HEARTLAND EXPRESS INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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 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. 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 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 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, 2020. Recent Developments On August 26, 2019 we completed our third acquisition within eight 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 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 $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 28 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 $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. (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, 2021 2020 (in thousands) Operating revenue $ 607,284 $ 645,262 Less: Fuel surcharge revenue (non-GAAP) 76,116 61,725 Operating revenue excluding fuel surcharge revenue 531,168 583,537 Operating expenses 501,877 551,843 Less: Fuel surcharge revenue (non-GAAP) 76,116 61,725 Adjusted operating expenses 425,761 490,118 Operating income $ 105,407 $ 93,419 Operating ratio 82.6 % 85.5 % Adjusted operating ratio (non-GAAP) 80.2 % 84.0 % (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, 2021 was $123.4 million or 20.3% of operating revenues, compared to $178.9 million or 27.7% of operating revenues in 2020. 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 $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. 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. 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 29 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. 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. 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, 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 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. 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 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. 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, 2021, our operating cash flows as a percentage of operating revenues five-year average was 23.0%, our three-year average was 24.3%, and most recently for 2021 was 20.3%. 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 30 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, 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 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. 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 2021 and 2020 were $3.29 and $2.55, respectively. The average price per gallon in 2022, through February 21, 2022, was $3.83. 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. 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. 31 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, 2021 2020 Operating revenue 100.0 % 100.0 % Operating expenses: Salaries, wages, and benefits 41.2 % 41.8 % Rent and purchased transportation 0.6 0.7 Fuel 16.4 13.3 Operations and maintenance 3.6 4.3 Operating taxes and licenses 2.3 2.3 Insurance and claims 3.4 3.5 Communications and utilities 0.7 0.8 Depreciation and amortization 17.1 17.0 Other operating expenses 3.5 4.1 Gain on disposal of property and equipment (6.2) (2.3) 82.6 % 85.5 % Operating income 17.4 % 14.5 % Interest income 0.1 % 0.1 % Interest expense 0.0 % 0.0 % Income before income taxes 17.5 % 14.6 % Income tax expense 4.4 3.6 Net income 13.1 % 11.0 % Year Ended December 31, 2021 Compared with the Year Ended December 31, 2020 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. 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. 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 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 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 32 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 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 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. 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. 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 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 33 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. 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 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. 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 2021 and 2020 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, 2021, we had $157.7 million in cash and cash equivalents, no outstanding debt, and $16.5 million available borrowing capacity on the line of credit. Operating cash flow for 2021 was $123.4 million compared to $178.9 million for 2020. 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 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 $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 1.8 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. The share repurchase authorization is discretionary and has no expiration date. 34 We paid income taxes, net of refunds, of $38.5 million in 2021, compared with $13.7 million during 2020. 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”). 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. 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, 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 Company's material cash requirements include the following contractual obligations and commercial commitments at December 31, 2021. 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) $ 25.8 $ 25.8 $ — $ — $ — Obligations for unrecognized tax benefits (2) 5.5 — — — 5.5 $ 31.3 $ 25.8 $ — $ — $ 5.5 (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, 2021, we had a total of $4.7 million in gross unrecognized tax benefits included in long-term income taxes payable in the consolidated balance sheets. Of this amount, $3.7 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate as of December 31, 2021. The total net amount of accrued interest and penalties for such unrecognized tax benefits was $0.8 million at December 31, 2021, 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. 35 A reconciliation of the obligations for unrecognized tax benefits is as follows: December 31, 2021 (in thousands) Gross unrecognized tax benefits $ 4,671 Accrued penalties and interest associated with the unrecognized tax benefits (net of benefit of interest deduction) 820 Obligations for unrecognized tax benefits $ 5,491 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 2018 and forward. 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 and Estimates 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 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: 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, over the estimated useful life down to an estimated salvage value. 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 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. 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. 36 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. 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. 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.