Knight-Swift Transportation - Q3 2013
October 23, 2013
Transcript
Operator (participant)
Good morning. My name is Gina, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight Transportation third quarter 2013 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Speakers for today's call will be Kevin Knight, Chairman and CEO, Dave Jackson, President, and Adam Miller, CFO. Mr. Miller, the meeting is yours.
Adam Miller (CFO)
Thank you, Gina. Good afternoon, everyone, and we appreciate everyone that's joined us for our conference call today. If you haven't already printed off the slides, they're available on our website at investor.knighttrans.com/events. Our call is scheduled to go until 5:30 P.M. Eastern Time. Following our commentary, we hope to answer as many questions as time will allow. If we're not able to get to your question due to time restrictions, you may call 602-606-6349 following our conference call, and we will return your call. Again, that number is 602-606-6349. The rules for questions remain the same as in the past. One question per participant. If we don't clearly answer the question, a follow-up question may be asked.
To begin, I'll first refer you to the second slide that has our disclosure. I'll also read the following. This conference call and presentation may contain forward-looking statements made by the company that involve risks, assumptions, and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A, Risk Factors, or Part I of the company's Annual Report on Form 10-K, filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Our actual results may differ. I'll now turn it over to Kevin Knight for a brief statement.
Kevin Knight (Chairman and CEO)
Thanks, Adam, and appreciate, appreciate everybody being on the call with us here today. Before we get into our third quarter results, I'd like to briefly discuss the recent proposal we made to acquire USA Truck for $9 per share in cash. While we are disappointed that USA Truck has rejected our all-cash premium proposal, we continue to believe that a combination of Knight and USA Truck would deliver enhanced value for, and is in the best interest of all of Knight and USA Truck's stakeholders. Our company has a demonstrated history of operational excellence, spanning over 23 years, and we believe that together, we could meaningfully increase the financial performance of USA Truck's operations.
Since making our proposal public, we have had discussions with several of USA Truck's largest shareholders, and they have indicated their support for our proposal and encouraged us to continue to take the necessary steps to acquire USA Truck. We hope that USA Truck will engage with us to discuss a transaction that is beneficial for both companies and all of our stakeholders. As you may have seen, in response to our proposal, USA Truck has decided to pursue litigation. There is no merit to USA Truck's claims. Our proposal was based on an extensive analysis we performed of publicly available information. With that said, the focus of today's call is our third quarter earnings. As such, we will not be commenting further on our proposal, and we appreciate your cooperation with that. Now I'll turn the call back to you, Adam.
Adam Miller (CFO)
All right. Thanks, Kevin. Now we'll begin by covering some of the numbers in detail, including a brief recap of the first quarter... or the, sorry, the third quarter results, starting with slide three. For the third quarter of 2013, total revenue increased 0.6% year-over-year to $239.3 million, while revenue, excluding trucking fuel surcharge, increased 1.7% to $195.8 million. Income from operations decreased 12.6% year-over-year to $24.3 million, while net income was down 9.2% year-over-year to $15.1 million. Our net income per diluted share was $0.19 versus $0.21 from the previous year. Now on to slide four.
For the first nine months of 2013, total revenue increased by 3.7% year-over-year to $719.5 million, while revenue, excluding trucking fuel surcharge, increased 5.1% to $585.6 million. Our income from operations decreased 2.3% year-over-year to $81.7 million, while net income declined 2.2% year-over-year to $49.2 million. Our net income per diluted share for the first nine months of 2013 was $0.61 versus $0.63 from the previous year. As a note, prior year-to-date comparisons exclude the non-cash $4 million pre-tax, $3.9 million after-tax charge for stock option acceleration taken in the first quarter of 2012.
Our GAAP earnings per diluted share were up 5.6% from $0.58 in 2012 to $0.61 in 2013. Now we'll move to slide five. Knight continues to be financially strong. We ended the third quarter with $531 million of stockholders' equity, and over the last 24 months, have returned $78.5 million to shareholders through cash dividends.... We continue to maintain a modern tractor fleet with an average age of two years. Our year-to-date free cash flow continues to outpace 2012, as we've generated $43.5 million of free cash flow in the first nine months of 2013, compared to $20.8 million in the same period of 2012.
Subsequent to the third quarter, we extended our existing unsecured line of credit from $150 million to $300 million, of which approximately $225 million is currently available. We believe this provides us the flexibility to pursue opportunities, including organic growth, acquisitions, and share repurchases. Dave will now review slides providing some additional insight to the third quarter results.
David Jackson (President)
Thanks, Adam. Good afternoon, everyone. We'll move to slide six. Revenue continues to trend positively as we recorded the highest revenue, excluding trucking fuel surcharge, for a third quarter in our company's history. Our non-asset-based businesses continue to be the fastest-growing businesses in our company. In our non-asset-based businesses, we continue to invest in capacity, which is people in the non-asset space, also training and technology, to enable us to provide valuable solutions to our customers across multiple modes. We believe our expanding capabilities have led to and will continue to lead to additional market share gain. Our average revenue, excluding fuel surcharge, per total mile increased 1.5%, while our average revenue per tractor increased 1% in the quarter.
Our miles per tractor decreased by 0.5%, as we were able to mitigate most of the negative impact of the new Hours of Service changes that were effective in July. Length of haul is, has remained relatively unchanged. Now on to slide seven. As a result of the challenging operating and economic environment, net income was down 9.2% for the third quarter. Based on prior year performance, the third quarter was a more difficult comparison for us than many of our peers. Year-to-date, adjusted net income is down 2.2% through the third quarter. Now on to slide eight. Despite the challenging environment, revenue, excluding fuel surcharge, continues to be up year-over-year for the 15th consecutive quarter.
