CORRESP: A correspondence can be sent as a document with another submission type or can be sent as a separate submission.
Published on December 2, 2009
December
2, 2009
Via
Edgar
Mr. Lyn
Shenk
Branch
Chief
Division
of Corporation Finance
U.S.
Securities and Exchange Commission
100 F
Street, N.E.
Mail Stop
3561
Washington,
D.C. 20549-3561
RE: Southwest
Airlines Co.
File No. 001-07259
Form 10-K: For the fiscal year ended
December 31, 2008
Form 8-K furnished on October 15,
2009
Dear Mr.
Shenk:
Form 8-K furnished on
October 15, 2009
Exhibit
99.1
Note regarding use of
non-GAAP financial measures
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1.
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Please
refer to your explanation of the items included in and excluded from your
non-GAAP measures of “economic” results. While we acknowledge
that your explanation is consistent with the disclosure that you proposed
in your correspondence filed on September 4, 2009, it is not clear to us
how certain adjustments included in your reconciliations of your non-GAAP
measures to the most comparable GAAP measures are consistent with your
explanation. For example, you state that you have established
the concept of “economic” results to provide visibility to the non-current,
non-cash aspects of your fuel hedging program and accounting, which
can materially impact your current financial results. You state
further that items excluded from your company’s economic results primarily
consist of certain “unrealized” gains or losses associated with
derivatives that settled in a prior period or will settle in a future
period. However, we note that for each period presented in your
reconciliation, you have recorded a significant adjustment for “Other
impact of fuel contracts settling in the current or a
prior period.” Furthermore, it appears that you have
reclassified realized ineffectiveness and mark-to-market (gains) or losses
from “Other (gains) losses” to “Fuel & Oil Expense.” Based
upon the observations noted above, it is unclear to us how certain
adjustments included in your reconciliation of your non-GAAP measures to
the most comparable GAAP measures are consistent with your description of
your non-GAAP measure, as well as its purpose. In addition, we
do not believe that your disclosure clearly explains why you believe that
your “economic” measures provide useful information to
investors. In this regard, we believe that your disclosure
could be improved with respect to conveying in plain English what the
measures are intended to represent. Please revise your
disclosure to more clearly explain how and why your non-GAAP measures are
useful to investors. For example, specifically explain how your
“economic” measures of results allow investors to accurately measure and
monitor your company’s comparative performance on a consistent basis –
particularly as each measure excludes recurring
items. Alternatively, please discontinue the presentation of
these non-GAAP measures.
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Response:
The
Company believes it can improve both its explanation of why these economic
results are useful to investors and the descriptions/captions within the
reconciliations themselves, which would provide additional clarity and
understanding of these non-GAAP measures. Due to the fact that the
Company considers its fuel derivative contracts to be an important tool in
managing its jet fuel costs, it provides these economic results in order to
present the Company’s performance utilizing the net cash paid for Fuel during
the applicable period.
The
adjustment in the Company’s reconciliation titled “Other impact of fuel
contracts settling in the current or a prior period” can potentially consist of
up to three components. These are 1) amounts related to contracts
that have settled in the current period, but for which gains and/or losses have
already been recognized in a prior period due to previous hedge ineffectiveness
and/or contracts marked to market through earnings, 2) amounts related to
contracts that have settled in the current period, but for which gains and/or
losses cannot be recognized because the Company has not yet consumed the
underlying fuel, and 3) amounts related to contracts that settled in a prior
period, but for which gains and/or losses are being recognized in the current
period because the Company has currently consumed the underlying hedged
fuel. In order to provide more clarity to this reconciliation, the
Company will provide separate lines for each of these components that are
present during each given period. The Company will also revise its
descriptions of these line items to clearly indicate what the amounts
represent—as noted in 1), 2), and 3) above.
The
Company does not believe these clarifications change its overall objective of
the non-GAAP reconciliation, which is to provide investors a view of the
Company’s results as if all cash settlements related to fuel derivative
contracts in the applicable period were reflected within Fuel and oil
expense—other than the net premium cost paid for option contracts, which the
Company presents as part of Other (gains) losses, net. The Company is
also proposing to change its note explaining why this presentation is useful to
investors in a more plain-English format, such as the following:
“Note
regarding use of non-GAAP financial measures
The
Company’s financial statements are prepared in accordance with Generally
Accepted Accounting Principles (GAAP). These GAAP financial
statements include unrealized non-cash adjustments and reclassifications, which
can be significant, as a result of accounting requirements and elections made
under Accounting Standards Codification Topic 815 (ASC 815, originally issued as
SFAS 133).
As a
result, the Company also provides financial information included in this press
release 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 that it has termed “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 purposes. These economic
results provide a better measure of the impact of the Company’s fuel hedges on
its operating performance and liquidity since they exclude the unrealized,
noncash adjustments and reclassifications that are recorded in GAAP results in
accordance with ASC 815, and they reflect all cash settlements related to fuel
derivative contracts within Fuel and oil expense. This enables the
Company’s management, as well as investors, to consistently assess its operating
performance on a year-over-year or quarter-over-quarter basis after considering
all programs in place to curtail fuel expense. However, because these
measures are not determined in accordance with GAAP, such measures are
susceptible to varying calculations and not all companies calculate the measures
in the same manner. As a result the aforementioned measures as presented may not
be directly comparable to similarly titled measures presented by other
companies.
Further
information on (i) the Company’s fuel hedging program, (ii) the requirements and
accounting associated with ASC 815, and (iii) the causes of hedge
ineffectiveness and/or mark-to-market gains or losses from derivative
instruments is included in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, and in the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2009.”
In
addition, since its third quarter 2009 earnings release included additional
reconciling items between its GAAP and non-GAAP results, the following
disclosure would have been included:
“In
addition to its ‘economic’ financial measures as defined above, the Company has
also provided other non-GAAP financial measures as a result of non-recurring
items that the Company believes are not indicative of its ongoing
operations. These include 1) charges associated with Freedom ’09, an
early retirement option offered to Employees resulting in a one-time third
quarter 2009 charge, and 2) an adjustment to the Company’s first quarter 2008
income tax provision due to a change in Illinois State income tax
laws. The Company also believes that evaluation of its financial
performance can be enhanced by a presentation of results that exclude the impact
of these non-recurring items in order to evaluate results on a comparative basis
with results in the current or prior periods that did not include such items,
and as a basis for expected operating results in future periods.”
****
In
connection with our above responses to the Staff’s comments, the Company
acknowledges that:
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The
Company is responsible for the adequacy and accuracy of the disclosure in
its filings;
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Staff
comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the
filings; and
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The
Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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Thank you
for your assistance. If you have any questions, please do not
hesitate to contact me at (214) 792-4459.
| Sincerely, | |||
| /s/ Laura Wright | |||
| Laura Wright | |||
| Chief Financial Officer |
| Copy to: | John T. Montford (Chairman, Audit Committee) |
| Gary C. Kelly | |
| Leah Koontz | |
| Madeleine Johnson | |
| David Heselton (Ernst & Young LLP) | |