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. [Operator Instructions] Speakers for today's call will be Kevin Knight, Chairman and CEO; Dave Jackson, President and Chairman; and Adam Miller, CFO. Mr. Miller, the meeting is yours.

Thank you, Gina. Good afternoon, everyone, and we appreciate everyone that has 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. [Operator Instructions] So 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 1 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.

Thanks, Adam, and 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 at 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. And now, I'll turn the call back to you, Adam.

All right. Thanks, Kevin. Now I'll begin by covering some of the numbers in detail, including a brief recap of the first quarter -- sorry, the third quarter results, starting with Slide 3. 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 4. For the first 9 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 9 months of 2013 was $0.61 versus $0.63 from the previous year. As a note, prior year-to-date comparisons exclude the noncash $4 million pretax, $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 5. 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 2 years. Our year-to-date free cash flow continues to outpace 2012 as we generated $43.5 million of free cash flow in the first 9 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 the slides to provide some additional insights to the third quarter results.

Thanks, Adam. Good afternoon, everyone. We'll move to Slide 6. Revenue continues to trend positively as we recorded the highest revenue, excluding trucking fuel surcharge, for our 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 on a non-assets 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. The length of haul has remained relatively unchanged. Now on to Slide 7. 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 any of our peers. Year-to-date, adjusted net income is down 2.2% through the third quarter. Now on to Slide 8. 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 per revenue, excluding fuel surcharge, is nearly 9% and just over 10% for net income. Now if you'll advance to Slide 9. Our non-asset based businesses are making a meaningful contribution to our revenue and represented 18% of our third quarter revenue, while just 3 years ago, it comprised only 6%. We continue…

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 for 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 internally as we leverage the 20 regional shops we operate in our network. In order to mitigate increasing depreciation cost, 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 in 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. And with that, I will turn it back to Dave to discuss guidance.

Thank you. If you move to Slide 12, it's our final slide. That will discuss the guidance. For the fourth quarter 2013, our guidance is $0.20 to $0.23 per diluted share. Our expected range for the first quarter 2014 is $0.18 to $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. [Operator Instructions] 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 it promptly. And as a reminder, the purpose of today's call is to discuss Knight Transportation's earning 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 Instructions] And your first question comes from the line of Justin Yagerman with Deutsche Bank.

It's Rob Salmon, I'm in for Justin. I guess it's actually pretty late in the day here, but I 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 for you to be looking to more aggressively expand the fleet?

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 1st of July. But really, for us, it's all about our revenue per truck, and it's also about yield. So as we -- 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. And so, as you see those numbers improve in our fleet, then you should expect for us to return to fleet growth. And the other thing that I would highlight is we do have some service centers that have grown. And -- but we've got some that have gone backwards more than they would like. So 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.

And Kevin, is there a specific level at the revenue per truck or just a low 80s OR? Will that be kind of when you guys turn the spigot on?

It's all about momentum. And certainly, the OR staying in the low 80s, that means our productivity is up and that means our yield is improving. So we don't have a specific number, but it'll be the momentum we feel as a management team and from our businesses. Thanks, Rob.

And your next question comes from the line of Tom Wadewitz with JPMorgan.

Let's see, I'll ask my question on your non-asset business. I wanted to see if you could give some perspective on what the drivers were of the operating ratio pressure? And then I guess specifically, within the truck brokerage fees, if you can give a sense of what the gross margin was on a year-over-year basis?

Tom, I'll take that. 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 to 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're talking about a 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 the 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 non-asset -- the purely non-asset players in the space that over time has been able to get better margins. And that's, of course, where we have our sites at longer term.

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 of squeeze within the brokerage market as well?

Yes. 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, 3 quarters, this has been our lowest growth quarter of the last 3, I believe. You end up with business that probably doesn't work as well as it should. And 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 we come out really strong over the course of the next couple of quarters as you know. Anytime you've seen any of our businesses kind of get a little bit out of whack from an OR perspective, we focus on it and we give it drilled down. We get -- we show significant improvement relatively quickly. So that's what I expect we're going to 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.

And your next question comes from the line of Anthony Gallo with Wells Fargo.

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 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.