Since the start of 2010, our compounded annual growth rate for revenue, excluding fuel surcharge, is nearly 9% and just over 10% for net income. Now, if you'll advance to slide nine. Our non-asset-based businesses are making a meaningful contribution to our revenue and represented 18% of our third quarter revenue, while just three years ago, it comprised only 6%. We continue to invest in the people and technology that enable growth in all or in our overall businesses. This depth in services better positions us to meet the changing and various transportation needs of our customers. Growth in the asset-based businesses will be more deliberate as we work to improve the revenue production on a per tractor basis before growing the fleet.
Although we expect to see faster-paced growth in the non-asset-based businesses in the near term, we remain confident in our ability to leverage our decentralized network of service centers for profitable asset-based growth as market dynamics improve. Now on to slide 10. In the third quarter, our asset-based businesses operated at an 85.6 operating ratio, with revenue declining at 2.7% year-over-year. This decline is a result of operating 151 fewer tractors as we reduced our fleet in areas where we experienced lower productivity. Again, our focus is on improving the productivity of our assets and controlling our costs effectively. We expect to improve our operating ratio sequentially as we move into the fourth quarter. Our non-asset-based businesses continued their growth of 25%+ during the quarter, while operating with an operating ratio of 96.9%.
As you know, this is an unacceptable operating ratio for our non-asset-based businesses, and we expect significant improvement sequentially as we move into the fourth quarter of this year. Consolidated, our operating ratio for the third quarter increased 200 basis points to 87.6%, with revenues excluding trucking fuel surcharge growing 1.7%. Year to date, our operating ratio is an 86.0%, with 5.1% growth in revenue, again, excluding trucking fuel surcharge. I'll now turn it over to Kevin.
Kevin Knight (Chairman and CEO)
Thanks, Dave. As you know, Knight has always been a cost leader in the industry, and we expect that to continue. During the third quarter, there were multiple areas within our industry and business that presented inflationary pressures. We feel we have tremendous opportunity to improve upon our third quarter results as we heighten our level of intensity in regards to our efforts to control costs and improve efficiencies. We are seeing improving results as we source qualified driving associates through multiple programs and leverage our decentralized network of service centers to improve our driver development. Rising equipment maintenance cost is an area we expect to improve eventually as we leverage the 20 regional shops we operate in our network. In order to mitigate increasing depreciation costs, we continue to focus on production, as well as improving the disposition of our used equipment.
Moving to Slide 12, our strategy remains consistent with prior quarters. We're designed to grow and service multiple truckload modes at high levels of efficiency, as measured by on-time service, cost per mile, or cost per transaction. Our value proposition to our customers is growing. Our people are excited about our resources and what they can accomplish for our customers. Our team is very high quality and ready for the challenges we face in terms of a slow economic environment, coupled with more regulation. Our belief is those challenges will bring our company significant opportunity. With that, I will turn it back to Dave to discuss guidance.
David Jackson (President)
Thank you. If you'll move to Slide 12, it's our final slide, I will discuss the guidance. For the fourth quarter 2013, our guidance is $0.20-$0.23 per diluted share. Our expected range for the first quarter 2014 is $0.18-$0.20 per diluted share. Some of the assumptions made by management include rates to continue to be slightly positive year-over-year and for utilization to be relatively in line with the year-ago period. It also includes consideration for potentially volatile fuel prices. These estimates represent management's best estimates based on current information available. Actual results may differ materially from these estimates. We would refer you to the Risk Factors section of the company's annual report for a discussion of the risks that may affect results. This concludes our prepared remarks. We would like to remind you that the call will end at 5:30 P.M. Eastern.
We will answer as many questions as time allows. Please keep it to one question. If we're not able to get to your question due to time constraints, please call 602-606-6349, and we'll do our best to follow up promptly. One more time, that number is 602-606-6349. As a reminder, the purpose of today's call is to discuss Knight Transportation's earnings results, and we will not be taking any questions on our proposal to acquire USA Truck. Thank you for your cooperation. We'll now entertain questions.
Operator (participant)
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Justin Yagerman with Deutsche Bank.
Robert Salmon (Associate Analyst)
Hey, good morning, guys. It's Rob Salmon on for Justin.
Kevin Knight (Chairman and CEO)
Hey, Rob.
David Jackson (President)
Hey, Rob.
Robert Salmon (Associate Analyst)
Hey, I guess it's actually pretty late in the day here, but was hoping to touch base on the expectations for growing the fleet. When would you revisit the overall fleet growth? What sort of metrics should we be kind of thinking about, whether it's on a revenue per tractor basis or an overall OR basis, where you'd be looking to more aggressively expand the fleet?
Kevin Knight (Chairman and CEO)
Rob, this is Kevin. I would say that, first off, we don't like to take trucks out of our fleet. I think you guys know that, and this year, we have chosen to do that. And that did help us in terms of not going overly negative in terms of our miles per truck this quarter, with the new regulations coming into effect the first of July. But really, for us, it's all about, you know, our revenue per truck, you know, and it's also about yield. So as we believe that we have the driver development programs in place now to support growth. But what we've got to see is we've got to see more miles and more yield or more revenue per mile, if you will.
As you see those numbers improve in our fleet, then you should expect for us to return to fleet growth. You know, the other thing that I would highlight is, you know, we do have some service centers that have grown. But we've got some that have gone backwards more than they would like. So, you know, we're out in the field every week, every month, working with our service centers, and we're going to keep working to improve our productivity per truck and our revenue per mile. So, when you see those numbers improving consistently, then you should expect for us to return to fleet growth.
Robert Salmon (Associate Analyst)
Kevin, is there a specific level at the revenue per truck or, or just, you know, a low 80s OR, will that be kind of when you guys turn the spigot on?
