Knight Transportation Posts Record Revenue and Net Income for the Second Quarter of 2006

PHOENIX--(BUSINESS WIRE)--July 19, 2006--Knight Transportation Inc. (NYSE: KNX) announced today its financial results for the quarter and year-to-date ended June 30, 2006.

For the quarter, total revenue increased 23.8%, to $165.8 million from $133.9 million for the same quarter of 2005. Revenue, before fuel surcharge, increased 17.2%, to $140.4 million from $119.7 million for the same quarter of 2005. Net income increased 21.2%, to $18.1 million from $15.0 million for the same period of 2005. Net income per diluted share increased to $0.21 from $0.17 for the same period of 2005. Excluding equity-based compensation expense for the second quarter 2006, net income increased 24.9%, to $18.7 million from $15.0 million for the same period of 2005, when equity-based compensation was not required to be expensed.

“Perhaps most important, the cost of recruiting, retaining, and compensating drivers continues to increase. We recently implemented a one-cent-per-mile increase for our drivers. With unfavorable driver demographics, intense competition, and limited control over scheduling and unloading procedures, we expect additional increases to be required over time.”

Year-to-date, total revenue increased 23.0%, to $314.8 million from $256.1 million for the same period of 2005. Revenue, before fuel surcharge, increased 16.9%, to $269.7 million from $230.8 million for the same period of 2005. Net income increased 22.6%, to $34.0 million from $27.7 million for the same period of 2005. Net income per diluted share increased to $0.39 from $0.32 for the same period of 2005. Excluding equity-based compensation expense for the six months ended June 30, 2006, net income increased 26.0%, to $34.9 million from $27.7 million for the same period of 2005, when equity-based compensation was not required to be expensed.

The company previously announced a cash dividend of $.02 per share to shareholders of record on June 12, 2006, which was paid on June 30, 2006.

Chairman and Chief Executive Officer Kevin P. Knight, in commenting on the quarter, said, "This quarter represented the 46th consecutive quarter, since going public, that Knight Transportation generated higher year-over-year operating income. Our operating ratio was 78.7%, a 60-basis-point improvement over the second quarter of 2005. In improving our operating ratio year-over-year, our associates worked diligently to overcome approximately 70 basis points of non-cash equity-based compensation expense and approximately 100 basis points of negative impact from brokerage and Edwards Bros. operations.

"Revenue growth continued during the quarter and was driven by a combination of fleet expansion and increased revenue per mile. In the quarter we opened two new dry van truckload service centers, Minneapolis and Tulsa, Okla., in addition to a new brokerage service center in Chicago.

"Continued positive results in insurance and claims, used equipment sales, and fuel surcharge recovery, as well as our constant focus on cost controls, more than overcame expense increases relating to recording equity-based compensation expense, increased difficulty in recruiting qualified driving associates, higher prices of revenue equipment and diesel fuel, declining fuel efficiency due to emissions control regulations, and increases in driver compensation.

"The 2006 period includes our initial adoption of the new accounting standard, which requires expensing of equity-based compensation such as stock options. At Knight Transportation, we have a broad-based stock option program with approximately 1,300 participants at the present date. The second quarter and first six months of 2006 included approximately $0.9 million and $1.6 million of non-cash equity-based compensation expense recorded, while such expense was not recorded in the first six months of 2005.

"During the quarter, average tractors operated increased 14.7% over the second quarter of 2005, an increase of 431 tractors. We expanded our fleet by 98 tractors as compared to the first quarter of 2006. For the quarter, we invested $30.2 million in net capital expenditures. At June 30, 2006, our balance sheet reflected $18.0 million in cash, $5.2 million in short-term investments, zero debt, and $387.0 million in shareholders' equity.

"We believe recruiting and retaining qualified drivers remains our industry's most significant issue. The lack of qualified drivers had a negative impact on seating (tractors with assigned drivers) our growth tractors in the quarter. Over half of the 3.9% decrease in utilization was attributable to a higher level of unseated tractors which reduced net income per share by approximately $0.01 per share. The decrease in utilization is also attributed to the new hours of service regulations and our use of advanced technology to manage compliance. Although utilization has been negatively impacted, our accident frequency and severity continues to improve resulting in the improvement on the insurance and claims expense line.

"Looking forward, we intend to continue to execute our business model that is focused on industry-leading growth and profitability. This will not be easy in the current environment of intense competition for drivers. However, with our network of 23 dry van and 3 refrigerated service centers to support recruiting and retention efforts nationwide, we are optimistic about our growth opportunity. We also will continue to evaluate the market for acquisition opportunities that make sense within our disciplined operating framework. Our base expectation is to grow our fleet by approximately 200 to 250 trucks over the remainder of the year. We will evaluate that base goal and may adjust it up or down based on factors such as freight demand, driver availability, and acquisitions.

