Southwest Airlines 2007 Annual Report Download - page 45

prices during 2006. Cash flows associated with purchas-
ing and/or selling derivatives are also classified as oper-
ating cash flows, although these amounts were not
material for 2007 or 2006. Cash flows from operating
activities for 2007 were also driven by the $645 million in
net income, plus noncash depreciation and amortization
expense of $555 million. For further information on the
Company’s hedging program and counterparty deposits,
see Note 10 to the Consolidated Financial Statements,
and Item 7A. Qualitative and Quantitative Disclosures
about Market Risk, respectively. Cash generated in 2007
and in 2006 was used primarily to finance aircraft-related
capital expenditures and to provide working capital.
Net cash flows used in investing activities in 2007
totaled $1.5 billion, approximately the same as in 2006.
Investing activities in both years primarily consisted of
payments for new 737-700 aircraft delivered to the
Company and progress payments for future aircraft deliv-
eries. The Company purchased 37 new 737-700 aircraft
in 2007 (the remaining two 737-700s added to the fleet
during 2007 were leased) versus the purchase of 36
737-700s in 2006. See Note 4 to the Consolidated
Financial Statements. Investing activities for 2007 were
also reduced by $198 million related to a change in the
balance of the Company’s short-term investments,
namely auction rate securities.
Net cash used in financing activities was $493 mil-
lion in 2007, primarily from the repurchase of $1.0 billion
of common stock. The Company repurchased a total of
66 million shares of outstanding common stock during
2007 as a result of buyback programs authorized by the
Company’s Board of Directors. These uses were partially
offset by the October 2007 issuance of $500 million Pass
Through Certificates consisting of $412 million 6.15%
Series A certificates and $88 million 6.65% Series B
certificates. Net cash used in financing activities was
$801 million in 2006, primarily from the repurchase
of $800 million of common stock and the repayment of
$607 million in debt. The Company repurchased a total
of 49 million shares of outstanding common stock during
2006 as a result of three buyback programs authorized by
the Company’s Board of Directors. These uses were
partially offset by the issuance of $300 million senior
unsecured 5.75% notes in December 2006 and $260 mil-
lion in proceeds from exercises of Employee stock
options. See Note 7 to the Consolidated Financial State-
ments for more information on the issuance and redemp-
tion of long-term debt.
The Company has various options available to meet
its 2008 capital and operating commitments, including
cash on hand and short-term investments at December 31,
2007, totaling $2.8 billion, internally generated funds,
and a $600 million bank revolving line of credit. In
addition, the Company will also consider various bor-
rowing or leasing options to maximize earnings and
supplement cash requirements. The Company believes
it has access to a wide variety of financing arrangements
because of its excellent credit ratings, unencumbered
assets, modest leverage, and consistent profitability.
The Company currently has outstanding shelf registra-
tions for the issuance of up to $540 million in public debt
securities and pass through certificates, which it may
utilize for aircraft financings or other purposes in the
future.
Off-Balance Sheet Arrangements, Contractual
Obligations, and Contingent Liabilities and
Commitments
Southwest has contractual obligations and commit-
ments primarily with regard to future purchases of aircraft,
payment of debt, and lease arrangements. The Company
received 39 Boeing 737-700 aircraft in 2007 — 37 of
which were new aircraft from Boeing, and two of which
were pre-owned and leased from a third party. As of
December 31, 2007, the Company had exercised all remain-
ing options for aircraft to be delivered in 2008, and had firm
orders for 29 737-700 aircraft in 2008, 20 in 2009, 10 each
in 2010-2012, and 29 thereafter. The Company also had
options for 8 737-700 aircraft in 2009, 24 in 2010, 22 in
2011 and 30 in 2012. Southwest also has an additional
54 purchase rights for 737-700 aircraft for the years 2008
through 2014. The Company has the option to substitute
737-600s or -800s for the -700s. This option is applicable
to aircraft ordered from Boeing and must be exercised
18 months prior to the contractual delivery date.
The leasing of aircraft effectively provides flexibility
to the Company as a source of financing. Although the
Company is responsible for all maintenance, insurance,
and expense associated with operating the aircraft, and
retains the risk of loss for leased aircraft, it has not made
any guarantees to the lessors regarding the residual value
(or market value) of the aircraft at the end of the lease
terms. The Company operates 95 leased aircraft, of which
86 are operating leases. As prescribed by GAAP, assets
and obligations under operating leases are not included in
the Company’s Consolidated Balance Sheet. Disclosure of
the contractual obligations associated with the Compa-
ny’s leased aircraft is included below as well as in Note 8
to the Consolidated Financial Statements.
The Company is required to provide standby letters
of credit to support certain obligations that arise in the
ordinary course of business. Although the letters of credit
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