þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
MINNESOTA | 41-1356149 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
Large accelerated filero | Accelerated filerþ | Non-accelerated filero | Smaller reporting companyo | |||
(Do not check if a smaller reporting company) |
2
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
(in thousands, except share data) | (Unaudited) | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 18,437 | $ | 11,391 | ||||
Short-term investments |
15,909 | 9,105 | ||||||
Accounts receivable, net of allowance for doubtful accounts
of $290 and $461 as of June 30, 2011 and September 30,
2010, respectively |
9,166 | 8,987 | ||||||
Inventories |
3,735 | 3,047 | ||||||
Deferred tax asset |
830 | 247 | ||||||
Prepaids and other |
2,526 | 4,701 | ||||||
Total current assets |
50,603 | 37,478 | ||||||
Property and equipment, net |
63,842 | 65,395 | ||||||
Long-term investments |
28,899 | 36,290 | ||||||
Deferred tax asset |
3,102 | 2,606 | ||||||
Intangible assets , net |
14,097 | 15,257 | ||||||
Goodwill |
8,010 | 8,010 | ||||||
Other assets, net |
4,896 | 5,243 | ||||||
Total assets |
$ | 173,449 | $ | 170,279 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 1,615 | $ | 3,341 | ||||
Accrued liabilities: |
||||||||
Compensation |
2,322 | 930 | ||||||
Accrued other |
1,834 | 1,753 | ||||||
Deferred revenue |
1,376 | 562 | ||||||
Other current liabilities |
376 | 1,061 | ||||||
Total current liabilities |
7,523 | 7,647 | ||||||
Deferred revenue, less current portion |
3,656 | 3,598 | ||||||
Other long-term liabilities |
4,394 | 4,675 | ||||||
Total liabilities |
15,573 | 15,920 | ||||||
Commitments and contingencies (Note 15) |
||||||||
Stockholders Equity |
||||||||
Series A Preferred stock- $.05 par value, 450,000 shares
authorized; no shares issued and outstanding |
| | ||||||
Common stock- $.05 par value, 45,000,000 shares
authorized; 17,525,477 and 17,423,601 shares issued and
outstanding |
876 | 871 | ||||||
Additional paid-in capital |
73,373 | 69,702 | ||||||
Accumulated other comprehensive income |
568 | 886 | ||||||
Retained earnings |
83,059 | 82,900 | ||||||
Total stockholders equity |
157,876 | 154,359 | ||||||
Total liabilities and stockholders equity |
$ | 173,449 | $ | 170,279 | ||||
3
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per share data) | (unaudited) | (unaudited) | ||||||||||||||
Revenue |
||||||||||||||||
Royalties and license fees |
$ | 7,529 | $ | 9,356 | $ | 22,787 | $ | 26,333 | ||||||||
Product sales |
5,839 | 5,769 | 16,449 | 15,586 | ||||||||||||
Research and development |
4,599 | 3,483 | 11,393 | 12,430 | ||||||||||||
Total revenue |
17,967 | 18,608 | 50,629 | 54,349 | ||||||||||||
Operating costs and expenses |
||||||||||||||||
Product costs |
1,704 | 2,388 | 5,813 | 6,820 | ||||||||||||
Customer research and development |
4,379 | 4,642 | 14,141 | 12,748 | ||||||||||||
Other research and development |
3,522 | 4,223 | 8,923 | 13,507 | ||||||||||||
Selling, general and administrative |
4,916 | 4,944 | 14,998 | 13,667 | ||||||||||||
Goodwill impairment charge |
| | 5,650 | | ||||||||||||
Restructuring charges |
| | 1,236 | 1,306 | ||||||||||||
Asset impairment charges |
| 191 | | 2,265 | ||||||||||||
Total operating costs and expenses |
14,521 | 16,388 | 50,761 | 50,313 | ||||||||||||
Income (loss) from operations |
3,446 | 2,220 | (132 | ) | 4,036 | |||||||||||
Other income (loss) |
||||||||||||||||
Investment income |
147 | 241 | 498 | 819 | ||||||||||||
Impairment loss on investments |
| (2,577 | ) | | (2,577 | ) | ||||||||||
Other income, net |
172 | 298 | 401 | 301 | ||||||||||||
Other income (loss) |
319 | (2,038 | ) | 899 | (1,457 | ) | ||||||||||
Income before income taxes |
3,765 | 182 | 767 | 2,579 | ||||||||||||
Income tax benefit (provision) |
77 | (1,098 | ) | (608 | ) | (2,005 | ) | |||||||||
Net income (loss) |
$ | 3,842 | $ | (916 | ) | $ | 159 | $ | 574 | |||||||
Basic net income (loss) per common share |
$ | 0.22 | $ | (0.05 | ) | $ | 0.01 | $ | 0.03 | |||||||
Diluted net income (loss) per common share |
$ | 0.22 | $ | (0.05 | ) | $ | 0.01 | $ | 0.03 | |||||||
Weighted average shares outstanding |
||||||||||||||||
Basic |
17,437 | 17,360 | 17,409 | 17,373 | ||||||||||||
Dilutive effect of outstanding stock
options and non-vested stock |
92 | | 47 | 12 | ||||||||||||
Diluted |
17,529 | 17,360 | 17,456 | 17,385 |
4
Nine Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
(in thousands) | (Unaudited) | |||||||
Operating Activities |
||||||||
Net income |
$ | 159 | $ | 574 | ||||
Adjustments to reconcile net income to net cash provided by operating
activities of continuing operations |
||||||||
Depreciation and amortization |
5,397 | 5,950 | ||||||
Gain on sales of investments |
(380 | ) | (300 | ) | ||||
Amortization of premium on investments |
72 | 101 | ||||||
Stock-based compensation |
3,239 | 4,192 | ||||||
Goodwill impairment charge |
5,650 | | ||||||
Asset impairment charges |
| 2,265 | ||||||
Impairment loss on investments |
| 2,577 | ||||||