Okay. Well, I think, Anthony, very little of the growth in our brokerage space is business 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 are very careful and calculated in terms of what bids we truly compete in, that we know it's going to work for our business. As a result of that, our largest customers -- as evidence of that, our largest customer is about 5% of revenue. And 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 a significant opportunity for us on the non-asset front for lanes 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 complement one another. Our asset-based business does not rely on our brokerage business to solve their needs. And 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 very conservative bunch, so that's why you've seen our brokerage grow and be profitable every step of the way. And so we arguably could have grown that thing much quicker if we didn't have as much concern for profitability as we do. So longer term, we think that every time we go through a bid cycle, it's -- the way 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.

Yes. And I would just add, Anthony, when you have a fleet of 4,000 trucks, there is 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% to 90%. And I could be wrong, Dave might correct me on this. 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 our dead head. And in order to have the kind of dead head 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 gain market share without centering our trucks where we currently don't want to send them. So I don't know...

Yeas, that's helpful. Just -- but just to clarify, is it also fair to say that you're not, except from maybe a few instances, you're not 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 and do brokerage. But you're not necessarily just out there banging out phone calls.

Yes, yes. 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 yes, 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 place before us. So -- 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 we'll do what we can with our trucks but it also allows us to help take 5 more loads than maybe we otherwise would have.

And your next question comes from the line of Scott Group with Wolfe Research.

So I understand you don't want to talk at all to any specifics on USA Truck but, Kevin, I just maybe want to get a sense 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?

Well, generally, Scott, I would say, when we think about acquisitions whether small or large, we're trying to find the right price for all parties, considering the value of the company. And so it really depends. I mean, you look at profitable companies much more differently than you look at nonprofitable companies. I mean, 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. Acquisitions, it's very diverse. I mean, we don't have one single way of looking at acquisitions. So that's really about all I have to say there and probably doesn't help much, but each acquisition opportunity is individual. And depending on how the company is operating depends on how we go about building what we think the value is of that particular company. And then things can change from our perspective as we -- as you have the opportunity to do due diligence. So -- and then those things can change things a bit. But anyway, that's basically how we look at things.

Okay. Just maybe philosophically, would you use stocks in a deal?

We have before. In most cases, in the past, we've used cash. We would rather use cash, but I can't tell you we've never used stock. We have used stock before and it's always an option. So it's not like we're close-minded about it, but we would prefer to use cash.

And your next question comes from the line of Brandon Oglen (sic) [Brandon Oglenski] with Barclays.

Kevin, can you talk to us a little bit here what's it's going to 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 is coming. We all had estimates of what the productivity hit is going to be. But yet, it seems like there's still too much capacity out there. I mean, is the 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?

Well, first off, Brandon, from my perspective, 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 we -- that is -- that regulation is proceeding down a path of actuality in '15 or '16. And so 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 to $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're going through an economic downturn, and so a lot of the truckers that were in a longer length of haul had to move in to 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 intermodal was going to be able to pick up a lot of [indiscernible]. If we didn't have that dynamic, if fuel prices would have remained at $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, but 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'll look at the downturn going back to '07, '08, that basically eliminated a bunch of the freight that was available, generally, the dry van industry is still working toward stabilization. Now I will tell…

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 going to change overnight, I mean, this could be a slow process to get back some of these regulatory headwinds we've seen recently, right?

Yes. And I -- yes, I would say though that shorter term, I think, there's more challenges. Longer term, depending on what your longer term is, I'm probably maybe more optimistic than most. So we'll have to see how it all plays out.

And your next question comes from the line of Tom Albrecht with BB&T Capital Markets.

I really got kind of 2 questions. So the first is sort of factual. Do you have an ending truck count and do you have a 2014 anticipated depreciation level?

Go ahead.

Yes -- I mean, Tom, we stopped giving the ending truck count. We feel that the average truck count is more reflective of what we're actually using when judging our performance. So we have -- we no longer give the ending truck count.

And what was the second part, Tom?

Your anticipated depreciation for '14 and then I had a little more subjective question.

Now what do you mean our anticipated depreciation?

Well, just, do you have a number that we can think about for modeling purposes, given the cost inflation the industry has?

No. I mean, we haven't provided any guidance in terms of our -- with respect to depreciation for 2014.

Yes and it's just probably, Tom, going to continue kind of the trend that it's been on over the last several years. I mean, it isn't like we see a significant spike in terms of what we're paying for trucks. It's just been a continuous climb in terms of what we pay for trucks. So kind of whatever it's been going up on a per truck basis the last couple or 3 years would be what you should expect going forward, is how I would look at it. Did you have something, Dave?

