 2016
 
2016-18: Statement of Cash Flows (Topic 230) – Restricted Cash
 
This update requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
 
January 2018
 
Currently under evaluation
August 2016
 
2016-15: Statement of Cash Flows (Topic 203) – Classification of Certain Cash Receipts and Cash Payments
 
This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.
 
January 2018
 
Currently under evaluation
May 2016
 
2016-12: Revenue from Contracts with Customers (Topic 606) – Narrow-scope Improvements and Practical Expedients
 
The amendments in this ASU clarify certain aspects regarding the collectibility criterion, sales taxes collected from customers, noncash consideration, contract modifications, and completed contracts at transition. It additionally clarifies that retrospective application only requires disclosure of the accounting change effect on prior periods presented, not on the period of adoption.
 
January 2018, Modified retrospective
 
Currently under evaluation (1)
April 2016
 
2016-10: Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing
 
The amendments in this ASU clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments do not change the core principle of the guidance.
 
January 2018, Modified retrospective
 
Currently under evaluation (1)
March 2016
 
2016-08: Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
 
The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations, but do not change the core principle of the guidance.
 
January 2018, Modified retrospective
 
Currently under evaluation (1)

13

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Date Issued
 
Reference
 
Description
 
Expected Adoption Date and Method
 
Financial Statement Impact
February 2016
 
2016-02: Leases (Topic 842)
 
This update seeks to increase the transparency and comparability among entities by requiring public entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. To satisfy the standard’s objective, a lessee will recognize a right-of-use asset representing its right to use the underlying asset for the lease term and a lease liability for the obligation to make lease payments. Both the right-of-use asset and lease liability will initially be measured at the present value of the lease payments, with subsequent measurement dependent on the classification of the lease as either a finance or an operating lease. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. Accounting by lessors will remain mostly unchanged from current GAAP.
 
January 2019, Modified retrospective
 
Currently under evaluation; expected to be material, but not yet quantifiable.
January 2016
 
2016-01: Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
 
The update (i) requires equity investments (except those accounted for under the equity method or that are consolidated) to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for an entity to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost; (iv) requires an entity to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (v) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements.
 
January 2018, retrospective
 
Currently under evaluation
August 2015
 
2015-14: Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date
 
This ASU deferred the effective date of ASU 2014-09 (Topic 606) to annual reporting periods beginning after December 15, 2017.
 
January 2018, Modified retrospective
 
Currently under evaluation (1)
____________
(1)
We have established an ASC 606 implementation team, which includes support from external experts, to evaluate and implement the standard. The diagnostic phase of assessing the financial and business impacts of implementing the standard is well underway and includes identifying revenue sources within the our lines of business, reviewing a sample of contracts, analyzing the impact on our systems, and developing a preliminary assessment. Based upon the procedures performed in the diagnostic phase, we anticipates that the following key considerations will impact the our accounting and reporting under the new standard:
•
identification of what constitutes a contract in the our business practices,
•
variability in individual contracts, such as customer-specific terms that may vary from the master agreement,
•
principal versus agent determinations,
•
timing of revenue recognition (for example, point-in-time versus over time and/or accelerated versus deferred),
•
single versus multiple performance obligations, including the timing of when such performance obligations are satisfied
•
new/changed estimates and management judgments (for example, system estimation of in-transit accruals versus manual estimation),
•
disaggregation of revenue by category within segments, and

14

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



•
others.

We expect that there will also be changes in sales, contracting, accounting, reporting, tax, debt covenants, and other business processes, policies, and controls, as a result of implementing the standard. The 2017 Merger is also affecting the timing and other components of the implementation process.
Based on the information currently available from the diagnostic phase, we cannot yet determine the quantitative impact on the financial statements. We expect changes related to the timing of revenue recognition between reportable periods, as well as changes in the requirements for accounting policy and other new disclosures. As the diagnostic phase is being finalized, we are proceeding to design and develop solutions in preparation for the implementation phase of the standard. Since we are continuing to evaluate the impact of the standard, disclosures around these preliminary assessments are subject to change.
 