Kevin Knight (Chairman and CEO)
It's all about momentum. And you know, certainly, the OR staying in the low 80s, that means our productivity is up, and that means our yield's improving. So, you know, we don't have a specific number, but it'll be the momentum we feel as a management team-
Robert Salmon (Associate Analyst)
I appreciate that.
Kevin Knight (Chairman and CEO)
and from our businesses. Thanks. Thanks, Rob.
Operator (participant)
Your next question comes from the line of Tom Wadewitz with JP Morgan.
Kevin Knight (Chairman and CEO)
Hey, Tom.
Tom Wadewitz (Senior Equity Research Analyst)
Hey, hey, Kevin, Dave, Adam. I'll ask my question on your non-asset-based business. Wanted to see if you could give some perspective on what the drivers of the operating ratio pressure were, and then, I guess, specifically within the truck brokerage piece, if you can give a sense of what the gross margin was on a year-over-year basis.
David Jackson (President)
You know, Tom, I'll take that. You know, in both of our non-asset-based businesses, the brokerage and the intermodal, we saw our gross margin off a little bit. And then in both businesses, we saw our costs up. Much of that is correlated with the growth and bringing on additional bodies and doing the training to get them up to speed and we haven't quite grown those businesses to a scale where they can spread out the cost of some of the technology as efficiently as we would like. We do feel like we can perform better in both improving the gross margin. And when I say it was off, it wasn't off by much year-over-year on the brokerage business, to your specific question.
But it, you know, you're talking about 100 basis point, a little over 100 basis points change year-over-year in gross margin. And so we feel though that we can do better with that, in part, as we grow this group from what's been a really small group initially, and we kind of stamp this out as a bit of a system. We think that system-wide, we can improve our buying with the kind of relationships we have with carriers there. So, that being said, our gross margin still, although off a little bit year-over-year, it's still below that of some of the purely non-asset players in the space, that over time have been able to get, you know, better margins.
That's, of course, where we have our sights set longer term.
Tom Wadewitz (Senior Equity Research Analyst)
Okay. So it's a mix of kind of, I guess, expansion cost pressures, but also something in terms of market being a little bit, little bit of squeeze within the brokerage market as well.
Kevin Knight (Chairman and CEO)
Yeah, and the other thing I would add, Tom, is anytime you're bringing on volume as rapidly as we have in that space over the last, specifically three quarters, this has been our lowest growth quarter of the last three, I believe. You know, you end up with business that probably doesn't work as well as it should. And, you know, there's risk in bringing on new business, and you kind of work through it as you go. But I think you'll see in that business, you'll see our culture come out really strong over the course of the next couple of quarters.
As you know, any time you've seen any of our businesses kind of get a little bit out of whack from an OR perspective, you know, we focus on it, and we get it drilled down, and we show significant improvement relatively quickly. So that's what I expect we're gonna see there. If we don't get it all worked out in the fourth quarter, then certainly by the first and second quarter next year, we will. So that's how I would look at that.
Tom Wadewitz (Senior Equity Research Analyst)
Okay. Thanks for the time.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
next question comes from the line of Anthony Gallo with Wells Fargo.
Kevin Knight (Chairman and CEO)
Hey, Anthony.
Anthony Gallo (Senior Equity Research Analyst)
Guys, within the brokerage business, how much of the business do you think right now comes from traffic that you don't want on your equipment, and so you're brokering it out versus incremental business that you've either won in a greenfield situation, or from existing customers that you either took away from another broker or maybe took from an asset-based carrier? Maybe if you could sort of frame where the growth is actually coming from, that would be helpful.
David Jackson (President)
Okay. Well, I think, you know, Anthony, very, very little of the, of the growth in our brokerage space is, is business that, that would directly compete with our own trucks. And so when we-- Given the vast, and diversified portfolio of customers that we have, somewhere around 1,000 active customers, we participate in a lot of bids. And in those bids, we're, we're very, careful and calculated in terms of what bids we, we, we, we truly compete in, that we know is gonna work for our business. You know, as a result of that, our largest customer, as evidence of that, our largest customer is about 5% of revenue. And so, so very diversified.
We see a lot of freight opportunities, and for one reason or another, it may not work well for our network or for our trucks, and that creates significant opportunity for us on the non-asset front, for lanes or, or even some, in some cases, at certain rates, that just wouldn't work for us. But we're able to find one of our partner carriers that has a need in that area or that market, and we're able to match that up. So, for us, it's this has allowed us to grow this business parallel to what we're doing on the asset-based side and to really not cannibalize one from another, but rather, rather complement one another. Our asset-based business does not rely on our brokerage business to solve their needs.
Really, over time, as we've had now years under our belt, this brokerage business, we're developing an independence there, where they're not absolutely dependent on the asset-based business to feed them opportunities. And so, we've got kind of a happy medium in between. A heavy focus for us has been on the buying side, making sure that we have quality capacity that we can rely on. We know what it costs. That enables us to go through the bid process and to make commitments to customers on the brokerage side, because we have a good understanding of what our cost is. And so we're a very conservative bunch, so that's why you've seen our brokerage grow at a... and be profitable every step of the way.
And so we arguably could have grown that thing much quicker if we, if we didn't have as much concern for profitability as we do. So longer, longer term, you know, we, we think that every time we go through a bid cycle,
... it's with the way that our business is set up. It's a new round of opportunity for us to go and find new opportunities and new matches without really directly competing with our own assets.
Kevin Knight (Chairman and CEO)
Yeah, and I would just add, Anthony, you know, when you have a fleet of 4,000 trucks, there's a lot of places that you aren't going, and but yet our customers have a need and have opportunities to go to those places. So I think you asked maybe for a percentage. I would say probably 85%-90%, and I could be wrong, Dave might correct me on this, of what we do in brokerage is stuff that we're not even interested in from a truckload space at this particular time. And so it allows us to provide our customers with more solutions while not taking our assets out of the network. I think one of the things we didn't highlight is, you know, our deadhead.
