HEARTLAND EXPRESS INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Item 7, as well as other items of this Annual Report, contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended and such statements are subject to the safe harbor created by those sections and the Private Securities Litigation Reform Act of 1995, as amended. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statements of assumptions underlying any of the foregoing. In this Item 7, statements relating to expected sources of working capital, liquidity and funds for meeting equipment purchase obligations, expected capital expenditures and incurrence of debt, future acquisitions and dispositions of and upgrades to revenue equipment, future market for used equipment, future trucking capacity, expected freight demand and volumes, future rates and prices, future impact of the acquisition of Millis Transfer and the impact of its driver training programs, future depreciation and amortization, future asset utilization, expected tractor and trailer count, expected fleet age, future driver market, expected gains on sale of equipment, expected driver compensation, expected independent contractor usage, including the classification of our independent contractors, expected rent expense, expected changes to financial controls, planned allocation of capital, future equipment costs, future income taxes, future insurance and claims, future growth, future safety performance, expected regulatory action and the impact of regulatory changes, future compliance with laws, future litigation and our potential exposure for pending legal proceedings, future goodwill impairment, future inflation, future share prices, dividends, and repurchases, if any, future fuel expense and the future effectiveness of fuel surcharge programs, and the impacts of the COVID-19 pandemic on our business operations and driver recruiting and retention, among others, are forward-looking statements. Such statements may be identified by their use of terms or phrases such as “seek,” “expects,” “estimates,” “anticipates,” “projects,” “believes,” “hopes,” “plans,” “goals,” “intends,” “may,” “might,” “likely,” “will,” “should,” “would,” “could,” “potential,” “predict,” “continue,” “strategy,” “future,” “outlook,” and similar terms and phrases. Forward-looking statements are based on currently available operating, financial, and competitive information. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Known factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” set forth above. Readers should review and consider the factors discussed in “Risk Factors” of this Annual Report, along with various disclosures in our press releases, stockholder reports, and other filings with the Securities and Exchange Commission. All such forward-looking statements speak only as of the date of this Annual Report. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based. Overview We, together with our subsidiaries, are a short-to-medium haul truckload carrier (predominately 500 miles or less per load). We primarily provide nationwide asset-based dry van truckload service for major shippers from Washington to Florida and New England to California. We focus on providing quality service to targeted customers with a high density of freight in our regional operating areas. We also offer temperature-controlled truckload services, which are not significant to our operations and have been reduced to serving select dedicated customers since 2019. We generally earn revenue based on the number of miles per load delivered and the revenue per mile paid. We operate our consolidated operations under the brand names of Heartland Express and Millis Transfer. We manage our business based on overall corporate operating goals and objectives that are the same for both brands. Our Chief Operating Decision Maker, our CEO, evaluates the operational efficiencies of our transportation services, operating performance and asset allocation on a combined basis based on consolidated operating goals and objectives. We believe the keys to success are maintaining high levels of customer service and safety, which are predicated on the availability of experienced drivers and late-model equipment. We believe that our service standards, safety record, and equipment accessibility have made us a core carrier to many of our major customers, as well as allowed us to build solid, long-term relationships with customers and brand ourselves as an industry leader for on-time service. Our headquarters is located in North Liberty, Iowa, in a low-cost environment with ready access to a skilled, educated, and industrious workforce. Our other terminals are located near major shipping corridors nationwide, affording proximity to 28 customer locations, driver domiciles, and distribution centers. Approximately 80% of our terminals are located within 200 miles of the 25 largest cities in the U.S. We believe our geographic reach and terminal locations assist us with driver recruiting and retention, efficient fleet maintenance, and consistent customer engagement. Our long-term objectives, which have not changed since we were founded in 1978, are to achieve significant growth, to operate with a low-80s operating ratio (operating expenses as a percentage of operating revenue), and to maintain a debt-free balance sheet. We maintain a disciplined approach to cost controls. We do this by scrutinizing all expenditures, prioritizing expenses that improve our drivers' experience or our customer service, minimizing non-driving personnel through proven technology when the cost of doing so is justified, and operating late-model tractors and trailers with sound warranty coverage and enhanced fuel efficiency. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this document can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Recent Developments On August 26, 2019 we completed our third acquisition within seven years. We acquired all the outstanding equity of Millis Transfer. The Millis Transfer acquisition added additional dry van truckload capacity to our core operations and this resulted in increased revenues and increased operating costs after August 26, 2019. Therefore, our financial results for 2019, only include Millis Transfer activity from August 26, 2019 to December 31, 2019. In 2020, we generated operating revenues of $645.3 million, including fuel surcharges, net income of $70.8 million, and basic net income per share of $0.87 on basic weighted average outstanding shares of 81.4 million. This compared to operating revenues of $596.8 million, including fuel surcharges, net income of $73.0 million, and basic net income per share of $0.89 on basic weighted average shares of 82.0 million in 2019. We posted an 85.5% operating ratio (which represents operating expenses as a percentage of operating revenues) for the year ended December 31, 2020, compared to 84.2% for the same period of 2019, and an 11.0% net margin (which represents net income as a percentage of operating revenues) for 2020, compared to 12.2% in the same period of 2019. We posted an 84.0% non-GAAP adjusted operating ratio (1) (operating expenses as a percentage of operating revenues, net of fuel surcharge) for the year ended December 31, 2020 compared to 81.9% for the same period of 2019. We had total assets of $951.2 million at December 31, 2020. We achieved a return on assets of 7.5% and a return on equity of 10.0% over the year ended December 31, 2020, compared to 8.2% and 11.0% respectively, for 2019. 29 (1) GAAP to Non-GAAP Reconciliation Schedule: Operating revenue, operating revenue excluding fuel surcharge revenue, fuel surcharge revenue, operating income, operating ratio, and adjusted operating ratio reconciliation (a) Twelve Months Ended December 31, 2020 2019 (in thousands) Operating revenue $ 645,262 $ 596,815 Less: Fuel surcharge revenue (non-GAAP) 61,725 74,955 Operating revenue excluding fuel surcharge revenue 583,537 521,860 Operating expenses 551,843 502,540 Less: Fuel surcharge revenue (non-GAAP) 61,725 74,955 Adjusted operating expenses 490,118 427,585 Operating income $ 93,419 $ 94,275 Operating ratio 85.5 % 84.2 % Adjusted operating ratio (non-GAAP) 84.0 % 81.9 % (a) Adjusted operating ratio as reported in this annual report is based upon operating expenses, net of fuel surcharge revenue, as a percentage of operating revenue excluding fuel surcharge revenue. We believe that adjusted operating ratio is more representative of our underlying operations by excluding the volatility of fuel prices, which we cannot control. Adjusted operating ratio is not a substitute for operating ratio measured in accordance with GAAP. There are limitations to using non-GAAP financial measures. Although we believe that adjusted operating ratio improves comparability in analyzing our period-to-period performance, it could limit comparability to other companies in our industry if those companies define adjusted operating ratio differently. Because of these limitations, adjusted operating ratio should not be considered a measure of income generated by our business or discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by primarily relying on GAAP results and using non-GAAP financial measures on a supplemental basis. Our cash flow from operating activities for the twelve months ended December 31, 2020 was $178.9 million or 27.7% of operating revenues, compared to $146.4 million or 24.5% of operating revenues in 2019. During 2020, we used $111.0 million in net investing cash flows, which was primarily used for $111.2 million of net purchases of revenue equipment. We used $32.7 million in financing activities including $6.5 million used to pay dividends to our shareholders and $25.7 million for stock repurchases during 2020. As a result, our cash, cash equivalents, and restricted cash increased by $35.1 million during the year ended December 31, 2020 to $131.1 million, with no outstanding debt. We operate in a cyclical industry. Demand for our freight services was elevated throughout all of 2018 (peak in mid-2018 and began to decline in the second half of 2018), which resulted in tight freight capacity. Throughout 2019, the general demand for freight services was at a level much lower than what was experienced throughout 2018. During 2020, the demand for freight services was volatile. Freight volumes in early 2020 were comparative to seasonal volumes of the first quarter of 2019. Then in March 2020 the demand for freight services dramatically increased as concerns over the COVID-19 pandemic escalated. In response to the outbreak of COVID-19, there was a short term drop in the demand for freight services in early second quarter of 2020, due to many businesses temporarily shutting down or scaling back operations with much of the working population of the United States working from home. By the end of the 2 nd quarter of 2020, demand for freight services began to improve as most businesses implemented their respective responses and protections against the pandemic which continued to build throughout the back half of 2020. This led to an overall increase in freight demand and favorable pricing environment as freight rates increased throughout the second half of 2020. The trucking industry has been faced with a qualified driver shortage. The pandemic events of 2020 intensified an already challenging qualified driver market. Competition for drivers, which has historically been