Note 3 — Earnings Per Share
The following table reconciles the basic and diluted earnings per share computation for the quarter ended and year-to-date September 30, 2017 and 2016:
 
Quarter Ended September 30,
 
Year-to-Date September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share data)
Weighted-average common shares outstanding – basic
102,846

 
80,040

 
87,978

 
80,284

Dilutive effect of stock options and unvested restricted stock units (1)
906

 
909

 
869

 
828

Weighted-average common shares outstanding – diluted
103,752

 
80,949

 
88,847

 
81,112

 
 
 
 
 
 
 
 
Net income attributable to Knight-Swift (2)
$
3,881

 
$
23,767

 
$
36,728

 
$
71,702

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.04

 
$
0.30

 
$
0.42

 
$
0.89

Diluted earnings per share
$
0.04

 
$
0.29

 
$
0.41

 
$
0.88

____________
(1)
Shares were excluded from the dilutive-effect calculation because the outstanding options' exercise prices were greater than the average market price of Knight's Common Stock for the 2016 periods and the Class A Common Stock for the 2017 periods.
 
Quarter Ended September 30,
 
Year-to-Date September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Number of anti-dilutive shares
654

 
937

 
488

 
1,072

(2)
Knight early adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting during the fourth quarter of 2016. The adoption of this standard resulted in the recognition of $1.8 million of excess tax benefits to the income tax provision for the year ended December 31, 2016. Net income and shares outstanding data for the quarter ended and year-to-date September 30, 2016 are presented as if the ASU was adopted at the beginning of 2016.
 
Note 4 — Information by Segment and Geography
Segment Information
As a result of the 2017 Merger, we have six reportable segments, which are the historical reportable operating segments of Knight and Swift: Knight Trucking, Knight Logistics, Swift Truckload, Swift Dedicated, Swift Refrigerated and Swift Intermodal. In determining our reportable segments, we focus on financial information such as total revenue and expenses, operating income, operating ratios, and other key operating statistics common in the industry. Our chief operating decision makers also use this information to evaluate this information to evaluate segment performance and allocate resources to our operations.
Knight Segments:
Knight Trucking — The Knight Trucking segment is comprised of three operating units (Dry Van, Refrigerated and Drayage).

15

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Knight Logistics — The Knight Logistics segment is comprised of two operating units (Brokerage and Intermodal). We also provide logistics freight management and other non-trucking services through our Knight Logistics business.
Swift Segments:
Swift Truckload — The Swift Truckload segment consists of one-way movements over irregular routes throughout the United States, Mexico, and Canada.
Swift Dedicated — The Swift Dedicated segment devotes use of equipment to specific customers and offers tailored solutions under long-term contracts.
Swift Refrigerated — The Swift Refrigerated segment primarily consists of shipments for customers that require temperature-controlled trailers. These shipments include one-way movements over irregular routes, as well as dedicated truck operations.
Swift Intermodal — The Swift Intermodal segment includes revenue generated by moving freight over the rail in Swift's containers and other trailing equipment, combined with revenue for drayage to transport loads between the railheads and customer locations.
Swift Non-reportable Segments — The Swift non-reportable segments include Swift's logistics and freight brokerage services, as well as support services that Swift's subsidiaries provide to customers and independent contractors, including repair and maintenance shop services, equipment leasing and insurance. Certain legal settlements and reserves, and other corporate expenses are also included in the non-reportable segments.
Intersegment Eliminations — Certain operating segments provide transportation and related services for other affiliates outside their reportable segment. For Knight operating segments, such services are billed at cost, and no profit is earned. For Swift operating segments, revenues for such services are based on negotiated rates, and are reflected as revenues of the billing segment. These rates are adjusted from time to time, based on market conditions. Such intersegment revenues and expenses are eliminated in our consolidated results.
The following tables present our financial information by segment:
 
Quarter Ended September 30,
 
Year-to-Date September 30,
 
2017
 
2016
 
2017
 
2016
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
Total revenue:
(Dollars in thousands)
Knight
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trucking
$
222,307

 
42.6
 %
 
$
228,590

 
81.5
 %
 
$
661,320

 
62.0
 %
 
$
672,969

 
81.2
 %
Logistics
57,904

 
11.1

 
53,643

 
19.1

 
166,959

 
15.7

 
163,955

 
19.8

Swift
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Truckload
115,899

 
22.2

 
—

 
—

 
115,899

 
10.9

 
—

 
—

Dedicated
39,120

 
7.5

 
—

 
—

 
39,120

 
3.7

 
—

 
—

Refrigerated
47,506

 
9.1

 
—

 
—

 
47,506

 
4.5

 
—

 
—

Intermodal
24,046

 
4.6

 
—

 
—

 
24,046

 
2.3

 
—

 
—

Subtotal
506,782

 


 
282,233

 


 
1,054,850

 


 
836,924

 


Swift Non-reportable segments
20,212

 
3.9

 
—

 
—

 
20,212

 
1.9

 
—

 
—

Intersegment
eliminations
(5,386
)
 
(1.0
)
 
