Knight-Swift Transportation Holdings Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 CERTIFICATION BY CFO PURSUANT TO 18 U.S.C. SECTION 1350 - Knight-Swift Transportation Holdings Inc.	knx-ex322x9302018.htm
EX-32.1 - EXHIBIT 32.1 CERTIFICATION BY CEO PURSUANT TO 18 U.S.C. SECTION 1350 - Knight-Swift Transportation Holdings Inc.	knx-ex321x9302018.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION BY CFO PURSUANT TO RULE 13A-14(A) OR 15D-14(A) - Knight-Swift Transportation Holdings Inc.	knx-ex312x9302018.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION BY CEO PURSUANT TO RULE 13A-14(A) OR 15D-14(A) - Knight-Swift Transportation Holdings Inc.	knx-ex311x9302018.htm
EX-10.1 - FOURTH AMENDMENT TO AMENDED AND RESTATED RECEIVABLES PURCHASE AGREEMENT - Knight-Swift Transportation Holdings Inc.	knxex1019302018.htm
EX-3.2 - BY-LAWS OF KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC. - Knight-Swift Transportation Holdings Inc.	knx-ex32x9302018.htm
EX-3.1 - RESTATED CERTIFICATE OF INCORPORATION - Knight-Swift Transportation Holdings Inc.	knx-ex31x9302018.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, 2018

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

___________________________________________________________________________________________________________________

___________________________________________________________________________________________________________________________________

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)

N/A

(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, every Interactive Data File required to be submitted 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 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	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 174,539,545 shares of the registrant's common stock outstanding as of October 31, 2018.

Glossary of Terms

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.



QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION	PAGE
Item 1. Financial Statements	4

Condensed Consolidated Balance Sheets (Unaudited) — September 30, 2018 and December 31, 2017	4

Condensed Consolidated Income Statements (Unaudited) — Quarter and Year-to-Date September 30, 2018 and 2017	5

Condensed Consolidated Statement of Stockholders' Equity (Unaudited) — Year-to-Date September 30, 2018	6

Condensed Consolidated Statements of Cash Flows (Unaudited) — Year-to-Date September 30, 2018 and 2017	7

Note 1 — Introduction and Basis of Presentation	9

Note 2 — Recently Adopted Accounting Pronouncements	11

Note 3 — Recently Issued Accounting Pronouncements, Not Yet Adopted	14

Note 4 — Merger and Acquisition	16

Note 5 — Restricted Investments, Held-to-Maturity	19

Note 6 — Assets Held for Sale	19

Note 7 — Goodwill and Other Intangible Assets	20

Note 8 — Income Taxes	21

Note 9 — Accounts Receivable Securitization	21

Note 10 — Purchase Commitments	22

Note 11 — Contingencies and Legal Proceedings	23

Note 12 — Share Repurchase Plans	25

Note 13 — Weighted Average Shares Outstanding	25

Note 14 — Fair Value Measurement	25

Note 15 — Related Party Transactions	28

Note 16 — Information by Segment and Geography	29

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3. Quantitative and Qualitative Disclosures About Market Risk	62

Item 4. Controls and Procedures	63
PART II OTHER INFORMATION
Item 1. Legal Proceedings	64

Item 1A. Risk Factors	64

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 3. Defaults Upon Senior Securities	64

Item 4. Mine Safety Disclosures	64

Item 5. Other Information	64

Item 6. Exhibits	65

Signatures	66

Table of Contents

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.
2015 RSA		Amended and Restated Receivables Sales Agreement, entered into in 2015 by Swift Receivables Company II, LLC with unrelated financial entities.
2017 Merger		See description of the 2017 Merger, included in Notes 1 and 4 of the footnotes to the condensed consolidated financial statements, within Part I, Item 1 of this Quarterly Report.
2017 Debt Agreement		The Company's Credit Agreement, entered into on September 29, 2017, consisting of the Revolver and Term Loan, which are defined below.
2018 RSA		Fourth Amendment to the Amended and Restated Receivables Sales Agreement, entered into on July 11, 2018 by Swift Receivables Company II, LLC with unrelated financial entities.
Abilene		Abilene Motor Express, Inc. and its related entities
Abilene Acquisition		See description of the Abilene Acquisition included in Notes 1 and 4 of the footnotes to the condensed consolidated financial statements, within Part I, Item 1 of this Quarterly Report.
Annual Report		Annual Report on Form 10-K
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
Board		Knight-Swift's Board of Directors
EPS		Earnings Per Share
FASB		Financial Accounting Standards Board
FLSA		Fair Labor Standards Act
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
NYSE		New York Stock Exchange
Quarterly Report		Quarterly Report on Form 10-Q
QTD		Quarter-to-date
Revolver		Revolving line of credit under the 2017 Debt Agreement
SEC		United States Securities and Exchange Commission
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		The Company's term loan under the 2017 Debt Agreement
US		The United States of America
YTD		Year-to-date

Table of Contents Glossary of Terms

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.



PART I FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets (Unaudited)



	September 30, 2018			December 31, 2017
	(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	91,335		$	76,649
Cash and cash equivalents – restricted	48,460			73,657
Restricted investments, held-to-maturity, amortized cost	20,511			22,232
Trade receivables, net of allowance for doubtful accounts of $14,550 and $14,829, respectively	625,293			574,265
Prepaid expenses	66,814			58,525
Assets held for sale	48,583			25,153
Income tax receivable	41,236			55,114
Other current assets	29,611			37,612
Total current assets	971,843			923,207
Property and equipment	3,200,826			2,847,143
Less: accumulated depreciation and amortization	(643,030		)	(462,922		)
Property and equipment, net	2,557,796			2,384,221
Goodwill	2,919,528			2,887,867
Intangible assets, net	1,431,612			1,440,903
Other long-term assets	51,287			47,244
Total assets	$	7,932,066		$	7,683,442
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	164,938		$	119,867
Accrued payroll and purchased transportation	132,937			107,017
Accrued liabilities	153,437			186,379
Claims accruals – current portion	165,490			147,285
Capital lease obligations and long-term debt – current portion	63,555			49,002
Total current liabilities	680,357			609,550
Revolving line of credit	235,000			125,000
Long-term debt – less current portion	364,531			364,771
Capital lease obligations – less current portion	73,686			127,132
Accounts receivable securitization	234,567			305,000
Claims accruals – less current portion	197,130			206,144
Deferred tax liabilities	726,409			679,077
Other long-term liabilities	24,200			26,398
Total liabilities	2,535,880			2,443,072
Commitments and contingencies (Notes 10 and 11)
Stockholders’ equity:
Preferred stock, par value $0.01 per share; 10,000 shares authorized; none issued	—			—
As of September 30, 2018, common stock, par value $0.01 per share; 500,000 shares authorized; 175,616 shares issued and outstanding. As of December 31, 2017, Class A common stock, par value $0.01 per share; 500,000 shares authorized; 177,998 shares issued and outstanding	1,756			1,780
As of December 31, 2017, Class B common stock, par value $0.01 per share; 250,000 shares authorized; none issued	—			—
Additional paid-in capital	4,236,923			4,219,214
Retained earnings	1,154,988			1,016,738
Total Knight-Swift stockholders' equity	5,393,667			5,237,732
Noncontrolling interest	2,519			2,638
Total stockholders’ equity	5,396,186			5,240,370
Total liabilities and stockholders’ equity	$	7,932,066		$	7,683,442

See accompanying notes to condensed consolidated financial statements (unaudited).

