Attached files
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| 8-K - FORM 8-K INVESTOR UPDATE WITH RECAST - SOUTHWEST AIRLINES CO | coverpage3-13x18.htm |
Southwest Airlines Co.
Condensed Consolidated Statement of Income
As Recast for Adoption of New Accounting Standards on January 1, 2018
(in millions, except per share amounts)
(unaudited)
Effective as of January 1, 2018, the Company adopted three new Accounting Standard Updates ("ASUs"): ASU 2014-09: Revenue from Contracts with Customers (the “New Revenue Standard”), ASU 2017-07: Compensation – Retirement Benefits (the “New Retirement Standard”), and ASU 2017-12: Derivatives and Hedging (the "New Hedging Standard"). In accordance with the transition provisions of these new standards, the Company has recast certain 2017 and 2016 financial information previously reported in accordance with GAAP in effect as of December 31, 2017 and 2016 to reflect the effects of adoption. This recast financial information is labeled “As Recast” and is included for supplemental purposes only. The impacts of adoption and related disclosures required by GAAP will be reported in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, as well as in subsequent filings. Note: Amounts throughout may not recalculate due to rounding.
Year Ended December 31, 2017 | |||||||||||||||||||||||
New Revenue Standard | |||||||||||||||||||||||
As Reported | Deferred Revenue Method | Reclassifications | New Retirement Standard | New Hedging Standard | As Recast | ||||||||||||||||||
(A) | (B) | (C) | (D) | ||||||||||||||||||||
OPERATING REVENUES: | |||||||||||||||||||||||
Passenger | $ | 19,141 | $ | 14 | $ | 608 | $ | — | $ | — | $ | 19,763 | |||||||||||
Freight | 173 | — | — | — | — | 173 | |||||||||||||||||
Other | 1,857 | — | (647 | ) | — | — | 1,210 | ||||||||||||||||
Total operating revenues | 21,171 | 14 | (39 | ) | — | — | 21,146 | ||||||||||||||||
OPERATING EXPENSES: | |||||||||||||||||||||||
Salaries, wages, and benefits | 7,319 | — | — | (14 | ) | — | 7,305 | ||||||||||||||||
Fuel and oil | 3,940 | — | — | — | 136 | 4,076 | |||||||||||||||||
Maintenance materials and repairs | 1,001 | — | — | — | — | 1,001 | |||||||||||||||||
Aircraft rentals | 198 | — | — | — | — | 198 | |||||||||||||||||
Landing fees and other rentals | 1,292 | — | — | — | — | 1,292 | |||||||||||||||||
Depreciation and amortization | 1,218 | — | — | — | — | 1,218 | |||||||||||||||||
Other operating expenses | 2,688 | — | (39 | ) | — | — | 2,649 | ||||||||||||||||
Total operating expenses | 17,656 | — | (39 | ) | (14 | ) | 136 | 17,739 | |||||||||||||||
OPERATING INCOME | 3,515 | 14 | — | 14 | (136 | ) | 3,407 | ||||||||||||||||
OTHER EXPENSES (INCOME): | |||||||||||||||||||||||
Interest expense | 114 | — | — | — | — | 114 | |||||||||||||||||
Capitalized interest | (49 | ) | — | — | — | — | (49 | ) | |||||||||||||||
Interest income | (35 | ) | — | — | — | — | (35 | ) | |||||||||||||||
Other (gains) losses, net | 234 | — | — | 14 | (136 | ) | 112 | ||||||||||||||||
Total other expenses (income) | 264 | — | — | 14 | (136 | ) | 142 | ||||||||||||||||
INCOME BEFORE INCOME TAXES | 3,251 | 14 | — | — | — | 3,265 | |||||||||||||||||
PROVISION FOR INCOME TAXES | (237 | ) | 145 | — | — | — | (92 | ) | |||||||||||||||
NET INCOME | $ | 3,488 | $ | (131 | ) | $ | — | $ | — | $ | — | $ | 3,357 | ||||||||||
NET INCOME PER SHARE: | |||||||||||||||||||||||
Basic | $ | 5.80 | (0.22 | ) | — | — | — | $ | 5.58 | ||||||||||||||
Diluted | $ | 5.79 | (0.22 | ) | — | — | — | $ | 5.57 | ||||||||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING: | |||||||||||||||||||||||
Basic | 601 | 601 | |||||||||||||||||||||
Diluted | 603 | 603 | |||||||||||||||||||||
5
Year Ended December 31, 2016 | |||||||||||||||||||||||
New Revenue Standard | |||||||||||||||||||||||
As Reported | Deferred Revenue Method | Reclassifications | New Retirement Standard | New Hedging Standard | As Recast | ||||||||||||||||||
(A) | (B) | (C) | (D) | ||||||||||||||||||||
OPERATING REVENUES: | |||||||||||||||||||||||
Passenger | $ | 18,594 | $ | (96 | ) | $ | 570 | $ | — | $ | — | $ | 19,068 | ||||||||||
Freight | 171 | — | — | — | — | 171 | |||||||||||||||||
Other | 1,660 | — | (610 | ) | — | — | 1,050 | ||||||||||||||||
Total operating revenues | 20,425 | (96 | ) | (40 | ) | — | — | 20,289 | |||||||||||||||
OPERATING EXPENSES: | |||||||||||||||||||||||
Salaries, wages, and benefits | 6,798 | — | — | (12 | ) | — | 6,786 | ||||||||||||||||
Fuel and oil | 3,647 | — | — | — | 154 | 3,801 | |||||||||||||||||
Maintenance materials and repairs | 1,045 | — | — | — | — | 1,045 | |||||||||||||||||
Aircraft rentals | 229 | — | — | — | — | 229 | |||||||||||||||||
Landing fees and other rentals | 1,211 | — | — | — | — | 1,211 | |||||||||||||||||
Depreciation and amortization | 1,221 | — | — | — | — | 1,221 | |||||||||||||||||
Other operating expenses | 2,514 | — | (40 | ) | — | — | 2,474 | ||||||||||||||||
Total operating expenses | 16,665 | — | (40 | ) | (12 | ) | 154 | 16,767 | |||||||||||||||
OPERATING INCOME | 3,760 | (96 | ) | — | 12 | (154 | ) | 3,522 | |||||||||||||||
OTHER EXPENSES (INCOME): | |||||||||||||||||||||||
Interest expense | 122 | — | — | — | — | 122 | |||||||||||||||||
Capitalized interest | (47 | ) | — | — | — | — | (47 | ) | |||||||||||||||
Interest income | (24 | ) | — | — | — | — | (24 | ) | |||||||||||||||
Other (gains) losses, net | 162 | — | — | 12 | (154 | ) | 21 | ||||||||||||||||
Total other expenses (income) | 213 | — | — | 12 | (154 | ) | 72 | ||||||||||||||||
INCOME BEFORE INCOME TAXES | 3,547 | (96 | ) | — | — | — | 3,450 | ||||||||||||||||
PROVISION FOR INCOME TAXES | 1,303 | (36 | ) | — | — | — | 1,267 | ||||||||||||||||
NET INCOME | $ | 2,244 | $ | (60 | ) | $ | — | $ | — | $ | — | $ | 2,183 | ||||||||||
NET INCOME PER SHARE: | |||||||||||||||||||||||
Basic | $ | 3.58 | (0.10 | ) | — | — | — | $ | 3.48 | ||||||||||||||
