Southwest Airlines 2006 Annual Report Download - page 70

purpose, the plan compensates each non-Employee
Director based on the performance of the Company’s
Common Stock and defers the receipt of such compen-
sation until after the non-Employee Director ceases to be
a Director of the Company. Pursuant to the plan, on the
date of the 2002 Annual Meeting of Shareholders, the
Company granted 750 non-transferable Performance
Shares to each non-Employee Director who had served
as a Director since at least May 2001. Thereafter, on the
date of each Annual Meeting of Shareholders, the Com-
pany will grant 750 Performance Shares to each non-
Employee Director who has served since the previous
Annual Meeting. A Performance Share is a unit of value
equal to the Fair Market Value of a share of Southwest
Common Stock, based on the average closing sale price of
the Common Stock as reported on the New York Stock
Exchange during a specified period. On the 30th calendar
day following the date a non-Employee Director ceases to
serve as a Director of the Company for any reason,
Southwest will pay to such non-Employee Director an
amount equal to the Fair Market Value of the Common
Stock during the 30 days preceding such last date of
service multiplied by the number of Performance Shares
then held by such Director. The plan contains provisions
contemplating adjustments on changes in capitalization
of the Company. The Company accounts for grants made
under this plan as liability awards, as defined, and since
the awards are not stock options, they are not reflected in
the above tables. The fair value of the awards as of
December 31, 2006, which is not material to the Com-
pany, is included in Accrued liabilities in the accompa-
nying Condensed Consolidated Balance Sheet.
Taxes
A portion of the Company’s granted options qualify
as incentive stock options (ISO) for income tax purposes.
As such, a tax benefit is not recorded at the time the
compensation cost related to the options is recorded for
book purposes due to the fact that an ISO does not
ordinarily result in a tax benefit unless there is a disqual-
ifying disposition. Stock option grants of non-qualified
options result in the creation of a deferred tax asset, which
is a temporary difference, until the time that the option in
exercised. Due to the treatment of incentive stock options
for tax purposes, the Company’s effective tax rate from
year to year is subject to variability.
14. Employee Retirement Plans
Defined Contribution Plans
The Company has defined contribution plans cov-
ering substantially all Southwest Employees. The South-
west Airlines Co. Profitsharing Plan is a money purchase
defined contribution plan and Employee stock purchase
plan. The Company also sponsors Employee savings plans
under section 401(k) of the Internal Revenue Code,
which include Company matching contributions. The
401(k) plans cover substantially all Employees. Contri-
butions under all defined contribution plans are primarily
based on Employee compensation and performance of the
Company.
Company contributions to all retirement plans
expensed in 2006, 2005, and 2004 were $301 million,
$264 million, and $200 million, respectively.
Postretirement Benefit Plans
The Company provides postretirement benefits to
qualified retirees in the form of medical and dental cov-
erage. Employees must meet minimum levels of service
and age requirements as set forth by the Company, or as
specified in collective bargaining agreements with spe-
cific workgroups. Employees meeting these require-
ments, as defined, may use accrued sick time to pay
for medical and dental premiums from the age of retire-
ment until age 65.
The following table shows the change in the Com-
pany’s accumulated postretirement benefit obligation
(APBO) for the years ended December 31, 2006 and
2005:
2006 2005
(In millions)
APBO at beginning of period ....... $ 94 $80
Service cost .................. 15 12
Interest cost .................. 5 4
Benefits paid ................. (5) (2)
Actuarial (gain) loss ........... 2 —
Plan amendments .............. — —
APBO at end of period............ $111 $94
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)