Deferred taxes |
(871 | ) | 990 | |||||
Tax benefits from exercise of stock options |
41 | (72 | ) | |||||
Other |
134 | 3 | ||||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
(179 | ) | 568 | |||||
Inventories |
(688 | ) | (176 | ) | ||||
Accounts payable and accrued liabilities |
(565 | ) | 531 | |||||
Income taxes |
1,876 | (2,796 | ) | |||||
Deferred revenue |
872 | 2,881 | ||||||
Prepaids and other |
263 | (575 | ) | |||||
Net cash provided by operating activities |
15,020 | 16,713 | ||||||
Investing Activities |
||||||||
Purchases of property and equipment |
(3,279 | ) | (7,196 | ) | ||||
Purchases of available-for-sale investments |
(48,309 | ) | (32,834 | ) | ||||
Sales/maturities of investments |
48,827 | 23,009 | ||||||
Payments related to prior business acquisitions |
(5,650 | ) | (750 | ) | ||||
Other investing activities |
| (500 | ) | |||||
Net cash used in investing activities |
(8,411 | ) | (18,271 | ) | ||||
Financing Activities |
||||||||
Tax benefit from exercise of stock options |
(41 | ) | 72 | |||||
Issuance of common stock |
487 | 892 | ||||||
Repurchase of common stock |
| (2,032 | ) | |||||
Purchase of common stock to pay employee taxes |
(9 | ) | (393 | ) | ||||
Net cash provided by (used in) financing activities |
437 | (1,461 | ) | |||||
Net change in cash and cash equivalents |
7,046 | (3,019 | ) | |||||
Cash and Cash Equivalents |
||||||||
Beginning of period |
11,391 | 11,636 | ||||||
End of period |
$ | 18,437 | $ | 8,617 | ||||
Supplemental Information |
||||||||
Cash paid (received) for income taxes |
$ | (398 | ) | $ | 3,811 | |||
Noncash transaction acquisition of property, plant, and equipment on account |
$ | 104 | $ | 1,096 | ||||
Noncash transaction acquisition of intangible assets on account |
$ | | $ | 210 |
5
| The milestone payment is non-refundable; | ||
| The milestone involved a significant degree of risk, and was not reasonably assured at the inception of the arrangement; | ||
| Accomplishment of the milestone involved substantial effort; | ||
| The amount of the milestone payment is commensurate with the related effort and risk; and | ||
| A reasonable amount of time passed between the initial license payment and the first and subsequent milestone payments. |
6
(i). | provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; | ||
(ii). | require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and | ||
(iii). | eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. |
7
8
Quoted Prices | ||||||||||||||||
in Active Markets | Total Fair | |||||||||||||||
for Identical | Significant Other | Significant | Value as of | |||||||||||||
Instruments | Observable Inputs | Unobservable Inputs | June 30, | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 2011 | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | | $ | 4,337 | $ | | $ | 4,337 | ||||||||
Available for sale debt securities |
||||||||||||||||
US government obligations |
| 29,391 | | 29,391 | ||||||||||||
Mortgage backed securities |
| 4,145 | | 4,145 | ||||||||||||
Municipal bonds |
| 2,932 | | 2,932 | ||||||||||||
Asset backed securities |
| 1,617 | | 1,617 | ||||||||||||
Corporate bonds |
| 3,672 | | 3,672 | ||||||||||||
Other assets |
2,476 | | | 2,476 | ||||||||||||
Total assets measured at fair value |
$ | 2,476 | $ | 46,094 | $ | | $ | 48,570 | ||||||||
Quoted Prices | ||||||||||||||||
in Active Markets | Total Fair | |||||||||||||||
for Identical | Significant Other | Significant | Value as of | |||||||||||||
Instruments | Observable Inputs | Unobservable Inputs | September 30, | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 2010 | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | | $ | 10,128 | $ | | $ | 10,128 | ||||||||
Available for sale debt securities |
||||||||||||||||
US government obligations |
| 25,626 | 704 | 26,330 | ||||||||||||
Mortgage backed securities |
| 4,757 | 69 | 4,826 | ||||||||||||
Municipal bonds |
| 3,150 | | 3,150 | ||||||||||||
Asset backed securities |
| 1,113 | | 1,113 | ||||||||||||
Corporate bonds |
| 5,852 | | 5,852 | ||||||||||||
Other assets |
2,624 | | | 2,624 | ||||||||||||
Total assets measured at fair value |
$ | 2,624 | $ | 50,626 | $ | 773 | $ | 54,023 | ||||||||
9
Fair Value Measurements Using Significant | ||||||||||||
Unobservable Inputs (Level 3) | ||||||||||||
Nine Months Ended June 30, 2011 | ||||||||||||
Available-for-Sale Debt Securities | ||||||||||||
U.S. Government | Mortgage | |||||||||||
Obligations | Backed | Total | ||||||||||
Balance, September 30, 2010 |
$ | 704 | $ | 69 | $ | 773 | ||||||
Transfers into Level 3 |
| | | |||||||||
Transfers out of Level 3 |
(695 | ) | (68 | ) | (763 | ) | ||||||
Total realized and unrealized gains (losses): |
||||||||||||
Included in other comprehensive income (loss) |
19 | (1 | ) | 18 | ||||||||
Purchases, issuances, sales and settlements, net |
(28 | ) | | (28 | ) | |||||||
Balance, June 30, 2011 |
$ | | $ | | $ | | ||||||
Fair Value Measurements Using Significant | ||||||||||||
Unobservable Inputs (Level 3) | ||||||||||||
