Profile - JustAnswer
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Southwest Airlines Company: Stock Symbol (LUV)
Website: WWW.
10-K Annual Report for year ending December 31, 2015, filed February 2, 2016
Question 1
|What 3 items of important information does the income statement reveal about the financial performance of the company over the last three | |
|years? | |
|Answer: The majority of revenues come from the sale of passenger tickets. That revenue has grown nicely: up 3.6% in 2015 and 5.6% in | |
|2014. The costs for fuel and oil were down substantially (likely due to oil from fracking). These costs declined from $5.3 billion to | |
|$3.6 billion from 2014 to 2105. Salaries and wages were up over 17% from 2014 to 2015. Maintenance was up 2.7% and landing fees were up | |
|4.9%. Both taxes and net income were up 91%. Cash dividends to shareowners were up 29%. Net Income divided by Total Revenues was 11.0% | |
|in 2015, up from 4.3% in 2013. All in all, it was a very successful year for the company. | |
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|You will note that my answer included 10 interesting things that I learned. You need to find at least 3. | |
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|A note on SEC Data | |
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|My data came from the SEC web site. I used the Interactive Data to create an Excel spreadsheet, and used that sheet to calculate the | |
|percentages. I copied that sheet into this document below. | |
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|Go to and look for the box that says Search EDGAR, Free access to over 21 million filings. There is a place to enter the | |
|company name or stock market ticker symbol. Enter the name and click the search icon. When I typed in Southwest A, the search box filled| |
|in “Southwest Airlines Co. (LUV). Under search results, enter 10-K in the box for filing type. Then you will have the choice between | |
|annual reports for the last 20 years or so. For Southwest, there is data available on an Excel spreadsheet for the last 7 years. Choose | |
|documents to see the 10-K as filed or Interactive Data to get the Excel spreadsheets. | |
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|Most company web sites have their annual reports available on the investor relations page. One can obtain summary financial statements on| |
|Morningstar, Yahoo Finance, and MSN Money. Unfortunately, in cases where company data does not fit standard formats, some numbers may be | |
|omitted. The SEC web site does not have this problem. | |
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|Most line items are self-explanatory. The Financial Statement Power Point may help with explanations. Also under Course Resources, | |
|Webliography, SEC guide to Financial Statements, may be helpful. The webliography contains other useful information. | |
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|The Excel sheets will have several minor statements that you can ignore. | |
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|Southwest Data for Question 1: | |
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|Southwest Airlines Company |12 Months Ended | | | |
|Consolidated Statement of Income - USD ($) $ in Millions | | | | |
| |12/31/15 |12/31/2014 |12/31/2013 | | | |
|OPERATING REVENUES: | | | | | | |
|Passenger | $ 18,299 | $ 17,658 | $ 16,721 | |103.6% |105.6% |
|Freight |179 |175 |164 | |102.3% | |
|Special revenue adjustment |172 |0 |0 | | | |
|Other |1,170 |772 |814 | |151.6% | |
|Total operating revenues |19,820 |18,605 |17,699 | |106.5% | |
|OPERATING EXPENSES: | | | | | | |
|Salaries, wages, and benefits |6,383 |5,434 |5,035 | |117.5% | |
|Fuel and oil |3,616 |5,293 |5,763 | |68.3% | |
|Maintenance materials and repairs |1,005 |978 |1,080 | |102.8% | |
|Aircraft rentals |238 |295 |361 | |80.7% | |
|Landing fees and other rentals |1,166 |1,111 |1,103 | |105.0% | |
|Depreciation and amortization |1,015 |938 |867 | |108.2% | |
|Acquisition and integration |39 |126 |86 | |31.0% | |
|Other operating expenses |2,242 |2,205 |2,126 | |101.7% | |
|Total operating expenses |15,704 |16,380 |16,421 | |95.9% | |
|OPERATING INCOME |4,116 |2,225 |1,278 | |185.0% | |
|OTHER EXPENSES (INCOME): | | | | | | |
|Interest expense |121 |130 |131 | |93.1% | |
|Interest Costs Capitalized Adjustment |(31) |(23) |(24) | |134.8% | |
|Interest income |(9) |(7) |(6) | |128.6% | |
|Other (gains) losses, net |556 |309 |(32) | |179.9% | |
|Total other expenses (income) |637 |409 |69 | |155.7% | |
|INCOME BEFORE INCOME TAXES |3,479 |1,816 |1,209 | |191.6% | |
|PROVISION FOR INCOME TAXES |1,298 |680 |455 | |190.9% | |
|NET INCOME | $ 2,181 | $ 1,136 | $ 754 | |192.0% | |
|NET INCOME PER SHARE, BASIC (in dollars per share) | $ 3.30 | $ 1.65 | $ 1.06 | |200.0% | |
|NET INCOME PER SHARE, DILUTED (in dollars per share) |3.27 |1.64 |1.05 | |199.4% | |
|Cash dividends declared per common share (in dollars per | $ 0.2850 | $ 0.2200 | $ 0.1300 | |129.5% | |
|share) | | | | | | |
| |11.0% |6.1% |4.3% | | | |
Question 2:
What 3 items of important information does the balance sheet reveal about the financial position of the company over the last two years?