intense, escalates during periods of 30 increased freight demand which intensified during the second half of 2020. Competition for qualified drivers will continue to be challenging going forward due to the decreasing numbers of qualified drivers in our industry. We continually explore new strategies to attract and retain qualified drivers with changes in market conditions and demands. We hire the majority of our drivers with at least six months of over-the-road experience and safe driving records. As previously discussed, Millis Transfer's driver training program will provide an additional source of future potential professional drivers. For 2021, we expect the industry trends experienced in the second half of 2020 will likely continue. Growth History and Capital Allocation In addition to organic growth through the development of our regional operating areas, we have completed eight acquisitions since 1986, with the most recent and our third acquisition within the last seven years, Millis Transfer, occurring on August 26, 2019. These eight acquisitions have enabled us to solidify our position within existing regions, expand into new operating regions, and pursue new customer relationships in new markets. We are highly selective about acquisitions, with our main criteria being (i) safe operations, (ii) high quality professional truck drivers, (iii) fleet profile that is compatible with our philosophy or can be replaced economically, and (iv) freight profile that will allow a path to a low-80s operating ratio upon full integration, application of our cost structure, and freight optimization, including exiting certain loads that fail to meet our operating profile. We expect to continue to evaluate acquisition candidates presented to us. We believe future growth depends upon several factors including the level of economic growth and the related customer demand, the available capacity in the trucking industry, our ability to identify and consummate future acquisitions, our ability to integrate operations of acquired companies to realize efficiencies, and our ability to attract and retain experienced drivers that meet our hiring standards. We manage our business primarily based on long-term cash flow generation prospects and return on equity, and we place less emphasis on quarterly earnings per share. When we are experiencing or expect favorable freight markets, we invest in fleet expansion internally, dependent on our ability to hire drivers that meet our qualifications, and through acquisitions. When freight markets are less favorable, we concentrate our assets on customers offering the most acceptable returns and are willing to shrink our fleet to maintain margins and limit net capital expenditures. We have also deployed available cash opportunistically toward dividends and stock repurchases. For the periods ended December 31, 2020, our operating cash flows as a percentage of operating revenues five-year average was 24.0%, our three-year average was 25.5%, and most recently for 2020 was 27.7%. Tractor Strategy and Depreciation Our CODM makes all revenue equipment purchasing and selling decisions on a combined basis based primarily on age, condition, and current market conditions for the equipment regardless of which legacy fleet the equipment was associated with. Our tractor strategy is important to our goals and differs from the practices of many of our peers. We strive to operate a relatively new fleet to keep operating costs low, better driver comfort, and enhance dependability. We seek the flexibility to buy and sell tractors (and trailers) opportunistically to capitalize on new and used equipment markets, size our fleet to the volume of attractive freight, and manage cash tax expense. One method we use to accomplish these goals is to depreciate our new tractors (excludes assets acquired through an acquisition) for financial reporting purposes using the 125% declining balance method, in which depreciation is higher in early periods and tapers off in later periods. We believe this method more accurately reflects actual asset values and affords us the flexibility to sell tractors at most points during their life cycle without experiencing losses. In addition, the decline in depreciation during later periods is typically offset by increased repairs and maintenance expense as the tractors age, which keeps our total operating costs more uniform over the operating life of the equipment. Trailers are depreciated using the straight-line method. Revenue equipment acquired through acquisitions is generally revalued to current market values as of the acquisition date. These acquired assets are depreciated on a straight-line basis aligned with the remaining period of expected use. As acquired equipment is replaced, our fleet returns to our base methods of declining balance depreciation for tractors and straight-line depreciation for trailers. We believe our revenue equipment strategy is sound over the long term. However, it can contribute to volatility in gain on sale of equipment and quarterly earnings per share. At December 31, 2020, our tractor fleet had an average age of 1.7 years and our trailer fleet had an average age of 3.7 years. During 2021, we expect the age of both our tractor and trailer fleets to decrease slightly compared to 2020, based on estimated net capital expenditures in 2021. Fuel Costs After salaries, wages, and benefits, and depreciation expense, fuel expense is our next highest operating cost. Containment of fuel cost continues to be one of management's top priorities. Average DOE diesel fuel prices per gallon for 2020 and 2019 were $2.55 and $3.06, respectively. The average price per gallon in 2021, through February 16, 2021, was $2.75. Fuel prices were volatile during 2020 with COVID-19 impacts generally deflating fuel prices. We cannot predict what fuel prices will be throughout 2021. We are not able to pass through all fuel price increases through fuel surcharge agreements with customers due 31 to tractor idling time, along with empty and out-of-route miles. Therefore, our operating income is negatively impacted with increased net fuel costs (fuel expense less fuel surcharge revenue) in a rising fuel environment and is positively impacted in a declining fuel environment. We expect to continue to manage and implement fuel initiative strategies that we believe will effectively manage fuel costs. These initiatives include strategic fueling of our trucks, whether it be terminal fuel or over-the-road fuel, reducing tractor idle time, controlling out-of-route miles, controlling empty miles, utilizing on-board power units to minimize idling, educating drivers to save energy, trailer skirting, and increasing fuel economy through the purchase of newer, more fuel-efficient tractors. Results of Operations The following table sets forth the percentage relationships of expense items to total operating revenue for the periods indicated: Year Ended December 31, 2020 2019 Operating revenue 100.0 % 100.0 % Operating expenses: Salaries, wages, and benefits 41.8 % 40.3 % Rent and purchased transportation 0.7 1.4 Fuel 13.3 17.1 Operations and maintenance 4.3 4.1 Operating taxes and licenses 2.3 2.4 Insurance and claims 3.5 2.8 Communications and utilities 0.8 0.8 Depreciation and amortization 17.0 16.8 Other operating expenses 4.1 3.8 Gain on disposal of property and equipment (2.3) (5.3) 85.5 % 84.2 % Operating income 14.5 % 15.8 % Interest income 0.1 % 0.7 % Interest expense 0.0 % (0.2) % Income before income taxes 14.6 % 16.3 % Income tax expense 3.6 4.1 Net income 11.0 % 12.2 % Year Ended December 31, 2020 Compared with the Year Ended December 31, 2019 On August 26, 2019 we completed our third acquisition within seven years. We acquired all the outstanding equity of Millis Transfer. The Millis Transfer acquisition added additional dry van truckload capacity to our core operations during the period August 26, 2019 to December 31, 2019 and for the full year of 2020. Operating revenue increased $48.5 million (8.1%), to $645.3 million for the year ended December 31, 2020 from $596.8 million for the year ended December 31, 2019. The increase in revenue was the net result of an increase in trucking and other revenues of $61.8 million partially offset by a decrease in fuel surcharge revenue of $13.3 million. Millis Transfer contributed approximately 24.0% of the operating revenues, for the year ended December 31, 2020. Operating revenues (the total of trucking and fuel surcharge revenue) are primarily earned based on loaded miles driven in providing truckload services. The number of loaded miles is affected by general freight supply and demand trends and the number of tractors. The number of tractors is directly affected by the number of available company drivers and independent contractors providing capacity to us. During 2019, we acquired Millis Transfer and the additional drivers and operations created growth to our operating fleet during part of the third and all of the fourth quarter of 2019 and the entire year of 2020. For 2021, we expect the industry trends experienced in 2020 will likely continue due to the driver shortage within our industry that will impact recruiting and retention, exacerbated by COVID-19 impacts. We also expect driver recruiting and retention to continue to be a challenge during 2021. Our operating revenues are reviewed regularly by our CODM on a combined basis across the U.S. due to the similar nature of our services offerings and related similar base pricing structure. The operating revenues increase was the result of an increase in loaded miles along with an increase in the average rate per loaded mile. 32 Fuel surcharge revenues represent fuel costs passed on to customers based on customer specific fuel surcharge recovery rates and billed loaded miles. Fuel surcharge revenues decreased primarily as a result of a decrease in average DOE diesel fuel prices of 16.5% during 2020 compared to 2019, as reported by the DOE. Salaries, wages, and benefits increased $29.4 million (12.2%), to $269.5 million for the year ended December 31, 2020 from $240.1 million in the 2019 period. Salaries, wages, and benefits increased primarily due to the addition of Millis Transfer drivers and partial year effects of recent driver pay increases, partially offset by attrition of drivers and less miles driven during 2020 as well as a decline in non-driver employees and related benefit costs for both groups. To address the demand for drivers across our industry, the Company implemented a driver wage increase for legacy Heartland Express drivers that was effective late October 2020. This equated to an approximate average increase of 6% per driver within the driver pay component of salaries, wages, and benefits expense. In addition, health insurance and workers' compensation had a net decrease of $1.0 million due to an overall net decrease in severity and frequency of claims. Rent and purchased transportation decreased $3.4 million (42.0%), to $4.6 million for the year ended December 31, 2020 from $8.0 million in the comparable period of 2019. The decrease was attributable to a decrease in amounts paid to independent contractors of $1.6 million and a net decrease in amounts paid for operating leases of revenue equipment and leased property expense of $1.8 million. The decrease in amounts paid to independent contractors was due to fewer miles driven by independent contractors. During