Diluted | $ | 3.55 | (0.10 | ) | — | — | — | $ | 3.45 | ||||||||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING: | |||||||||||||||||||||||
Basic | 627 | 627 | |||||||||||||||||||||
Diluted | 633 | 633 | |||||||||||||||||||||
(A) The adoption of the New Revenue Standard required the elimination of the incremental cost method of accounting for outstanding points earned through travel for the Company’s Rapid Rewards program Members. Such points are now required to be valued utilizing a relative selling price methodology in which a portion of each Passenger ticket flown is attributable to the frequent flyer points earned, and is deferred and recognized in Passenger revenue upon future redemption. Under the previous incremental cost method, the Company's liability only reflected the estimated cost of providing free travel for all points earned from flight activity and that were expected to be redeemed for future travel. The estimated incremental cost included only direct passenger costs such as fuel, food, and other operational costs. The relative fair value of these points earned through travel is materially greater than the amount estimated under the incremental cost method. There was no material change to the Company’s methodology for accounting for points sold through the Company's co-branded credit card agreement or to other loyalty program partners. In addition, the retrospective application of the New Revenue Standard resulted in an adjustment to the special item recorded in fourth quarter 2017 related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re-measurement of the Company’s deferred tax assets and liabilities. See the accompanying Reconciliation of 2017 and 2016 Financial Measures as Recast to Non-GAAP Financial Measures as Recast.
6
(B) The adoption of the New Revenue Standard required that the Company reclassify certain ancillary revenues previously classified and reported as Other revenues to Passenger revenues as well as certain expenses previously classified on a gross basis and reported as Other operating expenses to be offset on a net basis against Passenger revenues.
(C) The adoption of the New Retirement Standard required that the Company reclassify all components of its net periodic benefit cost (income), with the exception of service cost, previously classified and reported as operating expenses in Salaries, wages, and benefits to Other (gains) losses, net.
(D) In conjunction with the adoption of the New Hedging Standard, among other items, the Company is now required to report premium expense associated with hedges as a component of Fuel and oil expense, versus its prior election to report such expense as a component of Other (gains) losses, net. In order to conform prior results to this format and enhance comparability, the Company has elected to apply this change in presentation to prior periods as well.
7
Southwest Airlines Co.
Comparative Consolidated Operating Statistics
Twelve Months Ended December 31, 2017 and 2016
As Recast for Adoption of New Accounting Standards on January 1, 2018
(unaudited)
As Reported | As Recast | ||||||
Full Year | Full Year | ||||||
December 31, | December 31, | ||||||
2017 | 2017 | ||||||
Average passenger fare | $ | 146.95 | $ | 151.73 | |||
Passenger revenue yield per RPM (cents) (a) | 14.83 | 15.32 | |||||
RASM (cents) (b) | 13.76 | 13.75 | |||||
PRASM (cents) (c) | 12.44 | 12.85 | |||||
CASM (cents) (d) | 11.48 | 11.53 | |||||
CASM, excluding Fuel and oil expense (cents) | 8.92 | 8.88 | |||||
CASM, excluding Fuel and oil expense and profitsharing expense (cents) | 8.56 | 8.53 | |||||
CASM, excluding special items (cents) | 11.52 | 11.57 | |||||
CASM, excluding Fuel and oil expense and special items (cents) | 8.85 | 8.82 | |||||
CASM, excluding Fuel and oil expense, special items, and profitsharing expense (cents) | 8.50 | 8.47 | |||||
Fuel costs per gallon, including fuel tax | $ | 1.92 | $ | 1.99 | |||
Fuel costs per gallon, including fuel tax (economic) | $ | 2.00 | $ | 2.06 | |||
As Reported | As Recast | ||||||
Full Year | Full Year | ||||||
December 31, | December 31, | ||||||
2016 | 2016 | ||||||
Average passenger fare | $ | 149.09 | $ | 152.89 | |||
Passenger revenue yield per RPM (cents) (a) | 14.90 | 15.28 | |||||
RASM (cents) (b) | 13.75 | 13.66 | |||||
PRASM (cents) (c) | 12.52 | 12.84 | |||||
CASM (cents) (d) | 11.22 | 11.29 | |||||
CASM, excluding Fuel and oil expense (cents) | 8.76 | 8.73 | |||||
CASM, excluding Fuel and oil expense and profitsharing expense (cents) | 8.37 | 8.34 | |||||
CASM, excluding special items (cents) | 11.09 | 11.16 | |||||
CASM, excluding Fuel and oil expense and special items (cents) | 8.49 | 8.46 | |||||
CASM, excluding Fuel and oil expense, special items, and profitsharing expense (cents) | 8.10 | 8.07 | |||||
Fuel costs per gallon, including fuel tax | $ | 1.82 | $ | 1.90 | |||
Fuel costs per gallon, including fuel tax (economic) | $ | 1.92 | $ | 2.00 | |||
(a) Calculated as passenger revenue divided by revenue passenger miles. Also referred to as "yield," this is the average cost paid by a paying passenger to fly one mile, which is a measure of revenue production and fares.
(b) RASM (unit revenue) - Operating revenue yield per ASM, calculated as operating revenue divided by available seat miles. Also referred to as "operating unit revenues," this is a measure of operating revenue production based on the total available seat miles flown during a particular period.
(c) PRASM (Passenger unit revenue) - Passenger revenue yield per ASM, calculated as passenger revenue divided by available seat miles. Also referred to as “passenger unit revenues,” this is a measure of passenger revenue production based on the total available seat miles flown during a particular period.
(d) CASM (unit costs) - Operating expenses per ASM, calculated as operating expenses divided by available seat miles. Also referred to as "unit costs" or "cost per available seat mile," this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies.