Table of Contents Glossary of Terms

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

Condensed Consolidated Income Statements (Unaudited)



	Quarter-to-Date September 30,						Year-to-Date September 30,
	2018			2017			2018			2017
	(In thousands, except per share data)
Revenue:
Revenue, excluding fuel surcharge	$	1,188,743		$	469,683		$	3,482,663		$	961,685
Fuel surcharge	157,868			51,925			466,763			104,348
Total revenue	1,346,611			521,608			3,949,426			1,066,033
Operating expenses:
Salaries, wages, and benefits	381,174			154,390			1,114,252			316,844
Fuel	162,832			62,300			470,617			131,252
Operations and maintenance	87,362			37,267			260,660			78,516
Insurance and claims	52,701			21,117			164,975			37,982
Operating taxes and licenses	21,986			8,793			67,807			17,839
Communications	5,041			1,921			15,783			4,125
Depreciation and amortization of property and equipment	97,708			43,477			287,319			102,280
Amortization of intangibles	10,695			2,654			31,891			2,904
Rental expense	39,806			15,388			140,384			17,939
Purchased transportation	329,338			127,434			989,333			244,358
Impairments	—			16,746			—			16,746
Miscellaneous operating expenses	13,688			11,972			44,139			21,873
Merger-related costs	—			12,338			—			16,516
Total operating expenses	1,202,331			515,797			3,587,160			1,009,174
Operating income	144,280			5,811			362,266			56,859
Other (expenses) income:
Interest income	889			370			2,191			559
Interest expense	(7,528		)	(1,812		)	(21,424		)	(1,948		)
Other income, net	3,327			(1,442		)	6,487			(120		)
Other (expense) income, net	(3,312		)	(2,884		)	(12,746		)	(1,509		)
Income before income taxes	140,968			2,927			349,520			55,350
Income tax expense (benefit)	34,624			(1,272		)	80,816			17,786
Net income	106,344			4,199			268,704			37,564
Net income attributable to noncontrolling interest	(463		)	(318		)	(1,136		)	(836		)
Net income attributable to Knight-Swift	$	105,881		$	3,881		$	267,568		$	36,728

Earnings per share:
Basic	$	0.60		$	0.04		$	1.50		$	0.42
Diluted	$	0.60		$	0.04		$	1.50		$	0.41

Dividends declared per share:	$	0.06		$	0.06		$	0.18		$	0.18

Weighted average shares outstanding:
Basic	176,849			102,846			177,816			87,978
Diluted	177,750			103,752			178,793			88,847

See accompanying notes to the condensed consolidated financial statements (unaudited).

Table of Contents Glossary of Terms

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

Condensed Consolidated Statement of Stockholders' Equity (Unaudited)



	Common Stock					Additional Paid-in Capital			Retained Earnings			Total Knight-Swift Stockholders' Equity			Noncontrolling Interest			Total Stockholders’ Equity
	Shares		Par Value			Additional Paid-in Capital			Retained Earnings			Total Knight-Swift Stockholders' Equity			Noncontrolling Interest			Total Stockholders’ Equity
	(In thousands)
Balances – December 31, 2017	177,998		$	1,780		$	4,219,214		$	1,016,738		$	5,237,732		$	2,638		$	5,240,370
Common stock issued to employees	642		6			10,281						10,287						10,287
Common stock issued to the board of directors	19		—			774						774						774
Common stock issued under employee stock purchase plan	33		1			1,307						1,308						1,308
Company shares repurchased	(3,076	)	(31		)				(99,969		)	(100,000		)				(100,000		)
Shares withheld – restricted stock unit settlement									(2,550		)	(2,550		)				(2,550		)
Employee stock-based compensation expense						7,220						7,220						7,220
Cash dividends paid and dividends accrued									(32,100		)	(32,100		)				(32,100		)
Net income attributable to Knight-Swift									267,568			267,568						267,568
Distribution to noncontrolling interest															(1,255		)	(1,255		)
Net income attributable to noncontrolling interest															1,136			1,136
Net acquisition of remaining ownership interest, previously noncontrolling						(1,873		)				(1,873		)				(1,873		)
Net cumulative-effect adjustment from adopting ASC Topic 606									5,301			5,301						5,301
Balances – September 30, 2018	175,616		$	1,756		$	4,236,923		$	1,154,988		$	5,393,667		$	2,519		$	5,396,186

See accompanying notes to condensed consolidated financial statements (unaudited).

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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)



	Year-to-Date September 30,
	2018			2017
	(In thousands)
Cash flows from operating activities:
Net income	$	268,704		$	37,564
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, equipment, and intangibles	319,210			105,184
Gain on sale of property and equipment	(26,857		)	(2,465		)
Impairments	—			16,746
Deferred income taxes	48,045			(9,467		)
Other adjustments to reconcile net income to net cash provided by operating activities	930			7,054
Increase (decrease) in cash resulting from changes in:
Trade receivables	(17,191		)	(6,027		)
Income tax receivable	13,878			(23,859		)
Accounts payable	(10,528		)	(4,447		)
Accrued liabilities and claims accrual	(5,434		)	23,791
Other assets and liabilities	(10,112		)	(7,730		)
Net cash provided by operating activities	580,645			136,344
Cash flows from investing activities:
Proceeds from maturities of held-to-maturity investments	20,625			2,835
Purchases of held-to-maturity investments	(18,933		)	(3,015		)
Proceeds from sale of property and equipment, including assets held for sale	150,596			29,490
Purchases of property and equipment	(502,738		)	(91,925		)
Expenditures on assets held for sale	(25,426		)	(720		)
Net cash, restricted cash, and equivalents (invested in) acquired from mergers and acquisitions	(101,693		)	91,960
Other cash flows from investing activities	10,074			7,656
Net cash (used in) provided by investing activities	(467,495		)	36,281
Cash flows from financing activities:
Repayment of long-term debt and capital leases	(39,309		)	(454,148		)
Proceeds from long-term debt	—			400,000
Borrowings on revolving lines of credit, net	110,000			67,000
Borrowings under accounts receivable securitization	35,000			20,000
Repayment of accounts receivable securitization	(105,000		)	—
Proceeds from common stock issued	12,369			9,726
Payments to repurchase company's common stock	(100,000		)	—
Dividends paid	(32,287		)	(14,769		)
Other cash flows from financing activities	(4,270		)	(9,136		)
Net cash (used in) provided by financing activities	(123,497		)	18,673
Net (decrease) increase in cash, restricted cash, and equivalents	(10,347		)	191,298
Cash, restricted cash, and equivalents at beginning of period	151,733			9,406
Cash, restricted cash, and equivalents at end of period	$	141,386		$	200,704

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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

Condensed Consolidated Statements of Cash Flows (Unaudited) — Continued



Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	20,186	$	2,924
Income taxes, net of refunds received	16,146		50,709
Non-cash investing and financing transactions:
Equipment acquired included in accounts payable	$	51,893	$	16,557
Financing provided to independent contractors for equipment sold	4,876		1,801
Transfers from property and equipment to assets held for sale	88,544		26,180
Capital lease additions	—		15,020

See accompanying notes to condensed consolidated financial statements (unaudited).

Table of Contents Glossary of Terms

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 are specific to the Company, commonly used in the trucking industry, or are otherwise frequently used throughout this document. Definitions for these acronyms and terms are provided in the "Glossary of Terms," available in the front of this document.

Description of Business

Knight-Swift is a transportation solutions provider, headquartered in Phoenix, Arizona. As of September 30, 2018, the ending counts of the Company's fleet of revenue equipment included 19,600 operational tractors (comprised of 16,499 company tractors and 3,101 independent contractor tractors), 67,536 trailers, and 9,625 intermodal containers. The Company's six reportable segments are Knight Trucking, Knight Logistics, Swift Truckload, Swift Dedicated, Swift Refrigerated, and Swift Intermodal.

2017 Merger

On September 8, 2017, the Company became Knight-Swift Transportation Holdings Inc. upon the effectiveness of the 2017 Merger. The Company accounted for the 2017 Merger using the acquisition method of accounting in accordance with GAAP. 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 while Swift was the acquirer for legal purposes. For more information about the 2017 Merger, refer to Knight-Swift's Annual Report for the year ended December 31, 2017.

Abilene Acquisition

On March 16, 2018, the Company acquired all of the issued and outstanding equity interests of Abilene. Abilene's trucking and logistics businesses are included under the respective Knight segments. Please refer to Note 4 for more information about the Abilene Acquisition.

Basis of Presentation

The condensed consolidated financial statements and footnotes included in this Quarterly Report should be read in conjunction with the consolidated financial statements and footnotes included in Knight-Swift's Annual Report for the year ended December 31, 2017. The condensed consolidated financial statements in this Quarterly Report include the accounts of Knight-Swift Transportation Holdings Inc. and its subsidiaries. In management's opinion, these condensed consolidated financial statements were prepared in accordance with GAAP and include all adjustments necessary (consisting of normal recurring adjustments) for the fair statement of the periods presented.

