Southwest Airlines 2014 Annual Report Download - page 57

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Return on Invested Capital (ROIC) (in millions) (unaudited)
Year Ended
December 31, 2014
Year Ended
December 31, 2013
Year Ended
December 31, 2012
Operating Income, as reported $ 2,225 $ 1,278 $ 623
Add: Net impact from fuel contracts 28 84 32
Add: Acquisition and integration costs 126 86 183
Add: Labor ratification bonus 9 — —
Operating Income, non-GAAP $ 2,388 $ 1,448 $ 838
Net adjustment for aircraft leases (1) 133 143 117
Adjustment for fuel hedge premium expense (62) (60) (36)
Adjusted Operating Income, non-GAAP $ 2,459 $ 1,531 $ 919
Average invested capital (2) $ 11,470 $ 11,664 $ 12,580
Equity adjustment for hedge accounting 104 50 145
Adjusted average invested capital $ 11,574 $ 11,714 $ 12,725
ROIC, pre-tax 21.2% 13.1% 7.2%
(1) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating
aircraft rent expense and replacing with estimated depreciation expense for those same aircraft).
(2) Average Invested Capital is an average of the five most recent quarter end balances of debt, net present value
of aircraft leases, and equity adjusted for hedge accounting.
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. The Company believes
these economic results provide a better measure of the impact of the Company’s fuel hedges on its
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