Stock-based Compensation

2017 Merger Impact — Refer to Note 4 for a summary of the 2017 Merger transaction.

Accounting Perspective — Pursuant to the Merger Agreement, the following stock transactions occurred on September 8, 2017 (the "Merger Date"):


(1)	each outstanding Swift stock option fully vested as a result of the 2017 Merger, was converted into a stock option to acquire the Company's shares using a 0.72-for-one share consolidation ratio and adjusting the exercise price using the same consolidation ratio;


(2)	each outstanding unvested Swift restricted stock award fully vested as a result of the 2017 Merger, and was converted into the Company's Class A common stock, using the 0.72-for-one share consolidation ratio;


(3)	each outstanding unvested Swift restricted stock unit (except for the awards granted in May 2017 that excluded acceleration of vesting related to mergers within the award notices) fully vested as a result of the 2017 Merger, and was converted into the Company's Class A common stock, using the 0.72-for-one share consolidation ratio; and


(4)	each outstanding unvested Swift performance share unit (except for one director) fully vested as a result of the 2017 Merger, and was converted into the Company's Class A common stock, using the 0.72-for-one consolidation ratio.

Except for the conversion of stock options, unvested restricted stock awards, unvested restricted stock units, and unvested performance units discussed herein, the material terms of the awards remained unchanged. Prior to the closing of the 2017 Merger, Swift had various unvested equity awards outstanding, of which the vesting was accelerated as of the Merger Date (with the exceptions noted above).

In accordance with authoritative guidance on accounting for stock-based compensation, the Company revalued the awards upon the 2017 Merger closing and allocated the revised fair value between purchase consideration and continuing compensation expense, based on the ratio of service performed through the Merger Date over the total service period of the awards. The total value of Swift awards earned as of the Merger Date included as purchase consideration was $13.1 million. The revised fair value allocated to post-merger services resulted in incremental expense, which is recognized over the remaining service period of the awards. The total value of Swift awards not earned as of the Merger Date was $6.3 million, which is being expensed over the remaining future vesting period. Of this amount, $1.0 million was recorded within "Salaries, wages, and benefits" in the 2017 consolidated income statements. Refer to Note 4 to the consolidated financial statements for further information regarding the 2017 Merger.

Legal Perspective — Pursuant to the Merger Agreement, the following stock transactions occurred on the Merger Date:


(1)	each outstanding vested and unvested Knight stock option was assumed by the Company and automatically converted into a stock option to acquire an equal number of Company shares;


(2)	each outstanding vested and unvested Knight restricted stock unit was assumed by the Company and automatically converted into a restricted stock unit award of the Company; and


(3)	each outstanding vested and unvested Knight performance unit was assumed by the Company and automatically converted into a performance unit award of the Company.

Except for the conversion of stock options, restricted stock awards, restricted stock unit awards, and performance unit awards discussed herein, the material terms of the awards remained unchanged. Certain of the Knight performance unit awards vested upon the consummation of the 2017 Merger, as described below.

Compensatory Stock Plans

Before the 2017 Merger, Knight and Swift granted stock-based awards under their respective stock-based compensation plans, discussed below.

2014 Stock Plan — Currently, the 2014 Stock Plan, as amended and restated, is the combined company’s only compensatory stock-based incentive plan. The previous 2014 stock plan replaced Swift's 2007 Omnibus Incentive Plan when it was adopted by Swift's board of directors in March 2014 and then approved by the Swift stockholders in May 2014. The previous 2014 stock plan was amended and restated to rename the plan and for other administrative changes relating to the 2017 Merger. The terms of the 2014 Stock Plan, as amended and restated, remain substantially the same as the previous 2014 stock plan. The 2014 Stock Plan, as amended and restated, permits the payment of cash incentive compensation and authorizes the granting of stock options, stock appreciation rights, restricted stock and restricted stock units, performance shares and performance units, cash-based awards, and stock-based awards to the Company's employees and non-employee directors. As of December 31, 2017, the aggregate number of shares remaining available under the 2014 Stock Plan was approximately 2.9 million.

Legacy Plans — In connection with the 2017 Merger, the registered securities under the Knight Amended and Restated 2003 Stock Option Plan, the Knight 2012 Equity Compensation Plan, the Knight Amended and Restated 2015 Omnibus Incentive Plan, and the Swift 2007 Omnibus Incentive Plan (collectively, the "Legacy Plans") were deregistered. As such, no future awards may be granted under these Legacy Plans. Outstanding awards granted under the Legacy Plans were assumed by the combined company and continue to be governed by such Legacy Plans until such awards have been exercised, forfeited, canceled, or have otherwise expired or terminated.

See Note 2 regarding the Company's accounting policy for stock-based compensation.

Stock-based Compensation Expense

Stock-based compensation expense, net of forfeitures, which is included in "Salaries, wages, and benefits" in the consolidated income statements is comprised of the following:



	2017		2016		2015
	(In thousands)
Stock options	$	1,788	$	1,734	$	1,061
Restricted stock units and restricted stock awards	4,004		1,506		4,038
Performance units	450		801		1,913
Stock-based compensation expense – equity awards	$	6,242	$	4,041	$	7,012
Stock-based compensation expense – liability awards ⁽¹⁾	148		—		—
Total stock-based compensation expense, net of forfeitures	6,390		4,041		7,012
Income tax benefit	$	2,415	$	1,515	$	2,630

____________


(1)	Includes awards granted to executive management in November 2017 that ultimately settle in cash upon fulfilling a requisite service period (for restricted stock units) and fulfilling a requisite service period and achieving performance targets (for performance units).

Unrecognized Stock-based Compensation Expense

The following table presents the total unrecognized stock-based compensation expense and the expected weighted average period over which these expenses will be recognized:



	December 31, 2017
	Expense		Weighted Average Period
	(In thousands)		(In years)
Equity awards – Stock options	$	3,878	1.8
Equity awards – Restricted stock units and restricted stock awards	19,156		2.3
Equity awards – Performance units	1,303		3.1
Liability awards – Restricted stock units and performance units	3,169		2.7
Total unrecognized stock-based compensation expense	$	27,506	2.3

Stock Award Grants



	2017	2016	2015
Stock options	497,421	569,480	590,141
Restricted stock units and restricted stock awards	266,958	17,000	13,950
Performance units	44,244	177,741	165,720
Equity awards granted	808,623	764,221	769,811
Liability awards granted⁽¹⁾	77,620	—	—
Total stock awards granted	886,243	764,221	769,811

____________


(1)	Includes 46,572 performance units and 31,048 restricted stock units.

Stock Options

Stock options are the contingent right of award holders to purchase shares of the Company's Class A common stock at a stated price for a limited time. The exercise price of options granted equals the fair value of the Company's Class A common stock determined by the closing price of the Company's Class A common stock quoted on the NYSE on the grant date. Most stock options granted by the Company cannot be exercised until at least one year after the grant date and have a five to ten-year contractual term. Stock options are forfeited upon termination of employment for reasons other than death, disability, or retirement.

A summary of 2017 stock option activity follows:



Stock options outstanding:	Shares Under Option		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value ⁽¹⁾
					(In years)	(In thousands)
Stock options outstanding at December 31, 2016	1,737,400		$	23.19	2.9	$	17,200
Granted	497,421		33.35
Assumed Swift stock options from 2017 Merger	528,466		21.93
Exercised	(589,020	)	21.44
Expired	(24,552	)	24.44
Forfeited	(190,424	)	27.96
Stock options outstanding at December 31, 2017	1,959,291		$	25.48	3.2	$	35,779
Aggregate number of stock options expected to vest at a future date as of December 31, 2017	969,965		29.00		3.5	$	14,283
Exercisable at December 31, 2017	918,594		$	21.29	2.8	$	20,428

____________


(1)	The aggregate intrinsic value was computed using the closing share price on December 29, 2017 of $43.72 and on December 30, 2016 of $32.83, as applicable.

The fair value of each stock option grant is estimated on the grant date using the Black-Scholes option-valuation model. The following table presents the weighted average assumptions used in the fair value computation:



Stock option fair value assumptions:	2017	2016	2015
Dividend yield ⁽¹⁾	0.72%	0.99%	0.8%
Risk-free rate of return ⁽²⁾	1.49%	0.90%	0.98%
Expected volatility ⁽³⁾	27.95%	27.91%	25.88%
Expected term (in years) ⁽⁴⁾	3.2	2.7	2.7
Weighted average fair value of stock options granted	$6.78	$4.28	$5.00

____________


(1)	The dividend yield assumption is based on Knight's historical experience and anticipated future dividend payouts.


(2)	The risk-free interest rate assumption is based on the United States Treasury securities at a constant maturity with a maturity period that most closely resembles the expected term of the stock option award.


(3)	Expected volatility of the Company's Class A common stock is determined based on Knight's historical data.


(4)	The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and was determined based on an analysis of historical exercise behavior.

The following table summarizes stock option exercise information for the years presented:



Stock option exercises	2017		2016		2015
	(In thousands, except share data)
Number of stock options exercised	589,020		708,244		594,673
Intrinsic value of stock options exercised	$	8,792	$	7,100	$	8,300
Cash received upon exercise of stock options	$	13,159	$	13,188	$	9,930
Income tax benefit	$	1,833	$	1,847	$	3,175

The following table is a rollforward of the Company's unvested stock options:



Unvested stock options:	Shares		Weighted Average Fair Value
Unvested stock options at December 31, 2016	1,131,773		$	4.39
Granted	497,421		6.78
Vested	(398,073	)	4.18
Forfeited	(190,424	)	5.10
Unvested stock options at December 31, 2017	1,040,697		$	5.49

The total fair value of the shares vested during the years ended December 31, 2017, 2016, and 2015 was $1.7 million, $1.4 million, and $0.8 million, respectively.

Restricted Stock Units

A restricted stock unit represents a right to receive a common share of stock when the unit vests. Restricted stock unit recipients do not have voting rights with respect to the shares underlying unvested awards. Employees forfeit their units if their employment terminates before the vesting date.

The following table is a rollforward of unvested restricted stock units, including restricted stock units classified as equity and those classified as liabilities:



Unvested restricted stock units:	Number of Awards		Weighted Average Fair Value ⁽¹⁾
Unvested restricted stock units at December 31, 2016	686,786		$	16.46
Granted	298,006		36.44
Assumed Swift restricted stock units from 2017 Merger	168,488		40.85
Vested	(126,871	)	16.77
Forfeited	(46,692	)	23.59
Unvested restricted stock units at December 31, 2017	979,717		$	26.59

____________


(1)	The fair value of each restricted stock unit is based on the closing market price on the grant date, except for the Swift restricted stock unit awards assumed, which were re-measured at the Merger Date.

Performance Units

The Company issues performance units to selected key employees, that may be earned based on achieving performance targets approved by the compensation committee annually. The initial award is subject to an adjustment determined by the Company's performance achieved over a three-year performance period when compared to the objective performance standards adopted by the compensation committee. Furthermore, the performance units have additional service requirements subsequent to the achievement of the performance targets. Performance units do not earn dividend equivalents.

Performance units granted prior to the 2017 Merger were accelerated on September 8, 2017, the 2017 Merger date, pursuant to the terms of the award agreements. On the 2017 Merger date, awards granted in 2014, 2015, and 2016 were accelerated, but only the performance measurement period for the 2014 award was complete allowing for the final award to be expensed and paid out. The performance period for the 2015 and 2016 awards ended December 31, 2017. The performance criteria were not met based on the performance period results ended December 31, 2017, therefore, no expense was recorded, and no payout was made related to the 2015 or 2016 awards.

Beginning in 2013, Swift granted performance units to certain members of executive management. These awards provided each grantee a number of shares of Swift's Class A common stock at the end of a three-year period, based on certain performance criteria established by Swift's compensation committee.

The following table is a rollforward of unvested performance units, including performance units classified as equity and those classified as liabilities:



Unvested performance units:	Shares		Weighted Average Fair Value
Unvested performance units at December 31, 2016	508,478		$	25.60
Granted ⁽¹⁾	90,816		$	40.81
Assumed Swift performance units from 2017 Merger	56,817		$	40.85
Shares earned above target	21,117		$	23.85
Vested	(519,483	)	$	25.53
Forfeited	(10,112	)	$	25.40
Unvested performance units at December 31, 2017	147,633		$	35.34

____________


(1)	The performance measurement period for performance units granted in 2017 is January 1, 2018 to December 31, 2020 (three full calendar years). These awards will vest one month following the expiration of the performance measurement period.

The following table presents the weighted average assumptions used in the fair value computation for performance units, including performance units classified as equity and those classified as liabilities:



Performance unit fair value assumptions:	2017			2016			2015
Dividend yield⁽¹⁾	0.59		%	0.99		%	0.80		%
Expected volatility⁽²⁾	31.28		%	27.95		%	23.18		%
Average peer volatility⁽²⁾	28.45		%	34.37		%	30.70		%
Average peer correlation coefficient⁽³⁾	0.60			0.60			0.49
Risk-free interest rate⁽⁴⁾	1.88		%	0.89		%	0.78		%
Expected term (in years)⁽⁵⁾	3.1			2.8			2.6
Weighted-average fair value of performance units granted	$	40.81		$	23.89		$	29.30

____________


(1)	The dividend yield, used to project stock price to the end of the performance period, is based on the Knight's historical experience and future expectation of dividend payouts. Total stockholder return is determined assuming that dividends are reinvested in the issuing entity over the performance period, which is mathematically equivalent to utilizing a 0% dividend yield.


(2)	Management (or peer company) estimated volatility using Knight's (or peer company's) historical share price performance over the remaining performance period as of the grant date.


(3)	The correlation coefficients are used to model the way in which each entity tends to move in relation to each other; the correlation assumptions were developed using the same stock price data as the volatility assumptions.


(4)	The risk-free interest rate assumption is based on United States Treasury securities at a constant maturity with a maturity period that most closely resembles the expected term of the performance award.


(5)	Since the Monte Carlo Simulation valuation is an open form model that uses an expected life commensurate with the performance period, the expected life of the performance units was assumed to be the period from the grant date to the end of the performance period.

Non-compensatory Stock Plan: ESPP

In 2012, Swift's board of directors adopted, and its stockholders approved, the Swift Transportation Company 2012 ESPP (the "2012 ESPP"). The 2012 ESPP continues to be administered by the Company following the 2017 Merger, is intended to qualify under Section 423 of the Internal Revenue Code, and is considered noncompensatory. Pursuant to the 2012 ESPP, the Company is authorized to issue up to 1.4 million shares of its Class A common stock to eligible employees who participate in the plan. Employees are eligible to participate in the 2012 ESPP following at least 90 days of employment with the Company or any of its participating subsidiaries. Under the terms of the 2012 ESPP, eligible employees may elect to purchase Class A common stock through payroll deductions, not to exceed 15% of their gross cash compensation. The purchase price of the Class A common stock is 95% of the Class A common stock's fair market value quoted on the NYSE on the last trading day of each offering period. There are four three-month offering periods corresponding to the calendar quarters. Each eligible employee is restricted to purchasing a maximum of $6,250 of Class A common stock during an offering period, determined by the fair market value of the Class A common stock as of the first day of the offering period, and $25,000 of Class A common stock during a calendar year. Employees who own 5% or more of the total voting power or value of Class A common stock are restricted from participating in the 2012 ESPP.

The 2012 ESPP was amended and restated in January 2018 to be a Knight-Swift plan, thus permitting Knight employees to participate in the plan in addition to Swift employees. The terms and definitions of the amended and restated 2012 ESPP remain substantially the same as the original 2012 ESPP.

In 2017, the Company issued eight thousand shares under the 2012 ESPP at an average discounted price per share of $39.47. As of December 31, 2017, the Company is authorized to issue an additional 1.2 million shares under the 2012 ESPP.