Three Months Ended June 30, 2010 | ||||||||||||
Available-for-Sale Debt Securities | ||||||||||||
U.S. Government | Mortgage | |||||||||||
Obligations | Backed | Total | ||||||||||
Balance, March 31, 2010 |
$ | 924 | $ | 145 | $ | 1,069 | ||||||
Transfers into Level 3 |
| | | |||||||||
Total realized and unrealized gains (losses): |
||||||||||||
Included in other comprehensive income (loss) |
(33 | ) | 1 | (32 | ) | |||||||
Purchases, issuances, sales and settlements, net |
(103 | ) | (3 | ) | (106 | ) | ||||||
Balance, June 30, 2010 |
$ | 788 | $ | 143 | $ | 931 | ||||||
Fair Value Measurements Using Significant | ||||||||||||
Unobservable Inputs (Level 3) | ||||||||||||
Nine Months Ended June 30, 2010 | ||||||||||||
Available-for-Sale Debt Securities | ||||||||||||
U.S. Government | Mortgage | |||||||||||
Obligations | Backed | Total | ||||||||||
Balance, September 30, 2009 |
$ | 1,130 | $ | 73 | $ | 1,203 | ||||||
Transfers into Level 3 |
| 147 | 147 | |||||||||
Transfers out of Level 3 |
(36 | ) | (73 | ) | (109 | ) | ||||||
Total realized and unrealized gains (losses): |
||||||||||||
Included in other comprehensive income (loss) |
(39 | ) | 4 | (35 | ) | |||||||
Purchases, issuances, sales and settlements, net |
(267 | ) | (8 | ) | (275 | ) | ||||||
Balance, June 30, 2010 |
$ | 788 | $ | 143 | $ | 931 | ||||||
10
June 30, 2011 | ||||||||||||||||
Original Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
U.S. government obligations |
$ | 29,337 | $ | 58 | $ | (4 | ) | $ | 29,391 | |||||||
Mortgage-backed securities |
4,061 | 126 | (42 | ) | 4,145 | |||||||||||
Municipal bonds |
2,891 | 42 | (1 | ) | 2,932 | |||||||||||
Asset-backed securities |
1,659 | 3 | (45 | ) | 1,617 | |||||||||||
Corporate bonds |
3,646 | 27 | (1 | ) | 3,672 | |||||||||||
Total |
$ | 41,594 | $ | 256 | $ | (93 | ) | $ | 41,757 | |||||||
September 30, 2010 | ||||||||||||||||
Original Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
U.S. government obligations |
$ | 25,968 | $ | 395 | $ | (34 | ) | $ | 26,329 | |||||||
Mortgage-backed securities |
4,711 | 164 | (48 | ) | 4,827 | |||||||||||
Municipal bonds |
3,079 | 72 | | 3,151 | ||||||||||||
Asset-backed securities |
1,146 | 8 | (42 | ) | 1,112 | |||||||||||
Corporate bonds |
5,828 | 24 | | 5,852 | ||||||||||||
Total |
$ | 40,732 | $ | 663 | $ | (124 | ) | $ | 41,271 | |||||||
Amortized Cost | Fair Value | |||||||
Debt securities due within: |
||||||||
One year |
$ | 12,851 | $ | 12,858 | ||||
One to five years |
23,407 | 23,537 | ||||||
Five years or more |
5,336 | 5,362 | ||||||
Total |
$ | 41,594 | $ | 41,757 | ||||
11
Three Months Ended | Nine Months Ended | |||||||
June 30, 2011 | June 30, 2011 | |||||||
Proceeds from sales |
$ | 23,247 | $ | 47,827 | ||||
Gross realized gains |
$ | 171 | $ | 384 | ||||
Gross realized losses |
$ | | $ | (4 | ) |
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Raw materials |
$ | 1,238 | $ | 1,140 | ||||
Finished products |
2,497 | 1,907 | ||||||
Total |
$ | 3,735 | $ | 3,047 | ||||
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Investment in OctoPlus N.V. |
$ | 2,475 | $ | 2,624 | ||||
Investment in Nexeon MedSystems |
285 | 285 | ||||||
Investment in ThermopeutiX |
1,185 | 1,185 | ||||||
Investment in Novocell |
559 | 559 | ||||||
Other |
392 | 590 | ||||||
Other assets |
$ | 4,896 | $ | 5,243 | ||||
12
Useful life | June 30, | September 30, | ||||||||||
(in years) | 2011 | 2010 | ||||||||||
Customer list |
9 11 | $ | 8,657 | $ | 8,657 | |||||||
Core technology |
8 18 | 8,330 | 8,330 | |||||||||
Patents and other |
2 20 | 2,376 | 2,376 | |||||||||
Trademarks |
600 | 600 | ||||||||||
Less accumulated amortization of intangible assets |
(5,866 | ) | (4,706 | ) | ||||||||
Intangible assets, net |
$ | 14,097 | $ | 15,257 | ||||||||
Remainder of 2011 |
$ | 386 | ||
2012 |
1,544 | |||
2013 |
1,544 | |||
2014 |
1,544 | |||
2015 |
1,533 | |||
2016 |
1,395 |
Balance at September 30, 2010 |
$ | 8,010 | ||
Payments related to prior business acquisitions |
5,650 | |||
Goodwill impairment |
(5,650 | ) | ||
Balance at
June 30, 2011 |
$ | 8,010 | ||
13
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Product costs |
$ | 62 | $ | 29 | $ | 164 | $ | 95 | ||||||||
Customer research and development |
93 | 202 | 285 | 505 | ||||||||||||
Other research and development |
239 | 659 | 728 | 1,718 | ||||||||||||
Selling, general and administrative |
670 | 542 | 2,062 | 1,874 | ||||||||||||
Total |
$ | 1,064 | $ | 1,432 | $ | 3,239 | $ | 4,192 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Risk-free interest rates |
N/A | 2.2 | % | 1.5 | % | 2.0 | % | |||||||||
Expected life (years) |
N/A | 4.8 | 4.8 | 4.8 | ||||||||||||
Expected volatility |
N/A | 41.2 | % | 45.0 | % | 41.4 | % | |||||||||
Dividend yield |
N/A | 0 | % | 0 | % | 0 | % |
14
Employee | Facility- | |||||||||||
severance and | related | |||||||||||
benefits | costs | Total | ||||||||||
Balance at September 30, 2010 |
$ | 4 | $ | 1,179 | $ | 1,183 | ||||||
Accruals during the period |
1,174 | 62 | 1,236 | |||||||||
