KNIGHT TRANSPORTATION INC

The Company issues PRSUs to selected key employees, that may be earned based on achieving performance targets approved by our Compensation Committee annually. The initial award is subject to an adjustment determined by our performance achieved over a three-year performance period when compared to the objective performance standards adopted by the Compensation Committee; this adjustment ranges from 0 percent to 150 percent of the initial amount of the grant. A further adjustment is made based on our total shareholder return compared to a peer group approved by our Compensation Committee. This adjustment ranges from 75 percent to 125 percent of the award after adjustment for our performance. Furthermore, the PRSUs have additional service requirements subsequent to the achievement of the performance targets. PRSUs do not earn dividend equivalents, and are subject to accelerated vesting upon a change of control.

We are currently evaluating the effect that adopting the new guidance will have on our consolidated financial statements. We have established a team, including engaging external resources, to evaluate and implement this standard. We have identified revenue sources within our lines of business and developed a tool to facilitate documenting our contract reviews. Our process is ongoing and includes our assessment of when our performance obligations are satisfied, principal verses agent considerations as provided in ASU 2016-08, and selection of a method of adoption per the guidance. Based on the information currently available from our accounting assessment, we cannot determine the quantitative impact the adoption will have on our consolidated financial statements. Since we are continuing to evaluate the impact of the new guidance, the disclosures around our preliminary assessments are subject to change.

For the remainder of 2017, we expect the freight environment to continue to be challenging , however, we expect the environment to become more favorable towards the end of 2017, as capacity begins to tighten as a result of a weak demand for used equipment and additional regulatory burdens expected to phase in over the coming quarters.  We expect that pricing will respond positively as capacity continues to exit the market. However, in July 2017, the House Transportation Committee approved a bill that could have the effect of delaying or repealing the implementation of the rule requiring all carriers to use ELDs. Such a delay or repeal could affect the timing and extent to which capacity exits the market. Additionally, given where we are in the bid cycle, our contract rates could take longer to improve than our non-contract rates. Market factors that include higher driver wages, lower gain on sale of revenue equipment, and increased fuel costs may negatively affect our margins in our Trucking and Logistics segments.  In this environment, we plan to limit organic fleet expansion, focus on cost control, and grow revenues in our Logistics segment. We believe we have a higher percentage of non-contracted business than many of our peers, which we believe will provide us an opportunity to benefit from spot market changes that are expected when capacity tightens.

Trucking revenue decreased 4.8% to $194.0 million for the three months ended June 30, 2017, from $203.9 million for the same three months in 2016, and decreased 4.2% to $386.5 million for the six months ended June 30, 2017, from $403.3 million for the same six months in 2016. The decreases in Trucking revenue were attributable to decreases in tractor productivity, as measured by average revenue, before Trucking fuel surcharge, per tractor, which decreased 2.9% for the three months ended June 30, 2017, and 3.0% for the six months ended June 30, 2017, compared to the same periods in 2016. While average revenue per loaded mile improved 0.3% during the second quarter of 2017, compared to the second quarter of 2016, average miles per tractor decreased by 3.0% and non-paid empty mile percent increased by 20 basis points. Our average revenue per loaded mile decreased 1.0% in the six month period ended June 30, 2017, compared to the same period of 2016, and average miles per tractor decreased 2.0%, while our non-paid empty mile percent remained flat. We remain focused on developing our freight network and improving the productivity of our assets.

Purchased transportation expense, as a percentage of total revenue, increased to 21.3% for the three months ended June 30, 2017, from 19.5% for the same three months in 2016, and increased to 21.5% for the six months ended June 30, 2017, from 20.4% for the same six months in 2016. Purchased transportation expense is comprised of (i) payments to independent contractors for our Dry Van, Refrigerated, and Drayage operations in our Trucking segment; (ii) payments to third-party capacity providers for our Brokerage operations and to railroads for our Intermodal operations; and (iii) payments relating to logistics, freight management and non-Trucking services in our Logistics segment.  Purchased transportation expense expressed as a percentage of total revenue, before fuel surcharge, increased to 23.6%, and 23.8% in the three and six months ended June 30, 2017, respectively, from 21.3%, and 22.0%, in the same periods of 2016, respectively. Purchased transportation expense for independent contractors in our Trucking segment increased in both the three months and six months ended June 30, 2017, compared to the same periods of 2016, as the proportion of our tractor fleet comprised of independent contractors increased in the three month and six month periods of 2017.  Purchased transportation expense in our Logistics segment remained flat in both the three month and six month periods of 2017 and 2016. Purchased transportation expense generally takes into account changes in diesel fuel prices, resulting in lower payments during periods of declining fuel prices, and higher payments when fuel prices are rising. We expect purchased transportation will increase as a percentage of total revenue if we are successful in continuing to grow our Logistics segment, which increase could be partially offset if independent contractors exit the market with upcoming regulatory changes or further increased if we need to pay independent contractors more to stay with us in light of such regulatory changes.