(1,703
)
 
(0.6
)
 
(9,029
)
 
(1.0
)
 
(7,988
)
 
(1.0
)
Consolidated
total revenue
$
521,608

 
100.0
 %
 
$
280,530

 
100.0
 %
 
$
1,066,033

 
100.0
 %
 
$
828,936

 
100.0
 %

16

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Quarter Ended September 30,
 
Year-to-Date September 30,
 
2017
 
2016
 
2017
 
2016
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
Operating income (loss):
(Dollars in thousands)
Knight
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trucking
$
8,581

 
147.7
 %
 
$
34,439

 
93.2
%
 
$
54,603

 
96.0
 %
 
$
105,647

 
92.9
%
Logistics
3,651

 
62.8

 
2,495

 
6.8

 
8,677

 
15.3

 
8,095

 
7.1

Swift
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Truckload
7,967

 
137.1

 
—

 
—

 
7,967

 
14.0

 
—

 
—

Dedicated
2,949

 
50.7

 
—

 
—

 
2,949

 
5.2

 
—

 
—

Refrigerated
427

 
7.3

 
—

 
—

 
427

 
0.8

 
—

 
—

Intermodal
1,396

 
24.0

 
—

 
—

 
1,396

 
2.5

 
—

 
—

Subtotal
24,971

 
 
 
36,934

 
 
 
76,019

 
 
 
113,742

 
 
Swift Non-reportable segments
(19,160
)
 
(329.6
)
 
—

 
—

 
(19,160
)
 
(33.8
)
 
—

 
—

Consolidated operating income
$
5,811

 
100.0
 %
 
$
36,934

 
100.0
%
 
$
56,859

 
100.0
 %
 
$
113,742

 
100.0
%
 
Quarter Ended September 30,
 
Year-to-Date September 30,
 
2017
 
2016
 
2017
 
2016
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Amount
 
% of Total
Depreciation and amortization of property and equipment
(Dollars in thousands)
Knight
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trucking
$
27,552

 
63.4
%
 
$
27,863

 
96.1
%
 
$
83,678

 
81.8
%
 
$
82,999

 
96.4
%
Logistics
1,245

 
2.9

 
1,141

 
3.9

 
3,922

 
3.8

 
3,112

 
3.6

Swift
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Truckload
6,179

 
14.2

 
—

 
—

 
6,179

 
6.0

 
—

 
—

Dedicated
2,861

 
6.6

 
—

 
—

 
2,861

 
2.8

 
—

 
—

Refrigerated
2,147

 
4.9

 
—

 
—

 
2,147

 
2.1

 
—

 
—

Intermodal
603

 
1.4

 
—

 
—

 
603

 
0.6

 
—

 
—

Subtotal
40,587

 
 
 
29,004

 
 
 
99,390

 
 
 
86,111

 
 
Swift Non-reportable segments
2,890

 
6.6

 
—

 
—

 
2,890

 
2.8

 
—

 
—

Consolidated depreciation and amortization of property and equipment
$
43,477

 
100.0
%
 
$
29,004

 
100.0
%
 
$
102,280

 
100.0
%
 
$
86,111

 
100.0
%
No segment asset or liability information is provided as we do not prepare balance sheets by segment, and our chief decision makers do not review segment assets or liabilities to make operating decisions.

Geographical Information
In the aggregate, operating revenue from the Company's foreign operations was less than 5.0% of consolidated total operating revenue for the quarter ended and year-to-date September 30, 2017 and 2016. Additionally, long-lived assets on the Company's foreign subsidiaries' balance sheets were less than 5.0% of consolidated total assets as of September 30, 2017 and December 31, 2016.

17

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED




 
Note 5 — Purchase Price Allocation
As described in Note 1, we completed the 2017 Merger on September 8, 2017. Based on the evidence available, Knight was designated as the Accounting Acquirer.
Pursuant to the 2017 Merger, each share of Swift Class A Common Stock and Swift Class B Common Stock was converted into 0.72 shares of Knight-Swift by means of the Reverse Split. Following the consummation of the 2017 Merger, Knight and Swift stockholders own approximately 46% and 54%, respectively, of the Company. Based on Knight's $40.85 per share closing price on September 8, 2017 and the fair value of Swift equity awards, consisting of outstanding stock options and certain unvested restricted stock units, and noncontrolling interest assumed by the Company totaling $13.2 million, the 0.72 of a combined company share that the Swift stockholders received in respect of each class A share of Swift had a fair value of approximately $4.0 billion. See Note 22 for further discussion related to the treatment of the Swift equity awards assumed pursuant to the 2017 Merger.

