Southwest Airlines 2007 Annual Report Download - page 74

performance of the Company’s Common Stock and defers
the receipt of such compensation 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 Company granted 750 Performance
Shares to each non-Employee Director who has served since
the previous Annual Meeting. Effective beginning with the
2007 Annual Meeting, the plan was amended to increase
the annual number of Performance Shares to be granted to
1,000. 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 30
th
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
former 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, 2007, which is not material to
the Company, is included in Accrued liabilities in the
accompanying 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 is
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 covering
substantially all Southwest Employees. The Southwest
Airlines Co. Profit Sharing Plan (Profit Sharing Plan) is
a money purchase defined contribution plan and Employee
stock purchase plan. However, the Profit Sharing Plan was
amended as of January 1, 2008, and is now characterized as
simply a Profit Sharing Plan. The Company contributes
15 percent of its eligible pre-tax profits, as defined, to the
ProfitSharingPlanonanannualbasis.NoEmployee
contributions to the Profit Sharing Plan are allowed.
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 2007, 2006, and 2005 were $279 million,
$301 million, and $264 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 unused sick time to
pay for medical and dental premiums from the age of
retirement 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, 2007 and
2006:
2007 2006
(In millions)
APBO at beginning of period ...... $111 $ 94
Service cost ................. 16 15
Interest cost ................. 6 5
Benefits paid ................ (6) (5)
Actuarial (gain) loss ........... (39) 2
Plan amendments ............. — —
APBO at end of period ........... $ 88 $111
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)