Southwest Airlines 2007 Annual Report Download - page 77

The effective tax rate on income before income taxes differed from the federal income tax statutory rate for the
following reasons:
2007 2006 2005
(In millions)
Tax at statutory U.S. tax rates .................................... $370 $276 $274
Nondeductible items ........................................... 610 8
State income taxes, net of federal benefit. . . .......................... 38 414
Other, net .................................................. (1) 1 (1)
Total income tax provision..................................... $413 $291 $295
In July 2006, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” (FIN 48),
which clarifies the accounting and disclosure for uncer-
tainty in tax positions, as defined. FIN 48 seeks to reduce
the diversity in practice associated with certain aspects of
the recognition and measurement related to accounting
for income taxes. The Company is subject to the provi-
sions of FIN 48 as of January 1, 2007, and has analyzed
filing positions in all of the federal and state jurisdictions
where it is required to file income tax returns, as well as all
open tax years in these jurisdictions. The Company has
identified its federal tax return and its state tax returns in
California and Texas as “major” tax jurisdictions, as
defined. The only periods subject to examination for
the Company’s federal tax returns are the 2005 and
2006 tax years. The periods subject to examination for
the Company’s state tax returns in California and Texas
are years 2002 through 2006. The Company believes that
its income tax filing positions and deductions will be
sustained on audit and does not anticipate any adjust-
ments that will result in a material adverse effect on the
Company’s financial condition, results of operations, or
cash flow. Therefore, no reserves for uncertain income tax
positions have been recorded pursuant to FIN 48. In
addition, the Company did not record a cumulative effect
adjustment related to the adoption of FIN 48.
The Company’s policy for recording interest and
penalties associated with audits is to record such items as
a component of income before taxes. Penalties are
recorded in “Other (gains) losses, net,” and interest
paid or received is recorded in interest expense or interest
income, respectively, in the statement of income. For the
year ended December 31, 2007, the Company recorded
approximately $1 million in interest income related to the
settlement of audits for certain prior periods.
16. Net Income Per Share
The following table sets forth the computation of net income per share, basic and diluted:
2007 2006 2005
(In millions, except per
share amounts)
Net income ................................................. $645 $499 $484
Weighted-average shares outstanding, basic . .......................... 757 795 789
Dilutive effect of Employee stock options . . .......................... 11 29 17
Adjusted weighted-average shares outstanding, diluted ................... 768 824 806
Net income per share, basic ...................................... $ .85 $ .63 $ .61
Net income per share, diluted .................................... $ .84 $ .61 $ .60
The Company has excluded 49 million, 20 million, and 12 million shares from its calculations of net income per
share, diluted, in 2007, 2006, and 2005, respectively, as they represent antidilutive stock options for the respective periods
presented.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)