With respect to transactional/durational data, references to years pertain to calendar years. Similarly, references to quarters pertain to calendar quarters.

Note regarding comparability — Based on the structure of the 2017 Merger, the reported results do not include the results of operations of Swift and its subsidiaries on and prior to the 2017 Merger, in accordance with the accounting treatment applicable to the transaction. Additionally, the reported results do not include the results of operations of Abilene and its subsidiaries on and prior to its acquisition by the Company on March 16, 2018 in accordance with the accounting treatment applicable to the transaction. Accordingly, comparisons between the Company's quarter and year-to-date September 30, 2018 results and prior periods may not be meaningful.

Table of Contents Glossary of Terms

KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

Changes in Presentation

The Company's quarter and year-to-date September 30, 2018 changes in presentation were attributed to impacts from adopting accounting pronouncements (refer to Note 2) and simplifying the presentation of the consolidated balance sheets and statements of cash flows by reclassifying immaterial line items into other line items as indicated below.

Balance Sheet — The amounts presented in the Company's Annual Report for the year ended December 31, 2017 were reclassified to align with the September 30, 2018 presentation in this Quarterly Report as follows:


•	"Equipment sales receivables" and "Notes receivable, net" were reclassified to "Other current assets."


•	"Notes receivable, long-term" and "Other long-term assets, restricted cash, and investments" were reclassified to "Other long-term assets."


•	"Long term debt – current portion" was reclassified to "Capital lease obligations and long-term debt – current portion."


•	"Dividend payable – current portion" was reclassified to "Accrued liabilities."

Statement of Cash Flows — The amounts presented in the Company's Quarterly Report for the third quarter of 2017 were reclassified to align with the presentation in this Quarterly Report as follows:

•

"Transportation Resource Partners impairment," "Income from investment in TRP Partnerships," "Non-cash compensation expense for issuance of common stock to certain members of the Board of Directors," "Provision for doubtful accounts and notes receivable," "Stock-based compensation expense, net," and "Amortization of debt issue costs, and other" were reclassified to "Other adjustments to reconcile net income to net cash provided by operating activities."


•	Changes in "Other current assets," "Prepaid expenses," and "Other long-term assets" were reclassified to "Other assets and liabilities."


•	"Proceeds from notes receivable," "Payments received on equipment sales receivables," "Cash payments to Transportation Resource Partners," and "Cash proceeds from Transportation Resource Partners" were reclassified to "Other cash flows from investing activities."


•	"Shares withheld for employee taxes related to stock-based compensation," "Cash distribution to noncontrolling interest holder," and "Proceeds from exercise of stock options" were reclassified to "Other cash flows from financing activities."


•	"Repayments on Knight Revolver" and "Borrowings on Revolver" were reclassified to "Borrowings on revolving lines of credit, net."

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. At the same time, operating expenses generally increase, and tractor productivity of the Company's 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. These factors typically lead to lower operating profitability, as compared to other parts of the year. Additionally, beginning in the latter half of the third quarter and continuing into the fourth quarter, the Company typically experiences surges pertaining to holiday shopping trends toward delivery of gifts purchased over the Internet, as well as the impact of shorter holiday seasons (Thanksgiving holiday recently falling closer to Christmas).

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KNIGHT-SWIFT TRANSPORTATION HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

Note 2 — Recently Adopted Accounting Pronouncements

Revenue (ASC Topic 606): ASU 2014-09 — Revenue from Contracts with Customers

Summary of the Standard — In May 2014, the FASB issued ASU 2014-09, which established ASC Topic 606, Revenue from Contracts with Customers, and superseded the legacy revenue recognition requirements in ASC Topic 605. The core principle of the new standard is that companies should depict the transfer of promised goods or services to its customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard provides a five-step analysis for companies to apply in determining the timing, method, and amount of revenue recognition to achieve the core principle. The amendments in ASU 2014-09 became effective for public companies for annual reporting periods beginning after December 15, 2017 (in accordance with ASU 2015-14, which deferred the original effective date of ASU 2014-09). Companies may apply the amendments in ASU 2014-09 using the modified retrospective approach or a full retrospective approach, with early adoption permitted.

Adoption Method and Approach — The Company adopted ASC Topic 606 on January 1, 2018 by applying the modified retrospective approach, resulting in a cumulative-effect adjustment to retained earnings. Comparative information related to periods prior to January 1, 2018 continues to be reported under the legacy guidance in ASC Topic 605. Practical expedients used include: 1) applying the guidance only to contracts not yet completed as of January 1, 2018, 2) using the portfolio approach in evaluating and accounting for contract costs, 3) not disclosing remaining performance obligations since the duration is one year or less, and 4) expensing incremental contract costs as they are incurred since they would have otherwise been amortized over less than one year.

Revenue Disaggregation — Based on how economic factors affect the nature, amount, timing, and uncertainty of revenue or cash flows, management determined that revenues should be disaggregated by reportable segment. The required quantitative and qualitative disclosures are included in Note 16.

Contract Balances — $23.5 million and $17.0 million in-transit revenue balances are included in "Trade receivables, net of allowance for doubtful accounts" in the condensed consolidated balance sheets as of September 30, 2018 and January 1, 2018, respectively. The Company's contract liability balances as of September 30, 2018 and January 1, 2018 were immaterial.

Cumulative-effect Adjustment — The cumulative-effect adjustment to the Company's consolidated opening balance sheet included increases in "Trade receivables, net of allowance for doubtful accounts" of $17.0 million, in "Accrued payroll and purchased transportation" of $9.7 million, in "Accrued liabilities" of $0.2 million, in "Deferred tax liabilities" of $1.8 million, and in "Retained earnings" of $5.3 million.

Current Period Impact of Adoption — The required quantitative disclosures regarding the current period impact of adopting ASC Topic 606 on the condensed consolidated income statement and balance sheet are presented below. The amounts are entirely attributed to the in-transit accrual from the Company recognizing revenue over time under ASC Topic 606, compared to recognizing revenue at a point in time under ASC Topic 605.



	Current Period Impact
	Increase (Decrease)
Income Statement	Quarter-to-Date		Year-to-Date
Income Statement	September 30, 2018		September 30, 2018
	(in thousands)
Total revenue ⁽¹⁾	$	4,412	$	6,462
Total operating expenses ⁽²⁾	2,765		4,318
Income tax expense	399		504
Net income attributable to Knight-Swift	$	1,248	$	1,640


(1)	Current period impact primarily pertains to "Revenue, excluding fuel surcharge."


(2)	Current period impact primarily pertains to "Purchased transportation."

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	Current Period Impact
Balance Sheet	Increase (Decrease)
	September 30, 2018
	(in thousands)
Trade receivables, net of allowance for doubtful accounts	$	23,454

Accrued payroll and purchased transportation	13,982
Accrued liabilities	(932		)
Deferred tax liabilities	3,463

Retained earnings	$	6,941

The Company's adoption of ASC Topic 606 did not materially affect basic earnings per share, diluted earnings per share, or cash flows from operations for the periods presented.

Accounting Policy — Under ASC Topic 606, revenue continues to be recognized on a gross basis, as the Company acts as the principal. The legally enforceable contract is evidenced by the bill of lading upon pickup at the shipper's location. The transaction price has no significant financing component and typically consists of cash consideration. Non-cash consideration is estimated at fair value at contract inception. The transaction price is entirely allocated to the only performance obligation, which is satisfied over time: transportation services. Accordingly, revenue is recognized over time, which is a change in the Company's past practice, resulting in an immaterial impact on the Company's results of operations. Management estimates the amount of revenue in transit at period end based on the number of days completed of the dispatch, which management believes to be a faithful depiction of the transfer of services. Significant judgments involved in applying ASC Topic 606 include measuring in-transit revenue and estimating the allowance for doubtful accounts. The allowance for doubtful accounts is reviewed quarterly, and is based on historical experience and known trends and uncertainties in account billing and collectability.