Answer: First we note that Total Assets grew 8.1% from 2014 to 2015. Current assets of $4 billion are significantly less than Current Liabilities of $7.4 billion in 2015. In a manufacturing company this would indicate a weakness, but at Southwest most customers pay in advance for air fare so accounts receivable are low at $0.5 billion. Inventories of Parts and Supplies, at cost are also low at $0.3 billion. I would have to look in the footnotes to find out that Southwest does not keep a big supply of jet fuel; it buys fuel as is uses fuel. Flight equipment of $19.5 billion makes up the majority of the $24.7 billion property and equipment at cost. Depreciation of $9.1 billion suggests that the majority of the life of the airplanes and other property is still to come. Under current liabilities, we see that Air Traffic Liability was $3.0 billion. This is the amount of money customers paid to Southwest for tickets before flying. At Dec 31, 2015, this says that total tickets bought for 2016 was $3 billion. Total shareholders’ equity grew 8.6%.
You will note that my answer included 10 interesting things that I learned. You need to find at least 3.
Southwest Data for question 2
|Southwest Airlines Company | | | |
|Consolidated Balance Sheet - USD ($) $ in Millions |Dec. 31, 2015 |Dec. 31, 2014 | |
|Current assets: | | | |
|Cash and cash equivalents | $ 1,583 | $ 1,282 | |
|Short-term investments |1,468 |1,706 | |
|Accounts and other receivables |474 |365 | |
|Inventories of parts and supplies, at cost |311 |342 | |
|Prepaid expenses and other current assets |188 |232 | |
|Total current assets |4,024 |3,927 | |
|Property and equipment, at cost: | | | |
|Flight equipment |19,462 |18,473 |105.4% |
|Ground property and equipment |3,219 |2,853 | |
|Deposits on flight equipment purchase contracts |1,089 |566 | |
|Assets constructed for others |915 |621 | |
|Property and equipment, at cost |24,685 |22,513 | |
|Less allowance for depreciation and amortization |9,084 |8,221 | |
|Property and equipment, net |15,601 |14,292 | |
|Goodwill |970 |970 | |
|Other assets |717 |534 | |
|Total assets |21,312 |19,723 |108.1% |
|Current liabilities: | | | |
|Accounts payable |1,188 |1,203 |98.8% |
|Accrued liabilities |2,591 |1,565 |165.6% |
|Air traffic liability |2,990 |2,897 |103.2% |
|Current maturities of long-term debt |637 |258 |246.9% |
|Total current liabilities |7,406 |5,923 | |
|Long-term debt less current maturities |2,541 |2,434 |104.4% |
|Deferred income taxes |2,490 |2,782 | |
|Construction obligation |757 |554 | |
|Other noncurrent liabilities |760 |1,255 | |
|Stockholders' equity: | | | |
|Common stock, $1.00 par value: 2,000,000,000 shares authorized; |808 |808 | |
|807,611,634 shares issued in 2015 and 2014 | | | |
|Capital in excess of par value |1,374 |1,315 | |
|Retained earnings |9,409 |7,416 | |
|Accumulated Other Comprehensive Income (Loss), Net of Tax |(1,051) |(738) | |
|Treasury stock, at cost: 160,010,017 and 132,017,550 shares in 2015 |(3,182) |(2,026) | |
|and 2014 respectively | | | |
|Total stockholders' equity |7,358 |6,775 |108.6% |
|Total liabilities and stockholders' equity | $ 21,312 | $ 19,723 | |
Question 3
3) Can you identify the major sources of funding used by the company from the information presented in the company's annual report? Please look at the Statement of Cash Flows, formerly called the Source and Uses of Funds Statement.
