SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1995 OR ____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ Commission file No. 1-7259 SOUTHWEST AIRLINES CO. (Exact name of registrant as specified in its charter) TEXAS 74-1563240 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 36611, Dallas, Texas 75235-1611 (Address of principal executive offices) (Zip Code) (214) 904-4000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock outstanding as of the close of business on November 10, 1995: 143,931,917
SOUTHWEST AIRLINES CO. FORM 10-Q Part I - FINANCIAL INFORMATION Item 1. Financial Statements Southwest Airlines Co. CONDENSED CONSOLIDATED BALANCE SHEET (in thousands) (unaudited) <TABLE> <CAPTION> September 30, December 31, 1995 1994 <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $365,757 $174,538 Accounts receivable 120,257 75,692 Inventories of parts and supplies 38,157 37,565 Prepaid expenses and other 39,761 27,103 Total current assets 563,932 314,898 Property and equipment: Flight equipment 2,869,100 2,564,551 Ground property and equipment 426,591 384,501 Deposits on flight equipment purchase contracts 343,374 393,749 3,639,065 3,342,801 Less allowance for depreciation 958,284 837,838 2,680,781 2,504,963 Other assets 3,555 3,210 $3,248,268 $2,823,071 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $148,062 $117,599 Accrued liabilities 299,976 288,979 Air traffic liability 181,805 106,139 Income taxes payable 3,211 - Current maturities of long-term debt 13,711 9,553 Total current liabilities 646,765 522,270 Long-term debt less current maturities 671,066 583,071 Deferred income taxes 273,717 232,850 Deferred gains from sale and leaseback of aircraft 252,029 217,677 Other deferred liabilities 22,553 28,497 Stockholders' equity: Common stock 143,865 143,256 Capital in excess of par value 159,612 151,746 Retained earnings 1,078,661 943,704 Total stockholders' equity 1,382,138 1,238,706 $3,248,268 $2,823,071 </TABLE> See accompanying notes.
Southwest Airlines Co. CONDENSED CONSOLIDATED STATEMENT OF INCOME (in thousands except per share amounts) (unaudited) <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, 1995 1994 1995 1994 <S> <C> <C> <C> <C> Operating revenues: Passenger $735,275 $661,623 $2,042,378 $1,896,604 Freight 16,160 13,052 47,165 39,071 Other 13,540 10,614 34,636 30,082 Total operating revenues $764,975 685,289 2,124,179 1,965,757 Operating expenses: Salaries, wages, and benefits 223,585 195,799 644,415 563,637 Fuel and oil 92,034 82,652 264,090 231,139 Maintenance materials and repairs 55,729 48,296 159,982 141,939 Agency commissions 31,623 33,675 92,368 103,298 Aircraft rentals 44,229 32,961 124,709 94,988 Landing fees and other rentals 41,803 37,619 121,779 110,607 Depreciation 38,826 36,298 114,382 102,588 Other operating expenses 123,048 116,279 361,522 337,971 Total operating expenses 650,877 583,579 1,883,247 1,686,167 Operating income 114,098 101,710 240,932 279,590 Other expenses (income): Interest expense 15,038 13,102 43,811 40,234 Capitalized interest (8,255) (6,582) (25,155) (18,398) Interest income (6,849) (1,792) (14,259) (5,937) Nonoperating losses (gains), net (51) (146) 1,485 (131) Total other expenses (117) 4,582 5,882 15,768 Income before income taxes 114,215 97,128 235,050 263,822 Provision for income taxes 46,498 38,509 95,783 104,834 Net income $67,717 $58,619 $139,267 $158,988 Weighted average common and common equivalent shares outstanding 151,647 147,320 148,509 147,432 Net income per common and common equivalent share $.45 $.40 $.94 $1.08 </TABLE> See accompanying notes.
Southwest Airlines Co. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (unaudited) <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, 1995 1994 1995 1994 <S> <C> <C> <C> <C> Net cash provided by operating activities $49,720 $82,097 $347,923 $334,251 Investing activities: Net purchases of property and equipment (213,855) (240,485) (572,141) (613,946) Financing activities: Issuance of long-term debt - - 98,811 - Payment of long-term debt and capital lease obligations (2,731) (2,865) (7,758) (62,369) Payment of cash dividends (1,438) (1,432) (5,741) (4,290) Proceeds from aircraft sale and leaseback transactions 130,000 315,000 321,650 315,000 Proceeds from Employee stock plans 3,163 2,032 8,475 6,697 Net cash provided by financing activities 128,994 312,735 415,437 255,038 Net increase (decrease) in cash and cash equivalents (35,141) 154,347 191,219 (24,657) Cash and cash equivalents at beginning of period 400,898 116,567 174,538 295,571 Cash and cash equivalents at end of period $365,757 $270,914 $365,757 $270,914 Cash payments for: Interest, net of amount capitalized $14,270 $13,109 $25,381 $29,716 Income taxes $44,449 $26,764 $52,276 $64,274 </TABLE> See accompanying notes.