Cash (ASC Topic 230): ASU 2016-18 — Restricted Cash and ASU 2016-15 — Classification of Certain Cash Receipts and Cash Payments

Summary of the Standards — The FASB issued ASU 2016-18, Restricted Cash, in November 2016. The amendments in ASU 2016-18 require that a statement of cash flows explains the change during the reporting period in the total of cash, cash equivalents, including restricted cash and restricted cash equivalents. As such, restricted cash and restricted cash equivalents amounts should be included in the beginning and ending cash balances in the reconciliation at the bottom of the statement of cash flows.

The FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, in August 2016. This ASU has several amendments, which are designed to reduce existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU addresses eight specific cash flow issues: 1) debt prepayment or extinguishment costs, 2) settlement of zero-coupon debt instruments, 3) contingent consideration payments made after a business combination, 4) proceeds from settlement of insurance claims, 5) proceeds from settlement of corporate-owned life insurance policies, 6) distributions received from equity method investees, 7) beneficial interests in securitization transactions, and 8) separately identifiable cash flows and application of the predominance principle.

Adoption Method and Approach — For public companies, the amendments in these ASUs became effective for annual reporting periods beginning after December 15, 2017. The retrospective transition method is required, with prior periods adjusted to align with the current period presentation. Early adoption was permitted; however, the Company adopted the amendments in these ASUs in the first quarter of 2018.

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Impact of Adoption — As allowed by the amendments in ASU 2016-15, the Company elected to retrospectively apply the "Nature of Distribution" approach to classifying cash flows from its equity method investments. There were no other cash flow issues in ASU 2016-15 that impacted the Company's statement of cash flows presentation. The table below summarizes the impact on the year-to-date September 30, 2017 statement of cash flows of adopting ASU 2016-15 and ASU 2016-18.



	Year-to-Date September 30, 2017
	As Reported			ASU 2016-15 Reclassifications			ASU 2016-18 Reclassifications			Adjusted
	(in thousands)
Other adjustments to reconcile net income to net cash provided by operating activities ⁽¹⁾	$	3,033		$	4,021		$	—		$	7,054
Net cash provided by operating activities	132,323			4,021			—			136,344


Decrease (increase) in cash and cash equivalents - restricted	745			—			(745		)	—
Net cash, restricted cash, and equivalents (invested in) acquired from mergers and acquisitions ⁽²⁾	28,493			—			63,467			91,960
Other cash flows from investing activities ⁽¹⁾	11,502			(4,021		)	175			7,656
Net cash used in investing activities	(22,595		)	(4,021		)	62,897			36,281

Net increase in cash, restricted cash, and equivalents	$	128,401		$	—		$	62,897		$	191,298
Cash, restricted cash, and equivalents at beginning of period	8,021			—			1,385			9,406
Cash, restricted cash, and equivalents at end of period	$	136,422		$	—		$	64,282		$	200,704


(1)	See Note 1 for line items that were previously separately presented, but are included in "Other adjustments to reconcile net income to net cash provided by operating activities" and "Other cash flows from investing activities" for the current period presentation.


(2)	The caption, as previously filed, was "Cash and cash equivalents received with 2017 Merger."

Reconciliation of Cash, Restricted Cash, and Equivalents — In accordance with the amendments in ASU 2016-18, the following table reconciles cash, restricted cash, and equivalents per the condensed consolidated statements of cash flows to the condensed consolidated balance sheets.



	September 30, 2018		December 31, 2017		September 30, 2017		December 31, 2016
	(In thousands)
Balance Sheets
Cash and cash equivalents	$	91,335	$	76,649	$	136,422	$	8,021
Cash and cash equivalents – restricted ⁽¹⁾	48,460		73,657		62,685		—
Other long-term assets⁽¹⁾	1,591		1,427		1,597		1,385
Statements of Cash Flows
Cash, restricted cash, and equivalents	$	141,386	$	151,733	$	200,704	$	9,406


(1)	Reflects cash and cash equivalents that are primarily restricted for claims payments.

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Income Taxes (ASC Topic 740): ASU 2018-05 —Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118

Summary of the Standard — The FASB issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, in March 2018. ASU 2018-05 provides clarification to address uncertainty or diversity in views about the application of ASC Topic 740 in the period of enactment.

Current Period Impact of Adoption — As of September 30, 2018, the Company has not updated any estimated provisional amounts previously reported and is still evaluating the impact of the Tax Cuts and Jobs Act of 2017. Management will continue to assess its provision for income taxes as future guidance is issued but does not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.

Other ASUs

There were various other ASUs that became effective during the year-to-date September 30, 2018 period, which did not have a material impact on the Company's results of operations, financial position, cash flows, or disclosures.

Note 3 — Recently Issued Accounting Pronouncements, Not Yet Adopted



Date Issued	Reference	Description	Expected Adoption Date and Method	Financial Statement Impact
August 2018	2018-15: Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract	The amendments align the requirements for capitalizing implementation costs in a hosting arrangement with the guidance for internal-use software, resulting in expensing preliminary or post-implementation project costs and capitalizing certain application development costs. The capitalized costs should be included in the balance sheet line that includes prepayment for the fees of the associated hosting arrangement, and amortized over the noncancellable period of the arrangement. Amortization expense should be included in the income statement line that includes the fees associated with the hosting element of the arrangement. Payments for capitalized implementation costs should be classified in the statement of cash flows in the same manner as payments made for hosting element fees. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted.	January 2020, Prospective	Currently under evaluation, but not expected to be material
August 2018	2018-13: Fair Value Measurement (Topic 820): Disclosure Framework – Change to the Disclosure Requirements for Fair Value Measurement	The amendments in this ASU modify several disclosure requirements under Topic 820. These changes include removing the disclosure requirements related to the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and adding disclosure requirements about the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Additionally, the amendments remove the phrase "at a minimum" from the codification clarifying that materiality should be considered when evaluating disclosure requirements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted.	January 2019, Retrospective	Currently under evaluation, but not expected to be material

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Date Issued	Reference	Description	Expected Adoption Date and Method	Financial Statement Impact
July 2018	2018-11: Leases (Topic 842): Targeted Improvements	The amendments in this ASU provide entities with an additional transition method for implementing ASC Topic 842, in which entities have the option to apply the new standard at the adoption date, recognizing a cumulative-effect adjustment to the opening balance of retained earnings. Comparative periods would not be restated, and would instead be presented under the legacy ASC Topic 840 guidance. Under certain conditions, the amendments in this ASU also provide lessors a practical expedient regarding separating nonlease components from the associated lease components if the nonlease components would otherwise be accounted for under ASC Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.	Refer to ASU 2016-02, below	Refer to ASU 2016-02, below
July 2018	2018-10: Leases (Topic 842): Codification Improvements	This ASU contains various amendments to ASC Topic 842 that clarify the language, remove inconsistencies, and improve upon other issues, including those associated with implementing the new standard. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.	Refer to ASU 2016-02, below	Refer to ASU 2016-02, below
June 2018	2018-07: Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting	The amendments in this ASU expand the scope of ASC Topic 718 to include share-based payments to nonemployees, and for public business entities include 1) measuring awards to nonemployees at grant-date fair value, 2) measuring awards to nonemployees at the grant date, 3) for awards with performance conditions granted to nonemployees, assessing the probability of satisfying performance conditions when measuring such awards, and 4) generally subjecting equity-classified awards to the requirements of ASC Topic 718, eliminating the requirement to reassess classification upon vesting. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.	January 2019, Modified retrospective	Currently under evaluation
January 2018	2018-01: Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842	The amendments in this ASU permit entities to elect to exclude land easements which were not previously recorded as leases from the evaluation related to the adoption of ASC Topic 842. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.	Refer to ASU 2016-02, below	Refer to ASU 2016-02, below
February 2016	2016-02: Leases (Topic 842)	The new standard requires lessees to recognize assets and liabilities arising from both operating and financing leases on the balance sheet. Lessor accounting for leases is largely unaffected. For public business entities, the new standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.	January 2019, Modified retrospective - cumulative-effect adjustment to beginning balance of retained earnings at the adoption date	Currently under evaluation ⁽¹⁾

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(1)

ASC Topic 842, Leases — The Company established an implementation team, which includes support from external experts, to transition the Company from accounting for leases under ASC Topic 840 to accounting for leases under ASC Topic 842. The diagnostic phase of implementing the new standard is substantially complete, and management has tentatively selected practical expedients and accounting policies to evaluate the lease population. The Company is currently in the process of extracting and uploading lease data available from existing systems and documents into its new lease software solution.

