Question

In: Accounting

Please analyze this company financial and briefly tell me how they are performing and areas of...

Please analyze this company financial and briefly tell me how they are performing and areas of concern

Southwest Airlines Co.

Condensed Consolidated Statement of Income

(in millions, except per share amounts)

(unaudited)

Three months ended

March 31,

2017

2018

As Recast

Percent Change

OPERATING REVENUES:

Passenger

$

4,585

$

4,546

0.9

Freight

42

42

Other

317

266

19.2

     Total operating revenues

4,944

4,854

1.9

OPERATING EXPENSES:

Salaries, wages, and benefits

1,821

1,730

5.3

Fuel and oil

1,018

956

6.5

Maintenance materials and repairs

257

243

5.8

Landing fees and airport rentals

330

313

5.4

Depreciation and amortization

277

318

(12.9)

Other operating expenses

625

688

(9.2)

     Total operating expenses

4,328

4,248

1.9

OPERATING INCOME

616

606

1.7

OTHER EXPENSES (INCOME):

Interest expense

32

29

10.3

Capitalized interest

(10)

(11)

(9.1)

Interest income

(12)

(7)

71.4

Other (gains) losses, net

4

63

(93.7)

     Total other expenses (income)

14

74

(81.1)

INCOME BEFORE INCOME TAXES

602

532

13.2

PROVISION FOR INCOME TAXES

139

193

(28.0)

NET INCOME

$

463

$

339

36.6

NET INCOME PER SHARE:

Basic

$

0.79

$

0.55

43.6

Diluted

$

0.79

$

0.55

43.6

WEIGHTED AVERAGE SHARES OUTSTANDING:

Basic

587

613

(4.2)

Diluted

588

614

(4.2)

Southwest Airlines Co.

Reconciliation of Reported Amounts to Non-GAAP Items (excluding special items)

(See Note Regarding Use of Non-GAAP Financial Measures)

(in millions, except per share amounts)(unaudited)

Three months ended

March 31,

2017

2018

As Recast

Percent Change

Fuel and oil expense, unhedged

$

1,014

$

816

Add: Premium cost of fuel contracts

34

34

Add (Deduct): Fuel hedge (gains) losses included in Fuel and oil expense, net

(30)

106

Fuel and oil expense, as reported

$

1,018

$

956

Add: Net impact from fuel contracts (a)

7

37

Fuel and oil expense, excluding special items (economic)

$

1,025

$

993

3.2

Total operating expenses, as reported

$

4,328

$

4,248

Add: Net impact from fuel contracts (a)

7

37

Deduct: Lease termination expense

(5)

Add: Gain on sale of grounded aircraft

25

Total operating expenses, excluding special items

$

4,360

$

4,280

1.9

Deduct: Fuel and oil expense, excluding special items (economic)

(1,025)

(993)

Operating expenses, excluding Fuel and oil expense and special items

$

3,335

$

3,287

1.5

Deduct: Profitsharing expense

(102)

(99)

Operating expenses, excluding profitsharing, Fuel and oil expense, and special items

$

3,233

$

3,188

1.4

Operating income, as reported

$

616

$

606

Deduct: Net impact from fuel contracts (a)

(7)

(37)

Add: Lease termination expense

5

Deduct: Gain on sale of grounded aircraft

(25)

Operating income, excluding special items

$

584

$

574

1.7

Other (gains) losses, net, as reported

$

4

$

63

Deduct: Net impact from fuel contracts (a)

(65)

Other (gains) losses, net, excluding special items

$

4

$

(2)

n.m.

Net income, as reported

$

463

$

339

Add (Deduct): Net impact from fuel contracts (a)

(7)

28

Add: Lease termination expense

5

Deduct: Gain on sale of grounded aircraft

(25)

Add (Deduct): Net income tax impact of fuel and special items (b)

7

(13)

Net income, excluding special items

$

438

$

359

22.0

Net income per share, diluted, as reported

$

0.79

$

0.55

Add (Deduct): Impact from fuel contracts

(0.01)

0.04

Add (Deduct): Impact of special items

(0.04)

0.01

Add (Deduct): Net income tax impact of fuel and special items (b)

0.01

(0.02)

Net income per share, diluted, excluding special items

$

0.75

$

0.58

29.3

(a) See Reconciliation of Impact from Fuel Contracts.

(b) Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.

Twelve months
ended

Twelve months
ended

March 31, 2018

March 31, 2017

Operating income, as reported

$

3,417

$

3,269

Contract ratification bonuses

356

Net impact from fuel contracts

(125)

(247)

Asset impairment

21

Lease termination expense

28

27

Aircraft grounding charge

63

Gain on sale of grounded aircraft

(25)

Operating income, non-GAAP

$

3,358

$

3,426

Net adjustment for aircraft leases (a)

107

109

Adjusted operating income, non-GAAP (A)

$

3,465

$

3,535

Non-GAAP tax rate (B)

23.1%

(d)

36.6%

(e)

Net operating profit after-tax, NOPAT (A* (1-B) = C)

2,665

2,241

Debt, including capital leases (b)

$

3,300

$

3,282

Equity (b)

8,561

7,350

Net present value of aircraft operating leases (b)

732

957

Average invested capital

$

12,593

$

11,589

Equity adjustment for hedge accounting (c)

196

698

Adjusted average invested capital (D)

$

12,789

$

12,287

Non-GAAP ROIC, pre-tax (A/D)

27.1%

28.8%

Non-GAAP ROIC, after-tax (C/D)

20.8%

18.2%

Solutions

Expert Solution

Southwest airlines has implemented several cost effective strtegies.it provides only coach classservices to customer,operate only one type of aircraft and debtengine,ticketless and paperlesstravel reservation system,point to point transportation.various ratios are used for financial analysis.short term liquidity ratios are used for evalution of short term liquidity.the airlines industry is debt intensive industry due to debt incurred in financing of aircraft necessary for operations.Average collection period in days also incrrased.Company provides low fare air transportation services and its inventory consists of flight equipment expandable parts,material,and suppliesand is carried at average cost.the most popular profitability ratio is earning per share.earning per share gives a picture of current net income in particular period to no. of outstanding share of stock.

Southwest company price earning ratio shows confidence of public in companyThe main area of concern is that company should work for reducing operating expenses and debt ,lease termination expenses.


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