Note 17. Income taxes

Income taxes consisted of the following:


	Year Ending September 30,
	2011			2010			2009
Current:
Federal	$	48,041		$	9,818		$	(8,006	)
State		6,237			5,600			2,042
Foreign		9,743			13,112			18,441
Deferred
Federal		(8,680	)		13,789			16,436
State		(552	)		1,681			848
Foreign		543			(287	)		(1,701	)

	$	55,332		$	43,713		$	28,060

Earnings before income taxes by geographical area consisted of the following:


	Year Ending September 30,
	2011		2010		2009
United States	$	149,744	$	103,771	$	62,766
Other countries		37,823		51,104		59,710

	$	187,567	$	154,875	$	122,476

Deferred income taxes presented in the Consolidated Balance Sheets are related to the following:


	At September 30,
	2011			2010
Deferred tax assets:
Retirement healthcare and early retirement benefits	$	12,417		$	13,176
Foreign net operating loss carryforwards		4,276			2,245
Inventory		18,194			13,425
Deferred compensation		14,223			12,293
Defined benefit pension		7,681			2,943
Other		21,054			27,581
Valuation allowance		(3,201	)		(96	)

Total deferred tax assets, net of valuation allowance		74,644			71,567

Deferred tax liabilities:
Goodwill and intangibles — net		(103,393	)		(96,267	)
Other		(8,500	)		(21,237	)

Total deferred tax liabilities		(111,893	)		(117,504	)

Net deferred tax liabilities	$	(37,249	)	$	(45,937	)

Woodward has recorded a deferred tax asset of $4,276 as of September 30, 2011, reflecting the benefit of $25,024 in foreign net operating loss carryforwards. Of these carryforwards, $16,789 will expire by 2018 and is currently offset by a 100% valuation allowance; the net may be carried forward indefinitely.

At September 30, 2011, Woodward has not provided for taxes on undistributed foreign earnings of $113,788 that it considers indefinitely reinvested. These earnings could become subject to income taxes if they are remitted as dividends, are loaned to Woodward or any of Woodward's subsidiaries located in the United States, or if Woodward sells its stock in the foreign subsidiaries. However, the Company believes that foreign tax credits would largely offset any income tax that might otherwise be due.

Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Both positive and negative evidence are considered in forming Woodward's judgment as to whether a valuation allowance is appropriate, and more weight is given to evidence that can be objectively verified. Valuation allowances are reassessed whenever there are changes in circumstances that may cause a change in judgment.

The reasons for the differences between Woodward's effective income tax rate and the United States statutory federal income tax rate were as follows:


	Year Ending September 30,
Percent of pretax earnings	2011			2010			2009
Statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax benefit		2.3			2.4			1.5
Foreign tax rate differences		(0.3	)		(1.4	)		(2.1	)
Dividends on stock shares allocated to retirement savings plans		(0.3	)		(0.4	)		(0.5	)
Research credit		(2.7	)		(0.5	)		(3.1	)
Retroactive extension of research credit		(2.1	)		—			(1.7	)
Domestic production activities deduction		(2.1	)		(0.9	)		(0.3	)
Adjustment of tax issues for previous periods and audit settlements		(0.2	)		(5.9	)		(6.6	)
Other items, net		(0.1	)		(0.1	)		0.7

Effective tax rate		29.5	%		28.2	%		22.9	%

The changes in estimate of taxes for previous periods are primarily related to the favorable resolution of certain tax matters. There were favorable resolutions of tax matters of $2,148, $4,667 and $6,846 in the fiscal years ending September 30, 2011, September 30, 2010 and September 30, 2009.

Income taxes for the fiscal year ending September 30, 2011 included an expense reduction of $3,908 related to the retroactive extension of the U.S. research and experimentation tax credit.

During the fiscal year ending September 30, 2010, the Internal Revenue Service concluded an examination of Woodward's U.S. Federal income tax returns for fiscal years 2007 and 2008. Also during the fiscal year ending September 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 fiscal year ending September 30, 2010 by a net favorable amount of $6,784.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:


Balance, September 30, 2008	$	22,576
Tax positions related to the current year		1,431
Tax positions related to prior years		(556	)
Lapse of applicable statute of limitations		(3,668	)

Balance, September 30, 2009		19,783
Tax positions related to the current year		1,734
Tax positions related to prior years		(7,320	)
Lapse of applicable statute of limitations		(3,611	)

Balance, September 30, 2010		10,586
Tax positions related to the current year		4,264
Tax positions related to prior years		3,160
Lapse of applicable statute of limitations		(1,079	)

Balance, September 30, 2011	$	16,931

Worldwide unrecognized tax benefits included $3,517 recorded in connection with the IDS Acquisition.

The amounts of unrecognized tax benefits that would impact Woodward's effective tax rate if recognized, net of expected offsetting adjustments, were $14,078 at September 30, 2011 and $8,720 at September 30, 2010. At this time, Woodward estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $600 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:


	At September 30,
	2011		2010

Accrued interest and penalties	$	1,989	$	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. 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.