Yes. No, I think the concept there is we saw a real spike 2 or 3 years ago in the price of the truck. And so as we continue the cycle through in our refresh rate, which is better be 48 months where we fresh a truck and replace that. We're replacing those trucks with a new truck that's got a higher monthly depreciation. So it's just -- it catches up. It's been catching up to us and so the pace that you've seen it move, 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, it'll continue to clip at a modest -- the modest pace it has.

Yes, Tom, did you have another question?

Yes. I mean, the other question really is it looks like the -- since you don't give absolute dollars, and we have to kind of guess at the revenues for the asset-like businesses. It looks like that revenue was off about $5 million sequentially from the June quarter. I'm wondering what was behind that. And then if you could comment on the performance of the Reefer business.

Yes. I would say, Tom, just general demand. In other words, when you look at how 2nd quarters shape up compared to the 3rd quarters now, I think that's probably a fairly good expectation. I do think that 1 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, 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, Tom? What about the Reefer?

Yes, how did the Reefer business perform? I mean, given the OR deterioration and truck overall, it's hard to know how much of that was van versus reefer?

Well, first off, our Reefer OR year-over-year did not deteriorate. So it was basically flat, but it should have improved significantly, Tom. We didn't do very good in the third quarter last year in our Reefer business. And we have always been the leader in terms of OR performance in the reefer space, at least for anybody who you can get any information from. And so we're -- 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 the last few quarters. And we think we've got a solid plan to address that and we've got a specific team that leads that business. And they've probably not done some things this year that they wish they would have done. And so from our perspective, I'm not happy with where we are, but on a year-over-year basis, it was basically flat.

Maybe just -- Tom, maybe just add one thing to the previous question there about the sequential movements in brokerage and intermodal from a revenue perspective. And especially given our size, those businesses are still relatively small. But then the nature of brokerage, there is 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, in fact, in the third quarter. So I wouldn't view that as a loss of steam, if you will. It's more of just based on how those businesses based on the portfolio of the business, how that kind of works.

Yes. And I would say, Tom, especially in the brokerage business, I think you'll see good momentum sequentially from third quarter to fourth quarter would beat my expectation. And again, that's somewhat driven by the season, if you will.

And your next question comes from the line of William Greene with Morgan Stanley.

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 hours of service change, how long did it take for Knight or the industry to sort of accommodate that change and kind of move on such that everything was kind of normalized. You guys, I think, said you've kind of 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 kind of gets all sorted out and then were just normalized?

Well, first off, it really depends, Bill, on -- with us, we have electronic onboard recorders. So basically, we -- it happened July 1 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% to 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 midsized 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 talked 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 make those adjustments and then your audit process to catch any processes that are not accurate. So it takes a number -- it takes time. Now in most cases, a lot of the hour 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 going to take awhile, 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, we should have 2 things, an equal playing field, and there will be a tightening of capacity because the hours will be recorded accurately by our carriers. So that's what we're hoping for.

Yes. Let me just ask you one follow-up on that. Is it -- what can you do or the industry do to help the folks in D.C. understand kind of what they're doing here? Because 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 something to do. I don't know if you have any thoughts there.

Well, Bill, probably the main problem is 1 railroad probably greases more politicians' hands than the entire trucking industry combined. So we just as well cut through the bull and...

But you guys are bigger, aren't you?

What's that?

You guys are a lot bigger of an industry, though, in total. I mean, I know a bunch of small carriers but...

We are but we're a little discombobulated when it comes to our efforts there. And to give you an example, I think only 3,000 carriers are full dues paying members at the American Trucking Association. So 1 railroad packs more punch politically, probably than the whole trucking industry combined. Now what we do is 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 6 large carriers that were 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 what ATA does. So 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 going to be good. And I think it's going to be fine. And I don't necessarily see some of this regulation as being bad. I think some of it, Bill, 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 going to be on an equal playing field and I think it's going to be helpful for us. So that's basically how I see it.

Yes. No, I think you're right. I mean, I think in spite of everything they've thrown at you, you do a good job. It's tough.

And your next question comes from the line of Chris Wetherbee with Citi.

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. And 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 the significant improvement outside of those seasonal factors that we talked about. Is there the specific drivers of that improvement? Is there other stuff that you're thinking about?

