Southwest Airlines 2012 Annual Report Download - page 53

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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 which 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, the 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 2012, 2011, and 2010 charges of $183 million, $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, and 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. 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 these charges, it does
expect to treat the charges as special items in its future presentation of non-GAAP results. See Note 2 to the
Consolidated Financial Statements for further information on the AirTran acquisition.
YEAR IN REVIEW
For the 40th consecutive year, the Company was profitable, earning $421 million ($.56 per share, diluted) in
net income in 2012, compared to the Company’s 2011 net income of $178 million ($.23 per share, diluted). On a
non-GAAP basis, the Company’s 2012 net income was $417 million ($.56 per share, diluted), which was a 26.4
percent increase versus the Company’s 2011 net income on a non-GAAP basis of $330 million ($.43 per share,
45