SOUTHWEST AIRLINES CO. Notes to Condensed Consolidated Financial Statements 1. Basis of presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The condensed consolidated financial statements for the interim periods ended September 30, 1995 and 1994 include all adjustments (which include only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. Operating results for the three and nine month periods ended September 30, 1995 are not necessarily indicative of the results that may be expected for the year ended December 31, 1995. For further information, refer to the consolidated financial statements and footnotes thereto included in the Southwest Airlines Co. annual report on Form 10-K for the year ended December 31, 1994. 2. Dividends - During the three month periods ended September 30, 1995, June 30, 1995, March 31, 1995, September 30, 1994, June 30, 1994 and March 31, 1994, dividends of $.01 were declared on the 143,840,928, 143,648,993, 143,411,223, 143,141,181, 143,042,383 and 142,856,850 shares of common stock then outstanding, respectively. 3. Long-term debt - During March 1995, the Company issued $100 million of 8% senior unsecured notes due March 2005. Interest on the Notes is payable semi-annually on March 1 and September 1, commencing September 1, 1995. The Notes may not be redeemed prior to maturity. 4. Leases - During third quarter 1995, the Company completed transactions for the sale and leaseback of four new Boeing 737 aircraft. The lease terms, which require periodic lease payments through January 2019, increased the Company's commitments for operating leases by $236.5 million. 5. Reclassifications - Certain prior year amounts have been reclassified for comparison purposes.
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Comparative Consolidated Operating Statistics Relevant operating statistics for the three and nine month periods ended September 30, 1995 and 1994 are as follows: <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, 1995 1994 1995 1994 <S> <C> <C> <C> <C> Revenue passengers carried 11,682,228 11,254,033 33,299,341 31,947,498 Revenue passenger miles (RPMs) (000s) 6,252,006 5,718,949 17,450,334 16,215,299 Available seat miles (ASMs) (000s) 9,216,522 8,298,603 26,663,719 23,632,900 Load factor 67.8% 68.9% 65.4% 68.6% Average length of passenger haul 535 508 524 508 Trips flown 174,312 161,415 508,107 460,881 Average passenger fare $62.94 $58.79 $61.33 $59.37 Passenger revenue yield per RPM $.1176 $.1157 $.1170 $.1170 Operating revenue yield per ASM $.0830 $.0826 $.0797 $.0832 Operating expenses per ASM $.0706 $.0703 $.0706 $.0713 Average fuel cost per gallon $.5460 $.5415 $.5404 $.5309 Number of employees at period-end 19,748 16,417 19,748 16,417 Size of fleet at period-end 219 195 219 195 </TABLE> Material Changes in Results of Operations Consolidated net income for the three months ended September 30, 1995 was $67.7 million ($.45 per share) compared with $58.6 million ($.40 per share) earned in third quarter 1994.
Consolidated operating revenues increased 11.6 percent for the third quarter of 1995 and 8.1 percent for the nine months ended September 30, 1995, as compared to the corresponding periods of the prior year, primarily as a result of an 11.1 percent and 7.7 percent increase, respectively, in consolidated passenger revenues. The increase in passenger revenues resulted from a 9.3 percent and 7.6 percent increase in revenue passenger miles (RPMs) for the three and nine month periods ended September 30, 1995, respectively, coupled with a 7.1 percent and 3.3 percent increase in average passenger fare over these same periods. Available seat miles (ASMs) increased 11.1 percent and 12.8 percent in third quarter 1995 and the nine month period ended September 30, 1995, respectively, resulting in load factors of 67.8 percent and 65.4 percent for these same periods. The passenger revenue yield per RPM increased 1.6 percent to $.1176 for the three months ended September 30, 1995 and was flat for the nine months ended September 30, 1995. The third quarter 1995 load factor and revenue yield per RPM remained strong compared to second quarter 1995 results of 67.1 percent and $.1185, respectively, primarily due to modest fare increases and an enhanced fare structure. Bookings were not strong for October travel. The October 1995 load factor of 60.0 percent was 5.0 points below year ago levels, which were heavily stimulated by sales and promotional activities. Yield per RPM was almost 13 percent higher in October 1995 versus October 1994, however. With respect to the revenue outlook for the remainder of the fourth quarter 1995, we recently launched a sale with strong customer response. November and December load factors may still lag behind year ago levels. Yield per RPM should continue to exceed year ago levels, although at a lower rate of growth than October 1995. Consolidated freight revenues increased 23.8 percent in the third quarter of 1995 and 20.7 percent for the nine months ended September 30, 1995 as compared to the same periods of the prior year, primarily due to increased capacity, as well as an increase in air freight and United States mail services. Other revenues increased 27.6 percent in the third quarter 1995 and 15.1 percent for the nine months ended September 30, 1995, primarily due to increased charter and inflight service revenues.