Yes. Well, it's -- that's part of it because 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 that cost-per-transaction basis. And so that's where -- 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've started with. But we feel like that, that's a business that can operate in the -- in that lower 90s, that 92.5% to 93.5% operating ratio percentage. And so we believe that it's within reach, that in the -- just to make in the fourth quarter, we can see meaningful improvement to the tune of more than 150 basis points improvement, sequentially, in our operating ratio, particularly in our brokerage business when we compare to the third quarter, so...

Okay. So it speaks a little bit more to sort of internal measures that you guys are focusing on. And do you feel like that can happen in this -- in the market environment that we're at, which seems like the -- particularly on the brokerage side, that we're seeing gross margins under pressure. You can still kind of get that company-specific benefit?

I believe so, I believe so in the fourth quarter, given the holiday season that we still do have. So there's some opportunities that we have now that we've already started with that we -- 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 in the third quarter. So given the overall kind of freight demand, there wasn't the same kind of opportunities in the third quarter that we expect to see in the fourth quarter. And 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 in 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.

Would also add to that, Dave. We've -- 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 head count and getting them more up to speed and operating at the level that a -- or seasoned broker would be able to operate at. So we think that's going to provide some additional benefit, sequentially.

And your next question comes from the line of Brad Delco with Stephens.

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?

I'll let Adam take that, Brad.

So, Brad, we normally have several investments outstanding in our business and periodically recognize the gain, or sometimes, even a loss on those investments. So last year, we recognized about 100 -- or 1.5 million of those -- of the gain in those investments on the other line item. And for this year, to the third quarter, we're about 1 million with this year it would be 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 onetime -- certainly not atypical of -- for us to be able to recognize a gain from some of our investments. Most of that investment, I think, the majority -- or I 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 then we've had to accrue for.

Got you. And 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 mark-to-market at the end of the quarter? Would that exclude -- would you exclude that in your guidance?

Yes, we wouldn't include that, Brad.

Yes, Brad, we don't -- the accounting rules, that we book 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.

And your next question comes from the line of Todd Fowler with KeyBanc.

My question is about the fourth quarter guidance. And when I look back at the last 2 years, and your fourth quarter has been about a $0.01 better, sequentially, versus the third quarter. If I take the mid-point 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 going to be flat. It sounds like there are some opportunity on the asset-based side. What are the other things that are getting you to the sequential improvement into the fourth quarter?

Yes. I think certainly expecting more to come from our non-asset-based businesses. 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.

Yes. 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, 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 I am 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...

Okay, so you don't have embedded expectations for a significant seasonal ramp in the fourth quarter on the truckload side? It's more things operationally with non-asset refrigerated and then some rate improvement?

Yes.

Yes.

And your next question comes from the line of David Tamberrino with Stifel.

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. I just wanted you to dive a little bit deeper into what you're going to do to train that away. And specifically, how does the company plan to train away the mandatory 30-minute rest period, which I guess really turns into 45 minutes after you pull over, find a parking spot and shut the engine down and to start the clock?

Yes. Well, first off, David, 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 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, 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 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, we move down the road and try to get better at it each and every day.

Interesting. And maybe one last one, as I think about 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 Training and Driver School from other competitors?

Well. First off, David, in the past, we've only hired experienced drivers up until probably 2 to 3 years ago. And we started out very slowly, very deliberately in terms of developing our driver training programs. We probably would have been better served to have been more aggressive in that area, but we didn't want to displace our experienced driver hiring. And so we've basically increased the pool of available drivers by -- into going just from experienced drivers that work for somebody else to basically drivers that already have their CDL and they're looking to go into a training program, which we call our Squire program. And then we've also got 2 or 3 of our CDL programs up. What's the number?

Yes, I think more than 3, actually.

So anyway, we can develop drivers in all 3 of those areas where in the past, it's only been 1. And then the other thing we do, David, is we just leverage off of all of our service centers. And so, 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?

Yes, a little bit. I'm just trying to get out why -- what makes Knight -- what draws new drivers drives with CDL to Knight other than a Swift or a Werner or [indiscernible]?

Just our brand. Just who we are and how we do it. And if you want more detail than I had given you, you just have to talk to one of our drivers.

We invite you to go to driveknight.com.

And 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.

Well thanks, Gina. And, hey, thanks, everybody, for calling in and hopefully, 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.

And this concludes today's conference call. You may now disconnect.