the year ended December 31, 2020, independent contractors accounted for 0.7% of the total fleet miles compared to 1.2% for the same period of 2019. The decreases in operating leases of revenue equipment and leased terminal property expense was due to an effort to remove leased revenue equipment acquired from IDC from our operating fleet and decreasing the number of leased terminal locations during 2019. Our rent expense related to terminal locations was further reduced in 2020 resulting from the execution of a purchase option and related property acquisition. Fuel decreased $15.8 million (15.5%), to $86.1 million for the year ended December 31, 2020 from $101.9 million for the same period of 2019. The decrease in the DOE diesel fuel prices seen in 2020 was mostly due to a 15.7% average price decrease during the second quarter of 2020 compared to the first quarter of 2020. Fuel prices remained fairly consistent during the third and fourth quarters of 2020, although they began to increase in late 2020. This trend of fuel price increases has continued through February 2021. The latest DOE diesel fuel price in February 2021 is up 8.9% to the end of 2020 and is up 12.7% compared to the 2020 yearly average. We cannot currently predict how long and how much the average diesel prices will continue to increase. Depreciation and amortization increased $9.7 million (9.7%), to $109.9 million during the year ended December 31, 2020 from $100.2 million in the same period of 2019. The increase is attributable to an increase in the amount of tractor and trailer depreciation expense in our legacy fleet and the increase for the addition of depreciation expense on the acquired Millis Transfer fleet, partially offset by a slight decrease in intangible asset amortization. We expect depreciation expense in 2021 to be approximately $110.0 million to $120.0 million. Operating and maintenance expense increased $3.1 million (12.9%), to $27.6 million during the year ended December 31, 2020, from $24.5 million in the same period of 2019. Operating and maintenance costs increased mainly due to an increase in tractors and trailers and miles driven resulting from the Millis Transfer acquisition. In addition, there was an increase in maintenance activity to prepare revenue equipment for sale during 2020. There was a 93.7% increase in the quantity of tractors sold, partially offset by a 58.4% decline in volume of trailers sold during 2020 as compared to 2019. Operating taxes and licenses expense increased $0.5 million (3.5%), to $15.0 million during the year ended December 31, 2020 from $14.5 million in 2019, due to a higher number of revenue equipment units (tractors and trailers) licensed in 2020 as compared to 2019. Insurance and claims expense increased $5.2 million (30.7%), to $22.2 million during the year ended December 31, 2020 from $17.0 million in 2019 due primarily to an increase in premiums along with increased severity and frequency of claims. Increased premiums expense was due to a combination of increased revenue equipment units covered by our insurance policies during 2020 compared to 2019 mainly as a result of the Millis Transfer acquisition. In addition, the overall cost to insure our revenue equipment, on a per unit basis, has increased year-over-year due to a lack of insurance capacity across the transportation industry mainly as a result of the current legal environment. Other operating expenses increased $3.6 million (15.9%), to $26.4 million, during the year ended December 31, 2020 from $22.8 million in 2019, due mainly to more miles driven in 2020 due to a full year of Millis Transfer fleet miles. Gains on the disposal of property and equipment decreased $16.5 million (52.7%), to $14.8 million during the year ended December 31, 2020, from $31.3 million in the same period of 2019. The decrease was mainly due to a $15.0 million decrease in gains on sales of trailer equipment. The decrease in gains on trailer sales was due to a significant decrease in gains per unit sold 33 in 2020 as compared to 2019 as well as a 58.4% decline in volume of trailers sold during 2020 as compared to 2019. We currently anticipate tractor and trailer equipment sale activity to be elevated in 2021 compared to 2020, as we expect to continue to refresh the acquired Millis Transfer fleet and to a lesser extent our legacy operating fleet. Total gains are estimated to be approximately $20 to $25 million in 2021. This expectation is based on current used equipment prices and our anticipated timing of equipment sales however the used equipment market can be volatile and could impact these expectations. Our effective tax rate was 24.9% and 24.9% for years ended December 31, 2020 and 2019, respectively. We expect the 2021 effective tax rate to be comparable to the 2020 effective tax rate. Inflation and Fuel Cost Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, inflation has been fairly modest with its impacts mostly related to revenue equipment prices, tire prices and compensation paid to drivers. Innovations in equipment technology, EPA mandated new engine emission requirements and driver comfort have resulted in higher tractor prices. More significant inflation has been experienced in insurance and claims cost related to health insurance and claims and also auto liability insurance and claims. We historically have limited the effects of inflation through increases in freight rates and certain cost control efforts. Over the long term, general economic growth and industry supply and demand conditions have allowed rate increases, although the rate increases received have significantly lagged the increases in tractor prices and related depreciation expense. In addition to