Cash payments |
(1,057 | ) | (942 | ) | (1,999 | ) | ||||||
Balance at June 30, 2011 |
$ | 121 | $ | 299 | $ | 420 | ||||||
15
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 3,842 | $ | (916 | ) | $ | 159 | $ | 574 | |||||||
Other comprehensive income (loss): |
||||||||||||||||
Unrealized holding gains
(losses) on available-for-sale
securities arising during the
period, net of tax |
(80 | ) | (260 | ) | (82 | ) | (869 | ) | ||||||||
Less reclassification adjustment
for realized gains included in
net income, net of tax |
(106 | ) | (179 | ) | (236 | ) | (184 | ) | ||||||||
Other comprehensive income (loss) |
(186 | ) | (439 | ) | (318 | ) | (1,053 | ) | ||||||||
Comprehensive income (loss) |
$ | 3,656 | $ | (1,355 | ) | $ | (159 | ) | $ | (479 | ) | |||||
16
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
||||||||||||||||
Medical Device |
$ | 9,557 | $ | 11,684 | $ | 29,342 | $ | 33,385 | ||||||||
Pharmaceuticals |
4,970 | 3,711 | 11,804 | 12,645 | ||||||||||||
In Vitro Diagnostics |
3,440 | 3,213 | 9,483 | 8,319 | ||||||||||||
Total revenue |
$ | 17,967 | $ | 18,608 | $ | 50,629 | $ | 54,349 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Operating Income (Loss) |
||||||||||||||||
Medical Device |
$ | 4,516 | $ | 5,814 | $ | 14,885 | $ | 15,776 | ||||||||
Pharmaceuticals |
(799 | ) | (2,841 | ) | (12,116 | ) | (8,163 | ) | ||||||||
In Vitro Diagnostics |
1,426 | 1,212 | 3,323 | 2,572 | ||||||||||||
Corporate |
(1,697 | ) | (1,965 | ) | (6,224 | ) | (6,149 | ) | ||||||||
Total |
$ | 3,446 | $ | 2,220 | $ | (132 | ) | $ | 4,036 | |||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Depreciation and Amortization |
||||||||||||||||
Medical Device |
$ | 397 | $ | 536 | $ | 1,230 | $ | 1,633 | ||||||||
Pharmaceuticals |
1,026 | 1,201 | 3,041 | 3,237 | ||||||||||||
In Vitro Diagnostics |
200 | 208 | 598 | 626 | ||||||||||||
Corporate |
179 | 153 | 528 | 454 | ||||||||||||
Total |
$ | 1,802 | $ | 2,098 | $ | 5,397 | $ | 5,950 | ||||||||
17
18
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
19
Three Months Ended June 30, | ||||||||||||||||
Increase | ||||||||||||||||
(Dollars in thousands) | 2011 | 2010 | (Decrease) | Change | ||||||||||||
Revenue: |
||||||||||||||||
Medical Device |
$ | 9,557 | $ | 11,684 | $ | (2,127 | ) | (18 | )% | |||||||
Pharmaceuticals |
4,970 | 3,711 | 1,259 | 34 | % | |||||||||||
In Vitro Diagnostics |
3,440 | 3,213 | 227 | 7 | % | |||||||||||
Total revenue |
$ | 17,967 | $ | 18,608 | $ | (641 | ) | (3 | )% | |||||||
20
21
Three months ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Operating Income (Loss) |
||||||||
Medical Device |
$ | 4,516 | $ | 5,814 | ||||
Pharmaceuticals |
(799 | ) | (2,841 | ) | ||||
In Vitro Diagnostics |
1,426 | 1,212 | ||||||
Corporate |
(1,697 | ) | (1,965 | ) | ||||
Total |
$ | 3,446 | $ | 2,220 | ||||
Nine Months Ended June 30, | ||||||||||||||||
Increase | ||||||||||||||||
(Dollars in thousands) | 2011 | 2010 | (Decrease) | Change | ||||||||||||
Revenue: |
||||||||||||||||
Medical Device |
$ | 29,342 | $ | 33,385 | $ | (4,043 | ) | (12 | )% | |||||||
Pharmaceuticals |
11,804 | 12,645 | (841 | ) | (7 | )% | ||||||||||
In Vitro Diagnostics |
9,483 | 8,319 | 1,164 | 14 | % | |||||||||||
Total revenue |
$ | 50,629 | $ | 54,349 | $ | (3,720 | ) | (7 | )% | |||||||
22
23
Nine Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Operating Income (Loss) |
||||||||
Medical Device |
$ | 14,885 | $ | 15,776 | ||||
Pharmaceuticals |
(12,116 | ) | (8,163 | ) | ||||
In Vitro Diagnostics |
3,323 | 2,572 | ||||||
Corporate |
(6,224 | ) | (6,149 | ) | ||||
Total |
$ | (132 | ) | $ | 4,036 | |||
24
25
26
| our ability to successfully identify, negotiate, sign and close a potential strategic transaction related to our Pharmaceutical business; |
| the inability to realize the anticipated benefits of any potential transaction regarding our Pharmaceuticals business, if consummated, or of our other recent cost savings initiatives; |
| the potential adverse impact to our business as a result of our announcement to pursue strategic alternatives for our Pharmaceuticals business; |
| the Companys reliance on a small number of significant customers, which causes our financial results and stock price to be subject to factors affecting those significant customers and their products, the timing of market introduction of their or competing products, product safety or efficacy concerns and intellectual property litigation could adversely affect our growth strategy and the royalty revenue we derive; |
| general economic conditions which are beyond our control, including the impact of recession, business investment and changes in consumer confidence; |
| the Companys change in its organizational structure may not increase the number of market segments and applications that use its technologies; |
| a decrease in the Companys available cash or the value of its investment holdings could impact short-term liquidity requirements; |