Answer: First here is an explanation: There are 4 main parts to the Statement of Cash Flows: 1. Net cash provided by operating activities. 2. Net cash used in investing activities. 3. Net cash used in financing activities and 4. “NET CHANGE IN CASH AND CASH EQUIVALENTS.” (Yes, it is a bit strange to see all capital letters in this last category.) Cash inflows show as positive numbers. Cash outflows show as negative numbers with parentheses around them.
Cash Flow Net cash provided by operating activities was $3.2 billion in 2015. The majority of that came from $2.2 billion of net income and $1.0 billion of depreciation and amortization. (Note: Depreciation is a non-cash charge. The company has to pay cash soon after it purchased the airplanes and other property.) Net cash used in investing activities was ($1.9) billion. That was essentially the same as the amount of capital expenditures ($2.0) billion. The purchase and sale of short term investments were similar to each other. Net cash used in financing activities was ($1.0) billion. Southwest spent ($1.2) billion on the repurchase of common stock. It borrowed $0.5 billion and had other payments. NET CHANGE was positive $0.3 billion.
So in sum, Southwest Airlines Company had 3 Net cash from operating activities as the primary source of funding. Net income provided the most at $2.2 billion with depreciation next at $1 billion. The company did borrow $0.5 billion.
Southwest Data for Question 3:
|Southwest Airline Company | | | |
| | | | |
|Consolidated Statement of Cash Flows - USD ($) $ in Millions |12 Months Ended |
| |Dec. 31, 2015 |Dec. 31, 2014 |Dec. 31, 2013 |
|CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
|Net income | $ 2,181 | $ 1,136 | $ 754 |
|Adjustments to reconcile net income to cash provided by operating activities:| | | |
|Depreciation and amortization |1,015 |938 |867 |
|Unrealized (gain) loss on fuel derivative instruments |113 |279 |(5) |
|Deferred income taxes |(109) |501 |50 |
|Changes in certain assets and liabilities: | | | |
|Accounts and other receivables |(88) |54 |(17) |
|Other assets |103 |142 |(46) |
|Accounts payable and accrued liabilities |961 |36 |343 |
|Air traffic liability |94 |326 |400 |
|Cash collateral received from (provided to) derivative counterparties |(570) |(233) |57 |
|Other, net |(462) |(277) |74 |
|Net cash provided by operating activities |3,238 |2,902 |2,477 |
|Net cash used in investing activities | | | |
|Capital expenditures |(2,041) |(1,748) |(1,433) |
|Assets constructed for others |(102) |(80) |(14) |
|Purchases of short-term investments |(1,986) |(3,080) |(3,135) |
|Proceeds from sales of short-term and other investments |2,223 |3,185 |3,198 |
|Other, net |(7) |(4) |0 |
|Net cash used in investing activities |(1,913) |(1,727) |(1,384) |
|Net cash used in financing activities | | | |
|Proceeds from issuance of long-term debt |500 |300 |0 |
|Proceeds from Employee stock plans |46 |110 |96 |
|Reimbursement for assets constructed for others |24 |27 |0 |
|Proceeds from termination of interest rate derivative instrument |12 |0 |0 |
|Payments of long-term debt and capital lease obligations |(213) |(561) |(313) |
|Payments of cash dividends |(180) |(139) |(71) |
|Repayment of construction obligation |(10) |(11) |(5) |
|Repurchase of common stock |(1,180) |(955) |(540) |
|Other, net |(23) |(19) |(18) |
|Net cash used in financing activities |(1,024) |(1,248) |(851) |
|NET CHANGE IN CASH AND CASH EQUIVALENTS |301 |(73) |242 |
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |1,282 |1,355 |1,113 |
|CASH AND CASH EQUIVALENTS AT END OF PERIOD |1,583 |1,282 |1,355 |
|CASH PAYMENTS FOR: | | | |
|Interest |105 |128 |133 |
|Income taxes |1,440 |155 |346 |
|SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: | | | |
|Flight equipment under capital leases |193 |153 |26 |
|Assets constructed for others | $ 192 | $ 88 | $ 105 |
Question 4
4) Who is responsible for
a) the issuance, and
b) the content
of the company financial statements? (Note: this information may be difficult to find. Look for statements by management and the independent auditing firm.)