You know, in order to have the kind of deadhead that we have, you have to be extremely focused on your network, considering the length of haul that we have. So, it's a very complementary way to, you know, to gain market share without, you know, sending our trucks where we currently don't want to send them. So, I don't know if that-
Anthony Gallo (Senior Equity Research Analyst)
Yeah, that's helpful. Just, but just to clarify, is it also fair to say that you're not, except for maybe a few instances, really slugging it out face-to-face with other brokers? This is business that, in the past, you would have just not put on your trucks, but now you can do it through brokerage. But you're not necessarily just out there, you know, banging out phone calls against them?
Kevin Knight (Chairman and CEO)
Yeah, yeah. Some of both, though, Anthony. In other words, we are banging it out with those guys a bit, but really, for the most part, we're filling out our portfolio in a way that allows us to say yes more than we say no. So yeah, we do bang it out with the non-asset-based guys, but really more so, it's about banging it out ourselves amongst us with the opportunities our customers, you know, place before us.
Anthony Gallo (Senior Equity Research Analyst)
Thank you.
Kevin Knight (Chairman and CEO)
And the other area, Anthony, too, that we probably didn't highlight, I mean, we do have customers from time to time that need additional help, and you know, we'll do what we can with our trucks, but it also allows us to help, you know, take five more loads than maybe we otherwise would have.
Anthony Gallo (Senior Equity Research Analyst)
Thank you. Very helpful.
Operator (participant)
Your next question comes from the line of Scott Group with Wolfe Research.
Brandon Oglenski (Director and Senior Equity Analyst)
Hey, thanks. Afternoon, guys.
Kevin Knight (Chairman and CEO)
Hey, Scott.
David Jackson (President)
Hi, Scott.
Brandon Oglenski (Director and Senior Equity Analyst)
So, you know, I understand you don't want to talk at all any specifics on USA Truck. But Kevin, I just maybe wanted to get a sense of maybe on your philosophy more generally on acquisitions and how you think about... What's the right valuation for an acquisition? Do you think about it as you'd pay up to book value, more than book value? Do you think about using stock in a deal? Just more broadly, how do you think about acquisitions?
Kevin Knight (Chairman and CEO)
Well, generally, Scott, I would say, you know, when we think about acquisitions, whether small or large, we're trying to find the right price, you know, for all parties, considering the value of the company. And so, you know, it really depends. I mean, you look at profitable companies much more differently than you look at non-profitable companies. I mean, you know, if you've got a profitable company, then you know you're looking at a multiple of earnings or a multiple of EBITDA. If you've got a company that's not profitable, then you aren't looking at it that way. You know, acquisitions, you know, it's very diverse. I mean, we don't have one single way of looking at acquisitions.
So, that's really, you know, about all I have to say there, and probably doesn't help much. But, you know, each acquisition opportunity is individual. And, you know, depending on how the company is operating, depends on how we go about building what we think the value is of that, you know, of that particular company. And then, you know, things can change from our perspective as we, you know, as you, you know, have the opportunity to do due diligence. So, you know, and then those things can change things a bit. But anyway, that's basically how we look at things.
Brandon Oglenski (Director and Senior Equity Analyst)
Okay, just maybe philosophically, would you use stocks in a deal?
Kevin Knight (Chairman and CEO)
We have before, you know. We've, in most cases in the past, used cash. We would rather use cash, but you know, I can't tell you we've never used stock. We have used stock before, and it's always, you know, it's always an option. So, it's not like we're closed-minded about it, but we would prefer to use cash.
Brandon Oglenski (Director and Senior Equity Analyst)
... Okay, I appreciate it, Kevin. Thanks, guys.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Brandon Oglenski with Barclays.
Brandon Oglenski (Director and Senior Equity Analyst)
Guys, Kevin, can you talk to us a little bit here? What's it gonna take for this industry to be able to offset the cost pressures that keep coming from a regulatory perspective? I mean, we all knew Hours of Service was coming. We all had estimates of what the productivity hit was gonna be, but yet it seems like there's still too much capacity out there. I mean, is capacity the main issue, or do we need to be more aggressive on pricing? Is the bid structure just too outdated? What are the drivers here?
Kevin Knight (Chairman and CEO)
Well, first off, Brandon, from my perspective, you know, what we have to have is first and foremost, we've got to have balanced regulation. And so today, we still have customers that are using carriers that are not operating with electronic onboard recorders. So, that regulation is proceeding down a path of actuality in 2015 or 2016, and so, you know, that will help. I think one of the biggest challenges that we've had over the last several years is when fuel prices went from $1.25-$3.75, it made moving what would normally be dry van truckload freight over the road, it made it much more cost effective to move it basically over the rails.
While at the same time, you were going through an economic downturn, and you know, so a lot of the truckers that were in the longer length of haul had to move into the shorter length of haul, which, as you know, has been our space, going back to the beginning. So when fuel went to $3.75, it created a dynamic where you know, intermodal was going to be able to pick up a lot of those loads. If we didn't have that dynamic, if fuel prices would have remained $1.25, then basically, you'd have hundreds of thousands of loads that basically would still be moving via truck.
So when you look at kind of the out-of-balance regulation, if you will, that still needs to catch up, and it will, when you look at the competitive dynamics around the price of diesel and how that moves more freight intermodally, and then you look at the downturn going back to 2007, 2008, that basically eliminated a bunch of the freight that was available, you know, generally, the dry van industry is still working towards stabilization. Now, I will tell you, you know, I think we're getting a little closer to better rate environment than we were a couple of quarters ago.