| the difficulties and uncertainties associated with the lengthy and costly new product development and foreign and domestic regulatory approval processes, such as delays, difficulties or failures in achieving acceptable clinical results or obtaining foreign or FDA marketing clearances or approvals, which may result in lost market opportunities or postpone or preclude product commercialization by licensees; |
| the development of new products or technologies by competitors, technological obsolescence and other changes in competitive factors; |
| the Companys ability to successfully internally perform certain product development activities and governmental and regulatory compliance activities which the Company has not previously undertaken in any significant manner; and |
| other factors described below in Risk Factors and other sections of SurModics Annual Report on Form 10-K, which you are encouraged to read carefully. |
27
28
29
Exhibit | Description | |
3.1
|
Restated Articles of Incorporation, as amended incorporated by reference to Exhibit 3.1 of the Companys Quarterly Report on Form 10-QSB for the quarter ended December 31, 1999, SEC File No. 0-23837 | |
3.2
|
Restated Bylaws of SurModics, Inc., as amended November 30, 2009 Incorporated by reference to Exhibit 3.2 of the Companys Quarterly Report on Form 10-Q for the quarter ended December 31, 2009, SEC File No. 0-23837 | |
31.1*
|
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | |
31.2*
|
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | |
32.1*
|
Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 | |
32.2*
|
Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 | |
101*
|
Financial statements from the Quarterly Report on Form 10-Q for Surmodics, Inc. for the quarterly period ended June 30, 2011, filed on August 8, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements. |
* | Filed herewith |
30
August 8, 2011 | SurModics, Inc. |
|||
By: | /s/ Philip D. Ankeny | |||
Philip D. Ankeny | ||||
Senior Vice President and Chief Financial Officer (duly authorized signatory and principal financial officer) |
31
Exhibit | Description | |
3.1
|
Restated Articles of Incorporation, as amended incorporated by reference to Exhibit 3.1 of the Companys Quarterly Report on Form 10-QSB for the quarter ended December 31, 1999, SEC File No. 0-23837 | |
3.2
|
Restated Bylaws of SurModics, Inc., as amended November 30, 2009 incorporated by reference to Exhibit 3.2 of the Companys Quarterly Report on Form 10-Q for the quarter ended December 31, 2009, SEC File No. 0-23837 | |
31.1*
|
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | |
31.2*
|
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | |
32.1*
|
Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 | |
32.2*
|
Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 | |
101. INS*
|
XBRL Instance Document** | |
101.SCH*
|
XBRL Taxonomy Extension Schema Document** | |
101.CAL*
|
XBRL Taxonomy Calculation Linkbase Document** | |
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document** | |
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document** |
* | Filed herewith | |
** | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these Sections. |
32
1. | I have reviewed this quarterly report on Form 10-Q of SurModics, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: August 8, 2011 | Signature: | /s/ Gary R. Maharaj | ||
Gary R. Maharaj | ||||
President and Chief Executive Officer |
||||
33
1. | I have reviewed this quarterly report on Form 10-Q of SurModics, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: August 8, 2011 | Signature: | /s/ Philip D. Ankeny | ||
Philip D. Ankeny | ||||
Senior Vice President and Chief Financial Officer |
34
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: August 8, 2011 | Signature: | /s/ Gary R. Maharaj | ||
Gary R. Maharaj | ||||
President and Chief Executive Officer |
35
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: August 8, 2011 | Signature: | /s/ Philip D. Ankeny | ||
Philip D. Ankeny | ||||
Senior Vice President and Chief Financial Officer |
||||
36
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Share data |
Jun. 30, 2011
|
Sep. 30, 2010
|
---|---|---|
Current Assets | Â | Â |
Accounts receivable, allowance for doubtful accounts | $ 290 | $ 461 |
Stockholders' Equity | Â | Â |
Series A Preferred stock, par value | $ 0.05 | $ 0.05 |
Series A Preferred stock, shares authorized | 450,000 | 450,000 |
Series A Preferred stock, shares issued | 0 | 0 |
Series A Preferred stock, shares outstanding | 0 | 0 |
Commmon stock, par value | $ 0.05 | $ 0.05 |
Common stock, shares authorized | 45,000,000 | 45,000,000 |
Common stock, shares issued | 17,525,477 | 17,423,601 |
Common stock, shares outstanding | 17,525,477 | 17,423,601 |
Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2011
|
Jun. 30, 2010
|
Jun. 30, 2011
|
Jun. 30, 2010
|
|
Revenue | Â | Â | Â | Â |
Royalties and license fees | $ 7,529 | $ 9,356 | $ 22,787 | $ 26,333 |
Product sales | 5,839 | 5,769 | 16,449 | 15,586 |
Research and development | 4,599 | 3,483 | 11,393 | 12,430 |