Operating expenses per ASM increased 0.4 percent for the three months and decreased 1.0 percent for the nine months ended September 30, 1995 as follows: Southwest Airlines Co. Consolidated Operating Expenses per ASM (in cents except percent change) <TABLE> <CAPTION> Three months ended September 30, Increase Percent 1995 1994 (decrease) change <S> <C> <C> <C> <C> Salaries, wages, and benefits 2.12 2.10 .02 1.0 Profitsharing and Employee savings plans .30 .26 .04 15.4 Fuel and oil 1.00 1.00 - - Maintenance materials and repairs .61 .58 .03 5.2 Agency commissions .34 .40 <.06> <15.0> Aircraft rentals .48 .40 .08 20.0 Landing fees and other rentals .45 .45 - - Depreciation .42 .44 <.02> <4.5> Other operating expenses 1.34 1.40 <.06> <4.3> Total 7.06 7.03 .03 0.4 </TABLE> <TABLE> <CAPTION> Nine Months ended September 30, Increase Percent 1995 1994 (decrease) (change) <S> <C> <C> <C> <C> Salaries, wages,and benefits 2.18 2.13 .05 2.3 Profitsharing and Employee savings plans .24 .25 <.01> <4.0> Fuel and oil .99 .98 .01 1.0 Maintenance materials and repairs .60 .60 - - Agency commissions .35 .44 <.09> <20.5> Aircraft rentals .47 .40 .07 17.5 Landing fees and other rentals .45 .47 <.02> <4.3> Depreciation .43 .43 - - Other operating expenses 1.35 1.43 <.08> <5.6> Total 7.06 7.13 <.07> <1.0> </TABLE>
Profitsharing and Employee savings plans expense per ASM increased 15.4 percent for the three months ended September 30,1995 and decreased 4.0 percent for the nine months ended September 30, 1995, respectively, as compared to the same periods of the prior year primarily due to corresponding fluctuations in operating income per ASM and increased Company contributions to Employee savings plans for noncontract Employees and certain Employee groups covered by collective bargaining agreements. Fleet service employees are subject to an agreement with the Ramp, Operations and Provisioning Association, which became amendable in December 1994 and is currently in mediation. Southwest's mechanics and related employees are subject to an agreement with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America (the Teamsters), which became amendable August 16, 1995. Southwest is currently in negotiations with the Teamsters for a new contract. Fuel and oil expense per ASM has remained relatively flat year over year due to the stability of fuel prices. The average price paid for fuel during the first nine months of 1995 increased only 1.8 percent over the corresponding period of 1994. Since the end of third quarter 1995, fuel prices have averaged approximately $.57 per gallon. Agency commissions per ASM decreased by 15.0 percent and 20.5 percent for the three month and nine month periods ended September 30, 1995, as compared to the corresponding periods of 1994. As a result of 1994 and first quarter 1995 enhancements to Southwest's ticket delivery systems for direct Customers, as described below, the travel agency sales mix decreased from approximately 52 percent of total passenger sales in third quarter 1994 to 43 percent in third quarter 1995. The Company expects to maintain this travel agency sales mix in fourth quarter 1995. In response to actions taken by our competitor-owned reservations systems, we reduced our operating costs and enhanced our ticket delivery systems by developing our own Southwest Airlines Air Travel ("SWAT") system, allowing high-volume travel agents direct access to reservations; introduced overnight ticket delivery for travel agents; reduced to three the number of advanced days reservations required for overnight delivery of tickets to customers (Ticket By Mail); developed our own Ticketless system, which was rolled out system-wide on January 31, 1995; and effective March 30, 1995, subscribed to a new level of service with SABRE that allows SABRE travel agencies to electronically pursue other cost-effective solutions for automating non-SABRE travel agency bookings.