I think when we talk to our sales team, they're more optimistic about improving rates over the next, you know, three quarters than I sense that they were a year ago. So we could be, you know, we could be at the bottom, and I think we made a little bit of progress sequentially. I think maybe second quarter was kind of the low point in terms of our year-over-year revenue per mile growth. Don't quote me on that, Brandon. But that's, you know, that's really it. And I also believe that, you know, the driver situation is much more difficult. And I think over time, that's gonna give us an opportunity to enhance our yields.
You know, I consider that to be one of our greatest strengths, and I'm pleased with the changes we've made there to be more dynamic in terms of our driver development, recruiting, and our compensation programs. Even though some of our compensation programs, we're paying a little more than we would like to right now, I think we're gonna see some benefit in some cost areas that eventually will be driven by you know, the way we compensate our driving associates for performance. So I don't know, Brandon, did I answer your question?
Brandon Oglenski (Director and Senior Equity Analyst)
Well, no, you did. I mean, it just sounds like there's a lot of long-term challenges here, though. And if the regulations aren't gonna change overnight, I mean, this could be a slow process to get back some of these regulatory headwinds we've seen recently, right?
Kevin Knight (Chairman and CEO)
Yeah, and I, yeah, I would say, though, that you know, shorter term, I think there's more challenges. Longer term, you know, depending on what your longer term is, you know, I'm probably, maybe more optimistic than most. So, you know, we'll have to see how it all plays out.
Brandon Oglenski (Director and Senior Equity Analyst)
All right. Thanks a lot, Kevin.
Kevin Knight (Chairman and CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Thom Albrecht with BB&T Capital Markets.
Kevin Knight (Chairman and CEO)
Hey, Thom.
Thom Albrecht (Managing Director)
Mm-hmm, Kevin and everybody, hope you're doing well. I've really got kind of two questions. The first is sort of factual. Do you have an ending truck count, and do you have a 2014 anticipated depreciation level?
Kevin Knight (Chairman and CEO)
Go ahead.
Adam Miller (CFO)
Yeah, Thom, we stopped giving the ending truck count. We feel that the average truck count is more reflective of what people should be using when judging our performance. So we have—we've no longer given the ending truck count.
Kevin Knight (Chairman and CEO)
What was the second part, Thom?
Thom Albrecht (Managing Director)
Your anticipated depreciation for 2014, and then I had a little more subjective question.
Kevin Knight (Chairman and CEO)
Now, what do you mean our anticipated depreciation?
Thom Albrecht (Managing Director)
Well, just, do you have a number that we can think about for modeling purposes, given the cost inflation the industry has?
Adam Miller (CFO)
No. I mean, we haven't provided any guidance in terms of what we expect for depreciation for 2014.
Kevin Knight (Chairman and CEO)
Yeah, and it's just probably, Thom, gonna continue kind of on the trend that it's been on-
Adam Miller (CFO)
Yeah
Kevin Knight (Chairman and CEO)
Over the last several years. I mean, it, it isn't like we see, you know, a significant spike in terms of what we're paying for trucks. It's, it's just been a continuous climb in terms of, you know, what we pay for trucks. So kind of whatever it's been going up on a per truck basis the last, you know, couple or three years, would be what you should expect, you know, going forward, is how I would look at it. Did you have something, Dave?
David Jackson (President)
Yeah. No, I think, I think the concept there is, you know, we saw a real spike two, three years ago in the price of the truck. And so as we continue to cycle through in our refresh rate, which is about every 48 months, we'll refresh a truck and replace that, we're replacing those trucks with a new truck that's got a higher monthly depreciation. So it just, it's just it catches up. It's been catching up to us, and so the pace that you've seen it move, you know, while you adjust for any changes in owner-operator count, which there hasn't been a dramatic change there in recent quarters because that would obviously move. You wouldn't have the depreciation expense, you'd see it in purchase trends.
So, adjusting for owner-operator count, you know, it'll continue to clip up at a modest pace it has.
Kevin Knight (Chairman and CEO)
Now, Thom, did you have another question?
Thom Albrecht (Managing Director)
Yeah. I mean, the other question really is, it looks like the, since you don't give absolute dollars, it, you know, we have to kind of guess at the revenues for the asset-light businesses. It looks like that revenue was off about $5 million sequentially from the June quarter. I'm wondering, you know, what was behind that, and then if you could comment on the performance of the reefer business.
Kevin Knight (Chairman and CEO)
Yeah, I would say, Thom, just general demand. In other words, when you look at how second quarters shape up, you know, compared to third quarters now, I think that's probably, you know, a fairly good expectation. I do think that, you know, one week here in this fourth quarter, I think we actually set a record for the amount of revenue that we had in a week from brokerage. So that, you know, that, of course, is a pleasant surprise, but you don't build Rome in a week, as you know, so don't take that for more than it's worth. So I would just say, generally, the demand. And then what was your second question, Thom?
Adam Miller (CFO)
Reefer.
Kevin Knight (Chairman and CEO)
Just what about the reefer?
Thom Albrecht (Managing Director)
Yeah, how did the reefer business perform? I mean, given the OR deterioration in truck overall-
Kevin Knight (Chairman and CEO)
Yeah
Thom Albrecht (Managing Director)
It's hard to know how much of that was van versus reefer.
Kevin Knight (Chairman and CEO)
Well, first off, our reefer OR year-over-year did not deteriorate. So, it was basically flat. But you know, it should have improved significantly, Thom. We didn't do very good in the third quarter last year in our reefer business. And you know, we have always been the leader in terms of you know, OR performance in the reefer space, at least for anybody who you can get any information from. And so, we're, you know, our reefer business, in terms of how the reefer business looks to everybody else, is very good. But I would say it hasn't been Knight-like for you know, the last few quarters. And we think we've got a solid plan to address that.
You know, and we've got a specific team that leads that business. And you know, they've probably not done some things this year that they wish they would've done. And so you know, from our perspective, I'm not happy with where we are, but on a year-over-year basis, it was basically flat.