The purchase price allocation for the 2017 Merger is preliminary and has been allocated based on estimated fair values of the assets acquired and liabilities assumed at the acquisition date, pending the completion of an independent valuation of certain tangible and intangible assets acquired, assessment of lease agreements, certain identified contingent liabilities and the calculation of deferred taxes based upon the underlying tax basis of assets acquired and liabilities assumed and assessment of other tax related items. We expect that, as we obtain more information, the preliminary purchase price allocation disclosed below may change. Any future adjustments to the preliminary purchase price allocation, including changes within identifiable intangible assets or estimation uncertainty impacted by market conditions, may impact future net earnings. The purchase price allocation adjustments can be made through the end of our measurement period, which is not to exceed one year from the acquisition date.

The following table summarizes the total fair value consideration transferred (in thousands except per share data):
Number of Swift shares outstanding at September 8, 2017
134,765

Swift share conversion ratio
0.72

Swift shares outstanding post-Reverse Split and immediately prior to the 2017 Merger
97,031

Closing price of Knight on September 8, 2017
$
40.85

Fair value of equity portion of the 2017 Merger consideration
$
3,963,712

Fair Value of Swift equity awards and noncontrolling interest assumed
13,193

Total Fair value of consideration transferred
$
3,976,905



18

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



The following is a preliminary summary of the allocation of purchase consideration to the estimated fair value of Swift’s assets acquired and liabilities assumed in the 2017 Merger (in thousands):
Fair value of the consideration transferred
$
3,976,905

 
 
Cash and cash equivalents
$
28,484

Restricted cash and fixed maturity securities
85,615

Trade and other receivables
411,767

Prepaid expenses
44,564

Other current assets
19,736

Property and equipment
1,522,123

Identifiable intangible assets
1,285,900

Other noncurrent assets
18,537

Total assets
3,416,726

 
 
Accounts payable
(188,411
)
Accrued liabilities
(232,280
)
Claims accruals
(306,846
)
Long-term debt and capital lease obligations
(894,681
)
Deferred tax liabilities
(741,405
)
Other long-term liabilities
(18,452
)
Total liabilities
(2,382,075
)
 
 
Goodwill
$
2,942,254

The goodwill is primarily attributable to Swift’s existing workforce and the synergies expected to arise after the 2017 Merger. These acquired capabilities, when combined with Knight's business, will result in opportunities that allow us to provide services under contracts that could not have been pursued individually by either Knight or Swift. As noted above, our purchase price allocation is preliminary and as such, we have not completed the allocation of goodwill to our reportable segments. The goodwill will not be deductible for tax purposes.
The estimated fair value of the acquired identifiable intangible assets is based on a preliminary valuation completed for Swift, along with related tangible assets, using a combination of the income method, cost method and comparable market transactions. Following are the details of the preliminary purchase price allocated to the identifiable intangible assets acquired:    
 
Estimated Life
 
Estimated
Fair Value
 
(years)
 
(thousands)
Customer relationships
10 - 20 years
 
$
817,200

Trade name
indefinite
 
468,700

Total identifiable intangible assets
 
 
$
1,285,900

We assumed certain claims and contingent liabilities, including legal reserves, at the acquisition date. The fair value of these liabilities is preliminary, and, as we obtain additional information, the fair value of these liabilities may change.

In association with the 2017 Merger, we recognized certain merger-related costs, consisting of legal and professional fees, of $12.3 million and $16.5 million for the quarter ended and year-to-date September 30, 2017, respectively. Additionally, we incurred merger-related bonuses and accelerated stock compensation expense totaling $5.6 million, which is recorded in the "Salaries, wages and benefits" line in the accompanying condensed consolidated statements of income during the quarter ended and year-to-date September 30, 2017, as well as, merger-related statutory filing fees of $0.9 million and $0.1 million in driver-retention expenses recorded within the "Miscellaneous operating expenses" and "Purchased transportation" lines in the accompany condensed consolidated statements of income during the three and nine months ended September 30, 2017.


19

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Our condensed consolidated financial statements for the quarter ended and year-to-date September 30, 2017 include Swift's results of operations after September 8, 2017 (closing of the 2017 Merger) through September 30, 2017. During the quarter ended and year-to-date September 30, 2017, Swift's total revenue and net loss included within our consolidated operating results was $242.8 million and $5.5 million, respectively. Swift's net loss for this period includes a $16.7 million Impairment charge for the termination of implementation of the Swift Enterprise Resource Planning ("ERP") system, as well as, $2.5 million related to the amortization of intangibles acquired in the 2017 Merger.
 