8
Southwest Airlines Co.
Quarterly Adjustments to Statement of Income
Resulting from Adoption of New Accounting Standards on January 1, 2018
(in millions)
(unaudited)
FY 17 As Reported | 1Q17 | 2Q17 | 3Q17 | 4Q17 | FY 17 As Recast | ||||||||||||||||||
OPERATING REVENUES: | |||||||||||||||||||||||
Passenger revenue | $ | 19,141 | $ | 122 | $ | 146 | $ | 199 | $ | 157 | $ | 19,763 | |||||||||||
Other revenue | 1,857 | (151 | ) | (159 | ) | (167 | ) | (173 | ) | 1,210 | |||||||||||||
OPERATING EXPENSES: | |||||||||||||||||||||||
Salaries, wages, and benefits | 7,319 | (3 | ) | (4 | ) | (4 | ) | (3 | ) | 7,305 | |||||||||||||
Fuel and oil | 3,940 | 34 | 34 | 34 | 33 | 4,076 | |||||||||||||||||
Other operating expenses | 2,688 | (8 | ) | (8 | ) | (9 | ) | (14 | ) | 2,649 | |||||||||||||
OTHER EXPENSES (INCOME): | |||||||||||||||||||||||
Other (gains) losses, net | 234 | (31 | ) | (30 | ) | (30 | ) | (30 | ) | 112 | |||||||||||||
Provision for income taxes | (237 | ) | (9 | ) | (2 | ) | 16 | 140 | (92 | ) | |||||||||||||
FY 16 As Reported | 1Q16 | 2Q16 | 3Q16 | 4Q16 | FY 16 As Recast | ||||||||||||||||||
OPERATING REVENUES: | |||||||||||||||||||||||
Passenger revenue | $ | 18,594 | $ | 86 | $ | 119 | $ | 138 | $ | 130 | $ | 19,068 | |||||||||||
Other revenue | 1,660 | (145 | ) | (162 | ) | (155 | ) | (148 | ) | 1,050 | |||||||||||||
OPERATING EXPENSES: | |||||||||||||||||||||||
Salaries, wages, and benefits | 6,798 | (2 | ) | (2 | ) | (4 | ) | (4 | ) | 6,786 | |||||||||||||
Fuel and oil | 3,647 | 35 | 47 | 34 | 36 | 3,801 | |||||||||||||||||
Other operating expenses | 2,514 | (7 | ) | (8 | ) | (11 | ) | (12 | ) | 2,474 | |||||||||||||
OTHER EXPENSES (INCOME): | |||||||||||||||||||||||
Other (gains) losses, net | 162 | (33 | ) | (45 | ) | (30 | ) | (32 | ) | 21 | |||||||||||||
Provision for income taxes | 1,303 | (20 | ) | (13 | ) | (2 | ) | (2 | ) | 1,267 | |||||||||||||
9
Southwest Airlines Co.
Reconciliation of 2017 and 2016 Financial Measures as Recast to Non-GAAP Financial Measures as Recast
(See Note Regarding Use of Non-GAAP Financial Measures)
(in millions, except per share amounts)
(unaudited)
As previously discussed, on January 1, 2018, the Company adopted the New Revenue Standard, the New Retirement Standard, and the New Hedging Standard. The following tables present certain quarterly and annual unaudited 2017 and 2016 financial measures As Recast and non-GAAP financial measures As Recast.
1Q17 As Recast | 2Q17 As Recast | 3Q17 As Recast | 4Q17 As Recast | FY 17 As Recast | |||||||||||||||
Fuel and oil expense, unhedged | $ | 816 | $ | 867 | $ | 886 | $ | 955 | $ | 3,524 | |||||||||
Add: Premium cost of fuel contracts | 34 | 34 | 34 | 33 | 136 | ||||||||||||||
Add: Fuel hedge (gains) losses included in Fuel and oil expense, net | 106 | 123 | 117 | 70 | 416 | ||||||||||||||
Fuel and oil expense, as recast | $ | 956 | $ | 1,024 | $ | 1,037 | $ | 1,058 | $ | 4,076 | |||||||||
Add: Net impact from fuel contracts (a) | 37 | 46 | 46 | 27 | 156 | ||||||||||||||
Fuel and oil expense, as recast, excluding special items (economic) | $ | 993 | $ | 1,070 | $ | 1,083 | $ | 1,085 | $ | 4,232 | |||||||||
Total operating expenses, as recast | $ | 4,248 | $ | 4,516 | $ | 4,458 | $ | 4,517 | $ | 17,739 | |||||||||
Add: Net impact from fuel contracts (a) | 37 | 46 | 46 | 27 | 156 | ||||||||||||||
Deduct: Lease termination expense | (5 | ) | (8 | ) | (20 | ) | — | (33 | ) | ||||||||||
Deduct: Aircraft grounding charge | — | — | (63 | ) | — | (63 | ) | ||||||||||||
Total operating expenses, as recast, excluding special items | $ | 4,280 | $ | 4,554 | $ | 4,421 | $ | 4,544 | $ | 17,799 | |||||||||
Deduct: Fuel and oil expense, as recast, excluding special items (economic) | (993 | ) | (1,070 | ) | (1,083 | ) | (1,085 | ) | (4,232 | ) | |||||||||
Operating expenses, as recast, excluding Fuel and oil expense and special items | 3,287 | 3,484 | 3,338 | 3,459 | 13,567 | ||||||||||||||
Deduct: Profitsharing expense | (99 | ) | (202 | ) | (127 | ) | (115 | ) | (543 | ) | |||||||||
Operating expenses, as recast, excluding profitsharing, Fuel and oil expense, and special items | $ | 3,188 | $ | 3,282 | $ | 3,211 | $ | 3,344 | $ | 13,024 | |||||||||
Operating income, as recast | $ | 606 | $ | 1,215 | $ | 845 | $ | 741 | $ | 3,407 | |||||||||
Deduct: Net impact from fuel contracts (a) | (37 | ) | (46 | ) | (46 | ) | (27 | ) | (156 | ) | |||||||||
