Financial Statement Analysis

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DELTA AIR LINES, INC. Consolidated Balance Sheets December 31, 2019 2018 $ 2.882 S 1,565 (in millions, except share data) ASSETS Current Assets: Cash and cash equivalents Accounts receivable, net of an allowance for uncollectible accounts of $13 and $12 at December 31, 2019 and 2018, respectively Fuel inventory Expendable parts and supplies inventories, net of an allowance for obsolescence of $82 and $102 at December 31, 2019 and 2018, respectively Prepaid expenses and other Total current assets 2,854 730 2.314 592 521 1,262 8,249 463 1,406 6,340 31,310 5,627 9,781 28,335 5,994 9,781 Noncurrent Assets: Property and equipment, net of accumulated depreciation and amortization of $17,027 and $15,823 at December 31, 2019 and 2018, respectively Operating lease right-of-use assets Goodwill Identifiable intangibles, net of accumulated amortization of 5873 and 5862 at December 31, 2019 and 2018, respectively Cash restricted for airport construction Other noncurrent assets Total noncurrent assets Total assets 5,163 636 3,766 56,283 64.532 4,830 1,136 3,850 53,926 $ 60.266 LIABILITIES AND STOCKHOLDERS' EQUITY $ Current Liabilities: Current maturities of debt and finance leases Current maturities of operating leases Air traffic liability Accounts payable Accrued salaries and related benefits Loyalty program deferred revenue Fuel card obligation Other accrued liabilities Total current liabilities 2,287 S 801 5,116 3,266 3,701 3,219 736 1,078 20.204 1,518 955 4,661 2.976 3,287 2.989 1,075 1.117 18,578 Noncurrent Liabilities: Debt and finance leases Pension, postretirement and related benefits Loyalty program deferred revenue Noncurrent operating leases Deferred income taxes, net Other noncurrent liabilities Total noncurrent liabilities 8,873 8,452 3,509 5,294 1,456 1,386 28.970 8.253 9,163 3,652 5,801 163 969 28,001 Commitments and Contingencies Stockholders' Equit. Stockholders' Equity: Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 651,731,443 and 688,136.306 shares issued at December 31, 2019 and 2018, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost, 8,959,730 and 8,191,831 shares at December 31, 2019 and 2018, respectively Total stockholders' equity Total liabilities and stockholders' equity 11,129 12,454 (7,989) (236) 15.358 64.532 11,671 10,039 (7.825) (198) 13.687 60.266 The accompanying notes are an integral part of these Consolidated Financial Statements. 53 DELTA AIR LINES, INC. Consolidated Statements of Operations Year Ended December 31, 2018 2019 2017 $ S (in millions, except per share data) Operating Revenue: Passenger Cargo Other Total operating revenue 42,277 753 39.755 865 36,947 744 3,447 41.138 3,977 47,007 3,818 44,438 Operating Expense: Salaries and related costs Aircraft fuel and related taxes Regional carriers expense, excluding fuel Contracted services Depreciation and amortization Passenger commissions and other selling expenses Landing fees and other rent: Aircraft maintenance materials and outside repairs Profit sharing Passenger service Ancillary businesses and refinery Aircraft rent Other Total operating expense 11,225 8,519 3,584 2.641 2,581 1,993 1,762 1,751 1,643 1,251 1,245 10.743 9,020 3,438 2.175 2.329 1,941 1,662 1,575 1,301 10.058 6,756 3,466 2,108 2.222 1,827 1,501 1,591 1,065 1,123 1,495 1,178 1,695 423 394 351 1,771 40,389 1,723 39.174 1,609 35,172 Operating Income 6,618 5,264 5,966 (396) Non-Operating Expense: Interest expense, net Gain (loss) on investments, net Miscellaneous, net Total non-operating expense, net (301) 119 (311) 38 (238) (420) 160 (113) (70) (466) Income Before Income Taxes 6,198 5,151 5,500 Income Tax Provision (1,431) (1,216) (2.295) Net Income S 4,767 $ 3,935 S 3,205 Activate W 4.45 Go to Setting 4.43 $ 7.32 5.69 S Basic Earnings Per Share Diluted Earnings Per Share Cash Dividends Declared Per Share A A $ 7.30 5.67 $ $ 1.51 S 1.31 1.02 (397) Consolidated Statements of Cash Flows Year Ended December 31, (in millions) 2019 2018 2017 Cash Flows From Operating Activities: Net income $ 4,767 $ 3,935 $ 3,205 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,581 2,329 2,222 Deferred income taxes 1,473 1,364 2,242 Pension, postretirement and postemployment payments greater than expense (922) (790) (3.302) Changes in certain assets and