Note 15. Income taxes

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

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, 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,
	2011			2010			2011			2010

Earnings before income taxes	$	50,855		$	38,052		$	128,817		$	105,360
Income tax expense		14,799			6,187			38,272			26,873
Effective tax rate		29.1	%		16.3	%		29.7	%		25.5	%

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.

During the nine-months ended June 30, 2010, the Internal Revenue Service concluded an examination of Woodward's U.S. Federal income tax returns for fiscal years 2007 and 2008. During the three-months ended June 30, 2010, Woodward completed certain internal revaluation assessments and certain statutes of limitations expired. As a result, Woodward reduced its liability for unrecognized tax benefits during the three-months ending June 30, 2010 by a net favorable amount of $6,416.

Worldwide unrecognized tax benefits were as follows, including $3,517 recorded in connection with the IDS Acquisition:


	June 30,		September 30,
	2011		2010

Gross liability	$	16,269	$	10,586
Amount that would impact Woodward's effective tax rate, if recognized, net of expected offsetting adjustments		14,441		8,720

At this time, Woodward estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $2,260 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,
	2011		2010

Accured interest and penalties	$	2,072	$	1,431

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 2003 and forward. Statutes of limitations on Woodward's U.S. Federal income tax returns remain open for fiscal year 2008 and forward. Certain subsidiaries have open tax years back to 2007, which pre-dates the inclusion of these subsidiaries in the Woodward consolidated return filing group. Woodward is subject to U.S. state income tax examinations for fiscal years 2005 and forward.