Aircraft rentals per ASM increased 20.0 percent and 17.5 percent for the three and nine month periods ended September 30, 1995, compared to the corresponding periods of 1994. The increase was primarily due to the sale/leaseback financing of four aircraft during third quarter 1995 and six aircraft during second quarter 1995 with long-term operating leases and a higher percentage of the fleet consisting of leased aircraft. Other operating expenses per ASM decreased 4.3 percent and 5.6 percent for the three and nine month periods ended September 30, 1995, respectively. These decreases were primarily due to operating efficiencies resulting from the transition of Morris operational functions to Southwest, commencing first quarter 1994. Other expenses (income) for the three months and nine months ended September 30, 1995 included interest expense, capitalized interest, interest income, and nonoperating gains and losses. Interest expense increased in the first nine months of 1995 as compared to the first nine months of 1994 due to the March 1995 issuance of $100 million of 8 percent senior unsecured Notes due March 2005. Capitalized interest increased for the three month and nine month periods ended September 30, 1995 as a result of increased aircraft progress payments as compared to the same periods of the prior year. Interest income increased for the three and nine months ended September 30, 1995 due to higher invested cash balances and higher short-term interest rates. We expect our unit costs to increase in fourth quarter 1995 versus fourth quarter 1994, due to reduced aircraft utilization and a 4.3 cent per gallon jet fuel tax that went into effect October 1. Although efforts are underway in Congress to defer imposition of the tax for two years, our industry's previous two year tax exemption expired, by its term, on October 1, 1995 and the tax will be collected, as of that date, even if only on an interim basis. Material Changes in Financial Condition Net cash provided by operating activities was $49.7 million for the three months ended September 30, 1995. During third quarter 1995, the Company generated $130.0 million from the sale/leaseback of four Boeing 737 aircraft. During the twelve months ended September 30, 1995, cash of $424.9 million was provided from operations. This cash was primarily used to finance aircraft-related expenditures and provide working capital. For the twelve months ended September 30, 1995, net capital expenditures were $746.8 million, which were primarily for the purchase of 20 new and one used 737-300 aircraft, which had been previously leased by Morris, and progress payments for future aircraft deliveries. As of September 30, 1995, the Company had authority by its Board of Directors to purchase 3,750,000 shares of its common stock from time to time on the open market. No shares have been purchased pursuant to this authority since 1990. The Company's contractual commitments at September 30, 1995, consist primarily of scheduled aircraft acquisitions. These contractual commitments were affected by third quarter amendments to certain aircraft purchase contracts, which modified future progress payments. Seven 737-300s are scheduled for delivery in the remainder of 1995, 18 in 1996, and 13 in 1997. Four 737-700s are scheduled for delivery in 1997, 16 in 1998, 16 in 1999, 15 in 2000, and 12 in 2001. In addition, the Company has options to purchase up to eight 737-300s in 1997 and up to sixty-three 737- 700s during 1998-2004. The Company has the option, which must be exercised two years prior to the contractual delivery date, to substitute 737-600s or 737-800s for the 737-700s delivered subsequent to 1999. Aggregate funding needed for these commitments is approximately $2,609.4 million at September 30, 1995 due as follows: $136.3 million in 1995; $429.3 million in 1996; $468.0 million in 1997; $447.0 million in 1998; $551.3 million in 1999; $351.0 million in 2000; and $226.5 million in 2001. Additionally, the Company currently intends to exercise eight of its 1997 purchase options, which would increase funding requirements by $7.5 million in 1995, $22.7 million in 1996, and $220.1 million in 1997. Boeing is currently experiencing a work stoppage affecting approximately 32,500 machinists and aerospace workers which may impact future aircraft deliveries. The Company has received three of its seven scheduled fourth quarter aircraft deliveries and anticipates receiving two additional deliveries prior to year end. At this point, we do not know when we will receive our remaining fourth quarter deliveries or what impact the strike might have on 1996 deliveries. In any event, we do not believe the Boeing strike will have a material adverse effect on our fourth quarter 1995 flight schedule. The Company has various options available to meet its capital and operating commitments, including cash on hand at September 30, 1995 of $365.8 million, and a $460 million revolving credit line with a group of banks. In addition, the Company will also consider various external financing options to maximize earnings and cash flows and to maintain a strong capital structure.
PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company has received examination reports from the Internal Revenue Service proposing certain adjustments to Southwest's income tax returns for 1987 through 1991. The adjustments relate to certain types of aircraft financings consummated by Southwest, as well as other members of the aviation industry, during that time period. Southwest intends to vigorously protest the adjustments made with which it does not agree. The industry's difference with the IRS involves complex issues of law and fact which are likely to take a substantial period of time to resolve. Management believes that final resolution of such protest will not have a materially adverse effect upon the results of operations of Southwest. Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None to be reported. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a) Exhibits (11.1) Computation of Earnings Per Share (27) Financial Data Schedule b) Reports on Form 8-K The following report on Form 8-K was filed during the quarter. Form 8-K dated September 20, 1995 filed for the purpose of filing certain documents in connection with, and incorporated by reference into, Southwest Airlines Company's Registration Statement on Form S-3 (File No. 33-59113), as declared effective on May 9, 1995 and Southwest Airlines Company's Registration Statement on Form S-3 (File No. 33-54587), as declared effective on July 21, 1994, relating to Pass Through Certificates, series 1995-A.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHWEST AIRLINES CO. <TABLE> <S> <C> November 13, 1995 /s/ Gary C. Kelly Date Gary C. Kelly Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer) </TABLE> INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit Number Exhibit <S> <C> (11.1) Computation of Earnings Per Share (27) Financial Data Schedule </TABLE>