liabilities: Receivables (775) 108 (428) Fuel inventory (139) 324 Prepaid expenses and other current assets 94 (440) (57) Air traffic liability 454 297 284 Loyalty program deferred revenue 87 319 399 Profit sharing 354 233 (51) Accounts payable and accrued liabilities 144 (418) 955 Other, net 307 (247) (49) Net cash provided by operating activities 8,425 7,014 5,023 Cash Flows From Investing Activities: Property and equipment additions: Flight equipment, including advance payments (3,344) (3,704) 2.704) Ground property and equipment, including technology (1,592) (1,464) (1,187) Purchase of equity investments (170) (1,245) Sale of equity investments 279 28 Purchase of short-term investments (145) (925) Redemption of short-term investments 206 766 584 Other, net 58 126 211 Net cash used in investing activities (4,563) (4,393) (5,266) Cash Flows From Financing Activities: Payments on debt and finance lease obligations (3,320) (3,052) (1,258) Repurchase of common stock 2,027) (1,575) (1,677) Cash dividends (980) (909) (731) Fuel card obligation (339) 7 636 Proceeds from short-term obligations 1,750 Proceeds from long-term obligations 2.057 3,745 2,454 Other, net (21) 58 (154) Net cash used in financing activities (2,880) (1,726) (730) Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash 982 895 (973) Cash, cash equivalents and restricted cash at beginning of period 2.748 1,853 2.826 Cash, cash equivalents and restricted cash at end of period $ 3.730 $ 2.748 $ 1.853 Supplemental Disclosure of Cash Paid for Interest $ 481 $ 376 $ 390 Non-Cash Transactions: Treasury stock contributed to our qualified defined benefit pension plans $ $ $ 350 Right-of-use assets acquired under operating leases 464 1,041 Flight and ground equipment acquired under finance leases 650 93 261 Operating leases converted to finance leases 190 7 The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets to the total of the same such amounts shown above: Year Ended December 31, Activate W (in millions) 2019 2018 2017 Go to Settings Current assets: Cash and cash equivalents $ 2,882 $ 1,565 $ 1,814 Restricted cash included in prepaid expenses and other 212 47 39 - Year Ended December 31, (in millions) 2019 2018 2017 Current assets: Cash and cash equivalents S 2,882 $ 1,365 $ 1,814 Restricted cash included in prepaid expenses and other 212 47 39 Noncurrent assets: Cash restricted for airport construction 636 1.136 Total cash cash equivalents and restricted cash 3.730 2.748 $ 1.853 The accompanying notes are an integral part of these Consolidated Financial Statements. 56 We perform, at least quarterly, an assessment of the effectiveness of our derivative contracts designated as hedges, including assessing the possibility of counterparty default. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the hedge in earnings. We believe our derivative contracts that continue to be designated as hedges, consisting of interest rate and foreign currency exchange contracts, will continue to be highly effective in offsetting changes in fair value or cash flow, respectively. attributable to the hedged risk. Cash flows associated with purchasing and settling hedge contracts generally are classified as operating cash flows. However, if a hedge contract includes a significant financing element at inception, cash flows associated with the hedge contract are recorded as financing cash flows. Hedge Margin. The hedge margin we receive from counterparties is recorded in cash, with the offsetting obligation in accounts payable. The hedge margin we provide to counterparties is recorded in prepaid expenses and other. We do not offset margin funded to counterparties or margin funded to us by counterparties against fair value amounts recorded for our hedge contracts. Long-Lived Assets The following table summarizes our property and equipment: Hedge Margin. The hedge margin we receive from counterparties is recorded in cash, with the offsetting obligation in accounts payable. The hedge margin we provide to counterparties is recorded in prepaid expenses and other. We do not offset margin funded to counterparties or margin funded to us by counterparties against fair value amounts recorded for our hedge contracts. Long-Lived Assets The following table summarizes our property and equipment: December 31, (in millions, except for estimated useful