What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-22 · 136 added, 138 removed, 205 unchanged (57% of the section changed)

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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.

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with “Business” in Part I, Item 1 of this Annual Report, as well as the consolidated financial statements and accompanying footnotes included in this Annual Report.

This discussion contains forward-looking statements as a result of many factors, including those set forth under Part I, Item 1A.

“Risk Factors” and Part I “Cautionary Note Regarding Forward-looking Statements” of this Annual Report, and elsewhere in this report.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could differ materially from those discussed.

We, together with our subsidiaries, are a short-to-medium haul truckload carrier (predominately 500 miles or less per load).

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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

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.

Our headquarters is located in North Liberty, Iowa, in a lower-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 customer locations, driver domiciles, and distribution centers.

Approximately 80% of our terminals are located within 200 miles of the 25 largest metropolitan areas 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.

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Recent Developments

On August 26, 2019 we completed our third acquisition within seven years.

On August 26, 2019 we completed our third acquisition within eight years.

We acquired all the outstanding equity of Millis Transfer.

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In 2021, we generated operating revenues of $607.3 million, including fuel surcharges, net income of $79.3 million, and basic net income per share of $1.00 on basic weighted average outstanding shares of 79.6 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.

This compared to 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 in 2020.

We posted an 82.6% operating ratio (which represents operating expenses as a percentage of operating revenues) for the year ended December 31, 2021, compared to 85.5% for the

same period of 2020, and an 13.1% net margin (which represents net income as a percentage of operating revenues) for 2021, compared to 11.0% in the same period of 2020.

We posted an 80.2% non-GAAP adjusted operating ratio (1) (operating expenses as a percentage of operating revenues, net of fuel surcharge) for the year ended December 31, 2021 compared to 84.0% for the same period of 2020.

We had total assets of $951.2 million at December 31, 2020.

We had total assets of $928.5 million and total stockholders' equity of $727.1 million at December 31, 2021.

We achieved a return on assets of 8.4% and a return on equity of 10.9% over the year ended December 31, 2021, compared to 7.5% and 10.0% respectively, for 2020.

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During 2021, we used $2.6 million in net investing cash flows, which was primarily used for $2.5 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.

We used $132.6 million to purchase property and equipment and received $130.1 million from the sales of property and equipment.

We used $78.1 million in financing activities including $45.9 million used to pay regular and special dividends to our shareholders and $32.0 million for stock repurchases during 2021.

As a result, our cash, cash equivalents, and restricted cash increased by $42.6 million during the year ended December 31, 2021 to $173.8 million, with no outstanding debt.

Unrestricted cash and cash equivalents increased $43.8 million to $157.7 million.

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.

Throughout 2019, the general demand for freight services was at a level much lower than what has been experienced since.

During 2020, the demand for freight services was volatile.

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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.

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 second 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 and throughout 2021.

This led to an overall increase in freight demand and favorable pricing environment as freight rates increased throughout the second half of 2020 and continued to be strong throughout 2021.

We expect freight demand to continue to be strong well into 2022.

The trucking industry has been faced with a qualified driver shortage with more qualified drivers leaving the industry than joining.

The pandemic events of 2020-2021 intensified an already challenging qualified driver market.

Competition for drivers, which has historically been intense, escalates during periods of

increased freight demand which intensified during the second half of 2020.

Further, the pandemic events of 2020-2021 limited the capacity and output of driver training schools that bring new drivers to the industry.

Competition for drivers, which has historically been intense, escalates during periods of increased freight demand which intensified during the second half of 2020 and continued throughout 2021.

Competition for qualified drivers will continue to be challenging going forward due to the decreasing numbers of qualified drivers in our industry.

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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.

As previously discussed, our driver training program will provide an additional source of future potential professional drivers.

In order to attract and retain experienced drivers who understand the importance of customer service, we have sought to solidify our position as an industry leader in driver compensation in our operating markets.

In addition to the scheduled pay increases based on years of continued service, we have increased the base pay package and enhanced the compensation for our drivers multiple times during the last three years and anticipate further enhancements in 2022.

Our comprehensive driver compensation and benefits program rewards drivers for years of service and safe operating mileage benchmarks, which are critical to our operational and financial performance.

Our driver pay package includes future pay increases based on years of continued service with us, increased rates for accident-free miles of operation, detention pay, and other pay programs to assist drivers with unproductive time associated with circumstances outside of their control, such as inclement weather and equipment breakdowns.

We believe that our driver compensation and benefits package is consistently among the best in the industry.

We are committed to investing in our drivers and compensating them for safety as both are key to our operational and financial performance.

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.

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 eight 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, pursue new customer relationships in new markets, as well as expand business relationships with current customers 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.