Management expects to elect the land easement practical expedient and the package of practical expedients (regarding lease identification, lease classification, and initial direct costs), but not the hindsight practical expedient. Additionally, management expects to elect accounting policies to account for its revenue equipment leases at the portfolio level, to bundle nonlease components with their related lease components (as lessee), and to not recognize a right-of-use asset or lease liability for short-term leases. These policies are not substantially different from the Company’s current accounting policies. The impacts of the remaining accounting policy elections that are available under the new lease standard are still under review.

After considering the above practical expedient and accounting policy elections, management expects that adopting the new lease standard will result in adding a material amount of right-of-use assets and corresponding lease liabilities to the consolidated balance sheet as of January 1, 2019, with the net impact being recorded as a cumulative-effect adjustment to retained earnings. The impact of adopting the new lease standard is not expected to be material to the Company’s consolidated income statement, liquidity, or compliance with debt covenants.

Since management is continuing to evaluate the impact of ASC Topic 842, the above quantitative and qualitative disclosures are tentative and subject to change.

Note 4 — Merger and Acquisition

2017 Merger

Information about the accounting treatment of the 2017 Merger including details of the transaction, determination of the total fair value consideration, and allocation of the purchase price, are included in the Company's Annual Report for the year ended December 31, 2017.

The purchase price allocation for the 2017 Merger has been allocated based on estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The purchase price allocation was open for adjustments through the end of the measurement period which closed one year from the acquisition date.

During the year-to-date September 30, 2018 period and prior to the measurement period closing, the Company adjusted its purchase price allocation for new information obtained related to certain legal matters that were outstanding as of the 2017 Merger closing date, reflecting a $4.0 million increase in "Goodwill," a $6.5 million increase in "Accrued liabilities," and a $2.5 million decrease in "Deferred tax liabilities" in the September 9, 2017 opening balance sheet.

Abilene Acquisition

On March 16, 2018, the Company purchased 100.0% of the equity interests of Abilene. Abilene is a diversified truckload carrier located in Richmond, Virginia operating throughout the US and Canada.

The total consideration of $103.3 million consisted of approximately $80.5 million in cash consideration to the sellers, plus approximately $22.8 million for debt payoffs. The Company funded the Abilene Acquisition through cash-on-hand and borrowing on the Revolver on the date of the transaction. At closing, $7.0 million of the purchase price was placed in escrow to secure the sellers' indemnification obligations and an additional $4.5 million of the purchase price was placed in escrow in respect of certain tax obligations of the sellers. The purchase price remains subject to further adjustments, including a post-closing true-up.

The equity purchase agreement included an election under the Internal Revenue Code Section 338(h)(10). Accordingly, the book and tax basis of the acquired assets and liabilities are the same as of the purchase date. The equity purchase agreement contains customary representations, warranties, covenants, and indemnification provisions.

The results of the acquired business have been included in the condensed consolidated financial statements since the date of acquisition and represent 1.9% and 1.4% of consolidated total revenue, and 3.1% and 2.2% of consolidated net income attributable to Knight-Swift for the quarter and year-to-date September 30, 2018 periods, respectively. The acquired business also represented 1.5% of consolidated total assets as of September 30, 2018. The Company recorded approximately $0.2 million of acquisition-related expenses, which are included within "Miscellaneous operating expenses" in the condensed consolidated income statement for the year-to-date September 30, 2018 period.

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The goodwill recognized represents expected synergies from combining the operations of Abilene with the Company, including enhanced service offerings and sharing best practices in terms of driver recruiting and retention, as well as other intangible assets that did not meet the criteria for separate recognition. The goodwill is expected to be deductible for tax purposes.

The purchase price allocation for the Abilene Acquisition 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 valuation of acquired tangible assets, assessment of lease agreements, assessment of certain liabilities, the calculation of deferred taxes based upon the underlying tax basis of assets acquired and liabilities assumed, and assessment of other tax related items. As the Company obtains more information, the preliminary purchase price allocation disclosed below is subject to 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 the measurement period, which is not to exceed one year from the acquisition date.

The following table summarizes the fair value of the consideration transferred as of the acquisition date, including any adjustments during the measurement period:



	March 16, 2018 Opening Balance Sheet as Reported at March 31, 2018		Adjustments			Adjusted March 16, 2018 Opening Balance Sheet as Reported at September 30, 2018
	(in thousands)
Fair value of the consideration transferred	$	103,223	$	124		$	103,347

Cash	1,654		—			1,654
Trade receivables	11,745		778			12,523
Other assets	7,785		842			8,627
Property and equipment	41,403		—			41,403
Identifiable intangible assets ⁽¹⁾	23,000		(400		)	22,600
Total assets	85,587		1,220			86,807

Accounts payable	1,959		1,440			3,399
Accrued liabilities	2,419		4,942			7,361
Claims accruals	230		172			402
Total liabilities	4,608		6,554			11,162

Goodwill	$	22,244	$	5,458		$	27,702


(1)	Includes a $17.9 million customer relationship and a $4.7 million trade name.

The above adjustments were related to the completion of an independent valuation of certain acquired intangible assets, the identification of liabilities associated with capital expenditures incurred prior to the acquisition, adjustments for Abilene’s adoption of ASC Topic 606, and the associated deferred tax asset impact of these adjustments. No material income statement effects were identified with these adjustments.

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Consolidated Pro Forma Information

The following unaudited pro forma information combines the historical operations of Knight, Swift, and Abilene giving effect to the 2017 Merger, Abilene Acquisition, and related transactions as if they had been consummated on January 1, 2017, the beginning of the comparative periods presented.



	Quarter-to-Date September 30,		Year-to-Date September 30,
	2017		2018		2017
	(in thousands, except per share data)
Total revenue	$	1,300,318	$	3,969,067	$	3,847,437
Net income attributable to Knight-Swift	21,290		268,103		88,742
Earnings per share – diluted	0.12		1.50		0.50

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, Swift, and Abilene during the periods presented that were directly related to the 2017 Merger and the Abilene Acquisition, and related income tax effects of these items. As a result of the 2017 Merger, 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 $42.6 million and $57.0 million during the quarter and year-to-date September 30, 2017 periods, respectively, and are eliminated from presentation of the unaudited pro forma net income presented above.The acquisition-related expenses that Knight incurred from the Abilene Acquisition, discussed above, 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, Swift, and Abilene 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 identified transactions. 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 Abilene Acquisition and also does not reflect any restructuring or integration-related costs to achieve those potential cost savings.

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Note 5 — Restricted Investments, Held-to-Maturity

The following tables present the cost or amortized cost, gross unrealized gains and temporary losses, and estimated fair value of the Company's restricted investments, held-to-maturity:



	September 30, 2018
			Gross Unrealized
	Cost or Amortized Cost		Gains		Temporary Losses			Estimated Fair Value
	(In thousands)
United States corporate securities	$	17,039	$	—	$	(13	)	$	17,026
Municipal bonds	2,437		—		(2		)	2,435
Negotiable certificate of deposits	1,035		—		—			1,035
Restricted investments, held-to-maturity	$	20,511	$	—	$	(15	)	$	20,496



	December 31, 2017
			Gross Unrealized
	Cost or Amortized Cost		Gains		Temporary Losses			Estimated Fair Value
	(In thousands)
United States corporate securities	$	15,982	$	—	$	(14	)	$	15,968
Municipal bonds	4,970		—		(10		)	4,960
Negotiable certificate of deposits	1,280		—		—			1,280
Restricted investments, held-to-maturity	$	22,232	$	—	$	(24	)	$	22,208

As of September 30, 2018, the contractual maturities of the restricted investments, held-to-maturity, were one year or less. There were 29 securities and 32 securities that were in an unrealized loss position for less than twelve months as of September 30, 2018 and December 31, 2017, respectively. The Company did not recognize any impairment losses during the quarter and year-to-date September 30, 2018 periods.