life) Estimated Useful Life 2019 2018 Flight equipment 20-34 years $ 36,713 $ 33,898 Ground property and equipment 3-40 years 5,721 4,667 Information technology-related assets 3-15 years 3,276 3,361 Flight and ground equipment under finance leases Shorter of lease term or estimated useful life 1,608 1,055 Advance payments for equipment 1,019 1,177 Less: accumulated depreciation and amortization (17,027) (15,823) Total property and equipment, net $ 31,310 S 28.335 (1) Includes accumulated amortization for flight and ground equipment under finance leases in the amount of $546 million and $566 million at December 31, 2019 and 2018, respectively. We record property and equipment at cost and depreciate or amortize these assets on a straight-line basis to their estimated residual values over their estimated useful lives. The estimated useful life for leasehold improvements is the shorter of lease term or estimated useful life. Depreciation and amortization expense related to our property and equipment was $2.6 billion, $2.3 billion and $2.2 billion for the years ended December 31, 2019, 2018 and 2017, respectively. Residual values for owned aircraft, engines, spare parts and simulators are generally 5% to 10% of cost. We capitalize certain internal and external costs incurred to develop and implement software and amortize those costs over an estimated useful life of three to ten years. Included in the depreciation and amortization expense discussed above, we recorded $239 million, S205 million and $187 million for amortization of capitalized software for the years ended December 31, 2019, 2018 and 2017, respectively. The net book value of these assets, which are included in information technology-related assets above, totaled $1.1 billion and $819 million at December 31, 2019 and 2018, respectively. Our tangible assets consist primarily of flight equipment, which is mobile across geographic markets. Accordingly, assets are not allocated to specific geographic regions. We review flight equipment and other long-lived assets used in operations for impairment losses when events and circumstances indicate the assets may be impaired. Factors which could be indicators of impairment include, but are not limited to, (1) a decision to permanently remove flight equipment or other long-lived assets from operations, (2) significant changes in the estimated useful life, (3) significant changes in projected cash flows, (4) permanent and significant declines in fleet fair values and (5) changes to the regulatory environment. For long-lived assets held for sale, we discontinue depreciation and record impairment losses when the carrying amount of these assets is greater than the fair value less the cost to sell. Activate W Go to Settings 60 Question 4 Total depreciation and amortization expense recognized by Delta's on property and equipment since the assets were acquired was (in millions) at 12/31/19. O a. $31,310 O b. $44,158 O c. $17,027 O d. $15,823 Question 6 Use the following formula to calculate the company's sales to Property and Equipment for year ended 12/31/2018 and year ended 12/31/2019. Sales to Property and Equipment = Total Operating Revenue / Property and Equipment, net Round to two decimal places, for example, 1.5876329 = 1.59. Now answer the question below. Did Delta Air Lines more effectively use property and equipment to generate revenue in the year ended 12/31/2019 than in the year ended 12/31/2018? O a. Yes. b. No. Question 8 Delta uses depreciation method. O a. double-declining balance b. straight-line O c. accelerated O d. units of activity Question 9 1 points Save Ar In the first year of Delta's flight equipment useful life: O a. book value would be lower on the company's balance sheet with the depreciation method used by Delta compared to double-declining balance depreciation method. O b. book value would be the same amount on the company's balance sheet with the depreciation method used by Delta compared to double-declining balance depreciation method. O c net income would be lower on the company's income statement with the depreciation method used by Delta compared to double-declining balance depreciation method. d. net income would be higher on the company's income statement with the depreciation method used by Delta compared to double-declining balance depreciation method