David Jackson (President)
Yeah. Maybe just to Thom, just to add one thing to the previous question there about the sequential movements in brokerage and intermodal from a revenue perspective. You know, and especially given our size, those businesses are still relatively small. But you know, the nature of brokerage, there's big opportunities when you see surges in freight that relate to seasons or relate to temperature changes. And so, both in our intermodal business and in our brokerage business, we were able to take advantage of some of those seasonal opportunities in the second quarter, and you don't have that same season going the same effect in the third quarter. So I wouldn't view that as a loss of steam, if you will.
It's more just based on how those businesses, based on the portfolio of the business, how that kind of works.
Kevin Knight (Chairman and CEO)
Yeah, and I would say, Thom, especially in the brokerage business-
David Jackson (President)
Right
Kevin Knight (Chairman and CEO)
... I think you'll see good momentum sequentially from, you know, third quarter to fourth quarter, would be my expectation. And again, that's somewhat driven by the season, if you will.
Thom Albrecht (Managing Director)
... Okay. Thank you.
Kevin Knight (Chairman and CEO)
Thank you.
Thom Albrecht (Managing Director)
Go Cardinals, by the way.
Kevin Knight (Chairman and CEO)
Hey, Tom, we didn't talk about the Cardinals. Gee, whiz!
Thom Albrecht (Managing Director)
Yeah. Well, you know what? Go Cards is right.
Kevin Knight (Chairman and CEO)
Well, I think you're gonna win, so.
Thom Albrecht (Managing Director)
We don't wanna make any enemies, but we're sure glad it's not the Dodgers.
David Jackson (President)
I am, too.
Kevin Knight (Chairman and CEO)
Yeah.
Thom Albrecht (Managing Director)
All right.
Well, thanks again.
Kevin Knight (Chairman and CEO)
Hey, thank you, Thom.
Operator (participant)
Your next question comes from the line of William Greene with Morgan Stanley.
William Greene (Managing Director)
Hi, good afternoon.
Kevin Knight (Chairman and CEO)
William.
William Greene (Managing Director)
Hey, Kevin, you had a number of good insights there in answer to some of the long-term questions. How long in the past, when we had an Hours of Service change, how long did it take for Knight or the industry to sort of accommodate that change and kinda move on such that everything was kinda normalized? You guys, I think, said you've kinda adjusted to it, and it didn't have too much impact on you. But maybe you can just sort of talk about how long does it take before this kinda gets all sorted out, and then we're just normalized?
Kevin Knight (Chairman and CEO)
Well, first off, it really depends, Will, on you know with us, we have electronic onboard recorders. So basically, it happened July first for us, and we have to physically, right now, work through the issues to make sure that it doesn't have a negative impact on our overall production. I would say, and I'm probably just guessing, I would say less than 25%-30% of the trucks on the road have electronic onboard recording that we compete with on an over-the-road basis. Now, that isn't the case for most large carriers, but certainly for the small to mid-size carrier, that is. So really, they've only had to adjust depending on how accurate they are in terms of recording the information.
And so what I would tell you is most of the industry hasn't really even adapted. Now, the companies that talk to you guys and the companies like ourselves, some of them have, and some of them haven't. And some of them are fully deployed, and some of them aren't fully deployed. So when you're not fully deployed, you're relying on the driver to, you know, make those adjustments and then your audit process to catch any processes that are not accurate. So, you know, it takes time. Now, in most cases, a lot of the Hours of Service changes still have not been adapted.
I mean, I would say that probably many, many, many trucks are operating on the highway that have yet to really embrace the 11-hour rule and the 14-hour rule. So it's gonna take a while, but electronic onboard recorders we support 100%, and we believe that within the next couple of years, they'll be fully integrated. And so by the time we get to that spot, you know, we should have two things: an equal playing field, and you know, there will be a tightening of capacity because the hours will be recorded accurately by all carriers. So that's what we're hoping for.
William Greene (Managing Director)
Yeah. Let me just ask you one follow-up on that. What can you do or the industry do to help the folks in D.C. understand kinda what they're doing here? 'Cause it's, the rails look like they're pretty good at dealing with D.C., but I feel like a lot of bad stuff is coming out of D.C. on the trucks, and I don't feel like there's a broad enough response or an effective enough one, at least, to get this to change. But I don't know, maybe there's nothing to do. I don't know if you have any thoughts there.
Kevin Knight (Chairman and CEO)
Well, Will, probably the main problem is one railroad probably greases more politicians' hands than the entire trucking industry combined. So, you know, we just as well cut through the bull and
William Greene (Managing Director)
But you guys are bigger, aren't you?
Kevin Knight (Chairman and CEO)
What's that?
William Greene (Managing Director)
You guys are, you guys are a lot bigger of an industry, though, in total. I mean, I know a bunch of small carriers, but-
Kevin Knight (Chairman and CEO)
We are, but we're a little discombobulated when it comes to our efforts there. You know, to give you an example, I think only 3,000 carriers are full dues-paying members of the American Trucking Associations. So, you know, one railroad packs more punch politically, probably than the whole trucking industry combined. Now, what we do is, you know, we're part of ATA, and so we're active and supportive in that area. One of our folks is the leader of the Energy and Environmental Policy Committee at ATA.
We also are a member of a group called The Alliance, and there's six large carriers that we're founding members of that alliance, and we are actually the driving force behind some of these things that we need to work on as an industry on top of, you know, what ATA does. So you know, we're doing everything we can within our budget and within reason, and I think at the end of the day, I think trucking is gonna be good, and I think it's gonna be fine. And I don't necessarily see some of this regulation as being bad. I think some of it, Will, is long overdue.
And I think the way the system has worked in trucking over the last 10 or 15 or 20 years is really the regulation kind of works against the large carrier and probably favors the small carrier. And I think over time, we're gonna be on an equal playing field, and I think it's gonna be helpful for us. So, that's basically how I see it.