Add: Lease termination expense | 5 | 8 | 20 | — | 33 | ||||||||||||||
Add: Aircraft grounding charge | — | — | 63 | — | 63 | ||||||||||||||
Operating income, as recast, excluding special items | $ | 574 | $ | 1,177 | $ | 882 | $ | 714 | $ | 3,347 | |||||||||
Other (gains) losses, net, as recast | $ | 63 | $ | 44 | $ | 9 | $ | (3 | ) | $ | 112 | ||||||||
Add (Deduct): Net impact from fuel contracts (a) | (65 | ) | (41 | ) | (4 | ) | 4 | (106 | ) | ||||||||||
Other (gains) losses, net, as recast, excluding special items | $ | (2 | ) | $ | 3 | $ | 5 | $ | 1 | $ | 6 | ||||||||
Provision for income taxes, as recast | $ | 193 | $ | 422 | $ | 304 | $ | (1,011 | ) | $ | (92 | ) | |||||||
Add (Deduct): Net income tax impact of fuel and special items, excluding Tax reform impact (b) | 13 | 1 | 15 | (12 | ) | 17 | |||||||||||||
Add: Tax reform impact, as recast (c) | — | — | — | 1,270 | 1,270 | ||||||||||||||
Provision for income taxes, as recast, excluding special items | $ | 206 | $ | 423 | $ | 319 | $ | 247 | $ | 1,195 | |||||||||
10
1Q17 As Recast | 2Q17 As Recast | 3Q17 As Recast | 4Q17 As Recast | FY 17 As Recast | |||||||||||||||
Net income, as recast | $ | 339 | $ | 743 | $ | 528 | $ | 1,747 | $ | 3,357 | |||||||||
Add (Deduct): Net impact from fuel contracts (a) | 28 | (5 | ) | (42 | ) | (31 | ) | (50 | ) | ||||||||||
Add: Lease termination expense | 5 | 8 | 20 | — | 33 | ||||||||||||||
Add: Aircraft grounding charge | — | — | 63 | — | 63 | ||||||||||||||
Add (Deduct): Net income tax impact of fuel and special items, excluding Tax reform impact (b) | (13 | ) | (1 | ) | (15 | ) | 12 | (17 | ) | ||||||||||
Deduct: Tax reform impact, as recast (c) | — | — | — | (1,270 | ) | (1,270 | ) | ||||||||||||
Net income, as recast, excluding special items | $ | 359 | $ | 745 | $ | 554 | $ | 458 | $ | 2,116 | |||||||||
Net income per share, diluted, as recast | $ | 0.55 | $ | 1.23 | $ | 0.88 | $ | 2.94 | $ | 5.57 | |||||||||
Add (Deduct): Impact from fuel contracts | 0.04 | (0.01 | ) | (0.07 | ) | (0.05 | ) | (0.08 | ) | ||||||||||
Add: Impact of special items | 0.01 | — | 0.14 | — | 0.16 | ||||||||||||||
Add (Deduct): Net income tax impact of fuel and special items, excluding Tax reform impact (b) | (0.02 | ) | 0.01 | (0.02 | ) | 0.02 | (0.03 | ) | |||||||||||
Deduct: Tax reform impact, as recast (c) | — | — | — | (2.14 | ) | (2.11 | ) | ||||||||||||
Net income per share, diluted, as recast, excluding special items | $ | 0.58 | $ | 1.23 | $ | 0.93 | $ | 0.77 | $ | 3.51 | |||||||||
Operating expenses per ASM, as recast (cents) | 11.57 | ¢ | 11.24 | ¢ | 11.42 | ¢ | 11.92 | ¢ | 11.53 | ¢ | |||||||||
Deduct: Fuel expense, as recast, divided by ASMs | (2.60 | ) | (2.55 | ) | (2.66 | ) | (2.79 | ) | (2.65 | ) | |||||||||
Deduct: Profitsharing expense divided by ASMs | (0.27 | ) | (0.50 | ) | (0.33 | ) | (0.31 | ) | (0.35 | ) | |||||||||
Deduct: Impact of special items | (0.02 | ) | (0.02 | ) | (0.21 | ) | — | (0.06 | ) | ||||||||||
Operating expenses per ASM, as recast, excluding profitsharing, Fuel and oil expense, and special items (cents) | 8.68 | ¢ | 8.17 | ¢ | 8.22 | ¢ | 8.82 | ¢ | 8.47 | ¢ | |||||||||
11
1Q16 As Recast | 2Q16 As Recast | 3Q16 As Recast | 4Q16 As Recast | FY 16 As Recast | |||||||||||||||
Fuel and oil expense, unhedged | $ | 577 | $ | 716 | $ | 751 | $ | 783 | $ | 2,827 | |||||||||
Add: Premium cost of fuel contracts | 35 | 47 | 34 | 36 | 154 | ||||||||||||||
Add: Fuel hedge (gains) losses included in Fuel and oil expense, net | 275 | 187 | 190 | 169 | 820 | ||||||||||||||
Fuel and oil expense, as recast | $ | 887 | $ | 950 | $ | 975 | $ | 988 | $ | 3,801 | |||||||||
Add (Deduct): Net impact from fuel contracts (a) | (9 | ) | 31 | 97 | 81 | 201 | |||||||||||||
Fuel and oil expense, as recast, excluding special items (economic) | $ | 878 | $ | 981 | $ | 1,072 | $ | 1,069 | $ | 4,002 | |||||||||
Total operating expenses, as recast | $ | 3,908 | $ | 4,145 | $ | 4,463 | $ | 4,250 | $ | 16,767 | |||||||||
Deduct: Contract ratification bonuses | — | — | (356 | ) | — | (356 | ) | ||||||||||||
Add (Deduct): Net impact from fuel contracts (a) | (9 | ) | 31 | 97 | 81 | 201 | |||||||||||||
Deduct: Asset impairment | — | (21 | ) | — | — | (21 | ) | ||||||||||||
Deduct: Lease termination expense | — | — | (18 | ) | (4 | ) | (22 | ) | |||||||||||