inflation, significant fluctuations in fuel prices can adversely affect our operating results and profitability. We have attempted to limit the effects of increases in fuel prices through certain cost control efforts and our fuel surcharge program. We impose fuel surcharges on substantially all accounts. Although we historically have been able to pass through most long-term increases in fuel prices and operating taxes to customers in the form of surcharges and higher rates, these arrangements generally do not fully protect us from short-term fuel price increases and also may prevent us from receiving the full benefit of any fuel price decreases. Additionally, we are not able to recover fuel surcharge on empty miles, out of route miles, or fuel used in idling. Liquidity and Capital Resources The growth of our business requires significant investments in new revenue equipment. Historically, except for acquisitions, we have been debt-free, funding revenue equipment purchases with cash flow provided by operating activities and sales of equipment. Our primary source of liquidity is cash flow provided by operating activities. We entered into a line of credit during the fourth quarter of 2013, described below, to partially finance an acquisition, including the payoff of debt we assumed. Our primary source of liquidity during 2020 and 2019 was cash flow generated from operating activities. During 2019, we were able to fund the acquisition of Millis Transfer, including pay off of acquired debt, and revenue equipment purchases with cash on hand and cash flows provided by operating activities and sales of equipment. We believe we have adequate liquidity to meet our current and projected needs in the foreseeable future. We expect to have significant capital requirements over the long-term, which we expect to fund with cash flows provided by operating activities, proceeds from the sale of used equipment, and available capacity on the line of credit. At December 31, 2020, we had $113.9 million in cash and cash equivalents, no outstanding debt, and $88.5 million available borrowing capacity on the line of credit. Operating cash flow for 2020 was $178.9 million compared to $146.4 million for 2019. Cash flow from operating activities was 27.7% of operating revenues for the year ended December 31, 2020, compared to 24.5% for the same period of 2019. The CARES Act allows employers to defer the deposit and payment of the employer's share of Social Security taxes. As a result, we have deferred remitting payroll taxes normally paid on a weekly basis until the end of 2021 when the first half of the deferred tax payments are due and 2022 when the second half of the deferred tax payments are due. The CARES Act deferred federal payroll taxes as of December 31, 2020 was $8.9 million. Cash flows used in investing activities were $111.0 million during 2020, representing a decrease in cash used of $21.8 million compared to cash flows used in investing activities of $132.8 million during 2019. The decrease in cash used in investing activities was mainly the result of $61.9 million used to acquire Millis Transfer in 2019, partially offset by $40.3 million more net purchases of revenue equipment in 2020, compared to net purchases of revenue equipment in 2019. We currently anticipate net capital expenditures to be approximately $80.0 million to $90.0 million for 2021. Cash flows used in financing activities decreased $67.7 million in 2020 compared to 2019. This was primarily due to the net effect of $93.3 million cash used for repayments of debt which was acquired as part of the Millis Transfer acquisition in 2019, partially offset by $25.7 million cash used for repurchases of our common stock during 2020, as no shares were repurchased in 2019. There were no repayments of debt during 2020, as we had no indebtedness. 34 We have a stock repurchase program with 5.4 million shares remaining authorized for repurchase as of December 31, 2020 and the program has no expiration date. There were 1.5 million shares repurchased in the open market during the year ended December 31, 2020 and no shares were repurchased in 2019. Repurchases are expected to continue from time to time, as determined by market conditions, cash flow requirements, securities law limitations, and other factors, until the number of shares authorized have been repurchased, or until the authorization is terminated. The share repurchase authorization is discretionary and has no expiration date. We paid income taxes, net of refunds, of $13.7 million in 2020, compared with $18.9 million during 2019. The decline in net payments is due to a federal refund received during 2020, as well as increased net purchases of property and equipment, that qualified for additional tax deductions resulting in a reduction in estimated tax payments. In November 2013, Heartland Express, Inc. of Iowa, (the "Borrower"), a wholly owned subsidiary of the Company, entered into a Credit Agreement with Wells Fargo Bank, National Association, (the “Bank”). Pursuant to the Credit Agreement, the Bank provided a five-year, $250.0 million unsecured revolving line of credit which may be used for future working capital, equipment financing, and general corporate purposes. The Bank's original commitment decreased to $175.0 million on November 1, 2016 through scheduled maturity on October 31, 2018. However, on August 31, 2018, Borrower and the Bank entered into the First Amendment to this Credit Agreement. The First Amendment (i) provides for a $100.0 million unsecured revolving line of credit (the “Revolver”), which may be used for working capital, equipment financing, permitted acquisitions, and general corporate purposes, (ii) provides an uncommitted accordion feature, which allows the Company a one-time request, at the discretion of the Bank, to increase the Revolver by up to an additional $100.0 million, (iii) increases the letter of credit subfeature of the Credit Agreement from $20 million to $30 million, and (iv) extends the maturity of the Credit Agreement to August 31, 2021, subject to the Borrower’s ability to terminate the commitment at any time at no additional cost to the Borrower. The Credit Agreement is unsecured, with a negative pledge against all assets of our consolidated group, except for debt associated with permitted acquisitions, new purchase-money debt and capital lease obligations as described in the Credit Agreement. Borrowings under the Credit Agreement can either be, at Borrower's election, (i) one-month or three-month LIBOR (Index) plus a spread between 0.700% and 0.900% per annum, based on the Company's consolidated funded debt to adjusted EBITDA ratio or (ii) Prime (Index) plus 0.0%. There is a commitment fee on the unused portion of the Revolver between 0.0725% and 0.1750% per annum, based on the Company's consolidated funded debt to adjusted EBITDA ratio. The Credit Agreement contains customary financial covenants including, but not limited to, (i) a maximum adjusted leverage ratio of 2:1, measured quarterly on a trailing twelve month basis, (ii) a minimum net income requirement of $1.00, measured quarterly on a trailing twelve month basis, (iii) a minimum tangible net worth of $250.0 million requirement, measured quarterly, and (iv) limitations on other indebtedness and liens. The Credit Agreement also includes customary events of default, conditions, representations and warranties, and indemnification provisions. We were in compliance with the respective financial covenants during 2020. Off-Balance Sheet Transactions Our liquidity or financial condition is not materially affected by off-balance sheet transactions except as disclosed for purchase obligations and letters of credit. Contractual Obligations and Commercial Commitments The following sets forth our contractual obligations and commercial commitments at December 31, 2020. Payments due by period (in millions) Contractual Obligations Total Less than 1 year 1–3 years 3–5 years More than 5 years Purchase obligation (1) $ 121.9 $ 121.9 $ — $ — $ — Obligations for unrecognized tax benefits (2) 5.8 — — — 5.8 $ 127.7 $ 121.9 $ — $ — $ 5.8 35 (1) Relates mainly to our commitment on revenue equipment purchases, net of estimated sale values of tractor equipment where we have contracted values for used equipment. (2) Obligations for unrecognized tax benefits represent potential liabilities and includes interest and penalties. We are unable to reasonably determine when these amounts will be settled. See below for a detailed discussion of our unrecognized tax benefits. At December 31, 2020, we had a total of $4.9 million in gross unrecognized tax benefits included in long-term income taxes payable in the consolidated balance sheets. Of this amount, $3.9 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate as of December 31, 2020. The total net amount of accrued interest and penalties for such unrecognized tax benefits was $0.9 million at December 31, 2020, and is included in income taxes payable within the consolidated balance sheet. Income tax expense is increased each period for the accrual of interest on outstanding positions and penalties when the uncertain tax position is initially recorded. Income tax expense is reduced in periods by the amount of accrued interest and penalties associated with reversed uncertain tax positions due to lapse of applicable statute of limitations, when applicable, or when a position is settled. These unrecognized tax benefits relate to risks associated with state income tax filing positions for our corporate subsidiaries. A reconciliation of the obligations for unrecognized tax benefits is as follows: December 31, 2020 (in thousands) Gross unrecognized tax benefits $ 4,937 Accrued penalties and interest associated with the unrecognized tax benefits (net of benefit of interest deduction) 864 Obligations for unrecognized tax benefits $ 5,801 A number of years may elapse before an uncertain tax position is audited and ultimately settled. It is difficult to predict the ultimate outcome or the timing of resolution for uncertain tax positions. It is reasonably possible that the amount of unrecognized tax benefits could significantly increase or decrease within the next twelve months. These changes could result from the expiration of the statute of limitations, examinations or other unforeseen circumstances. We do not have any outstanding litigation related to income tax matters. At this time, management’s best estimate of the reasonably possible change in the amount of gross unrecognized tax benefits is approximately no change to an increase of $1.0 million during the next twelve months, due to the combination of expiration of certain statute of limitations and estimated additions. The federal statute of limitations remains open for the years 2017 and forward. Tax years 2010 and forward are subject to audit by state tax authorities depending on the tax code and administrative practice of each state. Critical Accounting Policies The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. We have identified certain accounting policies, described below, that are the most important to the portrayal of our current financial condition and results of operations. The most significant accounting policies and estimates that affect the financial statements include the following: Property, plant, and equipment Management estimates the useful lives of revenue equipment based on estimated use of the asset. It has been our historical practice to buy new tractor and trailer equipment directly from manufacturers. Tractors and trailers are depreciated using the 125% declining balance method for new tractors (excludes assets acquired in an acquisition) and straight-line method, respectively, as management believes this is the best matching of depreciation expense with the decline in estimated tractor and trailer values based on the use of the tractor and trailers. Revenue equipment acquired through acquisitions is generally revalued to current market values as of the acquisition date. These acquired assets are depreciated on a straight-line basis aligned with the remaining period of expected use. As acquired equipment is replaced, our fleet returns to our base methods of declining balance depreciation for tractors and straight-line depreciation for trailers. Depreciable lives of tractors and trailers are 5 and 7 years, respectively, when purchased new. Management estimates the useful lives on tractors based on average miles per truck per year 36 as well as manufacturer warranty periods. We have not historically run tractors outside of manufacturer warranty periods. Management estimates the useful lives of trailers based on manufacturer warranty periods as well as our internal maintenance programs. Estimates of salvage value are based upon the expected market values of equipment at the end of the expected useful life. A key component to expected market values of equipment is our historical maintenance programs which in management's opinion are critical to the resale value of equipment. Management selects depreciation methods that it believes most accurately reflects the timing of benefit received from the applicable assets. We periodically evaluate property and equipment for impairment upon the occurrence of events or changes in circumstances that indicate the carrying amount of assets may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset group to future net undiscounted cash flows expected to be generated by the group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount over which the carrying amount of the assets exceeds the fair value of the assets. There were no impairment charges recognized during the years ended December 31, 2020 and 2019. Goodwill and other intangibles Goodwill is not subject to amortization and is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. The Company performs its annual impairment test as of September 30. The Company first assesses qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of our reporting unit is less than its carrying amount, including goodwill. If, after assessing qualitative factors, the Company determines that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, then the Company performs a full fair value assessment of identifiable net assets to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. As of September 30, 2020, the Company’s assessment of qualitative factors confirmed our conclusion that a goodwill impairment did not occur. The significant qualitative factors considered include an increase in the Company’s revenue and continued strong cash flow. Our reporting unit had fair value significantly in excess of its carrying value. We periodically evaluate other intangibles that are amortizable for impairment when the occurrence of events or changes in circumstances that indicate the carrying amount of assets may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset group to future net undiscounted cash flows expected to be generated by the group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount over which the carrying amount of the assets exceeds the fair value of the assets. There were no impairment charges related to goodwill or other intangibles recognized during the years ended December 31, 2020 and 2019. Self-insurance accruals Management estimates accruals for the self-insured portion of pending accident liability, workers’ compensation, physical damage and cargo damage claims. These accruals are based upon individual case estimates, including reserve development, and estimates of incurred-but-not-reported losses based upon past experience. Industry development as well as our historical case results are used to determine development of individual case claims. These liabilities are undiscounted and represent management's best estimate of our ultimate obligations. Income taxes Significant management judgment is required to determine the provision for income taxes and to determine whether deferred income taxes will be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. A valuation allowance is required to be established for the amount of deferred income tax assets that are determined not to be realizable. We have not recorded a valuation allowance against deferred tax assets as it is management's opinion that it is more likely than not we will be able to utilize the remaining deferred tax assets based on our history of profitability and taxable income. Management judgment is required in the accounting for uncertainty in income taxes recognized in the financial statements based on recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The unrecognized tax benefits relate to risks associated with state income filing positions and not federal income tax filing positions. Measurement of uncertain income tax positions is based on statutes of limitations, penalty rates, and interest rates on a state by state and year by year basis. 37 New Accounting Pronouncements See Note 1 of the consolidated financial statements for a full description of recent accounting pronouncements and the respective dates of adoption and effects on results of operations and financial position.