William Greene (Managing Director)
Yeah. No, I think you're right. I mean, I think in spite of everything they've thrown at you, you do a good job, but it's tough. It's tough when they do that. Well, listen, thank you so much for the time.
David Jackson (President)
Thank you.
Operator (participant)
Your next question comes from the line of Chris Wetherbee with Citi.
Chris Wetherbee (Senior Research Analyst)
Thanks, guys. Good afternoon. Dave, I just want to pick up on a point that you made about the significant improvement potential in non-asset operating ratio in the fourth quarter. You talked about some of the seasonal trends that are going on there. I just want to make sure I sort of understand what you're thinking about and maybe sort of the magnitude that we're expecting with a significant improvement. So outside of those seasonal factors that we talked about, is there, you know, the, the specific drivers of that improvement? Is there other stuff that you're thinking about?
David Jackson (President)
Yeah, well, that's part of it, because in the—when there's seasonal opportunity, we typically see better opportunity in the gross margin, depending on our ability to buy. We feel like that there's improvement that can be had on a cost per transaction basis. And so that's where we remain very focused, is to make sure that we have the lowest cost per transaction. We—if you were to compare us to some of the non-asset folks out there, you'd find that our OR in that business is not substantially dissimilar to where their operating ratio is. However, they start with 350 basis points, sometimes more in gross margin than what we start with.
But we feel like that's a business that can operate in that lower, that lower nineties, that 92.5%-93.5% operating ratio. And so, we believe that, that it's within reach, that just in the fourth quarter, we can see meaningful improvement to the tune of, you know, more than 150 basis points improvement sequentially in our operating ratio, particularly in our brokerage business, when we compare to third quarter, so.
Chris Wetherbee (Senior Research Analyst)
Okay, so it speaks a little bit more to sort of internal measures that you guys are focusing on. Do you feel like that can happen in the market environment that we're at, which seems like, particularly on the brokerage side, that we're seeing gross margins under pressure, you can still kind of get that company-specific benefit?
David Jackson (President)
I believe so. I believe so in the fourth quarter, given the holiday season that we still do have. So, you know, there's some opportunities that we have now that we've already started with, that didn't exist in the third quarter, mainly due to the seasonality. And that's in addition, for the most part, that's in addition to the kind of opportunities that we saw, you know, in the third quarter. So, given the overall kind of freight demand, there wasn't the same kind of, there just weren't the same kind of opportunities in the third quarter that we expect to see in the fourth quarter.
Then we'll be working to build this business, so when we get to the first quarter, when we see ourselves back in the third quarter again of next year, of 2014, we've improved our agility, we've improved our cost structure and our buying in such a way that we don't have a performance like we've had for the third quarter this year in our non-asset-based businesses.
Adam Miller (CFO)
Well, also to add to that, Dave, you know, we've, you know, as we noted in the press release, we've invested in building the team and training, and we expect to start to see some return and benefit from bringing on that additional headcount and getting them more up to speed and operating at a level that a more seasoned broker would be able to operate at. So we think that's going to provide some additional benefit sequentially.
Chris Wetherbee (Senior Research Analyst)
Okay. That, that's very helpful, guys. Thanks very much for the time. I appreciate it.
David Jackson (President)
Thank you.
Operator (participant)
Your next question comes from the line of Brad Delco with Stephens.
David Jackson (President)
Hey, Brad.
Brad Delco (Associate)
Good afternoon, guys. Thanks for taking my question. Most have been answered, but Dave, this one's probably for you. Is there any way you can quantify what the gain was in the investment and then the offsetting legal expenses in the quarter you noted in your press release?
David Jackson (President)
I'll let Adam take that, Brad.
Adam Miller (CFO)
Well, so Brad, we know we normally have, you know, several investments outstanding in our business, and periodically recognize a gain or sometimes even a loss on those investments. So last year, we recognized about $1.5 million, and those of a gain in those investments on the other line item. And, you know, for this year, through the third quarter, we're about $1 million with, you know, this year being $900,000, roughly. So not the same trend as we were last year, but close to that. So admittedly, third quarter was higher than it would normally be, but certainly not a one-time event or certainly not atypical of, for us to be able to recognize a gain from some of our investments.
You know, most of that investment, I think the major- or I'd say most of that was offset by some additional legal expense. And so that's close to that $900,000, probably not fully the $900,000, but probably the majority of that was offset by some additional legal expense we incurred with some legal defense as well as some claims that we've had to accrue for.
Brad Delco (Associate)
Gotcha. I guess my question as it pertains to your guidance going forward, and without stating any names, any recent investments you've made, would you be booking gains on kind of marking the market at the end of the quarter? Would that exclude—would you exclude that in your guidance?
David Jackson (President)
Yeah, we wouldn't include that, Brad.
Adam Miller (CFO)
Yeah, Brad, we don't. The accounting rules, we mark to market, but that only flows through the equity portion of other comprehensive income, so that gain would not be recognized on our P&L statement.
Brad Delco (Associate)
Perfect. That's all I needed to know. Thanks, guys, for the time.
David Jackson (President)
Thanks, Brad.
Operator (participant)
Your next question comes from the line of Todd Fowler with KeyBanc.
Kevin Knight (Chairman and CEO)
Hey, Todd.
Todd Fowler (Director and Senior Equity Research Analyst)
Hey, hey, Kevin, good afternoon. It's late, but at least we don't have to talk about the Indians in the World Series, so that'll save some time there. We can laugh, I guess. My question is about the fourth quarter guidance, and when I look back at the last two years, you know, your fourth quarter's been about $0.01 better sequentially versus the third quarter. If I take the midpoint of your guidance this year, it's about $0.025, and it also depends on how we treat the gain for the third quarter, maybe as much as $0.035. Dave, I think you said in your prepared remarks that utilization is gonna be flat. It sounds like there's some opportunity on the asset-based side.