Total operating expenses, as recast, excluding special items | $ | 3,899 | $ | 4,155 | $ | 4,186 | $ | 4,327 | $ | 16,569 | |||||||||
Deduct: Fuel and oil expense, as recast, excluding special items (economic) | (878 | ) | (981 | ) | (1,072 | ) | (1,069 | ) | (4,002 | ) | |||||||||
Operating expenses, as recast, excluding Fuel and oil expense and special items | 3,021 | 3,174 | 3,114 | 3,258 | 12,567 | ||||||||||||||
Deduct: Profitsharing expense | (155 | ) | (206 | ) | (101 | ) | (123 | ) | (586 | ) | |||||||||
Operating expenses, as recast, excluding profitsharing, Fuel and oil expense, and special items | $ | 2,866 | $ | 2,968 | $ | 3,013 | $ | 3,135 | $ | 11,981 | |||||||||
Operating income, as recast | $ | 859 | $ | 1,196 | $ | 659 | $ | 808 | $ | 3,522 | |||||||||
Add: Contract ratification bonuses | — | — | 356 | — | 356 | ||||||||||||||
Add (Deduct): Net impact from fuel contracts (a) | 9 | (31 | ) | (97 | ) | (81 | ) | (201 | ) | ||||||||||
Add: Asset impairment | — | 21 | — | — | 21 | ||||||||||||||
Add: Lease termination expense | — | — | 18 | 4 | 22 | ||||||||||||||
Operating income, as recast, excluding special items | $ | 868 | $ | 1,186 | $ | 936 | $ | 731 | $ | 3,720 | |||||||||
Other (gains) losses, net, as recast | $ | 81 | $ | (88 | ) | $ | 33 | $ | (7 | ) | $ | 21 | |||||||
Add (Deduct): Net impact from fuel contracts (a) | (79 | ) | 90 | (31 | ) | 18 | (3 | ) | |||||||||||
Other (gains) losses, net, as recast, excluding special items | $ | 2 | $ | 2 | $ | 2 | $ | 11 | $ | 18 | |||||||||
Net income, as recast | $ | 481 | $ | 798 | $ | 385 | $ | 519 | $ | 2,183 | |||||||||
Add: Contract ratification bonuses | — | — | 356 | — | 356 | ||||||||||||||
Add (Deduct): Net impact from fuel contracts (a) | 88 | (121 | ) | (66 | ) | (99 | ) | (198 | ) | ||||||||||
Add: Asset impairment | — | 21 | — | — | 21 | ||||||||||||||
Add: Lease termination expense | — | — | 18 | 4 | 22 | ||||||||||||||
Add (Deduct): Net income tax impact of fuel and special items (b) | (33 | ) | 37 | (115 | ) | 35 | (75 | ) | |||||||||||
Net income, as recast, excluding special items | $ | 536 | $ | 735 | $ | 578 | $ | 459 | $ | 2,309 | |||||||||
Net income per share, diluted, as recast | $ | 0.74 | $ | 1.25 | $ | 0.62 | $ | 0.84 | $ | 3.45 | |||||||||
Add (Deduct): Impact from fuel contracts | 0.14 | (0.19 | ) | (0.11 | ) | (0.16 | ) | (0.31 | ) | ||||||||||
Add: Impact of special items | — | 0.03 | 0.60 | 0.01 | 0.63 | ||||||||||||||
Add (Deduct): Net income tax impact of fuel and special items (b) | (0.05 | ) | 0.06 | (0.18 | ) | 0.05 | (0.12 | ) | |||||||||||
Net income per share, diluted, as recast, excluding special items | $ | 0.83 | $ | 1.15 | $ | 0.93 | $ | 0.74 | $ | 3.65 | |||||||||
12
1Q16 As Recast | 2Q16 As Recast | 3Q16 As Recast | 4Q16 As Recast | FY 16 As Recast | |||||||||||||||
Operating expenses per ASM, as recast (cents) | 11.08 | ¢ | 10.84 | ¢ | 11.78 | ¢ | 11.44 | ¢ | 11.29 | ¢ | |||||||||
Deduct: Fuel expense, as recast, divided by ASMs | (2.51 | ) | (2.48 | ) | (2.57 | ) | (2.66 | ) | (2.56 | ) | |||||||||
Deduct: Profitsharing expense divided by ASMs | (0.44 | ) | (0.54 | ) | (0.27 | ) | (0.33 | ) | (0.39 | ) | |||||||||
Deduct: Impact of special items | — | (0.06 | ) | (0.99 | ) | (0.01 | ) | (0.27 | ) | ||||||||||
Operating expenses per ASM, as recast, excluding profitsharing, Fuel and oil expense, and special items (cents) | 8.13 | ¢ | 7.76 | ¢ | 7.95 | ¢ | 8.44 | ¢ | 8.07 | ¢ | |||||||||
(a) See Reconciliation of Impact from Fuel Contracts.
(b) Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.
(c) Adjustment related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re-measurement of the Company's deferred tax assets and liabilities at the new corporate tax rate. The lowering of the corporate tax rate had resulted in a $1.4 billion reduction to tax expense in fourth quarter 2017. The recasting of these prior year financials resulted in a $141 million reduction of that adjustment, to the current $1.27 billion.
13
Southwest Airlines Co.
Condensed Consolidated Statement of Income
As Recast for Adoption of New Accounting Standards on January 1, 2018
(in millions, except per share amounts)
(unaudited)
As previously discussed, on January 1, 2018, the Company adopted the New Revenue Standard and the New Retirement Standard. The following tables present the As Recast quarterly and annual unaudited 2017 and 2016 Condensed Consolidated Statements of Income.
