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, 1996 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) 792-4000 (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 6, 1996: 145,031,619
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, 1996 December 31, 1995 <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $594,030 $317,363 Accounts receivable 84,299 79,781 Inventories of parts and supplies 52,397 41,032 Deferred income taxes 11,531 10,476 Prepaid expenses and other current assets 31,697 24,484 Total current assets 773,954 473,136 Property and equipment: Flight equipment 3,270,289 3,024,702 Ground property and equipment 507,355 435,822 Deposits on flight equipment purchase contracts 217,461 323,864 3,995,105 3,784,388 Less allowance for depreciation 1,152,884 1,005,081 2,842,221 2,779,307 Other assets 3,340 3,679 $3,619,515 $3,256,122 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $133,144 $116,530 Accrued liabilities 369,504 349,419 Air traffic liability 206,083 131,156 Current maturities of long-term debt 12,183 13,516 Total current liabilities 720,914 610,621 Long-term debt less current maturities 652,246 661,010 Deferred income taxes 332,053 281,650 Deferred gains from sale and leaseback of aircraft 280,165 245,154 Other deferred liabilities 19,106 30,369 Stockholders' equity: Common stock 144,985 144,033 Capital in excess of par value 175,064 162,704 Retained earnings 1,294,982 1,120,581 Total stockholders' equity 1,615,031 1,427,318 $3,619,515 $3,256,122 </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, 1996 1995 1996 1995 Operating revenues: <C> <C> <C> <C> Passenger $855,719 $735,275 $2,473,142 $2,042,378 Freight 19,677 16,160 58,668 47,165 Other 16,096 13,540 42,519 34,636 Total operating revenues 891,492 764,975 2,574,329 2,124,179 Operating expenses: Salaries, wages, and benefits 254,798 223,585 750,241 644,415 Fuel and oil 126,239 92,034 345,757 264,090 Maintenance materials and repairs 70,565 55,729 199,598 159,982 Agency commissions 37,098 31,623 106,500 92,368 Aircraft rentals 47,960 44,229 138,879 124,709 Landing fees and other rentals 49,158 41,803 140,003 121,779 Depreciation 46,171 38,826 136,295 114,382 Other operating expenses 156,569 123,048 454,522 361,522 Total operating expenses 788,558 650,877 2,271,795 1,883,247 Operating income 102,934 114,098 302,534 240,932 Other expenses (income): Interest expense 14,717 15,038 44,642 43,811 Capitalized interest (5,009) (8,255) (17,731) (25,155) Interest income (7,480) (6,849) (16,878) (14,259) Nonoperating losses (gains), net 463 (51) (2,504) 1,485 Total other expenses 2,691 (117) 7,529 5,882 Income before income taxes 100,243 114,215 295,005 235,050 Provision for income taxes 39,385 46,498 115,828 95,783 Net income $60,858 $67,717 $179,177 $139,267 Weighted average common and common equivalent shares outstanding 150,808 151,647 152,295 148,509 Net income per common and common equivalent share $.40 $.45 $1.18 $.94 </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, 1996 1995 1996 1995 <S> <C> <C> <C> <C> Net cash provided by operating activities $82,033 $49,720 $445,924 $347,923 Investing activities: Net purchases of property and equipment (161,503) (213,855) (495,250) (572,141) Financing activities: Issuance of long-term debt - - - 98,811 Payment of long-term debt and capital lease obligations (3,047) (2,731) (11,103) (7,758) Payment of cash dividends (1,595) (1,438) (6,216) (5,741) Proceeds from aircraft sale and leaseback transactions 198,000 130,000 330,000 321,650 Proceeds from Employee stock plans 1,857 3,163 13,312 8,475 Net cash provided by financing activities 195,215 128,994 325,993 415,437 Net increase (decrease) in cash and cash equivalents 115,745 (35,141) 276,667 191,219 Cash and cash equivalents at beginning of period 478,285 400,898 317,363 174,538 Cash and cash equivalents at end of period $594,030 $365,757 $594,030 $365,757 Cash payments for: Interest, net of amount capitalized $17,276 $14,270 $35,220 $25,381 Income taxes $36,556 $44,449 $58,447 $52,276 </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, 1996 and 1995 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, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. 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, 1995. 2. Dividends - During the three month periods ended September 30, 1996, June 30, 1996, and March 31, 1996, dividends of $.011 per share were declared on the 144,956,331, 144,715,343, and 144,452,894 shares of common stock then outstanding, respectively. During the three month periods ended September 30, 1995, June 30, 1995, and March 31, 1995, dividends of $.01 per share were declared on the 143,840,928, 143,648,993, and 143,411,223 shares of common stock then outstanding, respectively. 