The following unaudited pro forma information combines the historical operations of Knight and Swift, giving effect to the 2017 Merger and related transactions as if they had been consummated on January 1, 2016, the beginning of the earliest period presented.

 
Year-to-Date
 
September 30, 2017
 
September 30, 2016
Total revenue
$
3,776,841

 
$
3,821,839

Net income
$
83,727

 
$
165,613

Diluted earnings per share
$
0.47

 
$
0.92


The unaudited pro forma condensed combined financial information has been presented for comparative purposes only and includes certain adjustments such as recognition of assets acquired at estimated fair values and related depreciation and amortization, elimination of transaction costs incurred by Knight and by Swift during the periods presented that were directly related to the 2017 Merger, and related income tax effects of these items. As a result of the 2017 Merger, both Knight and Swift incurred certain merger-related expenses, including professional legal and advisory fees, acceleration of share-based compensation, bonus incentives, severance payments, filing fees and other miscellaneous expenses. These merger-related expenses for both Knight and Swift totaled $57.0 million year-to-date September 30, 2017 and are eliminated from presentation of the unaudited pro forma net income presented above. The unaudited pro forma condensed combined financial information does not purport to represent the actual results of operations that Knight and Swift would have achieved had the companies been combined during the periods presented in the unaudited pro forma condensed combined financial statements and is not intended to project the future results of operations that the combined company may achieve after the 2017 Merger. The unaudited pro forma condensed combined financial information does not reflect any cost savings that may be realized as a result of the 2017 Merger and also does not reflect any restructuring or integration-related costs to achieve those potential cost savings.

 
Note 6 — Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price of our acquisitions over the fair value of the net assets acquired. The tax benefit from the recognition on the tax return of the amortization of the excess tax goodwill over book goodwill is treated as a reduction in the book basis of goodwill.

The changes in the carrying amounts of goodwill were as follows:
 
September 30, 2017
 
(In thousands)
Goodwill at beginning of period
$
47,031

Amortization relating to deferred tax assets
(15
)
Goodwill related to 2017 Merger
2,942,254

Goodwill at end of period
$
2,989,270


There were no goodwill impairments recorded year-to-date September 30, 2017 or 2016.
Identifiable intangible assets subject to amortization have been recorded at fair value. Intangible assets related to acquisitions prior 2017 are amortized over a remaining weighted-average amortization period of 7.6 years. Our customer relationship intangible assets related to the 2017 Merger are being amortized over a remaining weighted average amortization period of 19.9 years.

20

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Other intangible asset balances were as follows:
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Customer Relationships and Non Compete:
 
 
 
Gross carrying amount
$
820,900

 
$
3,700

Accumulated amortization
(4,029
)
 
(1,125
)
Customer relationships and non-compete, net
$
816,871

 
$
2,575

Trade Name:
 
 
 
Gross carrying amount
468,700

 
—

Intangible assets, net
$
1,285,571

 
$
2,575

The following table presents amortization of intangible assets related to the 2017 Merger and intangible assets existing prior to the 2017 Merger:
 
Quarter Ended September 30,
 
Year-to-Date September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Amortization of intangible assets related to the 2017 Merger
$
2,529

 
$
—

 
$
2,529

 
$
—

Amortization related to intangible assets existing prior to the 2017 Merger
125

 
125

 
375

 
375

Amortization of intangibles
$
2,654

 
$
125

 
$
2,904

 
$
375

Future amortization expense for intangible assets is estimated at $10.5 million for the remainder of 2017, $41.9 million per each of the years 2018 through 2019 and $41.8 million per each of the years 2020 and 2021, and $41.7 million in 2022.

 
Note 7 — Investments and Related Commitments
Investment balances included in “Other long-term assets, restricted cash and investments” on our accompanying condensed consolidated unaudited balance sheets were as follows:
 
September 30, 2017
 
December 31, 2016
 
(in thousands)
Investment in Transportation Resource Partners (TRP)
$
211

 
$
214

Investment in Transportation Resource Partners III (TRP III)
2,146

 
5,882

Investment in Transportation Resource Partners IV (TRP IV)
2,580

 
1,882

Investment in Transportation Resource Partners CoInvest Partners, (NTI) I, LP (TRP Coinvestment)
8,625

 
10,000

Investment in Transportation Resource Partners CoInvest Partners, (QLS) I, LP (TRP Coinvestment QLS)
7,145