1Q17 As Recast | 2Q17 As Recast | 3Q17 As Recast | 4Q17 As Recast | FY 17 As Recast | |||||||||||||||
OPERATING REVENUES: | |||||||||||||||||||
Passenger | $ | 4,546 | $ | 5,379 | $ | 4,944 | $ | 4,895 | $ | 19,763 | |||||||||
Freight | 42 | 44 | 42 | 45 | 173 | ||||||||||||||
Other | 266 | 308 | 317 | 318 | 1,210 | ||||||||||||||
Total operating revenues | 4,854 | 5,731 | 5,303 | 5,258 | 21,146 | ||||||||||||||
OPERATING EXPENSES: | |||||||||||||||||||
Salaries, wages, and benefits | 1,730 | 1,863 | 1,791 | 1,921 | 7,305 | ||||||||||||||
Fuel and oil | 956 | 1,024 | 1,037 | 1,058 | 4,076 | ||||||||||||||
Maintenance materials and repairs | 243 | 251 | 263 | 243 | 1,001 | ||||||||||||||
Aircraft rentals | 54 | 53 | 51 | 40 | 198 | ||||||||||||||
Landing fees and other rentals | 313 | 332 | 324 | 324 | 1,292 | ||||||||||||||
Depreciation and amortization | 318 | 319 | 302 | 279 | 1,218 | ||||||||||||||
Other operating expenses | 634 | 674 | 690 | 652 | 2,649 | ||||||||||||||
Total operating expenses | 4,248 | 4,516 | 4,458 | 4,517 | 17,739 | ||||||||||||||
OPERATING INCOME | 606 | 1,215 | 845 | 741 | 3,407 | ||||||||||||||
OTHER EXPENSES (INCOME): | |||||||||||||||||||
Interest expense | 29 | 27 | 28 | 30 | 114 | ||||||||||||||
Capitalized interest | (11 | ) | (13 | ) | (15 | ) | (11 | ) | (49 | ) | |||||||||
Interest income | (7 | ) | (8 | ) | (9 | ) | (11 | ) | (35 | ) | |||||||||
Other (gains) losses, net | 63 | 44 | 9 | (3 | ) | 112 | |||||||||||||
Total other expenses (income) | 74 | 50 | 13 | 5 | 142 | ||||||||||||||
INCOME BEFORE INCOME TAXES | 532 | 1,165 | 832 | 736 | 3,265 | ||||||||||||||
PROVISION FOR INCOME TAXES | 193 | 422 | 304 | (1,011 | ) | (92 | ) | ||||||||||||
NET INCOME | $ | 339 | $ | 743 | $ | 528 | $ | 1,747 | $ | 3,357 | |||||||||
NET INCOME PER SHARE: | |||||||||||||||||||
Basic | $ | 0.55 | $ | 1.23 | $ | 0.88 | $ | 2.95 | $ | 5.58 | |||||||||
Diluted | $ | 0.55 | $ | 1.23 | $ | 0.88 | $ | 2.94 | $ | 5.57 | |||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING: | |||||||||||||||||||
Basic | 613 | 604 | 597 | 592 | 601 | ||||||||||||||
Diluted | 614 | 605 | 598 | 594 | 603 | ||||||||||||||
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1Q16 As Recast | 2Q16 As Recast | 3Q16 As Recast | 4Q16 As Recast | FY 16 As Recast | |||||||||||||||
OPERATING REVENUES: | |||||||||||||||||||
Passenger | $ | 4,484 | $ | 5,024 | $ | 4,807 | $ | 4,753 | $ | 19,068 | |||||||||
Freight | 42 | 45 | 42 | 42 | 171 | ||||||||||||||
Other | 241 | 272 | 273 | 263 | 1,050 | ||||||||||||||
Total operating revenues | 4,767 | 5,341 | 5,122 | 5,058 | 20,289 | ||||||||||||||
OPERATING EXPENSES: | |||||||||||||||||||
Salaries, wages, and benefits | 1,537 | 1,637 | 1,905 | 1,705 | 6,786 | ||||||||||||||
Fuel and oil | 887 | 950 | 975 | 988 | 3,801 | ||||||||||||||
Maintenance materials and repairs | 262 | 280 | 258 | 244 | 1,045 | ||||||||||||||
Aircraft rentals | 59 | 59 | 56 | 55 | 229 | ||||||||||||||
Landing fees and other rentals | 302 | 309 | 307 | 293 | 1,211 | ||||||||||||||
Depreciation and amortization | 290 | 299 | 315 | 318 | 1,221 | ||||||||||||||
Other operating expenses | 571 | 611 | 647 | 647 | 2,474 | ||||||||||||||
Total operating expenses | 3,908 | 4,145 | 4,463 | 4,250 | 16,767 | ||||||||||||||
OPERATING INCOME | 859 | 1,196 | 659 | 808 | 3,522 | ||||||||||||||
OTHER EXPENSES (INCOME): | |||||||||||||||||||
Interest expense | 30 | 32 | 31 | 30 | 122 | ||||||||||||||
Capitalized interest | (11 | ) | (11 | ) | (12 | ) | (12 | ) | (47 | ) | |||||||||
Interest income | (5 | ) | (6 | ) | (6 | ) | (7 | ) | (24 | ) | |||||||||
Other (gains) losses, net | 81 | (88 | ) | 33 | (7 | ) | 21 | ||||||||||||
Total other expenses (income) | 95 | (73 | ) | 46 | 4 | 72 | |||||||||||||
INCOME BEFORE INCOME TAXES | 764 | 1,269 | 613 | 804 | 3,450 | ||||||||||||||
PROVISION FOR INCOME TAXES | 283 | 471 | 228 | 285 | 1,267 | ||||||||||||||
NET INCOME | $ | 481 | $ | 798 | $ | 385 | $ | 519 | $ | 2,183 | |||||||||
NET INCOME PER SHARE: | |||||||||||||||||||
Basic | $ | 0.75 | $ | 1.26 | $ | 0.62 | $ | 0.84 | $ | 3.48 | |||||||||
Diluted | $ | 0.74 | $ | 1.25 | $ | 0.62 | $ | 0.84 | $ | 3.45 | |||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING: | |||||||||||||||||||
Basic | 641 | 632 | 618 | 617 | 627 | ||||||||||||||
Diluted | 648 | 639 | 625 | 621 | 633 | ||||||||||||||
15
Southwest Airlines Co.
Condensed Consolidated Balance Sheet
December 31, 2017 and 2016
As Recast for Adoption of New Accounting Standards on January 1, 2018
(in millions, except per share amounts)
(unaudited)
As previously discussed, on January 1, 2018, the Company adopted the New Revenue Standard. The following tables present the effects of the adoption of the New Revenue Standard on the December 31, 2017 and 2016 unaudited Condensed Consolidated Balance Sheet.