Total revenue | 17,967 | 18,608 | 50,629 | 54,349 |
Operating costs and expenses | Â | Â | Â | Â |
Product costs | 1,704 | 2,388 | 5,813 | 6,820 |
Customer research and development | 4,379 | 4,642 | 14,141 | 12,748 |
Other research and development | 3,522 | 4,223 | 8,923 | 13,507 |
Selling, general and administrative | 4,916 | 4,944 | 14,998 | 13,667 |
Goodwill impairment charge | Â | Â | 5,650 | Â |
Restructuring charges | Â | Â | 1,236 | 1,306 |
Asset impairment charges | Â | 191 | Â | 2,265 |
Total operating costs and expenses | 14,521 | 16,388 | 50,761 | 50,313 |
Income (loss) from operations | 3,446 | 2,220 | (132) | 4,036 |
Other income (loss) | Â | Â | Â | Â |
Investment income | 147 | 241 | 498 | 819 |
Impairment loss on investments | Â | (2,577) | Â | (2,577) |
Other income, net | 172 | 298 | 401 | 301 |
Other income (loss) | 319 | (2,038) | 899 | (1,457) |
Income before income taxes | 3,765 | 182 | 767 | 2,579 |
Income tax benefit (provision) | 77 | (1,098) | (608) | (2,005) |
Net income (loss) | $ 3,842 | $ (916) | $ 159 | $ 574 |
Basic net income (loss) per common share | $ 0.22 | $ (0.05) | $ 0.01 | $ 0.03 |
Diluted net income (loss) per common share | $ 0.22 | $ (0.05) | $ 0.01 | $ 0.03 |
Weighted average shares outstanding | Â | Â | Â | Â |
Basic | 17,437 | 17,360 | 17,409 | 17,373 |
Dilutive effect of outstanding stock options and non-vested stock | 92 | Â | 47 | 12 |
Diluted | 17,529 | 17,360 | 17,456 | 17,385 |
Document and Entity Information (USD $)
In Millions, except Share data |
9 Months Ended | ||
---|---|---|---|
Jun. 30, 2011
|
Aug. 01, 2011
|
Mar. 31, 2010
|
|
Document and Entity Information [Abstract] | Â | Â | Â |
Entity Registrant Name | SURMODICS INC | Â | Â |
Entity Central Index Key | 0000924717 | Â | Â |
Document Type | 10-Q | Â | Â |
Document Period End Date | Jun. 30, 2011 | ||
Amendment Flag | false | Â | Â |
Document Fiscal Year Focus | 2011 | Â | Â |
Document Fiscal Period Focus | Q3 | Â | Â |
Current Fiscal Year End Date | --09-30 | Â | Â |
Entity Well-known Seasoned Issuer | No | Â | Â |
Entity Voluntary Filers | No | Â | Â |
Entity Current Reporting Status | Yes | Â | Â |
Entity Filer Category | Accelerated Filer | Â | Â |
Entity Public Float | Â | Â | $ 207 |
Entity Common Stock, Shares Outstanding | Â | 17,524,607 | Â |
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Intangible Assets
|
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Intangible Assets [Abstract] | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible Assets |
(7) Intangible Assets
Intangible assets consist principally of acquired patents and technology, customer
relationships, licenses, and trademarks. The Company recorded amortization expense of $0.4 million
for each of the three-month periods ended June 30, 2011 and 2010. The Company recorded amortization
expenses of $1.2 million for each of the nine-month periods ended June 30, 2011 and 2010.
Intangible assets consisted of the following (in thousands):
Based on the intangible assets in service as of June 30, 2011, estimated amortization expense
for each of the next five fiscal years is as follows (in thousands):
Future amortization amounts presented above are estimates. Actual future amortization expense
may be different, as a result of future acquisitions, impairments, changes in amortization periods,
or other factors.
|
Comprehensive Income (Loss)
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Comprehensive Income (Loss) [Abstract] | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive Income (Loss) |
(12) Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows (in thousands):
|
Fair Value Measurements
|
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Fair Value Measurements [Abstract] | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements |
(3) Fair Value Measurements
The accounting guidance on fair value measurements defines fair value, establishes a framework
for measuring fair value under GAAP, and expands disclosures about fair value measurements. The
guidance is applicable for all financial assets and financial liabilities and for all nonfinancial
assets and nonfinancial liabilities recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). Fair value is defined as the exchange price
that would be received from selling an asset or paid to transfer a liability (an exit price) in an
orderly transaction between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required or permitted to be recorded at fair value,
the Company considers the principal or most advantageous market in which it would transact and also
considers assumptions that market participants would use when pricing the asset or liability, such
as inherent risk, transfer restrictions and risk of nonperformance.
Fair Value Hierarchy
Accounting guidance on fair value measurements requires that assets and liabilities carried at
fair value be classified and disclosed in one of the following three categories:
Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.
