Southwest Airlines 1999 Annual Report Download - page 46

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The Company received a statutory notice of deficiency from the Internal Revenue
Service (IRS) in July 1995 in which the IRS proposed to disallow deductions claimed by the
Company on its federal income tax returns for the taxable years 1989 through 1991 for the
costs of certain aircraft inspection and maintenance procedures. The IRS has proposed
similar adjustments to the tax returns of numerous other members of the airline industry. In
response to the statutory notice of deficiency, the Company filed a petition in the United
States Tax Court on October 30, 1997, seeking a determination that the IRS erred in
disallowing the deductions claimed by the Company and there is no deficiency in the
Company’s tax liability for the taxable years in issue. It is expected that the Tax Court’s
decision will not be entered for several years. Management believes the final resolution of
this controversy will not have a material adverse effect upon the financial position or results
of operations of the Company.
The effective tax rate on income before income taxes differed from the federal
income tax statutory rate for the following reasons:
(In thousands)1999 1998 1997
Tax at statutory
U.S. tax rates $270,764 $246,789 $180,935
Nondeductible items 6,664 5,099 5,893
State income taxes, net of federal benefit 21,356 20,445 13,166
Other, net 449 (652) (810)
Total income
tax provision $299,233 $271,681 $199,184
12. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands except per share amounts)1999 1998 1997
NUMERATOR:
Net income, available to common
stockholders
$474,378 $433,431 $317,772
DENOMINATOR:
Weighted-average shares outstanding,
basic 503,065 500,013 492,947
Dilutive effect of Employee stock options 32,862 29,736 18,836
Adjusted weighted-average shares
outstanding, diluted 535,927 529,749 511,783