As Reported | New Revenue | As Recast | |||||||||
December 31, 2017 | Standard (a) | December 31, 2017 | |||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 1,495 | $ | — | $ | 1,495 | |||||
Short-term investments | 1,778 | — | 1,778 | ||||||||
Accounts and other receivables | 662 | — | 662 | ||||||||
Inventories of parts and supplies, at cost | 420 | — | 420 | ||||||||
Prepaid expenses and other current assets | 460 | — | 460 | ||||||||
Total current assets | 4,815 | — | 4,815 | ||||||||
Property and equipment, at cost: | |||||||||||
Flight equipment | 21,368 | — | 21,368 | ||||||||
Ground property and equipment | 4,399 | — | 4,399 | ||||||||
Deposits on flight equipment purchase contracts | 919 | — | 919 | ||||||||
Assets constructed for others | 1,543 | — | 1,543 | ||||||||
28,229 | — | 28,229 | |||||||||
Less allowance for depreciation and amortization | 9,690 | — | 9,690 | ||||||||
18,539 | — | 18,539 | |||||||||
Goodwill | 970 | — | 970 | ||||||||
Other assets | 786 | — | 786 | ||||||||
$ | 25,110 | $ | — | $ | 25,110 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 1,320 | $ | — | $ | 1,320 | |||||
Accrued liabilities | 1,777 | (77 | ) | 1,700 | |||||||
Air traffic liability | 3,460 | 35 | 3,495 | ||||||||
Current maturities of long-term debt | 348 | — | 348 | ||||||||
Total current liabilities | 6,905 | (42 | ) | 6,863 | |||||||
Long-term debt less current maturities | 3,320 | — | 3,320 | ||||||||
Air traffic liability - loyalty noncurrent | — | 1,070 | 1,070 | ||||||||
Deferred income taxes | 2,358 | (239 | ) | 2,119 | |||||||
Construction obligation | 1,390 | — | 1,390 | ||||||||
Other noncurrent liabilities | 707 | — | 707 | ||||||||
Stockholders' equity: | |||||||||||
Common stock | 808 | — | 808 | ||||||||
Capital in excess of par value | 1,451 | — | 1,451 | ||||||||
Retained earnings | 14,621 | (789 | ) | 13,832 | |||||||
Accumulated other comprehensive income | 12 | — | 12 | ||||||||
Treasury stock, at cost | (6,462 | ) | — | (6,462 | ) | ||||||
Total stockholders' equity | 10,430 | (789 | ) | 9,641 | |||||||
$ | 25,110 | $ | — | $ | 25,110 | ||||||
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As Reported | New Revenue | As Recast | |||||||||
December 31, 2016 | Standard (a) | December 31, 2016 | |||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 1,680 | $ | — | $ | 1,680 | |||||
Short-term investments | 1,625 | — | 1,625 | ||||||||
Accounts and other receivables | 546 | — | 546 | ||||||||
Inventories of parts and supplies, at cost | 337 | — | 337 | ||||||||
Prepaid expenses and other current assets | 310 | — | 310 | ||||||||
Total current assets | 4,498 | — | 4,498 | ||||||||
Property and equipment, at cost: | |||||||||||
Flight equipment | 20,275 | — | 20,275 | ||||||||
Ground property and equipment | 3,779 | — | 3,779 | ||||||||
Deposits on flight equipment purchase contracts | 1,190 | — | 1,190 | ||||||||
Assets constructed for others | 1,220 | — | 1,220 | ||||||||
26,464 | — | 26,464 | |||||||||
Less allowance for depreciation and amortization | (9,420 | ) | — | (9,420 | ) | ||||||
17,044 | — | 17,044 | |||||||||
Goodwill | 970 | — | 970 | ||||||||
Other assets | 774 | — | 774 | ||||||||
$ | 23,286 | $ | — | $ | 23,286 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 1,178 | $ | — | $ | 1,178 | |||||
Accrued liabilities | 1,985 | (64 | ) | 1,921 | |||||||
Air traffic liability | 3,115 | 108 | 3,223 | ||||||||
Current maturities of long-term debt | 566 | — | 566 | ||||||||
Total current liabilities | 6,844 | 44 | 6,888 | ||||||||
Long-term debt less current maturities | 2,821 | — | 2,821 | ||||||||
Air traffic liability - loyalty noncurrent | — | 998 | 998 | ||||||||
Deferred income taxes | 3,374 | (385 | ) | 2,989 | |||||||
Construction obligation | 1,078 | — | 1,078 | ||||||||
Other noncurrent liabilities | 728 | — | 728 | ||||||||
Stockholders' equity: | |||||||||||
Common stock | 808 | — | 808 | ||||||||
Capital in excess of par value | 1,410 | — | 1,410 | ||||||||
Retained earnings | 11,418 | (657 | ) | 10,761 | |||||||
Accumulated other comprehensive loss | (323 | ) | — | (323 | ) | ||||||
Treasury stock, at cost | (4,872 | ) | — | (4,872 | ) | ||||||
Total stockholders' equity | 8,441 | (657 | ) | 7,784 | |||||||
$ | 23,286 | $ | — | $ | 23,286 | ||||||
(a) As previously discussed, the New Revenue Standard required the Company to adopt the relative fair value approach for valuing its liabilities associated with Customer flight points. As a result, the Company increased its loyalty program liability as of December 31, 2017 and 2016, by $1.1 billion.
17
Southwest Airlines Co.
Non-GAAP Return on Invested Capital (ROIC)
(See Note Regarding Use of Non-GAAP Financial Measures)
As Recast for Adoption of New Accounting Standards on January 1, 2018
(in millions, except per share amounts)
(unaudited)
As previously discussed, on January 1, 2018, the Company adopted the New Revenue Standard, the New Retirement Standard, and the New Hedging Standard. The following tables present the effects of the adoption of these standards on the twelve months ended December 31, 2017 and 2016 Non-GAAP ROIC.
As Reported | As Recast | ||||||
Twelve Months Ended | Twelve Months Ended | ||||||
December 31, 2017 | December 31, 2017 | ||||||
Operating income, as reported | $ | 3,515 | $ | 3,407 | |||
Net impact from fuel contracts | (156 | ) | (156 | ) | |||
Lease termination expense | 33 | 33 | |||||
Aircraft grounding charge | 63 | 63 | |||||
Operating income, non-GAAP | $ | 3,455 | $ | 3,347 | |||
Net adjustment for aircraft leases (a) | 109 | 110 | |||||
Adjustment for fuel hedge accounting (b) | (135 | ) | — | ||||
Adjusted Operating income, non-GAAP (A) | $ | 3,429 | $ | 3,457 | |||
Debt, including capital leases (c) | $ | 3,259 | $ | 3,259 | |||
Equity (c) | 8,881 | 8,194 | |||||
Net present value of aircraft operating leases (c) | 785 | 785 | |||||
Average invested capital | $ | 12,925 | $ | 12,238 | |||
Equity adjustment for hedge accounting (b) | 296 | 296 | |||||
Adjusted average invested capital (B) | $ | 13,221 | $ | 12,534 | |||
Non-GAAP ROIC, pre-tax (A/B) | 25.9 | % | 27.6 | % | |||
18
As Reported | As Recast | ||||||
Twelve Months Ended | Twelve Months Ended | ||||||
December 31, 2016 | December 31, 2016 | ||||||
Operating income, as reported | $ | 3,760 | $ | 3,522 | |||
Contract ratification bonuses | 356 | 356 | |||||
Net impact from fuel contracts | (202 | ) | (201 | ) | |||
Asset impairment | 21 | 21 | |||||
Lease termination expense | 22 | 22 | |||||
Operating income, non-GAAP | $ | 3,957 | $ | 3,720 | |||
Net adjustment for aircraft leases (a) | 111 | 110 | |||||
Adjustment for fuel hedge accounting (b) | (152 | ) | — | ||||
Adjusted Operating income, non-GAAP (A) | $ | 3,916 | $ | 3,830 | |||
Debt, including capital leases (c) | $ | 3,304 | $ | 3,304 | |||
Equity (c) | 7,833 | 7,195 | |||||
Net present value of aircraft operating leases (c) | 1,015 | 1,015 | |||||
Average invested capital | $ | 12,152 | $ | 11,514 | |||
Equity adjustment for hedge accounting (b) | 886 | 886 | |||||
Adjusted average invested capital (B) | $ | 13,038 | $ | 12,400 | |||
Non-GAAP ROIC, pre-tax (A/B) | 30.0 | % | 30.9 | % | |||
(a) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft). The Company makes this adjustment to enhance comparability to other entities that have different capital structures by utilizing alternative financing decisions.
