Southwest Airlines 2012 Annual Report Download - page 62

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substantially lower premiums than prevailing commercial rates and for levels of coverage not available in the
commercial market. The government-provided supplemental coverage from the Wartime Act is currently set to
expire on September 30, 2013. Although another extension beyond this date is expected, if such coverage is not
extended by the government, the Company could incur substantially higher insurance costs or experience
unavailability of adequate coverage in future periods.
Other
Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and
losses. Interest expense for 2012 decreased by $47 million, or 24.2 percent, compared to 2011, primarily as a
result of the Company’s repayment of its $400 million 10.5% notes in December 2011 and $385 million 6.5%
notes in March 2012. For first quarter 2013, the Company expects interest expense to be comparable to fourth
quarter 2012’s results. See Note 2 to the Consolidated Financial Statements.
Capitalized interest for 2012 increased by $9 million, or 75.0 percent, compared to 2011, primarily due to an
increase in average progress payment balances for scheduled future aircraft deliveries.
Interest income for 2012 decreased by $3 million, or 30.0 percent, compared to 2011, primarily due to lower
rates earned on invested cash and short-term investments.
Other (gains) losses, net, primarily includes amounts recorded as a result of the Company’s hedging
activities. See Note 10 to the Consolidated Financial Statements for further information on the Company’s
hedging activities. The following table displays the components of Other (gains) losses, net, for the years ended
December 31, 2012 and 2011:
Year ended December 31,
(in millions) 2012 2011
Mark-to-market impact from fuel contracts settling in future
periods ................................................ $ (221) $ 21
Ineffectiveness from fuel hedges settling in future periods ......... 42 33
Realized ineffectiveness and mark-to-market (gains) or losses ...... (42) 35
Premium cost of fuel contracts ............................... 36 107
Other ................................................... 4 2
$ (181) $ 198
Income taxes
The Company’s effective tax rate was approximately 39 percent for 2012, compared to 45 percent for 2011.
The lower rate for 2012 primarily was driven by the Company’s higher 2012 income before taxes (thus diluting the
impact of permanent tax differences), a portion of acquisition-related costs being non-deductible in 2011, and
additional income tax expense of $5 million in 2011 as a result of an IRS settlement agreed to in first quarter 2011
related to tax years 2007 through 2009. On a non-GAAP basis, the Company currently projects a full year 2013
effective tax rate of approximately 38 to 40 percent based on currently forecasted financial results. However, the
Company’s effective tax rate during interim periods of 2013 may differ significantly from this full year estimate.
54