 
9,735

 
$
20,707

 
$
27,713

In 2003, Knight signed a partnership agreement with Transportation Resource Partners ("TRP"), a company that makes privately negotiated equity investments. Per the original partnership agreement, Knight committed to invest $5.0 million in TRP. In 2006, Knight increased the commitment amount to $5.5 million. We recorded no impairment in the quarter ended September 30, 2017, and $67,000 impairment was recorded in the quarter ended September 30, 2016. We recorded impairment of $3,000 and $67,000 during year-to-date September 30, 2017 and 2016, respectively. Our investment in TRP is accounted for using the cost method, as the level of influence over the operations of TRP is minor, and the balance is included in "Other long-term assets, restricted cash and investments" on our accompanying condensed consolidated unaudited balance sheets.
In 2008, Knight formed Knight Capital Growth, LLC and committed $15.0 million to invest in another partnership managed and

21

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



operated by the managers and principals of TRP. This partnership, Transportation Resource Partners III, LP ("TRP III"), is focused on investment opportunities similar to TRP. In 2015, TRP III released Knight from $2.1 million of its outstanding commitment. As of September 30, 2017, we have contributed approximately $11.1 million to TRP III, leaving an outstanding commitment of $1.8 million. We recorded income from our investment in TRP III of approximately $0.4 million, and received distributions of $0.8 million for the quarter ended September 30, 2017, and income of approximately $32,100 for the quarter ended September 30, 2016. We recorded income from our investment in TRP III of approximately $1.5 million, and received distributions of  $5.3 million for year-to-date September 30, 2017, and recorded income of approximately $0.2 million, and received $0.4 million distributions for year-to-date September 30, 2016. Our investment in TRP III is accounted for using the equity method, and the carrying value of our investment is included in "Other long-term assets, restricted cash and investments" on our accompanying condensed consolidated unaudited balance sheets.
In 2015, Knight committed to invest in another TRP partnership, TRP Capital Partners, LP (“TRP IV”). TRP IV is managed and operated by the managers and principals of TRP and TRP III, and is focused on similar investment opportunities. Knight committed to contribute a total of $4.9 million to TRP IV, and have contributed approximately $2.8 million, including approximately $1.1 million in year-to-date September 30, 2017, leaving an outstanding commitment of approximately $2.1 million as of September 30, 2017. We received distributions from TRP IV of approximately $0.4 million, and recorded impairment of approximately $53,000 in year-to-date September 30, 2017. Our investment in TRP IV is accounted for using the cost method, as the level of influence over the operations of TRP IV is minor, and the balance is included in "Other long-term assets, restricted cash and investments" on our accompanying condensed consolidated unaudited balance sheets.
In the first quarter of 2016, Knight committed to invest in another TRP partnership, TRP CoInvest Partners, (NTI) I, LP (“TRP Coinvestment”). The new partnership is managed and operated by the managers and principals of the other TRP partnerships, and is focused on similar investment opportunities. Knight committed to contribute, and has paid a total of, $10.0 million to the new partnership, leaving no outstanding commitment as of September 30, 2017. Knight recorded a loss from our investment in TRP Coinvestment of approximately $0.3 million in the quarter ended September 30, 2017, and no income or loss was recorded in the quarter ended September 30, 2016. We recorded a loss from our investment in TRP Coinvestment of approximately $1.4 million in year-to-date September 30, 2017, and no income or loss was recorded in year-to-date September 30, 2016. Our investment in TRP Coinvestment is accounted for using the equity method, and the carrying value is included in "Other long-term assets, restricted cash and investments" on our accompanying condensed consolidated unaudited balance sheets.
In the third quarter of 2016, Knight committed to invest in another TRP partnership, TRP CoInvest Partners, (QLS) I, LP (“TRP Coinvestment QLS”). The new partnership is managed and operated by the managers and principals of the other TRP partnerships, and is focused on similar investment opportunities. Knight committed to contribute, and has paid a total of, $9.7 million to the new partnership, leaving no outstanding commitment as of September 30, 2017. We recorded income from our investment in TRP Coinvestment QLS of approximately $0.2 million in the quarter ended September 30, 2017, and we recorded income from our investment in TRP Coinvestment QLS of approximately $1.5 million, and received distributions of approximately $4.1 million for year-to-date September 30, 2017. Our investment in TRP Coinvestment is accounted for using the equity method, and the carrying value is included in "Other long-term assets, restricted cash and investments" on our accompanying condensed consolidated unaudited balance sheets.