"From a freight perspective, we are optimistic that demand for our services will remain solid through the remainder of the year for all three of our businesses, Knight Transportation, Knight Refrigerated, and Knight Brokerage. Assuming GDP growth remains favorable, we believe that tight driver capacity and little capacity growth by many publicly traded carriers will continue to offer an environment for rate increases to offset the additional costs.

"From an expense perspective, we believe the cost of operating in our industry will continue to rise for the foreseeable future and that to generate adequate returns truckload carriers must remain vigilant on costs and pursue adequate compensation for services rendered.

"The major cost increases we anticipate relate to equipment prices, fuel costs, and driver-related expenses. We expect tractor prices to increase because of emissions control regulations. In addition, tractor and trailer prices have already increased due to higher commodity prices and costs of production. Accordingly, depreciation expense per tractor and trailer is expected to increase gradually over time as new equipment is absorbed into the fleet.

"We also expect fuel expense to increase in future periods as a result of high fuel prices and lower fuel efficiency. We expect fuel prices to remain high for the remainder of the year and expect even further increases, later in the year, with the introduction of the EPA-mandated ultra-low sulfur diesel fuel. Compounding the issue, the ultra-low sulfur diesel and emissions control components on new engines are expected to reduce fuel mileage. It will be a challenge for our industry to negotiate rates and fuel surcharges that take this reality into account.

"Perhaps most important, the cost of recruiting, retaining, and compensating drivers continues to increase. We recently implemented a one-cent-per-mile increase for our drivers. With unfavorable driver demographics, intense competition, and limited control over scheduling and unloading procedures, we expect additional increases to be required over time.

"We also believe that truckload carriers will face challenges to productivity brought on by federal hours of service limitations on drivers, increasing port and highway congestion that can limit shipment velocity, and other prospect of delays in seating tractors if the driver shortage worsens. Our industry must continue to work with the shipping industry, infrastructure planners, and individual customers to improve efficiency and obtain adequate compensation for increasing shipment times.

"From an equipment perspective, we continue to make significant investments in our modern and efficient fleet. Unlike many of our peers, we have not engaged in a significant "pre-buy" of tractors during 2006, in advance of federal emissions control regulations that become effective in 2007. We chose to continue the strategy of consistent tractor growth and replacement that we have followed since our inception, including during the implementation of the first round of emissions control in 2002. We believe our policy makes sense for us because we have continued to add growth tractors consistently throughout our history, and it would not have been prudent to accumulate several hundred unmanned tractors in advance of our anticipated 2007 needs. In addition, we believe a relatively consistent acquisition and trade policy helps us avoid substantial swings in capital expenditures and expenses, which can occur when a massive equipment shift occurs in a short period. We also wish to minimize the disruptions to customers, drivers, shops, and our equipment disposition program that could accompany unnecessary volatility in our acquisition and trade cycle," concluded Knight.

The company also added the following information:

The company will not hold a conference call to discuss the second quarter results. Instead, the company has expanded its quarterly press release disclosure and commentary, and believes this affords a favorable combination of widespread, fair, and timely disclosure to shareholders and other interested parties. The company expects to continue with this expanded written disclosure format in future periods.

Knight Transportation Inc. is a truckload carrier offering dry van, refrigerated, and brokerage services to customers through a network of service centers located throughout the United States. As "Your Hometown National Carrier," Knight strives to offer customers and drivers personal service and attention through each service center, while offering integrated freight transportation nationwide and beyond through the scale of one of North America's largest trucking companies. The principal types of freight we transport include consumer staples, retail, paper products, packaging/plastics, manufacturing, and import/export commodities.

INCOME STATEMENT DATA:
  
                        Three Months Ended       Six Months Ended
                   (Unaudited, in thousands, except per share amounts)

                          2006      2005            2006      2005
                          ----      ----           ----       ----
REVENUE:
  Revenue, before fuel
   surcharge            $140,372  $119,722        $269,711  $230,797
  Fuel surcharge          25,395    14,145          45,108    25,252
                        --------  --------        --------  --------
TOTAL REVENUE            165,767   133,867         314,819   256,049
                        --------  --------        --------  --------

OPERATING EXPENSES:
  Salaries, wages and
   benefits               47,861    39,196          91,063    76,114
  Fuel expense - gross    43,224    30,192          79,247    56,033
  Operations and
   maintenance             8,286     8,171          17,714    15,803
  Insurance and claims     6,108     5,940          11,862    12,304
  Operating taxes and
   licenses                3,341     2,964           6,592     5,894
  Communications           1,428       952           2,737     1,927
  Depreciation and
   amortization           14,993    12,786          29,593    25,096
  Lease expense -
   revenue equipment         108         -             217         -
  Purchased 
   transportation          9,832     7,127          17,738    13,611
  Miscellaneous
   operating expenses        658     1,725           2,030     3,305
                        --------  --------        --------  --------
                         135,839   109,053         258,793   210,087
                        --------  --------        --------  --------
  Income From Operations  29,928    24,814          56,026    45,962
                        --------  --------        --------  --------