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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.

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 or short-term revenue volatility.

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.

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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.

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.

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At December 31, 2021, our tractor fleet had an average age of 1.4 years and our trailer fleet had an average age of 3.4 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.

During 2022, we expect the age of both our tractor and trailer fleets to increase compared to 2021, based on estimated net capital expenditures in 2022 due to our expectation of a shortage of reasonably priced new revenue equipment available in 2022.

After salaries, wages, and benefits, and depreciation expense, fuel expense is our next highest operating cost.

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The average price per gallon in 2022, through February 21, 2022, was $3.83.

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

to tractor idling time, along with empty and out-of-route miles.

Fuel prices steadily increased throughout 2021 compared to 2020.

This trend has continued into 2022.

We cannot predict what fuel prices will be throughout 2022, but fuel expense has become the second highest expense behind salaries, wages and benefits in 2022 thus far.

We are not able to pass through all fuel price increases through fuel surcharge agreements with customers due 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.

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Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020

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.

Operating revenue decreased $38.0 million (5.9%), to $607.3 million for the year ended December 31, 2021 from $645.3 million for the year ended December 31, 2020.

The decrease in revenue was the net result of a decrease in trucking and other revenues of $52.4 million partially offset by an increase in fuel surcharge revenue of $14.4 million.

Millis Transfer contributed approximately 24.8% of the operating revenues, for the year ended December 31, 2021.

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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.

For 2022, we expect the industry trends experienced in 2020 and 2021 will likely continue.

We expect the driver shortage within our industry will continue to impact recruiting and retention efforts during 2022.

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.

The operating revenues decrease was the net result of a decrease in loaded miles as a result of fewer drivers partially offset by an increase in the average rate per loaded mile along with increased driver utilization.

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.

Fuel surcharge revenues increased primarily as a result of an increase in average DOE diesel fuel prices of 28.9% during 2021 compared to 2020, as reported by the DOE, which was partially offset by decreased miles driven.

Salaries, wages, and benefits decreased $19.5 million (7.2%), to $250.0 million for the year ended December 31, 2021 from $269.5 million in the 2020 period.

Salaries, wages, and benefits decreased primarily due to the decrease in the number of drivers partially offset by increased driver and support staff wages.

In response to current hiring and retention challenges in our industry we have increased wages and enhanced the compensation for our drivers multiple times in the last twelve months.

Further, we have continued to get more creative in providing better pay, benefits, equipment, and facilities for our drivers.

We expect the qualified driver shortage within the trucking industry to continue to be a challenge in the foreseeable future.

Fuel increased $13.5 million (15.7%), to $99.6 million for the year ended December 31, 2021 from $86.1 million for the same period of 2020.

The increase in fuel was primarily due to higher average diesel price per gallon (28.9%) as reported by the

DOE, partially offset by decreased miles driven.

Throughout the twelve months ended December 31, 2021, we were in a rising fuel price environment, while during most of 2020 we were in a declining fuel price environment.

The difference in the lowest DOE price in 2020 (November) to the highest DOE price in 2021 (November) was $1.36 per gallon or a 57.4% increase.

The trend of fuel price increases has continued through February 2022.

The latest DOE diesel fuel price in February 2022 is up 12.2% compared to the end of 2021, is up 23.4% compared to the 2021 yearly average, and is up 42.4% to the February 2021 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.

Depreciation and amortization decreased $5.8 million (5.3%), to $104.1 million during the year ended December 31, 2021 from $109.9 million in the same period of 2020.

The decrease in depreciation and amortization is attributable to ongoing fleet replacement strategies and adjusting our fleet to our driver base expectation.

We expect depreciation expense in 2022 to be approximately $90.0 million to $100.0 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.

Operating and maintenance expense decreased $6.1 million (22.2%), to $21.5 million during the year ended December 31, 2021, from $27.6 million in the same period of 2020.

Operating and maintenance costs decreased mainly due to a reduction in miles driven partially offset by increased costs associated with an increase in equipment sales volume.

There was a 132.8% increase in volume of trailers sold during 2021 as compared to 2020, partially offset by a 3.4% decrease in the quantity of tractors sold.

We believe that new equipment price inflation and the lack of availability of new revenue equipment will continue throughout 2022.

As a result of manufacturer production shortages and increased costs for new revenue equipment, our trade activity in 2022 is anticipated to be significantly below levels experienced in recent years.

At December 31, 2021, the Company’s tractor fleet had an average age of 1.4 years and the Company's trailer fleet had an average age of 3.4 years.

Given our average age of revenue equipment is in the top tier of our industry, we do not believe that extending our trade cycle in 2022 will significantly increase operations and maintenance expense compared to the rest of the industry.