 
Note 8 — Marketable Equity Securities
Historically, Knight, from time to time, held certain marketable equity securities classified as available-for-sale securities, which are recorded at fair value with unrealized gains and losses, net of tax, as a component of "Accumulated other comprehensive income" in stockholders' equity on the accompanying condensed consolidated unaudited balance sheets. Realized gains and losses on available-for-sale securities are included in the determination of net income. We use specific identification to determine the cost of securities sold, or amounts reclassified out of accumulated other comprehensive income into earnings and included in “Other income” on the accompanying condensed consolidated statements of income.
The following table shows our realized gains during the quarter ended and year-to-date September 30, 2017 and 2016, on certain securities that were classified as available-for-sale:
 
Quarter Ended September 30,
 
Year-to-Date September 30,
 
2017
 
2016
 
2017
 
2016
Realized Gains:
(In thousands)
Sales proceeds
$
—

 
$
2,220

 
$
—

 
$
7,403

Cost of securities sold
—

 
796

 
—

 
2,909

Realized gain
$
—

 
$
1,424

 
$
—

 
$
4,494

 
 
 
 
 
 
 
 
Realized gain, net of taxes
$
—

 
$
878

 
$
—

 
$
2,771


22

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED




During the quarter ended September 30, 2016, Knight disposed of its holdings in available-for-sale equity investments, leaving no balance on the accompanying condensed consolidated unaudited balance sheets as of September 30, 2017 or December 31, 2016.

 
Note 9 — Restricted Investments
The following table presents the cost or amortized cost, gross unrealized gains and temporary losses, and estimated fair value of our restricted investments:
 
September 30, 2017
 
 
 
Gross Unrealized
 
 
 
Cost or Amortized
Cost
 
Gains
 
Temporary
Losses
 
Estimated Fair Value
 
(In thousands)
United States corporate securities
$
16,033

 
$
—

 
$
(5
)
 
$
16,028

Municipal bonds
4,990

 
1

 
(2
)
 
4,989

Negotiable certificate of deposits
1,280

 
—

 
—

 
1,280

Restricted investments, held to maturity
$
22,303

 
$
1

 
$
(7
)
 
$
22,297

Refer to Note 21 for additional information regarding fair value measurements of restricted investments, money market fund and debt securities recorded in "Other long-term assets, restricted cash and investments" on the condensed consolidated unaudited balance sheet.
As of September 30, 2017, the contractual maturities of the restricted investments were one year or less. There were 29 securities that were in an unrealized loss position for less than twelve months as of September 30, 2017. We did not recognize any impairment losses for year-to-date September 30, 2017.
 
Note 10 — Income Taxes
Effective Tax Rate — The effective tax rate for the quarter ended September 30, 2017 and September 30, 2016 was (43.5)% and 38.1%, respectively. We recognized discrete items relating to stock compensation deductions and the impact of state tax rate changes on deferred taxes benefiting the respective quarters.
The year-to-date September 30, 2017 and September 30, 2016 effective tax rate were 32.1% and 39.2%, respectively. We recognized discrete items relating to stock compensation deductions and the impact of state tax rate changes on deferred taxes benefiting those periods.
We believe it is reasonably possible that a decrease of up to $0.7 million in unrecognized tax benefits related to federal tax credit claims for refund may be necessary within the coming year due to settlement of such tax credit claims with the relevant taxing authority.
Interest and Penalties — Accrued interest and penalties related to unrecognized tax benefits as of September 30, 2017 and December 31, 2016 were approximately $1.7 million and $0.4 million, respectively.
Tax Examinations — Certain of our subsidiaries are currently under examination by various state jurisdictions for tax years ranging from 2011 through 2015. At the completion of these examinations, management does not expect any adjustments that would have a material impact on our effective tax rate. Years subsequent to 2011 remain subject to examination.
 
Note 11 — Property and Equipment
To ensure that our facilities remain modern and efficient, we periodically have facility upgrades, or new construction, in process at our various terminals or corporate headquarters locations. Until these projects are completed, we consider these to be assets not yet placed in service and they are not depreciated.  Once they are placed into service, we depreciate them according to our depreciation policy. At September 30, 2017 and December 31, 2016, we had approximately $7.0 million and $13.0 million, respectively, of facility construction in process assets included under "Buildings and building improvements” on the accompanying condensed consolidated unaudited balance sheets.


23

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



 
Note 12 — Assets Held for Sale
Revenue equipment that is not utilized in continuing operations and is held for sale is classified as "Assets held for sale" on the accompanying condensed consolidated unaudited balance sheets.  Assets held for sale at September 30, 2017 and December 31, 2016, totaled $24.9 million and $9.6 million, respectively. Assets held for sale are no longer subject to depreciation, and are recorded at the lower of depreciated carrying value or fair market value less selling costs. We expect to sell these assets and replace them with new assets within twelve months of being classified as "Assets held for sale."