Refer to Note 14 for additional information regarding fair value measurements of the Company's investments.

Note 6 — Assets Held for Sale

The Company expects to sell its assets held for sale within the next twelve months. Revenue equipment held for sale totaled $48.6 million and $25.2 million as of September 30, 2018 and December 31, 2017, respectively. Net gains on disposals, including disposals of property and equipment classified as assets held for sale, reported in "Miscellaneous operating expenses" in the condensed consolidated income statements were:


•	$11.0 million and $0.8 million, for the quarter-to-date September 30, 2018 and 2017 periods, respectively, and


•	$27.6 million and $2.5 million, for the year-to-date September 30, 2018 and 2017 periods, respectively.

The Company's net carrying value of land and facilities classified as held for sale in the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017 was zero.

The Company did not recognize any impairment losses related to assets held for sale during the September 30, 2018 or 2017 quarter and year-to-date periods.

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Note 7 — Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amount of goodwill were as follows:



	(In thousands)
Goodwill, balance at December 31, 2017	$	2,887,867
Amortization relating to deferred tax assets	(15		)
Abilene Acquisition ⁽¹⁾	27,702
2017 Merger — September 9, 2017 opening balance sheet adjustment ⁽²⁾	3,974
Goodwill, balance at September 30, 2018	$	2,919,528


(1)	The goodwill associated with the Abilene Acquisition was allocated to the Knight Trucking segment. See Note 4 regarding the amount attributed to adjustments to the March 17, 2018 opening balance sheet.


(2)	The goodwill adjustment associated with the 2017 Merger resulted in a $4.8 million increase, a $1.1 million increase, and a $1.9 million decrease in goodwill allocated to the Swift Truckload, Swift Dedicated, and Swift Refrigerated segments, respectively. See Note 4 regarding the nature of the adjustment.

There were no goodwill impairments recorded during the September 30, 2018 or 2017 quarter and year-to-date periods.

Other Intangible Assets

Other intangible asset balances were as follows:



	September 30, 2018			December 31, 2017
	(In thousands)
Customer relationships and non-compete:
Gross carrying amount⁽¹⁾	$	838,100		$	820,200
Accumulated amortization	(46,388		)	(14,497		)
Customer relationships and non-compete, net	$	791,712		$	805,703
Trade names:
Gross carrying amount ⁽¹⁾	639,900			635,200
Intangible assets, net	$	1,431,612		$	1,440,903


(1)	The changes in the gross carrying amounts of intangible assets are related to the Abilene Acquisition and are discussed in Note 4.

The Company's customer relationship intangible assets related to the Abilene Acquisition are being amortized over a weighted average period of 20.0 years.

As of September 30, 2018, management anticipates that the composition and amount of amortization associated with intangible assets will be $10.7 million for the remainder of 2018, $42.7 million for each of the years 2019 through 2021, and $42.6 million in 2022. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment of intangible assets, accelerated amortization of intangible assets, and other events.

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Note 8 — Income Taxes

Effective Tax Rate — The quarter-to-date September 30, 2018 and September 30, 2017 effective tax rates were 24.6% and (43.5)%, respectively. The change was primarily a result of a year-over-year increase in third quarter income before income taxes, partially offset by impacts from the Tax Cuts and Jobs Act of 2017, which reduced the federal corporate income tax rate from 35.0% to 21.0%. The Company recognized stock compensation deductions and the impact of state tax rate changes on deferred taxes as discrete items during the quarter ended September 30, 2017.

The year-to-date September 30, 2018 and September 30, 2017 effective tax rates were 23.1% and 32.1%, respectively. The decrease was primarily a result of the Tax Cuts and Jobs Act of 2017. The Company recognized discrete items relating to stock compensation deductions and a favorable audit settlement of nondeductible penalties during the year-to-date September 30, 2018 period. The Company also recognized discrete items relating to stock compensation deductions and the impact of state tax rate changes on deferred taxes during the year-to-date September 30, 2017 period.

Valuation Allowance — The Company has not established a valuation allowance as it has been determined that, based upon available evidence, a valuation allowance is not required. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. All other deferred tax assets are expected to be realized and utilized by continued profitability in future periods.

Unrecognized Tax Benefits — The Company does not anticipate a decrease of unrecognized tax benefits during the next twelve months.

Interest and Penalties — Accrued interest and penalties related to unrecognized tax benefits as of September 30, 2018 and December 31, 2017 were approximately $1.4 million and $0.3 million, respectively.

Tax Examinations — Certain of the Company's subsidiaries are currently under examination by various state and federal jurisdictions for tax years ranging from 2011 through 2016. At the completion of these examinations, management does not expect any adjustments that would have a material impact on the Company's effective tax rate. Years subsequent to 2013 remain subject to examination.

Note 9 — Accounts Receivable Securitization

On July 11, 2018, Swift Receivables Company II, LLC ("SRCII") , a wholly-owned subsidiary of the Company, entered into the 2018 RSA, which further amends the 2015 RSA. The parties to the 2018 RSA are 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 for letters of credit and as administrator. Pursuant to the related purchase and sale agreement and together with the 2018 RSA, the Company'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 2018 RSA is subject to fees, various affirmative and negative covenants, representations and warranties, and default and termination provisions customary for facilities of this type. The Company was in compliance with these covenants as of September 30, 2018. Collections on the underlying receivables by the Company are held for the benefit of SRCII and the various purchasers and are unavailable to satisfy claims of the Company and its subsidiaries.

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The following table summarizes the key differences between the 2018 RSA and the 2015 RSA (dollars in thousands):



	2018 RSA		2015 RSA
Effective date	July 11, 2018		December 10, 2015
Final maturity date	July 11, 2021		January 10, 2019
Borrowing capacity		$325,000		$400,000
Accordion option ⁽¹⁾		$175,000		$75,000
Unused commitment fee rate ⁽²⁾	20 to 40 basis points		35 basis points
Program fees on outstanding balances ⁽³⁾	one-month LIBOR + 80 to 100 basis points		one-month LIBOR + 90 basis points


(1)	The accordion option increases the maximum borrowing capacity, subject to participation of the purchasers.


(2)	The 2018 RSA commitment fee rate is based on the percentage of the maximum borrowing capacity utilized.


(3)	The 2018 RSA program fee is based on the Company's consolidated total net leverage ratio.

The 2018 RSA and 2015 RSA are secured borrowings that are collateralized by the Company's eligible receivables, for which the Company is the servicing agent. The Company's eligible receivables are included in "Trade receivables, net of allowance for doubtful accounts" in the condensed consolidated balance sheets. As of September 30, 2018, the Company's eligible receivables generally have high credit quality, as determined by the obligor's corporate credit rating.

Availability under the 2018 RSA and 2015 RSA is calculated as follows:



	2018 RSA			2015 RSA
	September 30, 2018			December 31, 2017
	(In thousands)
Borrowing base, based on eligible receivables	$	322,400		$	317,600
Less: outstanding borrowings ⁽¹⁾	(235,000		)	(305,000		)
Less: outstanding letters of credit	(70,725		)	—
Availability under accounts receivable securitization facilities	$	16,675		$	12,600


(1)	Outstanding borrowings are included in "Accounts receivable securitization" in the condensed consolidated balance sheets. Interest accrued on the aggregate principal balance at a rate of 3.0% and 2.1% as of September 30, 2018 and December 31, 2017, respectively.

Program fees and unused commitment fees are recorded in "Interest expense" in the condensed consolidated income statements. The Company incurred accounts receivable securitization program fees of $2.0 million and $0.4 million during the quarter-to-date September 30, 2018 and 2017 periods, respectively. The Company incurred accounts receivable securitization program fees of $6.0 million and $0.4 million during the year-to-date September 30, 2018 and 2017 periods, respectively.

Refer to Note 14 for information regarding the fair value of the 2018 RSA and 2015 RSA.

Note 10 — Purchase Commitments

As of September 30, 2018, the Company had outstanding commitments to acquire revenue equipment of $208.2 million in 2018 ($194.1 million of which were tractor commitments) and none thereafter. These purchases may be financed through any combination of operating leases, capital leases, debt, proceeds from sales of existing equipment, and cash flows from operations.

