Income Taxes

12 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 19.  Income taxes

Income taxes consisted of the following:

	Year Ended September 30,
	2022			2021			2020
Current:
Federal	$	21,869		$	15,109		$	15,976
State		2,310			853			1,383
Foreign		27,577			34,354			22,588
Deferred:
Federal		(13,216	)		(8,369	)		10,784
State		(8,623	)		(2,658	)		(547	)
Foreign		(1,717	)		(2,139	)		(8,698	)
	$	28,200		$	37,150		$	41,486

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

	Year Ended September 30,
	2022		2021		2020
United States	$	99,427	$	136,280	$	180,753
Other countries		100,471		109,519		101,128
	$	199,898	$	245,799	$	281,881

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

	September 30, 2022			September 30, 2021
Deferred tax assets:
Defined benefit plans, other postretirement	$	4,144		$	5,364
Foreign net operating loss carryforwards		3,449			2,110
Inventory		57,102			51,011
Stock-based and other compensation		42,428			36,343
Deferred revenue net of unbilled receivables		49,491			46,002
Other reserves		8,017			10,619
Tax credits and incentives		25,623			22,756
Lease obligations		7,150			5,818
Other		3,402			7,936
Valuation allowance		(2,537	)		(4,138	)
Total deferred tax assets, net of valuation allowance		198,269			183,821
Deferred tax liabilities:
Goodwill and intangibles - net		(187,988	)		(210,911	)
Property, plant and equipment		(100,215	)		(105,724	)
Right of use assets		(7,013	)		(5,497	)
Defined benefit plans, pension		(3,969	)		(2,837	)
Other		(2,832	)		(2,722	)
Total deferred tax liabilities		(302,017	)		(327,691	)
Net deferred tax liabilities	$	(103,748	)	$	(143,870	)

Woodward has recorded a net operating loss (“NOL”) deferred tax asset of $3,449 as of September 30, 2022 and $2,110 as of September 30, 2021. The majority of the NOL carryforwards as of September 30, 2022 expire at various times beginning in fiscal years 2023 through 2029.

Woodward has recorded tax credits and incentives deferred tax assets of $25,623 as of September 30, 2022 and $22,756 as of September 30, 2021. The majority of the tax credit and incentive carryforwards as of September 30, 2022 expire at various times beginning in fiscal year 2023 through 2034.

Deferred tax assets are reduced by a valuation allowance when the realization of the deferred tax asset is less than 50 percent likely. 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 releasing a valuation allowance related to certain state tax credit carryforwards that we determined are now more likely than not realizable.

At September 30, 2022, Woodward has not provided for taxes on undistributed foreign earnings of $346,000 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, 2022, September 30, 2021 and September 30, 2020 to Woodward’s effective income tax rate:

	Year Ending September 30,
	2022			2021			2020
Percent of pretax earnings
Statutory tax rate		21.0	%		21.0	%		21.0	%
State income taxes, net of federal tax benefit		(2.5	)		(0.5	)		0.3
Taxes on international activities		0.8			(0.1	)		(2.1	)
Research credit		(4.5	)		(3.1	)		(3.6	)
Net excess income tax benefit from stock-based compensation		(2.5	)		(4.2	)		(2.8	)
Adjustments of prior period tax items		—			0.4			1.0
Compensation and benefits		0.3			0.5			0.4
Other items, net		1.5			1.1			0.5
Effective tax rate		14.1	%		15.1	%		14.7	%

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. 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 decrease in the effective tax rate for fiscal year 2022 compared to fiscal year 2021 is primarily attributable to a partial release of valuation allowance related to state credits and increased Research and Development Credit in the current fiscal year when compared to the prior fiscal year. This decrease was partially offset by a smaller stock-based compensation tax benefit in the current fiscal year 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,
	2022			2021			2020
Beginning balance	$	15,199		$	9,851		$	10,305
Additions to current year tax positions		1,783			2,289			1,890
Reductions to prior year tax positions		(963	)		—			(2,415	)
Additions to prior year tax positions		112			3,166			71
Lapse of applicable statute of limitations		(4,193	)		(107	)		—
Ending balance	$	11,938		$	15,199		$	9,851

Included in the balance of unrecognized tax benefits were $8,092 as of September 30, 2022 and $8,724 as of September 30, 2021 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 $4,203 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 2019 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 2018 and thereafter. Woodward’s, fiscal years remaining open to examination in significant foreign jurisdictions include 2017 and thereafter.