 
Note 13 — Notes Receivable
We provide financing to independent contractors and third parties on equipment sold or leased under our equipment sale program. Most of the notes are collateralized and are due in weekly installments, comprised of principal and interest payments. Interest rates are set forth in the contracts and generally range from 2.0% to 20.0%.
Notes receivable are included in "Notes receivable, net" and "Notes receivable, long-term" in the condensed consolidated balance sheets and were comprised of:
 
September 30, 2017
 
December 31, 2016
 
(In thousands)
Notes receivable from independent contractors
$
10,910

 
$
1,039

Notes receivable from third parties
8,292

 
2,808

Gross notes receivable
19,202

 
3,847

Allowance for doubtful notes receivable
(559
)
 
(240
)
Total notes receivable, net of allowance
$
18,643

 
$
3,607

 
 
 
 
Current portion, net of allowance
5,984

 
560

Long-term portion
$
12,659

 
$
3,047


 
Note 14 — Accounts Receivable Securitization
On December 10, 2015, SRCII, Swift's wholly-owned subsidiary, entered into the 2015 RSA, which further amended the 2013 RSA. The parties to the 2015 RSA include SRCII as the seller, Swift Transportation Services, LLC as the servicer, the various conduit purchasers, the various related committed purchasers, the various purchaser agents, the various letters of credit participants, and PNC Bank, National Association as the issuing bank of letters of credit and as administrator. Pursuant to the 2015 RSA, Swift's receivable originator subsidiaries sell, on a revolving basis, undivided interests in all of their eligible accounts receivable to SRCII. In turn, SRCII sells a variable percentage ownership interest in the eligible accounts receivable to the various purchasers. The facility qualifies for treatment as a secured borrowing under ASC 860, Transfers and Servicing. As such, outstanding amounts are classified as liabilities on our condensed consolidated unaudited balance sheets. As of September 30, 2017, Knight and its subsidiaries are not parties to the 2015 RSA. Refer to Note 21 for information regarding the fair value of the 2015 RSA.
As of September 30, 2017, interest accrued on the aggregate principal balance at a rate of 1.8%. Program fees and unused commitment fees are recorded in "Interest expense" in the condensed consolidated statements of income. We incurred program fees of $0.4 million related to the 2015 RSA during the quarter ended and year-to-date September 30, 2017.
The 2015 RSA is subject to customary fees and contains various customary affirmative and negative covenants, representations and warranties, and default and termination provisions. Collections on the underlying receivables are held for the benefit of SRCII and The Purchasers in the facility and are unavailable to satisfy the Company's claims.
 
Note 15 — Debt and Financing
Knight-Swift Credit Agreement
On September 29, 2017, we entered into a $1.2 billion unsecured credit facility with a group of banks (the “2017 Agreement”) replacing Swift’s previous secured credit facility (the “2015 Agreement”) and Knight’s previous unsecured credit facility (the “2013 Agreement”).  The 2017 Agreement includes a $800.0 million revolving line of credit maturing October 2022 (the "Revolver"), $85.0 million of which was drawn at closing, and a $400 million Term Loan (the "Term Loan") maturing October 2020. There are no scheduled principal payments on the Term Loan until its maturity.
The 2015 Agreement included a $600.0 million revolving line of credit maturing July 2020 ($35.0 million outstanding as of the closing of the 2017 Agreement) and a $680.0 million Term Loan A ($450.0 million face value outstanding as of closing). Additionally, prior to the 2017 Merger, the 2013 Agreement included a $300.0 million revolving line of credit maturing August 2019, with no balance outstanding as of the closing of the 2017 Agreement. Upon closing of the 2017 Agreement, proceeds from our $400.0 million Term Loan, $85.0 million drawn from the Revolver, and $3.4 million cash on hand were used to pay off the then-outstanding balances and accrued interest and fees under the 2015 Agreement, as well as certain transaction fees and expenses associated with the 2017 Agreement.

24

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED



Under the 2017 Agreement, the interest rate applicable to the Revolver and the Term Loan is subject to a leverage-based pricing grid and equaled the LIBOR rate plus 1.125% at closing, which is 0.375% lower than the rate applicable under the Swift 2015 Agreement and 0.50% higher than the rate applicable under the 2013 Agreement as of the closing of the 2017 Agreement.
The following table presents the key terms of the 2017 Agreement:
Description
 
Term Loan
 
Revolver (2)