What are the other things that are getting you to the sequential improvement into the fourth quarter?
David Jackson (President)
Yeah, I think certainly expecting more to come from our non-asset-based businesses. You know, we were disappointed with in the third quarter with the kind of operating income that came from those businesses. And so we would expect to see sequential growth in those businesses from third to fourth quarter.
Kevin Knight (Chairman and CEO)
Yeah, and I would add that we would hope that our reefer business would be better in the fourth quarter on a year-over-year basis. So. And also, you know, the fact of the matter is, hey, it seems like second quarter, in terms of rate growth, was a bottom for us, Todd. And so, you know, hey, I'm not ready to predict yet that. Or I'm not ready to call that, but certainly, we hope that that's what we're looking at, so.
Todd Fowler (Director and Senior Equity Research Analyst)
Okay, so you don't have embedded expectations for, you know, significant seasonal ramp in the fourth quarter on the truckload side? It's more things operationally with, with, non-asset refrigerated and then some rate improvement.
Kevin Knight (Chairman and CEO)
Yes.
David Jackson (President)
Yes. Uh-huh.
Todd Fowler (Director and Senior Equity Research Analyst)
Okay. All right. Thanks a lot for the time.
Kevin Knight (Chairman and CEO)
Thanks.
Operator (participant)
Your next question comes from the line of David Ross with Stifel.
David Ross (Group Head and Managing Director)
Good evening, gentlemen.
Kevin Knight (Chairman and CEO)
How are you?
David Ross (Group Head and Managing Director)
I'm doing well. How are you doing today?
Kevin Knight (Chairman and CEO)
Good.
David Ross (Group Head and Managing Director)
Great! I wanted to dig a little bit deeper on the Hours of Service rules, and just maybe if you could quantify how much of an impact that was for the quarter. And then you said in the release that you believe you can mitigate the impact through future training. Just wanted you to dive a little bit deeper into what you're gonna do to train that away. And specifically, how does a company plan to train away the mandatory 30-minute rest period, which I guess, you know, really turns into 45 minutes after you pull over, find a parking spot, and shut the engine down to start the clock?
Kevin Knight (Chairman and CEO)
Yeah. Well, first off, David, of every 14 hours available, 11 hours driving for our drivers, we don't use, and never have, prior to the rule going into effect, all that time efficiently. So, basically, what we do is we have optimization systems that help us identify things that are slowing the network down. We also have teams of revenue improvement folks, if you will, that work with each of our businesses, that basically, on a market-by-market basis, are working continuously to, you know, do what I would call improve the bottom 20%. And that isn't only on rate, that is also on flow.
And so how we overcome the half hour and how we overcome the restart is just simply becoming more efficient via the tools and via the people that we have. And a lot of the training comes from, you know, first you have awareness, where a certain load is not flowing the way that it needs to in conjunction with the new rules. And then, basically, you take steps with your customer to either improve that flow or to replace that load with a load that you know that basically works better for you. So now the rules are upon us. We have the structure in place to manage through it, we think very effectively.
We have the technology in place that allows, helps us with the planning, the most efficiently, that we can, based on the parameters we've programmed that system with. And then, basically, you know, we move down the road and try to get better, at it, each and every day.
David Ross (Group Head and Managing Director)
Interesting. And then maybe one last one, as I think the hour just expired. Can you speak a little bit more as to what you've done to augment your driver training and what you're really doing to differentiate Knight's training and driver school from other competitors?
Kevin Knight (Chairman and CEO)
Well, first off, David, in the past, we've only hired experienced drivers up until probably two to three years ago. And we started out very slowly, you know, very deliberately in terms of developing our driver training programs. We probably would've been better served to have been more aggressive in that area, but we didn't want to displace our experienced driver hiring. And so, you know, we've basically increased the pool of available drivers by going from just experienced drivers that have worked for somebody else, to basically drivers that already have their CDL and are looking to go into a training program, which we call our Squire program. And then we've also got two or three of our CDL programs up. What's the number?
David Jackson (President)
Yeah, I think more than, more than three, actually. Yeah.
Kevin Knight (Chairman and CEO)
Yeah.
David Jackson (President)
Four.
Kevin Knight (Chairman and CEO)
So, anyway, we can develop drivers in all three of those areas, where in the past it's only been one. And then the other thing we do, David, is we just leverage off of all of our service centers. And so basically, we have people in the field that are recruiting in each and every market that we serve in. And our service center network is also a very important part of our driver development and retention efforts. Each one of our service centers have people in place to not only recruit, but also to develop and retain. So, it gives us an advantage to do that part of this business very effectively. And did I answer your question?
David Ross (Group Head and Managing Director)
Yeah, a little bit. I'm just trying to get at, you know, why—what makes Knight, what draws, you know, new drivers, drivers with a CDL to Knight other than a Swift or a Werner or a Celadon?
Kevin Knight (Chairman and CEO)
Just our brand, just who we are and how we do it. And, you know, if you want more detail than I've given you, you'll just have to talk to one of our drivers.
David Jackson (President)
We invite you to go to driveknight.com.
David Ross (Group Head and Managing Director)
I believe I will.
Kevin Knight (Chairman and CEO)
Okay.
David Ross (Group Head and Managing Director)
All right. Well, thank you very much, gentlemen.
Operator (participant)
That's all the time that we have for questions. I would now like to turn the call over to Kevin Knight for closing remarks.
Kevin Knight (Chairman and CEO)
Well, thanks, Gina, and hey, thanks, everybody, for calling in, and hope we've answered your questions. We've done it to the best of our ability, and look forward to talking to you next quarter. Thanks.
Operator (participant)
This concludes today's conference call. You may now disconnect.