3. Leases - During third quarter 1996, the Company completed transactions for the sale and leaseback of six new Boeing 737 aircraft. The lease terms, which require periodic lease payments through May 2021, increased the Company's commitments for operating leases by $355.7 million. 4. Common stock - Effective July 18, 1996, the Company amended and restated its Common Stock Rights Agreement dated July 14, 1986 (the Agreement). The principal purpose of the amendment and restatement was to extend the Agreement by 10 years. For further information regarding the Agreement, refer to footnote 8 to the consolidated financial statements included in the Southwest Airlines Co. annual report on Form 10-K for the year ended December 31, 1995. 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, 1996 and 1995 are as follows:
<TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, 1996 1995 1996 1995 <S> <C> <C> <C> <C> Revenue passengers carried 12,846,516 11,682,228 36,826,493 33,299,341 Revenue passenger miles (RPMs) (000s) 7,333,497 6,252,006 19,979,952 17,450,334 Available seat miles (ASMs) (000s) 10,479,825 9,216,522 30,286,698 26,663,719 Load factor 70.0% 67.8% 66.0% 65.4% Average length of passenger haul 571 535 543 524 Trips flown 191,979 174,312 558,788 508,107 Average passenger fare $66.61 $62.94 $67.16 $61.33 Passenger revenue yield per RPM $.1167 $.1176 $.1238 $.1170 Operating revenue yield per ASM $.0851 $.0830 $.0850 $.0797 Operating expenses per ASM $.0752 $.0706 $.0750 $.0706 Average fuel cost per gallon $.6615 $.5460 $.6279 $.5404 Number of employees at period-end 23,066 19,748 23,066 19,748 Size of fleet at period-end 241 219 241 219 </TABLE> Material Changes in Results of Operations Consolidated net income for the three months ended September 30, 1996 was $60.9 million ($.40 per share) compared with $67.7 million ($.45 per share) earned in third quarter 1995. Consolidated operating revenues increased 16.5 percent for the third quarter of 1996 and 21.2 percent for the nine months ended September 30, 1996, as compared to the corresponding periods of the prior year, primarily as a result of a 16.4 percent and 21.1 percent increase, respectively, in consolidated passenger revenues. The increase in passenger revenues resulted from a 17.3 percent and 14.5 percent increase in revenue passenger miles (RPMs) for the three and nine month periods ended September 30, 1996, respectively, coupled with a 5.8 percent and 9.5 percent increase in average passenger fare over these same periods. Available seat miles (ASMs) increased 13.7 percent and 13.6 percent in third quarter 1996 and the nine month period ended September 30, 1996, respectively, resulting in load factors of 70.0 percent and 66.0 percent for these same periods. The increase in ASMs resulted primarily from the addition of 22 aircraft since third quarter 1995. The reimposition of the ten percent federal excise tax negatively impacted revenues in third quarter 1996. The ticket tax was reinstated on August 27, 1996 and is currently expected to expire again on December 31, 1996. In celebration of the Company's 25th Anniversary, Southwest launched a fare sale in July for travel between August 19 and October 31, 1996. The sale was extremely popular and resulted in record advance bookings, with more than four and a half million seats sold. Although July and early August load factors and revenues were negatively impacted by the telephone line congestion experienced during our sale, the load factor for the month of September 1996 was positively impacted, up 9.5 points over September 1995's performance. The October load factor of 72.2 percent also compared favorably to last year's load factor of 60.0 percent. Although passenger revenue yield per RPM for the month of October was down due to the fare sale, passenger revenue per ASM increased compared to October 1995. Thus far, November and December traffic and bookings also look strong. (The immediately preceding sentence is a forward-looking statement which involves uncertainties that could result in actual results differing materially from expected results. Some significant factors include, but may not be limited to, competitive pressure such as fare sales and capacity changes by other carriers, general economic conditions, and variations in advanced booking trends.) Consolidated freight revenues increased 21.8 percent in the third quarter of 1996 and 24.4 percent for the nine months ended September 30, 1996 as compared to the same periods of the prior year, primarily due to increased capacity, as well as an increase in United States mail services. Other revenues increased 18.9 percent