Subsequent to September 30, 2018, management discovered that one of the Company's equipment manufacturers was behind schedule, and will accordingly delay the delivery of approximately $24.6 million of the above tractor commitments to the first quarter of 2019.

As of September 30, 2018, the Company had outstanding purchase commitments to acquire facilities and non-revenue equipment of $4.8 million in the remainder of 2018, $4.1 million in the two-year period of 2019 through 2020, $0.1 million in 2021, and none thereafter. Factors such as costs and opportunities for future terminal expansions may change the amount of such expenditures.

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Note 11 — Contingencies and Legal Proceedings

Legal Proceedings

Information is provided below regarding the nature, status, and contingent loss amounts, if any, associated with the Company's pending legal matters. There are inherent uncertainties in these legal matters, some of which are beyond management's control, making the ultimate outcomes difficult to predict. Moreover, management's views and estimates related to these matters may change in the future, as new events and circumstances arise and the matters continue to develop.

The Company has made accruals with respect to its legal matters where appropriate, which are included in "Accrued liabilities" in the condensed consolidated balance sheets. The Company has recorded an aggregate accrual of approximately $90.2 million, relating to the Company's outstanding legal proceedings as of September 30, 2018.

Based on management's present knowledge of the facts and (in certain cases) advice of outside counsel, management does not believe that loss contingencies arising from pending matters are likely to have a material adverse effect on the Company's overall financial position, operating results, or cash flows after taking into account any existing accruals. However, actual outcomes could be material to the Company's financial position, operating results, or cash flows for any particular period.



EMPLOYEE COMPENSATION AND PAY PRACTICES MATTERS
Washington Overtime Class Actions
The plaintiffs allege one or more of the following, pertaining to Washington state-based driving associates: that Swift 1) failed to pay minimum wage; 2) failed to pay overtime; 3) failed to pay all wages due at established pay periods; 4) failed to provide proper meal and rest periods; 5) failed to provide accurate wage statements; and 6) unlawfully deducted from employee wages. The plaintiffs seek unpaid wages, exemplary damages, interest, other costs, and attorneys' fees.
Plaintiff(s)	Defendant(s)	Date instituted	Court or agency currently pending in
Troy Slack ⁽¹⁾	Swift Transportation Company of Arizona, LLC and Swift Transportation Corporation	September 9, 2011	United States District Court for the Western District of Washington

Julie Hedglin ⁽¹⁾	Swift Transportation Company of Arizona, LLC and Swift Transportation Corporation	January 14, 2016	United States District Court for the Western District of Washington
Recent Developments and Current Status
On August 29, 2017, the parties in the Slack matter reached a settlement; however, the parties are currently disputing the scope of the settlement release. There have been no significant developments in the Slack matter during the first three quarters of 2018. Additionally, the parties in the Hedglin matter have reached a tentative settlement. The likelihood that a loss has been incurred for the Slack and Hedglin matters is probable and estimable, and the loss has accordingly been accrued.
California Wage, Meal, and Rest Class Actions
The plaintiffs generally allege one or more of the following: that the Company 1) failed to pay the California minimum wage; 2) failed to provide proper meal and rest periods; 3) failed to timely pay wages upon separation from employment; 4) failed to pay for all hours worked; 5) failed to pay overtime; 6) failed to properly reimburse work-related expenses; and 7) failed to provide accurate wage statements.
Plaintiff(s)	Defendant(s)	Date instituted	Court or agency currently pending in
John Burnell⁽¹⁾	Swift Transportation Co., Inc	March 22, 2010	United States District Court for the Central District of California

James R. Rudsell⁽¹⁾	Swift Transportation Co. of Arizona, LLC and Swift Transportation Company	April 5, 2012	United States District Court for the Central District of California
Recent Developments and Current Status
The parties have reached a tentative settlement of the matter. As such, the likelihood that a loss has been incurred is probable and estimable, and the loss has accordingly been accrued.


(1)	Individually and on behalf of all others similarly situated.

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INDEPENDENT CONTRACTOR MATTERS
Ninth Circuit Independent Contractor Misclassification Class Action
The putative class alleges that Swift misclassified independent contractors as independent contractors, instead of employees, in violation of the FLSA and various state laws. The lawsuit also raises certain related issues with respect to the lease agreements that certain independent contractors have entered into with Interstate Equipment Leasing, LLC. The putative class seeks unpaid wages, liquidated damages, interest, other costs, and attorneys' fees.
Plaintiff(s)	Defendant(s)	Date instituted	Court or agency currently pending in
Joseph Sheer, Virginia Van Dusen, Jose Motolinia, Vickii Schwalm, Peter Wood ⁽¹⁾	Swift Transportation Co., Inc., Interstate Equipment Leasing, Inc., Jerry Moyes, and Chad Killebrew	December 22, 2009	Unites States District Court of Arizona and Ninth Circuit Court of Appeals
Recent Developments and Current Status
In January 2017, the district court issued an order finding that the plaintiffs had signed contracts of employment and thus the case could properly proceed in court, instead of arbitration. Swift has appealed this decision to the Ninth Circuit Court of Appeals and the parties have discussed settlement. There were no significant developments during the first three quarters of 2018. Based on the above, the likelihood that a loss has been incurred is probable and estimable, and the loss has accordingly been accrued.
Utah Collective and Individual Arbitration
The plaintiffs allege that the Central Parties (defined below) misclassified independent contractors as independent contractors, instead of employees, in violation of the FLSA and various state laws. The putative class seeks unpaid wages, liquidated damages, interest, other costs, and attorneys' fees.
Plaintiff(s)	Defendant(s)	Date instituted	Court or agency currently pending in
Gabriel Ciluffo, Kevin Shire, and Bryan Ratterree ⁽¹⁾	Central Refrigerated Service, Inc., Central Leasing, Inc., Jon Isaacson, and Jerry Moyes (the "Central Parties"), as well as Swift Transportation Company	June 1, 2012	American Arbitration Association
Recent Developments and Current Status
In October 2016, the arbitrator ruled that approximately 1,300 Central Refrigerated Service, Inc. drivers should have been classified as employees, not independent contractors. The arbitrator ruled that damages could ultimately be assessed in a collective proceeding and denied Swift's motion to decertify the collective proceeding. On April 14, 2017, the parties reached a settlement of the matter. On April 3, 2018, the court granted final approval of the settlement and the Company paid the settlement in the second quarter of 2018.


(1)	Individually and on behalf of all others similarly situated.

Self Insurance

The Company is insured against auto liability ("AL") claims under a primary self-insured retention ("SIR") policy. Knight's AL claims have SIRs ranging from $1.0 million to $3.0 million per occurrence depending on the policy period.

For the policy period March 1, 2018 to March 1, 2019, the Knight SIR is $1.0 million with additional responsibility up to $1.6 million per occurrence within its primary limit and applicable aggregate limits. For the policy period March 1, 2017 to March 1, 2018, the Knight SIR was $1.0 million, with additional responsibility up to $1.6 million per occurrence within its primary limit and applicable aggregate limits. For the policy period March 1, 2016 to March 1, 2017, the Knight SIR was $2.5 million with no additional aggregate limits or deductibles within the primary AL policy. The Company secured excess liability coverage up to $130.0 million per occurrence for the Knight policy periods March 1, 2018 to March 1, 2019, March 1, 2017 to March 1, 2018, and March 1, 2016 to March 1, 2017. Knight also carries a $2.5 million aggregate deductible for any loss or losses within the excess coverage layer. Swift AL claims have $250.0 million of coverage per occurrence ($350.0 million aggregated limits through October 31, 2016), subject to a $10.0 million SIR per-occurrence.

The Company is self-insured for workers' compensation coverage. The Knight self-retention level has a maximum of $1.0 million per occurrence. Swift maintains statutory coverage limits, subject to a $5.0 million SIR for each accident or disease. Additionally, through Knight, the Company maintains primary and excess coverage for employee medical expenses and hospitalization, with self-insured retention of $0.3 million per claimant. Since January 1, 2015, Swift has been fully insured on its medical benefits, subject to contributed premiums.