The Company’s Level 1 asset consists of its investment in OctoPlus, N.V. (see Note 6 for
further information). The fair market value of this investment is based on the quoted price of
OctoPlus shares traded on the Euronext Amsterdam Stock Exchange.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for
similar assets or liabilities in active markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the asset or liability.
The Company’s Level 2 assets consist of money market funds, U.S. Treasury securities,
corporate bonds, municipal bonds, U.S. agency securities, agency and municipal securities, certain
asset-backed securities and mortgage-backed securities. Fair market values for these assets are
based on quoted vendor prices and broker pricing where all significant inputs are observable.
Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no
market activity and that are significant to the measurement of the fair value of the assets or
liabilities. Level 3 assets and liabilities include those whose fair value measurements are
determined using pricing models, discounted cash flow methodologies or similar valuation
techniques, as well as significant management judgment or estimation.
In valuing assets and liabilities, the Company is required to maximize the use of quoted
market prices and minimize the use of unobservable inputs. The Company did not significantly change
its valuation techniques from prior periods.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
In instances where the inputs used to measure fair value fall into different levels of the
fair value hierarchy, the fair value measurement has been determined based on the lowest level
input that is significant to the fair value measurement in its entirety. The Company’s assessment
of the significance of a particular item to the fair value measurement in its entirety requires
judgment, including the consideration of inputs specific to the asset or liability. The following
table presents information about the Company’s financial assets and liabilities measured at fair
value on a recurring basis as of June 30, 2011 (in thousands):
Short-term investments disclosed in the condensed consolidated balance sheets include
held-to-maturity investments totaling $3.1 million as of June 30, 2011. Held-to-maturity
investments are carried at an amortized cost.
The following table presents information about the Company’s financial assets and liabilities
measured at fair value on a recurring basis as of September 30, 2010 (in thousands):
Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis
The Company had no financial assets in the three months ended June 30, 2011, that were
measured using significant unobservable inputs (Level 3 inputs), thus no table is presented. The
following tables reconcile financial assets and liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) (in thousands):
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company’s investments in non-marketable securities of private companies are accounted for
using the cost method as the Company does not exert significant influence over the investee’s
operating or financial activities. These investments, as well as held-to-maturity securities, are
measured at fair value on a non-recurring basis when they are deemed to be other-than-temporarily
impaired. In determining whether a decline in value of non-marketable equity investments in private
companies has occurred and is other-than-temporary, an assessment is made by considering available
evidence, including the general market conditions in the investee’s industry, the investee’s
product development status and subsequent rounds of financing and the related valuation and/or the
Company’s participation in such financings. The Company also assesses the investee’s ability to
meet business milestones and the
financial condition and near-term prospects of the individual investee, including the rate at
which the investee is using its cash and the investee’s need for possible additional funding at a
potentially lower valuation. The valuation methodology for determining the decline in value of
non-marketable equity securities is based on inputs that require management judgment and are Level
3 inputs.
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Revolving Credit Facility
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9 Months Ended |
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Jun. 30, 2011
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Revolving Credit Facility [Abstract] | Â |
Revolving Credit Facility |
(9) Revolving Credit Facility
In February 2011, the Company extended its unsecured revolving credit
facility through March 2012 and reduced the credit facility to $15.0 million. Borrowings
under the credit facility, if any, will bear interest at a benchmark rate plus an applicable margin
based upon the Company’s funded debt to EBITDA ratio. As of June 30, 2011, the Company had no debt
outstanding under the credit facility and was in compliance with all covenants.
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Operating Segments
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9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
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Operating Segments [Abstract] | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating Segments |
(14) Operating Segments
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing performance.
The Company manages its operations according to its three business units, as follows: (1) the
Medical Device unit, which is comprised of surface modification coating technologies to improve
access, deliverability, and predictable deployment of medical devices, as well as drug delivery
coating technologies to provide site-specific drug delivery from the surface of a medical device.
End markets include coronary, peripheral, and neuro-vascular, and urology, among others; (2) the
Pharmaceuticals unit, which incorporates a broad range of drug delivery technologies for injectable
therapeutics, including microparticles, nanoparticles, and implants addressing a range of clinical
applications including ophthalmology, oncology, dermatology and neurology, among others. Based in
Birmingham, Alabama, the Pharmaceuticals business includes the Company’s Current Good Manufacturing
Practice (cGMP) manufacturing facility; and (3) the In Vitro Diagnostics unit, which consists of
component products and technologies for diagnostic test kits and biomedical research applications.
Products include microarray slide technologies, protein stabilization reagents, substrates, and
antigens.
The table below presents revenue and operating income (loss) from the business units, for the
three- and nine-month periods in fiscal 2011 and 2010, as follows (in thousands):
Segment results above for the three-month period ended June 30, 2010 include an asset
impairment charge of $375 in Corporate and adjustment of $184 to a prior fiscal 2010 asset
impairment charge in the Pharmaceuticals segment.
Segment results above for the nine-month period ended June 30, 2011 include goodwill
impairment charges of $5,650 in the Pharmaceuticals segment and restructuring charges of $1,236 in
Corporate.
Segment results for the nine-month period ended June 30, 2010 include an asset impairment
charge of $1,890 in the Pharmaceuticals segment and an asset impairment charge of $375 and
restructuring charges of $1,306 in Corporate.
Corporate includes expenses for administrative corporate functions, such as executive,
corporate accounting, legal, human resources and Board related, that have not been fully allocated
to segments. Corporate also includes special charges, such as restructuring costs, which are not
specific to a segment.
Asset information by segment is not presented in the table above because the Company does not
provide our chief operating decision maker assets by segment, as the data is not readily available.
