Southwest Airlines 2006 Annual Report Download - page 73

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The effective tax rate on income before income taxes differed from the federal income tax statutory rate for the
following reasons:
2006 2005 2004
(In millions)
Tax at statutory U.S. tax rates .................................... $276 $274 $123
Nondeductible items ........................................... 10 87
State income taxes, net of federal benefit. . . .......................... 414 3
Other, net .................................................. 1(1) (9)
Total income tax provision..................................... $291 $295 $124
The Internal Revenue Service (IRS) regularly
examines the Company’s federal income tax returns
and, in the course of which, may propose adjustments
to the Company’s federal income tax liability reported on
such returns. It is the Company’s practice to vigorously
contest those proposed adjustments that it deems lacking
of merit. The Company’s management does not expect
that the outcome of any proposed adjustments presented
to date by the IRS, individually or collectively, will have a
material adverse effect on the Company’s financial con-
dition, results of operations, or cash flows.
16. Net Income Per Share
The following table sets forth the computation of net income per share, basic and diluted:
2006 2005 2004
(In millions, except per
share amounts)
Net income ................................................. $499 $484 $215
Weighted-average shares outstanding, basic . .......................... 795 789 783
Dilutive effect of Employee stock options . . .......................... 29 17 21
Adjusted weighted-average shares outstanding, diluted ................... 824 806 804
Net income per share, basic ...................................... $ .63 $ .61 $ .27
Net income per share, diluted .................................... $ .61 $ .60 $ .27
The Company has excluded 20 million, 12 million,
and 31 million shares from its calculations of net income
per share, diluted, in 2006, 2005, and 2004, respectively,
as they represent antidilutive stock options for the respec-
tive periods presented.
17. Contingencies
The Company is subject to various legal proceedings
and claims arising in the ordinary course of business,
including, but not limited to, examinations by the Inter-
nal Revenue Service (IRS). The IRS regularly examines
the Company’s federal income tax returns and, in the
course thereof, proposes adjustments to the Company’s
federal income tax liability reported on such returns. It is
the Company’s practice to vigorously contest those pro-
posed adjustments it deems lacking of merit.
The Company’s management does not expect that
the outcome in any of its currently ongoing legal pro-
ceedings or the outcome of any proposed adjustments
presented to date by the IRS, individually or collectively,
will have a material adverse effect on the Company’s
financial condition, results of operations or cash flow.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)