Southwest Airlines 2009 Annual Report Download - page 4

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Reconciliation of Non-GAAP Measures
The Company’s financial statements are prepared in accordance with Generally Accepted Accounting Principles
(GAAP). These GAAP financial statements include unrealized non-cash adjustments and reclassifications, which
can be significant, as a result of accounting requirements and elections made under Accounting Standards
Codification Topic 815 (ASC 815, originally issued as SFAS 133).
As a result, the Company also provides financial information 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, 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 non-GAAP 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 a non-GAAP 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 purposes. These non-GAAP 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 ASC 815, 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 its operating performance on a year-over-year or
quarter-over-quarter basis after considering all programs in place to curtail 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 and accounting associated
with ASC 815, 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,
2009.
The Company also believes that evaluation of its financial performance can be enhanced by a presentation of
results that exclude the impact of these items in order to evaluate results on a comparative basis with results in the
current or prior periods that did not include such items and as a basis for expected operating results in future
periods.
In addition to the fuel hedging items discussed 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 1) charges associated with Freedom ’09, an early retirement option offered to Employees resulting in a
one-time third quarter 2009 charge, 2) an adjustment to the Company’s first quarter 2008 income tax provision due
to a change in Illinois state income tax laws, 3) a charge during third quarter 2007 related to the Company’s
voluntary early-out program, 4) a charge during third quarter 2007 from a change in the Illinois state income tax
law resulting in an increase in state income taxes, which increase was subsequently reversed in first quarter 2008
due to the reversal of the August 2007 state income tax law change, and 5) a charge from a change in the Texas
state tax law related to franchise taxes (2006).
(In millions, except per share amounts) 2005 2006 2007 2008 2009
Net income, as reported $484 $499 $645 $178 $99
(Deduct)/Add: Impact from fuel contracts, net (96) 142 (319) 206 14
Add/(Deduct): Income tax impact of fuel contracts, net 37 (54) 122 (78) (5)
Add: Charge from voluntary early-out program, net - - 12 - 35
(Deduct): Change in Texas state tax law, net - (9) - - -
Add/(Deduct): Charge (Reversal) from change in Illinois state income tax
law, net - - 11 (12) -
Net income, Non-GAAP $425 $578 $471 $294 $143
Net income per share, diluted, as reported $0.60 $0.61 $0.84 $0.24 $0.13
Impact of fuel contracts, net (0.07) 0.10 (0.26) 0.17 0.02
(Deduct)/Add: Impact of special items, net - (0.01) 0.03 (0.01) 0.04
Net income per share, diluted, Non-GAAP $0.53 $0.70 $0.61 $0.40 $0.19