Answer: I looked in Documents not the Interactive Data. On page 108 I learned that “These financial statements are the responsibility of the Company’s management.” This was in the Report of the Independent Registered Public Accounting Firm. On page 111, I learned about the responsibility of management for internal controls in section 9A. On page 199 I learned that the primary signature was from Tammy Romo, Executive Vice President and Chief Financial Officer. On page 120 I saw the signatures of Gary C. Kelly, Chairman and Chief Executive Officer; Tammy Romo; Ron Ricks, Vice Chairman of the Board; and all directors.
Southwest information from:
Question 5
5) What assurance, if any, is there that the financial statements are in compliance with GAAP, and are free of material misstatements?
Answer: On page 108, we see a Report of Independent Registered Public Accounting Firm from Ernst & Young LLP in which they provide reasonable assurance that the financial statements are free of material misstatement. Further on page 109 in a second, Report of Independent Registered Public Accounting Firm, we see that they write. “In our opinion, Southwest Airlines Co. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.” And “We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Southwest Airlines Co. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015 and our report dated February 2, 2016 expressed an unqualified opinion thereon.”
Southwest information from:
6) Of what use, if any, are the notes to the financial statements? Give an example of something learned from the footnotes of your company.
Answer: The notes to the financial statements contain useful information. They explain what terms mean and expand information. If you want to find out what is in inventories or property and equipment, there are explanations in the notes on page 73. An explanation of the liability for the frequent program can be found on page 75. Financial Derivative Instruments are described on page 77 and in more detail on page 91. Note 10 describes the use of hedging to control fuel costs and the assessment of risk of this program. In note 4, commitments including leases and aircraft on order are described on pages 80 through 83. Note 6 describes long term debt including interest rates on pages 84 through 87. And Note 14, Income Tax explains the difference between accrued tax and tax paid. It is found on pages 106 and 107.
Southwest information from:
7) What can you learn from the Business Section of the 10-K? Give two facts learn from reading this section.
Answer: Item 1 Business describes the company’s business. It starts with the sentence, “Southwest Airlines Co. (the “Company” or “Southwest”) operates Southwest Airlines, a major passenger airline that provides scheduled air transportation in the United States and near-international markets. For the 43rd consecutive year, the Company was profitable, earning $2.2 billion in net income.” The business model is one of point to point service rather than hub and spoke that defines most of the industry. There is information on International Service, cost structure and even fuel strategy. Among many other facts, the fare structure is described (Wanna Get Away, Fly Anytime and Business Select). There is information about competition and long descriptions of regulation. In Item 1A, Risk, there are description if 16 major risks and some lesser risks including the effect of the economy and the threat of war, terrorist attacks and political instability. The business section begins on page 4 and ends on page 28.
Southwest information from:
8) What can you learn from the Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A)? Give two facts learned from reading this section.
Answer: Item 7 is Management's Discussion and Analysis of Financial Condition and Results of Operations. It starts with a comparison between management accounting used to run the business and GAAP accounting. It describes in detail the difference between results in 2014 and 2015. The most significant difference was, “Fuel and oil expense for 2015 decreased by $1.7 billion, or 31.7 percent, compared with 2014.” However, the amount of the decrease wasn’t predicted perfectly so, “As a result of the Company's fuel hedging program, the Company recognized losses totaling $254 million in Fuel and oil expense for 2015, compared with net gains totaling $28 million for 2014” This means Southwest didn’t keep all of the benefits of the reduction in fuel costs. Also, there is a comparison between 2013 and 2014.
Another significant item was about income tax. “The Company's effective tax rate was approximately 37.3 percent for 2015, compared with 37.4 percent for 2014.”
Southwest information from:
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