in the third quarter 1996 and 22.8 percent for the nine months ended September 30, 1996, primarily due to increased charter revenue. Operating expenses per ASM increased 6.5 percent and 6.2 percent for the three months and nine months ended September 30, 1996, respectively, primarily due to significantly higher jet fuel prices; the 4.3 cent per gallon federal jet fuel tax implemented October 1, 1995; and higher aircraft maintenance costs. Excluding jet fuel costs and related taxes, operating expenses per ASM for the three and nine month periods ended September 30, 1996, were up 3.0 percent and 3.5 percent, respectively. Unit costs are expected to increase in fourth quarter 1996 versus fourth quarter 1995 primarily due to higher jet fuel prices and higher advertising costs from our recent expansion into Providence, Rhode Island, the upcoming expansion into Jacksonville, Florida, and our launch of the "Freedom" advertising campaign. (The immediately preceding sentence is a forward-looking statement which involves uncertainties that could result in actual results differing materially from expected results. Such uncertainties include, but may not be limited to, the largely unpredictable levels of fuel prices.) Southwest Airlines Co. Consolidated Operating Expenses per ASM (in cents except percent change) <TABLE> <CAPTION> Three months ended September 30, Increase Percent 1996 1995 (decrease) change <S> <C> <C> <C> <C> Salaries, wages, and benefits 2.17 2.12 .05 2.4 Profitsharing and Employee savings plans .26 .30 (.04) (13.3) Fuel and oil 1.20 1.00 .20 20.0 Maintenance materials and repairs .68 .61 .07 11.5 Agency commissions .35 .34 .01 2.9 Aircraft rentals .46 .48 (.02) (4.2) Landing fees and other rentals .47 .45 .02 4.4 Depreciation .44 .42 .02 4.8 Other operating expenses 1.49 1.34 .15 11.2 Total 7.52 7.06 .46 6.5 </TABLE> <TABLE> Nine months ended September 30, Increase Percent 1996 1995 (decrease) change <S> <C> <C> <C> <C> Salaries, wages, and benefits 2.22 2.18 .04 1.8 Profitsharing and Employee savings plans .26 .24 .02 8.3 Fuel and oil 1.14 .99 .15 15.2 Maintenance materials and repairs .66 .60 .06 10.0 Agency commissions .35 .35 - - Aircraft rentals .46 .47 (.01) (2.1) Landing fees and other rentals .46 .45 .01 2.2 Depreciation .45 .43 .02 4.7 Other operating expenses 1.50 1.35 .15 11.1 Total 7.50 7.06 .44 6.2 </TABLE> Salaries, wages, and benefits per ASM increased 2.4 percent and 1.8 percent for the three and nine month periods ended September 30, 1996, respectively, as compared to the same periods of the prior year, primarily due to an increase in Reservation Sales Agent wages. The Company's flight attendants are subject to an agreement with the Transport Workers Union of America, AFL-CIO (TWU), which became amendable May 31, 1996. Southwest is currently in negotiations with TWU to amend the contract. Profitsharing and Employee savings plans expense per ASM decreased 13.3 percent for the three months ended September 30,1996 and increased 8.3 percent for the nine months ended September 30, 1996, respectively, as compared to the same periods of the prior year based on the profitability of the corresponding period. Fuel and oil expense per ASM increased 20.0 percent and 15.2 percent in third quarter 1996 and the nine month period then ended due to higher jet fuel prices. The average price paid for jet fuel in the three and nine month periods ended September 30, 1996 was $.6615 and $.6279 per gallon, respectively, compared to $.5460 and $.5404 for the corresponding periods in 1995. Since the end of third quarter 1996, fuel prices have averaged approximately $.73 per gallon. Maintenance materials and repairs per ASM increased 11.5 percent and 10.0 percent for the three and nine month periods ended September 30, 1996, respectively, as compared to the corresponding periods of 1995, primarily as a result of higher engine overhaul costs and increased scheduled airframe inspections during 1996. Agency commissions per ASM increased by 2.9 percent for the third quarter 1996 and remained unchanged for the nine months ended September 30, 1996. Management believes that the third quarter 1996 increase is due to an increase in the use of travel agents in July as a result of telephone line congestion during the fare sale. Aircraft rentals per ASM decreased 4.2 percent and 2.1 percent for the three and nine month periods ended September 30, 1996, compared to the corresponding periods of 1995. The decrease was primarily due to a lower percentage of the aircraft fleet being leased. Landing fees and other rentals per ASM increased 4.4 percent and 2.2 percent for the three and nine month periods ended September 30, 1996, respectively, compared to the