Southwest Airlines 2008 Annual Report Download - page 49

Income taxes
The provision for income taxes, as a percentage
of income before taxes, increased to 39.0 percent in
2007 from 36.8 percent in 2006. The higher 2007 rate
included an $11 million ($.01 per share, diluted) net
addition related to a revision in Illinois income tax
laws enacted in 2007. The 2006 rate included a $9
million net reduction related to a revision in the State
of Texas franchise tax law enacted during 2006. As a
result of the January 2008 reversal of the 2007
Illinois tax law change, the Company reversed the
previously mentioned $11 million net charge during
first quarter 2008.
Liquidity And Capital Resources
Net cash used in operating activities was $1.5
billion in 2008 compared to $2.8 billion provided by
operations in 2007. For the Company, operating cash
inflows primarily are derived from providing air
transportation for Customers. The vast majority of
tickets are purchased prior to the day on which travel is
provided and, in some cases, several months before the
anticipated travel date. Operating cash outflows
primarily are related to the recurring expenses of
operating the airline. Operating cash flows over the past
three years have also been significantly impacted by the
Company’s fuel hedge positions and the significant
fluctuation in fair value of those positions. During 2006,
2007, and the first ten months of 2008, the value of the
Company’s fuel derivative instruments was positive,
resulting in the Company holding counterparty cash
deposits — at times significant amounts. These cash
deposits held were reflected as an increase to Cash and a
corresponding increase to Accrued liabilities. In the
Consolidated Statement of Cash Flows, increases and/or
decreases to these cash deposits have been reflected in
operating cash flows within the changes to “Accounts
payable and accrued liabilities” line item. In late 2008,
the net fair value of fuel derivative instruments held
became a liability, requiring the Company to post cash
collateral with a counterparty. As of December 31,
2008, the amount of cash posted with this counterparty
was $240 million, and is reflected as a decrease to Cash
and a corresponding increase to “Prepaid expenses and
other current assets.” Increases or decreases to cash
deposits posted to counterparties are reflected in
operating cash flows within the changes to “Other
current assets” line item. Since the amount of cash
collateral deposits held by the Company at
December 31, 2007 was $2.0 billion, the net change in
cash deposits for 2008 was a net operating outflow of
$2.2 billion. This compares to an increase in
counterparty deposits (operating inflow) of $1.5 billion
for 2007. The increase in these deposits during 2007
was due to the significant increase in fair value of the
Company’s fuel derivative portfolio from December 31,
2006, to December 31, 2007 (in conjunction with rising
energy prices). Cash flows associated with purchasing
derivatives, which are also classified as operating cash
flows, were a net outflow of $418 million in 2008, but
were immaterial for 2007. Cash flows from operating
activities for 2008 were also driven by the $178 million
in net income, plus noncash depreciation and
amortization expense of $599 million. For further
information on the Company’s hedging program and
counterparty deposits, see Note 10 to the Consolidated
Financial Statements, and “Item 7A. Qualitative and
Quantitative Disclosures about Market Risk,”
respectively. Operating cash generated primarily is used
to finance aircraft-related capital expenditures and to
provide working capital.
Net cash flows used in investing activities in
2008 totaled $978 million, versus $1.5 billion used in
2007. Investing activities in both years primarily
consisted of payments for new 737-700 aircraft
delivered to the Company and progress payments for
future aircraft deliveries. The Company purchased 26
new 737-700 aircraft in 2008 versus the purchase of
37 737-700s in 2007. See Note 4 to the Consolidated
Financial Statements. Investing activities for 2008
and 2007 were also reduced by $55 million and $198
million, respectively, related to changes in the
balance of the Company’s short-term investments.
Net cash provided by financing activities was $1.7
billion in 2008. During 2008, the Company borrowed
$600 million under a Term Loan Agreement, borrowed
$400 million under its revolving credit facility, sold
$400 million of Secured Notes, and raised
approximately $173 million from a sale and leaseback
transaction involving five of the Company’s 737-700
aircraft. The Company also received $117 million in
proceeds from Employees’ exercise of stock options
and $91 million from a credit line borrowing. These
inflows were partially offset by the Company’s
repurchase of $54 million of its Common Stock,
representing a total of 4.4 million shares. Net cash used
in financing activities was $493 million in 2007,
primarily from the Company’s repurchase of $1.0
billion of its common stock. The Company repurchased
a total of 66 million shares of outstanding common
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