Southwest Airlines 2011 Annual Report Download - page 51

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Note Regarding Use of Non-GAAP Financial Measures
The Company’s 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 the Company believes are not indicative of its ongoing operational performance.
As a result, the Company also provides financial information in this filing 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, 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 greater transparency to investors as supplemental information
to its GAAP results. The Company’s economic financial 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 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 Other (gains) losses, net, for both GAAP and
non-GAAP (including economic) purposes in the period of contract settlement. 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, 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 Note 10 to the Consolidated Financial Statements.
In addition to its “economic” financial measures, as defined above, the Company has also provided other
non-GAAP financial measures as a result of items that the Company believes are not indicative of its ongoing
operations. These include 2011 and 2010 charges of $134 million and $8 million, respectively, (before the impact
of profitsharing and/or taxes) related to expenses associated with the Company’s acquisition and integration of
AirTran, a 2011 charge of $17 million (before the impact of profitsharing and/or taxes) for an asset impairment
related to the Company’s decision not to equip its Classic (737-300/500) aircraft with “Required Navigation
Performance” (RNP) capabilities, and a 2009 charge of $66 million (before profitsharing and/or taxes) related to
Freedom ‘09, a voluntary early retirement program. The Company believes that evaluation of its financial
performance compared to prior and future periods can be enhanced by a presentation of results that exclude the
impact of these items. As a result of the Company’s acquisition of AirTran, which closed on May 2, 2011, the
Company has incurred and expects to continue to incur substantial charges associated with integration of the two
companies. While the Company cannot predict the exact timing or amounts of such charges, it does expect to
treat the charges as special items in its future presentation of non-GAAP results. See Note 2 and Note 9 to the
Consolidated Financial Statements for further information on the AirTran acquisition and Freedom ‘09,
respectively.
YEAR IN REVIEW
For the 39th consecutive year, the Company was profitable, earning $178 million ($.23 per share, diluted) in
2011, compared to the Company’s 2010 net income of $459 million ($.61 per share, diluted). On a non-GAAP
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