Deferred Income Taxes

9 Months Ended

Sep. 30, 2011

Deferred Income Taxes [Abstract]

Deferred Income Taxes

10.  Deferred Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes.  The Company generates deferred tax assets primarily as a result of write-downs of deferred preservation costs, inventory, and in-process research and development; accruals for tissue processing and product liability claims; asset impairments; and operating losses.  The Company acquired significant deferred tax assets from its acquisition of Cardiogenesis in the second quarter of 2011 as discussed below.

        As of September 30, 2011 the Company maintained a total of $2.3 million in valuation allowances against deferred tax assets, related to state net operating loss carryforwards, and a net deferred tax asset of $19.8 million.  As of December 31, 2010 the Company had a total of $1.8 million in valuation allowances against deferred tax assets and a net deferred tax asset of $15.3 million. 

        The increase in the Company's net deferred tax assets is due to the acquisition of Cardiogenesis in the second quarter of 2011, as Cardiogenesis had significant deferred tax assets, primarily due to its net operating loss carryforwards.  The Company believes that the realizability of its acquired net operating loss carryforwards will be limited in future periods due to a change in control of its subsidiary Cardiogenesis, as mandated by Section 382 of the Internal Revenue Code of 1986, as amended.  The Company believes that its acquisition of Cardiogenesis constitutes a change in control.  The deferred tax assets recorded on the Company's Summary Consolidated Balance Sheets do not include amounts that it expects will not be realizable due to this change in control.  A portion of the acquired net operating loss carryforwards is related to state income taxes and can only be used by the Company's subsidiary Cardiogenesis.  Due to Cardiogenesis' history of losses when operated as a stand-alone company, management believes it is more likely than not that these deferred tax assets will not be realized.  Therefore, the Company recorded a valuation allowance against these state net operating loss carryforwards.  See also Note 5 above for a further discussion of the Company's acquisition of Cardiogenesis.

        The Company's effective income tax rate was approximately 12% and 36% for the three and nine months ended September 30, 2011, respectively, as compared to a benefit of 34% for the three months ended September 30, 2010 and expense of 52% for the nine months ended September 30, 2010.  The significant change in the Company's effective income tax rate for the three months ended September 30, 2011 as compared to the prior year period was due to the discrete and favorable effect of deductions taken on the Company's 2010 federal tax returns, which were filed in the third quarter of 2011.  For the nine months ended September 30, 2011, this favorable effect was largely offset by the unfavorable tax treatment recognized in the second quarter of 2011 of certain acquisition related expenses, which the Company incurred related to its acquisition of Cardiogenesis. 

                The Company's tax years 2008 through 2010 generally remain open to examination by the major taxing jurisdictions to which the Company is subject.  However, certain returns from years prior to 2008, in which net operating losses and tax credits have arisen, are still open for examination by the tax authorities.