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Note 12 — Share Repurchase Plans

On June 1, 2018, the Board approved the repurchase of up to $250.0 million of the Company's outstanding common stock (the "Knight-Swift Repurchase Plan"). With the adoption of the Knight-Swift Repurchase Plan, the Company terminated the $150.0 million repurchase plan approved by Swift's board of directors in February 2016 (the "Swift Repurchase Plan") which was prior to the 2017 Merger. When terminated, the Swift Repurchase Plan had approximately $62.9 million in remaining authorized purchases. During the quarter and year-to-date September 30, 2018 periods, the Company purchased 3.1 million shares of its common stock for $100.0 million under the Knight-Swift Repurchase Plan, and as such $150.0 million in authorized purchases remained as of September 30, 2018. Subsequent to September 30, 2018, the Company repurchased 1.1 million shares for $33.6 million under the Knight-Swift Repurchase Plan, leaving $116.4 million available as of November 6, 2018.

Note 13 — Weighted Average Shares Outstanding

Basic and diluted earnings per share, as presented in the condensed consolidated income statements, are calculated by dividing net income attributable to Knight-Swift by the respective weighted average common shares outstanding during the period.

The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding:



	Quarter-to-Date September 30,		Year-to-Date September 30,
	2018	2017	2018	2017
	(In thousands)
Basic weighted average common shares outstanding	176,849	102,846	177,816	87,978
Dilutive effect of equity awards	901	906	977	869
Diluted weighted average common shares outstanding	177,750	103,752	178,793	88,847
Anti-dilutive shares excluded from diluted earnings per share ⁽¹⁾	48	654	48	488


(1)	Shares were excluded from the dilutive-effect calculation because the outstanding awards' exercise prices were greater than the average market price of Knight-Swift's common stock for the periods presented.

Note 14 — Fair Value Measurement

ASC Topic 820, Fair Value Measurements and Disclosures, requires that the Company disclose estimated fair values for its financial instruments. The estimated fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for the asset or liability. Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Changes in assumptions could significantly affect these estimates. Because the fair value is estimated as of September 30, 2018 and December 31, 2017, the amounts that will actually be realized or paid at settlement or maturity of the instruments in the future could be significantly different.

The tables below exclude certain financial instruments. The excluded financial instruments are as follows: cash and cash equivalents, restricted cash included in "Cash and cash equivalents – restricted", net accounts receivable, income tax refund receivable, and accounts payable. The estimated fair values of these financial instruments approximate their carrying values as they are short-term in nature. Additionally, for notes payable under revolving lines of credit, fair value approximates the carrying value due to the variable interest rate. For capital leases, the carrying value approximates the fair value, as the Company's capital leases are structured to amortize in a manner similar to the depreciation of the underlying assets. All remaining balance sheet amounts excluded from the table below are not considered financial instruments subject to this disclosure.

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Financial Assets — The carrying amounts and estimated fair values of the Company's financial assets are included in Note 5 for restricted investments, held-to-maturity and under "Recurring Fair Value Measurements" below for other investments.

Financial Liabilities —The following table presents the carrying amounts and estimated fair values of the Company's financial liabilities:



	September 30, 2018				December 31, 2017
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(In thousands)
Term Loan, due October 2020 ⁽¹⁾	$	364,531	$	365,000	$	364,355	$	365,000
2018 RSA, due July 2021 ⁽²⁾	234,567		235,000		—		—
2015 RSA, due January 2019	—		—		305,000		305,000
Revolver, due October 2022	235,000		235,000		125,000		125,000


(1)	The carrying amount of the Term Loan is included in "Long-term debt, less current portion," and is net of $0.5 million and $0.6 million in deferred loan costs as of September 30, 2018 and December 31, 2017, respectively.


(2)	The carrying amount of the 2018 RSA is included in "Accounts Receivable Securitization," and is net of $0.4 million in deferred loan costs as of September 30, 2018.

The estimated fair values of the Company's financial instruments as of September 30, 2018 and December 31, 2017 represent management's best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. The estimated fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the estimated fair value measurement reflects management's own judgments about the assumptions that market participants would use in pricing the asset or liability. These judgments are developed by the Company based on the best information available under the circumstances.

The following summary presents a description of the methods and assumptions used to estimate the fair value of each class of financial instrument.

Restricted Investments, Held to Maturity — The estimated fair value of the Company's restricted investments, held to maturity, is based on quoted prices in active markets that are readily and regularly obtainable. See Note 5 for additional disclosures regarding restricted investments, held to maturity.

Term Loan — The estimated fair value of the Term Loan approximates the face value.

Accounts Receivable Securitization — The Company's securitization of accounts receivable consists of borrowings outstanding pursuant to the 2018 RSA as of September 30, 2018 and the 2015 RSA as of December 31, 2017, as discussed in Note 9. The estimated fair value of the Company's accounts receivable securitization approximates the face value.

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Recurring Fair Value Measurements — The following table depicts the level in the fair value hierarchy of the inputs used to estimate fair value of assets measured on a recurring basis as of September 30, 2018 and December 31, 2017:



			Fair Value Measurements at Reporting Date Using:
	Estimated Fair Value⁽¹⁾		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
	(In thousands)
As of September 30, 2018
Money market funds	$	1,591	$	1,591	$	—	$	—
Debt securities – municipal securities	2,531		—		2,531		—
As of December 31, 2017
Money market funds	$	1,427	$	1,427	$	—	$	—
Debt securities – municipal securities	1,887		—		1,887		—


(1)	The money market funds and debt securities are trading securities and are restricted to meet statutory requirements. The carrying value, included within "Other long-term assets" in the Company's condensed consolidated balance sheets, approximates the estimated fair value.

As of September 30, 2018 and December 31, 2017, there were no liabilities on the condensed consolidated balance sheets estimated at fair value that were measured on a recurring basis.

Nonrecurring Fair Value Measurements — As of September 30, 2018 and December 31, 2017, the Company had no major categories of liabilities estimated at fair value that were measured on a nonrecurring basis.

As of September 30, 2018, the Company had no major categories of assets estimated at fair value that were measured on a nonrecurring basis. The following table depicts the level in the fair value hierarchy of the inputs used to estimate fair value of assets measured on a nonrecurring basis as of December 31, 2017:



			Fair Value Measurements at Reporting Date Using:
	Estimated Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Losses
	(In thousands)
As of December 31, 2017
Software ⁽¹⁾	$	—	$	—	$	—	$	—	$	(16,746	)
Equipment ⁽²⁾	350		—		—		350		(98		)


(1)	The Company terminated the implementation of Swift's enterprise resource planning system in 2017. The related impairment loss was included in "Impairments" within operating income in the consolidated income statement (within Swift's non-reportable segments).


(2)	Management reassessed the fair value of certain Interstate Equipment Leasing, LLC tractors as of December 31, 2017, which had a total book value of $0.4 million, determining that there was an impairment loss. The impairment loss was included in "Impairments" within operating income in the consolidated income statement (within Swift's non-reportable segments).

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Note 15 — Related Party Transactions

The following table presents Knight-Swift's transactions with companies controlled by and/or affiliated with its related parties:



	Quarter-to-Date September 30,								Year-to-Date September 30,
	2018				2017				2018				2017
	Provided by Knight-Swift		Received by Knight-Swift		Provided by Knight-Swift		Received by Knight-Swift		Provided by Knight-Swift		Received by Knight-Swift		Provided by Knight-Swift		Received by Knight-Swift
	(In thousands)
Freight Services:
Central Freight Lines ⁽¹⁾	$	—	$	—	$	—	$	—	$	427	$	—	$	—	$	—
SME Industries ⁽¹⁾	176		—		—		—		623		—		—		—
Total	$	176	$	—	$	—	$	—	$	1,050	$	—	$	—	$	—
Facility and Equipment Leases:
Central Freight Lines ⁽¹⁾	$	222	$	92	$	—	$	—	$	690	$	277	$	—	$	—
Other Affiliates ⁽¹⁾	4		—		—		—		15		—		—		—
Total	$	226	$	92	$	—	$	—	$	705	$	277	$	—	$	—
Other Services:
Updike Distribution and Logistics ⁽²⁾	$	—	$	—	$	772	$	—	$

Knight-Swift Transportation Holdings Inc. - FORM 10-Q - November 9, 2018

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