Operating taxes and licenses expense decreased $1.4 million (9.1%), to $13.6 million during the year ended December 31, 2021 from $15.0 million in 2020, due to a lower number of revenue equipment units (tractors and trailers) licensed in 2021 as compared to 2020.

Insurance and claims expense decreased $1.4 million (6.3%), to $20.8 million during the year ended December 31, 2021 from $22.2 million in 2020.

There was a decrease in severity and frequency of claims as well as a reduction in risk exposure resulting from less miles driven, partially offset by an increase in insurance premiums in 2021 compared to 2020.

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

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.

We expect that insurance premiums will continue trending upward.

In recent years we have modified our coverage to better match the benefit of insurance coverage received to the insurance premiums charged.

We will continue this evaluation with our 2022 insurance renewal, which could result in a change to our coverage limits and insurance premium costs.

Other operating expenses decreased $5.0 million (18.9%), to $21.4 million, during the year ended December 31, 2021 from $26.4 million in 2020, due mainly to decreased variable costs associated with the reduction of revenue equipment units in our fleet.

Gains on the disposal of property and equipment increased $22.6 million (152.4%), to $37.4 million during the year ended December 31, 2021, from $14.8 million in the same period of 2020.

The increase was due to a $13.3 million increase in gains on sales of trailer equipment.

The increase in gains on trailer sales was due to a 44.2% increase in gains per unit sold in 2021 as compared to 2020 as well as a 132.8% increase in volume of trailers sold.

Gains on tractor equipment sales increased by $5.1 million during 2021 compared to 2020 as a result of a 61.2% increase in gains per tractor sold partially offset by a 3.4% decrease in the quantity of tractors sold.

The remaining $4.2 million gain was primarily due to the sale of a terminal facility.

We expect the used equipment market to remain strong in 2022, although our participation may be limited by production shortages and increased costs for new revenue equipment to replace sold units.

Our effective tax rate was 25.2% and 24.9% for years ended December 31, 2021 and 2020, respectively.

We expect the 2021 effective tax rate to be comparable to the 2020 effective tax rate.

The increase in the effective tax rate is due to non-recurring favorable adjustments realized in 2020.

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.

During the past year there has been an inflation uptick.

Significant price increases in original equipment manufacturer revenue equipment has impacted the cost for us to acquire new equipment, while there has been a corresponding inflationary impact to prices offered on the sale of our used equipment.

The cost increases have also impacted the cost of parts for equipment repairs and maintenance, inclusive of tires.

The qualified driver shortage experienced by the trucking industry has had the affect of

increasing compensation paid to drivers.

Significant inflation has been experienced in insurance and claims cost related to health insurance and claims as well as auto liability insurance and claims.

Further, innovations in equipment technology, EPA mandated new engine emission requirements and driver comfort have also resulted in higher tractor prices.

We have the ability to limit new equipment purchases given our average age of revenue equipment is in the top tier of our industry.

We do not believe that extending our trade cycle in 2022 will significantly increase operations and maintenance expense compared to the rest of the industry.

We historically have limited the effects of inflation through increases in freight rates and certain cost control efforts.

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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.

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 or continued rising price environments like we experienced throughout 2021.

These arrangements 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.

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Cash flow from operating activities was 20.3% of operating revenues for the year ended December 31, 2021, compared to 27.7% for the same period of 2020.

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 change predominantly relates to increased cash paid for income taxes and other payroll taxes as further described below.

The CARES Act allowed employers to defer the deposit and payment of the employer's share of Social Security taxes.

As a result, during 2020 we deferred remitting payroll taxes normally paid on a weekly basis until the end of 2021 when the first half of the deferred tax payments were paid and 2022 when the second half of the deferred tax payments are due.

The CARES Act deferred federal payroll taxes as of December 31, 2021 was $4.7 million.

Cash flows used in investing activities were $2.6 million during 2021, representing a decrease in cash used of $108.4 million compared to cash flows used in investing activities of $111.0 million during 2020.

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.

The decrease in cash used in investing activities was mainly the result of $108.7 million less of net purchases of property and equipment in 2021, compared to net purchases of property and equipment in 2020.

We currently anticipate higher net capital expenditures for revenue equipment in 2022 compared to 2021, despite a lower number of new equipment units anticipated to be purchased, as a result of a reduced volume of units anticipated to be sold in 2022 compared to 2021.

Cash flows used in financing activities increased $45.4 million in 2021 compared to 2020.

This was primarily due to a special dividend paid of $39.5 million in 2021 and $32.0 million cash used for repurchases of our common stock during 2021, as compared to $25.7 million cash used for repurchases of our common stock during 2020.