corresponding periods of 1995 primarily due to increases in landing fee rates. Management expects fourth quarter 1996 increases to appear high due to a $4.9 million airport credit received in fourth quarter 1995. Depreciation expense per ASM increased 4.8 percent for third quarter 1996 and 4.7 percent for the nine months ended September 30, 1996 as compared to the same periods of 1995 due to owned aircraft representing a higher percentage of the total fleet. Other operating expenses per ASM increased 11.2 percent and 11.1 percent for the three and nine month periods ended September 30, 1996, respectively. These increases were primarily due to the 4.3 cent per gallon jet fuel tax as well as increased advertising costs resulting from the October 1996 expansion into Providence, Rhode Island. Other expenses (income) for the three months and nine months ended September 30, 1996 included interest expense, capitalized interest, interest income, and nonoperating gains and losses. Interest expense increased in the first nine months of 1996 as compared to the first nine months of 1995 due to the March 1995 issuance of $100 million of 8 percent senior unsecured Notes due March 2005. Capitalized interest decreased for the nine month period ended September 30, 1996 as a result of certain amendments to aircraft purchase contracts during third quarter 1995 that affected the timing of payments. Interest income increased for the three and nine months ended September 30, 1996 due to higher invested cash balances. Material Changes in Financial Condition Net cash provided by operating activities was $82.0 million for the three months ended September 30, 1996. During third quarter 1996, the Company generated $198.0 million from the sale/leaseback of six Boeing 737 aircraft. During the twelve months ended September 30, 1996, cash of $554.4 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, 1996, net capital expenditures were $651.8 million, which were primarily for the purchase of 22 new 737-300 aircraft and progress payments for future aircraft deliveries. The Company opened service to Providence, Rhode Island on October 27, 1996 and recently announced expansion to Jacksonville, Florida beginning January 1997. In September 1996, the Company's Board of Directors reaffirmed a 1990 authorization for the Company to purchase shares of its common stock from time-to-time on the open market. The authorization reaffirmed the purchase of up to 2,500,000 shares. No shares have been purchased pursuant to this authority since 1990. The Company's contractual commitments at September 30, 1996 consist primarily of scheduled aircraft acquisitions. Five 737- 300s are scheduled for delivery in fourth quarter 1996 and 15 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 sixty-seven 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 $2,220.7 million at September 30, 1996 due as follows: $89.8 million in 1996; $564.1 million in 1997; $444.5 million in 1998; $548.9 million in 1999; $348.7 million in 2000; and $224.7 million in 2001. The Company has various options available to meet its capital and operating commitments, including cash on hand at September 30, 1996 of $594.0 million, internally generated funds, and a revolving credit line with a group of banks of up to $460 million (none of which had been drawn at September 30, 1996). In addition, the Company will also consider various borrowing or leasing options to maximize earnings and supplement cash requirements. The Company currently has outstanding shelf registrations for the issuance of $114.4 million public debt securities which it currently intends to utilize for aircraft financings in 1997. 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. This forward-looking statement is based on management's current understanding of the relevant law and facts; it is subject to various contingencies including the views of legal counsel, changes in the IRS' position, the potential cost and risk associated with litigation and the actions of the IRS, judges and juries. 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 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 17, 1996 was filed for the purpose of filing certain exhibits in connection with, and incorporated by references into Southwest Airlines Co. Registration Statement on Form S-3 (File No. 33-59113), as declared effective on May 9, 1995, relating to Pass Through Certificates, Series 1996-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, 1996 /s/ Gary C. Kelly Date Gary C. Kelly Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer) </TABLE>
INDEX TO EXHIBITS Exhibit Number Exhibit (11.1) Computation of Earnings Per Share (27) Financial Data Schedule