Southwest Airlines 2012 Annual Report Download - page 68

Income taxes
The Company’s consolidated effective tax rate was approximately 45 percent for 2011, compared to
38 percent for 2010. The higher rate for 2011 primarily was driven by the Company’s lower 2011 income before
taxes (thus enhancing the impact of permanent tax differences), a portion of acquisition-related costs being non-
deductible, additional income tax expense of $5 million as a result of an IRS settlement agreed to in first quarter
2011 related to tax years 2007 through 2009, and a first quarter 2011 $2 million charge as a result of a State of
Illinois tax law change.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.1 billion in 2012, compared to $1.4 billion provided by
operating activities in 2011. Operating cash inflows primarily are derived from providing air transportation to
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 airline operations. Operating cash flows can also be significantly impacted by the
Company’s fuel hedge positions and the significant fluctuation in fair value of those positions and the
corresponding cash collateral requirements associated with those positions. In the Consolidated Statement of
Cash Flows, increases and/or decreases to these cash deposits are reflected in operating cash flows as Cash
collateral received from (provided to) fuel derivative counterparties. As of December 31, 2012, there was no cash
either held from or provided to fuel hedge counterparties, so the net change in cash deposits for 2012 was a net
operating inflow of $233 million. Cash flows associated with entering into new fuel derivatives, which are also
classified as Other, net, operating cash flows, were net inflows of $23 million in 2012, net inflows of
$192 million in 2011, and net outflows of $359 million in 2010. Cash flows from operating activities for 2012
were also significantly impacted by the Company’s net income (as adjusted for non-cash depreciation and
amortization expense and non-cash unrealized losses on fuel derivative instruments). For further information on
the Company’s hedging program and counterparty deposits, see Note 10 to the Consolidated Financial
Statements and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk,” respectively. Operating
cash generated is used primarily to finance aircraft-related capital expenditures and to provide working capital.
Net cash used in investing activities in 2012 totaled $833 million, versus $1.1 billion used in 2011. Investing
activities in both years included payments for new 737-700 or 737-800 aircraft delivered to the Company and
progress payments for future aircraft deliveries. The Company purchased 29 new Boeing 737-800 aircraft in
2012, versus the purchase of 18 Boeing 737-700s in 2011. See Note 4 to the Consolidated Financial Statements.
Investing activities for 2012 and 2011 also reflect $483 million of net inflows and $48 million of net outflows,
respectively, related to changes in the balance of the Company’s short-term investments.
Net cash used in financing activities was $947 million in 2012. During 2012, the Company repaid
$578 million in debt and capital lease obligations that came due, which included the prepayment of
approximately $19 million in December related to a high-interest aircraft secured loan that Southwest assumed as
part of the AirTran acquisition and repurchased approximately $400 million of its outstanding common stock
through a share repurchase program. Net cash used in financing activities was $766 million in 2011. During
2011, the Company repaid $540 million in debt and capital lease obligations that came due, repurchased
approximately $225 million of its outstanding common stock through a share repurchase program, and used
$81 million in cash to repay convertible note holders following the acquisition of AirTran. See Note 7 to the
Consolidated Financial Statements for more information on the issuance and redemption of long-term debt.
The Company has a large net deferred tax liability on its Consolidated Balance Sheet. The deferral of
income taxes has resulted in a significant benefit to the Company and its liquidity position. Since the Company
purchases the majority of the aircraft it acquires, it has been able to utilize accelerated depreciation methods
(including bonus depreciation) available under the Internal Revenue Code in 2012 and in previous years, which
has enabled the Company to defer the cash tax payments associated with these depreciable assets to future years.
Based on the Company’s scheduled future aircraft deliveries from Boeing and existing tax laws in effect, the
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