There were no repayments of debt during 2021 and 2020, as we had no indebtedness.

We have a stock repurchase program with 6.6 million shares remaining authorized for repurchase as of December 31, 2021 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.

There were 1.8 million shares repurchased in the open market during the year ended December 31, 2021 and 1.5 million shares were repurchased in 2020.

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.

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We paid income taxes, net of refunds, of $38.5 million in 2021, compared with $13.7 million during 2020.

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.

The increase in net tax payments is due to a federal refund received in 2020 compared to 2021 and increased current year tax liability associated with the recognition of increased tax gains on revenue equipment sales and less accelerated depreciation deductions in 2021 compared to 2020.

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.

On August 31, 2021, the Borrower and the Bank entered into the Second Amendment to this Credit Agreement.

The Second Amendment (i) provides for a $25.0 million 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) decreases the letter of credit subfeature of the Credit Agreement from $30.0 million to $20.0 million, and (iv) extends the maturity of the Existing Credit Agreement to August 31, 2023, 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.

Interest on outstanding indebtedness under the Second Amendment is based on the Secured Overnight Financing Rate (“SOFR”) plus a spread based on the Company’s consolidated funded debt to adjusted EBITDA ratio.

A non-usage fee is payable on the unused portion of the Revolver 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.

The Credit Agreement also includes customary events of default, covenants, representations and warranties, and indemnification provisions.

We were in compliance with the respective financial covenants as of and for the years ended December 31, 2021 and December 31, 2020.

Contractual Obligations and Commercial Commitments

The following sets forth our contractual obligations and commercial commitments at December 31, 2020.

The Company's material cash requirements include the following contractual obligations and commercial commitments at December 31, 2021.

Payments due by period (in millions)

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Tax years 2011 and forward are subject to audit by state tax authorities depending on the tax code and administrative practice of each state.

Critical Accounting Policies

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S.

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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.

We have identified certain accounting policies and estimates, 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.

Revenue equipment estimated useful lives and salvage values

Over 99% of our total miles comes from company drivers operating the Company's revenue equipment.

Management estimates the useful lives of revenue equipment based on estimated period of use for 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.

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.

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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

as well as manufacturer warranty periods.

Management estimates the useful lives on tractors based on average miles per truck per year as well as manufacturer warranty periods.

We have not historically run tractors outside of manufacturer warranty periods.

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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.

It is reasonably likely that changing revenue equipment markets could result in a change in depreciable life or salvage value estimate.

Management believes that a change in estimate will not significantly affect the long-term financial condition of the Company or its ability to fund its continuing operations.

A change in estimate would impact depreciation and amortization in the consolidated statements of comprehensive income and revenue equipment in the consolidated balance sheets.

We have not had any material changes to our estimate methodology in the past three years.

Auto Liability and Workers’ Compensation Claims Reserve

The Company is self-insured for a portion of the risk related to auto liability and workers' compensation.

Management estimates accruals for the self-insured portion of pending accident liability and workers’ compensation claims by evaluating the nature and severity of individual claims and by estimating future claims development based upon historical development trends, utilizing the facts and circumstances known on the applicable balance sheet date.

The accruals are made up of individual case estimates, including reserve development, and estimates of incurred-but-not-reported losses based upon past experience.

Auto liability and workers' compensation unpaid liabilities are determined by projecting the estimated ultimate loss related to a claim, less actual costs paid to date.

Industry development as well as our historical case results are used to determine development of individual case claims.

The estimates rely on the assumption that historical claim patterns are an accurate representation for future claims that have been incurred but not completely paid.

The ultimate resolution of these claims may be for an amount significantly different than the amount estimated by management and case reserves are continually adjusted as new or revised information becomes available on the status of each claim.

There is a high level of estimation uncertainty related to determining the severity of these types of claims, as well as the inherent subjectivity in estimating the total costs to settle or for defense against these claims.

These liabilities are undiscounted and represent management's best estimate of our ultimate obligations.

The actual cost to settle self-insured claims liabilities may differ from the Company's reserve estimates due to legal costs, claims and information on known claims that have been incurred but not reported as well as various other uncertainties.

It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims liability at December 31, 2021.

Management believes that the ultimate resolution of these claims will not significantly affect the long-term financial condition of the Company or its ability to fund its continuing operations.

A change in estimate could impact salaries, wages and benefits (workers compensation) or insurance and claims (auto liability) in the consolidated statements of comprehensive income and insurance accruals in the consolidated balance sheets.

We have not had any material changes to our estimate methodology in the past three years.

Significant management judgment is required to determine the provision for income taxes and to determine whether deferred income taxes will be realized.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis