Note 16. Income taxes

U.S. GAAP requires that the interim period tax provision be determined as follows:

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At the end of each quarter, Woodward estimates the tax that will be provided for the current fiscal year stated as a percentage of estimated "ordinary income." The term ordinary income refers to earnings from continuing operations before income taxes, excluding significant unusual or infrequently occurring items.

The estimated annual effective rate is applied to the year-to-date ordinary income at the end of each quarter to compute the estimated year-to-date tax applicable to ordinary income. The tax expense or benefit related to ordinary income in each quarter is the difference between the most recent year-to-date and the prior quarter year-to-date computations.

•

The tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about beginning of the year valuation allowances, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the event occurs.

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income of Woodward in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year. In addition, as a global commercial enterprise, Woodward's tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, changes in the estimate of the amount of undistributed foreign earnings that Woodward considers indefinitely reinvested, as well as other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The following table sets forth the tax expense and the effective tax rate for Woodward's income from operations:


	Three-Months Ending						Nine-Months Ending
	June 30,						June 30,
	2012			2011			2012			2011
Earnings before income taxes	$	37,708		$	50,855		$	131,922		$	128,817
Income tax expense		9,406			14,799			36,452			38,272
Effective tax rate		24.9	%		29.1	%		27.6	%		29.7	%

In determining the tax amounts in Woodward's financial statements, estimates are sometimes used that are subsequently adjusted in the actual filing of tax returns or by updated calculations. Such adjustments resulted in a net tax benefit of $2,592 and $3,429 in the third quarter and first nine months of fiscal year 2012, respectively. In fiscal year 2011 such adjustments resulted in a net tax benefit of $1,880 and $1,607 in the third quarter and first nine months, respectively. In addition, Woodward occasionally has resolutions of tax issues with tax authorities related to prior years due to the conclusion of audits and the lapse of applicable statutes of limitations. Such resolutions resulted in a net tax benefit of $968 and $1,130 in the third quarter and first nine months of fiscal year 2012, respectively. In fiscal year 2011, such resolutions resulted in a net tax benefit of $191 and $353 in the third quarter and first nine months, respectively.

Income taxes for the nine-months ending June 30, 2012 included a tax benefit of $3,326 related to a reduction in the anticipated amount of undistributed earnings of certain of Woodward's foreign subsidiaries that were previously expected to be repatriated into the U.S. within the foreseeable future. Woodward now anticipates that a portion of those earnings will remain indefinitely invested outside the U.S. to support the growth of its foreign operations, and has accordingly reversed the deferred tax liability associated with repatriating those earnings.

Income taxes for the nine-months ending June 30, 2011 included an expense reduction of $3,088 related to the retroactive extension of the U.S. research and experimentation tax credit.

Worldwide unrecognized tax benefits were as follows:


	June 30,		September 30,
	2012		2011
Gross liability	$	17,837	$	16,931
Amount that would impact Woodward's effective tax rate, if recognized, net of expected offsetting adjustments		14,798		14,078

At this time, Woodward estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $2,149 in the next twelve months due to the completion of reviews by tax authorities and the expiration of certain statutes of limitations.

Woodward recognizes interest and penalties related to unrecognized tax benefits in tax expense. Woodward had accrued interest and penalties of the following:


	June 30,		September 30,
	2012		2011
Accrued interest and penalties	$	1,521	$	1,989

Woodward's tax returns are audited by U.S., state, and foreign tax authorities, and these audits are at various stages of completion at any given time. Fiscal years remaining open to examination in significant foreign jurisdictions include 2004 and forward. Woodward has been subject to U.S. Federal income tax examinations for fiscal years through 2008. Woodward is subject to U.S. state income tax examinations for fiscal years 2007 and forward.