(b) The Adjustment for fuel hedge accounting in the numerator was due to the Company’s accounting policy decision to classify fuel hedge accounting premiums below the Operating income line, and thus adjusted Operating income to reflect such policy decision. With the adoption of the New Hedging Standard, the Company is now required to report premium expense associated with hedges as a component of Fuel and oil expense, and thus is included in recasted Operating income, as reported. The Equity adjustment for hedge accounting in the denominator adjusts for the cumulative impacts, in Accumulated other comprehensive income and Retained earnings, of gains and/or losses associated with hedge accounting related to fuel hedge derivatives that will settle in future periods. The current period impact of these gains and/or losses are reflected in the Net impact from fuel contracts in the numerator.
(c) Calculated as an average of the five most recent quarter end balances or remaining obligations. The Net present value of aircraft operating leases represents the assumption that all aircraft in the Company’s fleet are owned, as it reflects the remaining contractual commitments discounted at the Company's estimated incremental borrowing rate as of the time each individual lease was signed.
NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES
The Company's unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These GAAP financial statements include (i) unrealized non-cash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult.
As a result, the Company also provides financial information in this Current Report on Form 8-K that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information (also referred to as "excluding special items"), including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides additional insight to investors as supplemental information to its GAAP results. The non-GAAP measures provided that reflect the Company’s performance on an economic fuel cost basis include Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating expenses, non-GAAP, excluding Fuel and oil expense; Operating expenses, non-GAAP, excluding Fuel and oil expense and profitsharing; Operating income, non-GAAP; Other (gains) losses, net, non-GAAP; Net income, non-GAAP; and Net income per share, diluted, non-GAAP. The Company's economic Fuel
19
and oil expense results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an “economic” basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts are reflected as a component of Fuel and oil expense, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide a better measure of the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, non-cash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors and analysts, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations, and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.
Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
In addition, the Company’s GAAP results in the applicable periods include other charges or benefits that are also deemed “special items” that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends. Financial measures identified as non-GAAP (or as excluding special items) have been adjusted to exclude special items. Special items include:
1. | Contract ratification bonuses recorded for certain workgroups. As the bonuses would only be paid at ratification of the associated tentative agreement and would not represent an ongoing expense to the Company, management believes its results for the associated periods are more usefully compared if the impacts of ratification bonus amounts are excluded from results. Generally, union contract agreements cover a specified three- to five- year period, although such contracts officially never expire, and the agreed upon terms remain in place until a revised agreement is reached, which can be several years following the amendable date; |
2. | A noncash impairment charge related to leased slots at Newark Liberty International Airport as a result of the Federal Aviation Administration announcement in April 2016 that this airport was being changed to a Level 2 schedule-facilitated airport from its previous designation as Level 3 (a "slot" is the right of an air carrier, pursuant to regulations of the Federal Aviation Administration, to operate a takeoff or landing at a specific time at certain airports); |
3. | Lease termination costs recorded as a result of the Company acquiring 13 of its Boeing 737-300 aircraft off operating leases as part of the Company’s strategic effort to remove its Classic aircraft from operations on or before September 29, 2017, in the most economically advantageous manner possible. The Company had not budgeted for these early lease termination costs, as they were subject to negotiations being concluded with the third-party lessors. The Company recorded the fair value of the aircraft acquired off operating leases, as well as any associated remaining obligations to the balance sheet as debt; |
4. | An Aircraft grounding charge recorded in third quarter 2017, as a result of the Company grounding its remaining Boeing 737-300 aircraft on September 29, 2017. The loss was a result of the remaining net lease payments due and certain lease return requirements that may have to be performed on these leased aircraft prior to their return to the lessors as of the cease-use date. The Company had not budgeted for the lease return requirements, as they are subject to negotiation with third party lessors; and |
5. | An adjustment to Provision for income taxes related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re-measurement of the Company's deferred tax assets and liabilities at the new corporate tax rate of 21 percent. This adjustment is a non-cash item and is being treated as a special item. |
Because management believes each of these items can distort the trends associated with the Company’s ongoing performance as an airline, the Company believes that evaluation of its financial performance can be enhanced by a supplemental presentation of results that exclude the impact of these items in order to enhance consistency and comparativeness with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. The following measures are often provided, excluding special items, and utilized by the
20
Company’s management, analysts, and investors to enhance comparability of year-over-year results, as well as to industry trends: Total operating expenses, non-GAAP; Operating expenses, non GAAP excluding Fuel and oil expense; Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing; Operating income, non-GAAP; Other (gains) losses, net, non-GAAP; Provision for income taxes, non-GAAP; Net income, non-GAAP; and Net income per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding profitsharing, Fuel and oil expense, and special items.
The Company has also provided its calculation of return on invested capital, which is a measure of financial performance used by management to evaluate its investment returns on capital. Return on invested capital is not a substitute for financial results as reported in accordance with GAAP, and should not be utilized in place of such GAAP results. Although return on invested capital is not a measure defined by GAAP, it is calculated by the Company, in part, using non-GAAP financial measures. Those non-GAAP financial measures are utilized for the same reasons as those noted above for Net income, non-GAAP and Operating income, non-GAAP - the comparable GAAP measures include charges or benefits that are deemed “special items” that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends, and the Company’s profitability targets and estimates, both internally and externally, are based on non-GAAP results since in the vast majority of cases the “special items” cannot be reliably predicted or estimated. The Company believes non-GAAP return on invested capital is a meaningful measure because it quantifies the Company's effectiveness in generating returns relative to the capital it has invested in its business. Although return on invested capital is commonly used as a measure of capital efficiency, definitions of return on invested capital differ; therefore, the Company is providing an explanation of its calculation for non-GAAP return on invested capital in the accompanying reconciliation, in order to allow investors to compare and contrast its calculation to those provided by other companies.
21