Interest income              293       143             577       253
                        --------  --------        --------  --------

  Income Before Income
   Taxes                  30,221    24,957          56,603    46,215

INCOME TAXES              12,100    10,000          22,650    18,500
                        --------  --------        --------  --------

NET INCOME               $18,121   $14,957         $33,953   $27,715
                        ========  ========        ========  ========
Net Income Per Share
    - Basic                $0.21     $0.18           $0.40     $0.33
    - Diluted              $0.21     $0.17           $0.39     $0.32

Weighted Average Shares
 Outstanding
   - Basic                85,830    85,223          85,788    85,172
   - Diluted              87,113    86,966          87,141    87,020


BALANCE SHEET DATA:
                                              6/30/2006    12/31/2005
                                              ---------    ----------
   ASSETS                                    (Unaudited, in thousands)

Cash and cash equivalents                      $17,973       $18,809
Short term investment                            5,176         2,278
Restricted cash                                      -           211
Accounts receivable, net                        77,983        79,848
Notes receivable, net                              277           241
Inventories and supplies                         3,656         3,355
Prepaid expenses                                 8,670         7,156
Deferred tax asset                               8,244         8,533
                                              ---------    ----------
  Total Current Assets                         121,979       120,431
                                              ---------    ----------

Property and equipment, net                    385,753       352,339
Notes receivable, long-term                        376           344
Goodwill                                         8,439         8,119
Other assets and restricted cash                 4,400         2,594
                                              ---------    ----------

  Total Assets                                $520,947      $483,827
                                              =========    ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable                              $  9,668      $  7,464
Accrued payroll                                  6,641         5,452
Accrued liabilities                             16,468        13,307
Dividends payable                                    -         1,713
Other current liabilities                            -           211
Claims accrual                                  23,049        26,155
                                              ---------    ----------
  Total Current Liabilities                     55,826        54,302

Deferred Income Taxes                           78,149        76,597
                                              ---------    ----------

  Total Liabilities                            133,975       130,899
                                              ---------    ----------

Common stock                                       859           857
Additional paid-in capital                      90,672        87,148
Retained earnings                              295,441       264,923
                                              ---------    ----------
  Total Shareholders' Equity                   386,972       352,928
                                              ---------    ----------

  Total Liabilities and Shareholders' Equity  $520,947      $483,827
                                              =========    ==========


                        Three Months Ended      Six Months Ended 

                             June 30,               June 30, 
                           2006    2005           2006    2005
                           ----    ----           ----    ----
                           (Unaudited)             (Unaudited)

OPERATING STATISTICS                       %                      %
                                         Change                 Change
Average Revenue Per
 Loaded Mile(a)           $1.701  $1.622   4.9%  $1.685  $1.628   3.5%

Average Revenue Per
 Total Mile(a)            $1.498  $1.433   4.5%  $1.481  $1.433   3.3%

Empty Mile Factor          11.9%   11.7%   1.7%   12.1%   12.0%   0.8%

Average Miles Per
 Tractor                  27,305  28,408  -3.9%  53,803  55,674  -3.4%

Average Length of Haul       558     565  -1.2%     565     565   0.0%

Operating Ratio(b)         78.7%   79.3%          79.2%   80.1%

Average Tractors - Total   3,359   2,928  14.7%   3,324   2,879  15.5%

Tractors - End of Quarter:
  Company                  3,195   2,746          3,195   2,746
  Owner - Operator           222     235            222     235
                          ------- -------        ------- -------
                           3,417   2,981          3,417   2,981

Trailers - End of Quarter  7,917   7,381          7,917   7,381

Net Capital Expenditures 
(in thousands)           $30,248 $24,330        $57,416 $37,596

Cash Flow From Operations
 (in thousands)          $22,419 $27,436        $61,698 $53,285

(a) Excludes fuel surcharge. (b) Operating ratio as reported in this press release is based upon total operating expenses, net of fuel surcharge, as a percentage of revenue, before fuel surcharge. Revenue from fuel surcharge is available on the accompanying statements of income. We measure our revenue, before fuel surcharge, and our operating expenses, net of fuel surcharge, because we believe that eliminating this sometimes volatile source of revenue affords a more consistent basis for comparing our results of operations from period to period.

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These statements generally may be identified by their use of terms or phrases such as "expects," "estimates," "anticipates," "projects," "believes," "plans," "intends," "may," "will," "should," "could," "potential," "continue," "future," and terms or phrases of similar substance. Forward-looking statements are based upon the current beliefs and expectations of our management and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Accordingly, actual results may differ from those set forth in the forward-looking statements. Readers should review and consider the factors that may affect future results and other reports, Annual Report on Form 10-K, and other filings with the Securities Exchange Commission. We disclaim any obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking information.