Southwest Airlines 1995 Annual Report Download - page 32

32
such, the Company will only be required to supplement its financial statements with additional
disclosures beginning in 1996.
2. ACQUISITION
On December 31, 1993, Southwest exchanged 3,574,656 newly issued shares of its common
stock for all of the outstanding stock of Morris Air Corporation (Morris), a low-fare
commercial/charter air carrier based in Salt Lake City. The acquisition was accounted for as a
pooling of interests and, accordingly, the Company’s consolidated financial statements were
restated to include the accounts and operations of Morris for all periods prior to the acquisition.
Merger expenses of $10,803,000 relating to the merger of Southwest and Morris have been
included in 1993 operating expenses as required for financial reporting purposes; however, these
expenses have been separately reported as “merger expenses” to reflect the impact of these
nonrecurring expenses on operating results.
3. ACCOUNTING CHANGES
INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), “Accounting for Income Taxes”. As a result of adopt-
ing SFAS 109, the Company recorded deferred tax assets of $6,977,000 and reduced deferred
tax liabilities by $9,048,000 at January 1, 1993, which resulted in an increase to the Company’s
1993 net income of $16,025,000 ($.11 per share) for the cumulative effect of the accounting
change.
POSTRETIREMENT BENEFITS Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 106 (SFAS 106), “Employers’ Accounting for Postretirement
Benefits Other Than Pensions”. The cumulative effect of this change in accounting method at
January 1, 1993 reduced 1993 net income by $766,000 (net of benefit from income taxes of
$469,000) or $.01 per share. The effect of adopting SFAS 106 on 1993 income before
cumulative effect of accounting changes was not material.
4. COMMITMENTS
The Company’s contractual purchase commitments consist primarily of scheduled aircraft
acquisitions. Timing of payments pursuant to contractual commitments was affected by third
quarter 1995 amendments to certain aircraft purchase contracts, which modified future progress
payment schedules. Twenty 737-300 aircraft are scheduled for delivery in 1996, and 17 in 1997.
Four 737-700s are scheduled for delivery in 1997, 16 in 1998, 16 in 1999, 15 in 2000, and 12 in
2001. In addition, the Company has options to purchase up to sixty-seven 737-700s during 1998-
2004. The Company has the option, which must be exercised two years prior to the contractual
delivery date, to substitute 737-600s or 737-800s for the 737-700s delivered subsequent to 1999.
Aggregate funding needed for these commitments is approximately $2,614.0 million, subject to
adjustments for inflation, due as follows: $461.5 million in 1996, $576.9 million in 1997, $446.9
million in 1998, $551.2 million in 1999, $351.0 million in 2000, and $226.5 million in 2001.
The Company uses jet fuel and heating oil fixed price swap arrangements to hedge its exposure
to price fluctuations on approximately two percent of its annual fuel requirements. As of
December 31, 1995, the Company had a heating oil swap agreement with a broker-dealer to
exchange monthly payments on a notional quantity of 1,050,000 gallons during May 1996. Under
the swap agreement, the Company pays or receives the difference between the daily average
heating oil price and a fixed price of $.46 per gallon. Gains and losses on such transactions are
recorded as adjustments to fuel expense and have been insignificant. Although such agreements
expose the Company to credit loss in the event of nonperformance by the other parties to the
agreements, the Company does not anticipate such nonperformance.