Income Taxes

12 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 19.  Income taxes

Income taxes consisted of the following:

	Year Ended September 30,
	2021			2020			2019
Current:
Federal	$	15,109		$	15,976		$	40,173
State		853			1,383			2,402
Foreign		34,354			22,588			34,660
Deferred:
Federal		(8,369	)		10,784			(2,015	)
State		(2,658	)		(547	)		(2,948	)
Foreign		(2,139	)		(8,698	)		(11,262	)
	$	37,150		$	41,486		$	61,010

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

	Year Ended September 30,
	2021		2020		2019
United States	$	136,280	$	180,753	$	211,267
Other countries		109,519		101,128		109,345
	$	245,799	$	281,881	$	320,612

Significant components of deferred income taxes presented in the Consolidated Balance Sheets are related to the following:

	September 30, 2021			September 30, 2020
Deferred tax assets:
Defined benefit plans, other postretirement	$	5,364		$	6,238
Foreign net operating loss carryforwards		2,110			6,106
Inventory		51,011			53,867
Stock-based and other compensation		36,343			35,919
Defined benefit plans, pension		—			5,624
Deferred revenue net of unbilled receivables		46,002			39,990
Other reserves		10,619			10,119
Tax credits and incentives		22,756			14,340
Lease obligations		5,818			5,764
Other		7,936			9,223
Valuation allowance		(4,138	)		(1,833	)
Total deferred tax assets, net of valuation allowance		183,821			185,357
Deferred tax liabilities:
Goodwill and intangibles - net		(210,911	)		(218,900	)
Property, plant and equipment		(105,724	)		(107,862	)
Right of use assets		(5,497	)		(4,837	)
Defined benefit plans, pension		(2,837	)		—
Other		(2,722	)		(2,673	)
Total deferred tax liabilities		(327,691	)		(334,272	)
Net deferred tax liabilities	$	(143,870	)	$	(148,915	)

Woodward has recorded a net operating loss (“NOL”) deferred tax asset of $2,110 as of September 30, 2021 and $6,106 as of September 30, 2020.  A portion of these NOL carryforwards were utilized in the current year.  The majority of the NOL carryforwards as of September 30, 2021 expire at various times beginning in fiscal years 2023 through 2027, and Woodward has recognized valuation allowances against all NOL carryforwards that are less than 50 percent likely to be realized.  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 change in the valuation allowance was primarily the result of recording a valuation allowance related to certain state tax credit carryforwards that we determined are not more likely than not realizable and the release of valuation of allowance at a wholly-owned subsidiary.

At September 30, 2021, Woodward has not provided for taxes on undistributed foreign earnings of $302,000 that it considered 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.  Any additional U.S. taxes could be offset, in part or in whole, by foreign tax credits.  The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated.  Based on these variables, it is impractical to determine the income tax liability that might be incurred if these funds were to be repatriated.

The following is a reconciliation of the U.S. Federal statutory tax 21% in the fiscal years ended September 30, 2021, September 30, 2020 and September 30, 2019 to Woodward’s effective income tax rate:

	Year Ending September 30,
	2021			2020			2019
Percent of pretax earnings
Statutory tax rate		21.0	%		21.0	%		21.0	%
State income taxes, net of federal tax benefit		(0.5	)		0.3			(0.1	)
Taxes on international activities		(0.1	)		(2.1	)		0.2
Research credit		(3.1	)		(3.6	)		(3.3	)
Net excess income tax benefit from stock-based compensation		(4.2	)		(2.8	)		(3.5	)
Adjustments of prior period tax items		0.4			1.0			0.9
Compensation and benefits		0.5			0.4			0.3
Transition Tax		—			—			3.3
Other items, net		1.1			0.5			0.2
Effective tax rate		15.1	%		14.7	%		19.0	%

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.  In addition, Woodward occasionally has resolutions of tax items with tax authorities related to prior years due to the conclusion of audits and the lapse of applicable statutes of limitations.  Such adjustments are included in the “Adjustments of prior period tax items” line in the above table.  

The increase in the effective tax rate for fiscal year 2021 compared to fiscal year 2020 is primarily attributable to (i) decreased current fiscal year foreign earnings in lower tax jurisdictions when compared to the prior fiscal year, and (ii) decreased Research and Development Credit in the current fiscal year when compared to the prior fiscal year.  This increase is partially offset by (i) a larger favorable net excess income tax benefit from stock-based compensation, (ii) a favorable U.S. current fiscal year state tax provision when compared to the prior fiscal year, and (iii) a smaller detrimental adjustment to prior period tax items when compared to the prior fiscal year.  

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

	Year Ending September 30,
	2021			2020			2019
Beginning balance	$	9,851		$	10,305		$	8,364
Additions to current year tax positions		2,289			1,890			1,930
Reductions to prior year tax positions		—			(2,415	)		—
Additions to prior year tax positions		3,166			71			11
Lapse of applicable statute of limitations		(107	)		—			—
Ending balance	$	15,199		$	9,851		$	10,305

Included in the balance of unrecognized tax benefits were $8,724 as of September 30, 2021 and $4,730 as of September 30, 2020 of tax benefits that, if recognized, would affect the effective tax rate.  At this time, Woodward estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $5,385 in the next twelve months due to the completion of review by tax authorities, lapses of statutes, and the settlement of tax positions.  Woodward accrues for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax payments in tax expense.  

Woodward’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at various stages of completion at any given time.  Reviews of tax matters by authorities and lapses of the applicable statutes of limitation may result in changes to tax expense.  Woodward’s fiscal years remaining open to examination for U.S. Federal income taxes include fiscal years 2018 and thereafter.  In fiscal year 2020, Woodward concluded its U.S. Federal income tax examination through fiscal year 2017, which included a foreign tax carryback to fiscal year 2016.  Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 2017 and thereafter.  Woodward closed various audits in foreign jurisdictions in the second and third quarters of fiscal year 2020.  Consequently, fiscal years remaining open to examination in significant foreign jurisdictions include 2016 and thereafter.