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Stock-based Compensation
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9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
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Stock-based Compensation [Abstract] | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based Compensation |
(10) Stock-based Compensation
The Company has stock-based compensation plans under which it grants stock options and
restricted stock awards. Accounting guidance requires all share-based payments to be recognized as
an operating expense, based on their fair values, over the requisite service period. The Company’s
stock-based compensation expenses were allocated as follows (in thousands):
As of June 30, 2011, approximately $5.3 million of total unrecognized compensation costs
related to non-vested awards is expected to be recognized over a weighted average period of
approximately 3 years. The unrecognized compensation costs above exclude $1.9 million associated
with performance share awards that are currently not anticipated to be fully expensed because the
performance conditions for certain award periods are not expected to be met.
Stock Option Plans
The Company uses the Black-Scholes option pricing model to determine the weighted average
grant date fair value of stock options granted. There were no stock options granted in the
three-month period ended June 30, 2011. The weighted average per share fair value of stock options
granted during the three-month period ended June 30, 2010 was $7.05. The weighted average per share
fair value of stock options granted during the nine-month periods ended June 30, 2011 and 2010 was
$3.96 and $6.91, respectively. The assumptions used as inputs in the model were as follows:
The risk-free interest rate assumption was based on the U.S. Treasury’s rates for U.S.
Treasury zero-coupon bonds with maturities similar to those of the expected term of the award. The
expected life of options granted is determined based on the Company’s experience. Expected
volatility is based on the Company’s stock price movement over a period approximating the expected
term. Based on management’s judgment, dividend rates are expected to be zero for the expected life
of the options. The Company also estimates forfeitures of options granted, which are based on
historical experience.
The Company’s Incentive Stock Options (ISO) are granted at a price of at least 100% of the
fair market value of the common stock of the Company on the date of the grant or 110% with respect
to optionees who own more than 10% of the total combined voting power of all classes of stock. ISOs
expire in seven years or upon termination of employment and are exercisable at a rate of 20% per
year commencing one year after the date of grant. Nonqualified stock options are granted at fair
market value on the date of grant. Nonqualified stock options expire in 7 to 10 years or upon
termination of employment or service as a Board member. Nonqualified stock options granted prior to
May 2008 generally become exercisable with respect to 20% of the shares on each of the first five
anniversaries following the grant date, and nonqualified stock options granted subsequent to May
2008 generally become exercisable with respect to 25% of the shares on each of the first four anniversaries
following the grant date.
No stock options were exercised during the three-month periods ended June 30, 2011 and 2010
and during the nine-month period ended June 30, 2011. The total pre-tax intrinsic value of options
exercised during the nine-month period ended June 30, 2010 was not meaningful, as our stock price
of $16.41 on June 30, 2010 was below the value of options exercised. The intrinsic value
represents the difference between the exercise price and the fair market value of the Company’s
common stock on the last day of the respective fiscal period.
Restricted Stock Awards
The Company has entered into restricted stock agreements with certain key employees, covering
the issuance of common stock
(Restricted Stock). Under accounting guidance these shares are considered to be non-vested
shares. The Restricted Stock will be released to the key employees if they are employed by the
Company at the end of the vesting period. The stock-based compensation table above includes
Restricted Stock expenses of $0.2 million and $0.6 million during the three-month and nine-month
periods ended June 30, 2011, respectively, and $0.2 million and $0.8 million for the three-month
and nine-month periods ended June 30, 2010, respectively.
Performance Share Awards
The Company has entered into performance share agreements with certain key employees, covering
the issuance of common stock (Performance Shares). The Performance Shares vest upon the achievement
of all or a portion of certain performance objectives, which must be achieved during the
performance period. Compensation is recognized in each period based on management’s best estimate
of the achievement level of the grants’ specified performance objectives and the resulting vesting
amounts. The Company recognized expenses of $0.1 million and $0.2 million related to Performance
Shares for the three-month and nine-month periods ended June 30, 2011, respectively. The Company
did not recognize an expense for the three-month period ended June 30, 2010 and recognized expense
of less than $0.1 million for the nine-month period ended June 30, 2010.
1999 Employee Stock Purchase Plan
Under the 1999 Employee Stock Purchase Plan (“Stock Purchase Plan”), the Company is authorized
to issue up to 400,000 shares of common stock. All full-time and part-time employees can choose to
have up to 10% of their annual compensation withheld, with a limit of $25,000, to purchase the
Company’s common stock at purchase prices defined within the provisions of the Stock Purchase Plan.
As of June 30, 2011 and 2010, there were less than $0.1 million and $0.2 million of employee
contributions, respectively, included in accrued liabilities in the accompanying condensed
consolidated balance sheets. Stock compensation expense recognized related to the Stock Purchase
Plan for the three-month periods ended June 30, 2011 and 2010
totaled less than $0.1 million in each period. Stock compensation expense for the nine-month periods ended June 30,
2011 and 2010 totaled $0.1 million and $0.2 million, respectively. The stock-based compensation
table above includes the Stock Purchase Plan expenses.
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Goodwill
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9 Months Ended | |||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
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Goodwill [Abstract] | Â | |||||||||||||||||||||||||||||||||||
Goodwill |
(8) Goodwill
Goodwill represents the excess of the cost of the acquired entities over the fair value
assigned to the assets purchased and liabilities assumed in connection with the Company’s
acquisitions. The carrying amount of goodwill is evaluated annually, and between annual evaluations
if events occur or circumstances change indicating that the carrying amount of goodwill may be
impaired.
The following table summarizes the changes in carrying amount of goodwill (in thousands):
During the Company’s fiscal 2010 annual test of goodwill impairment, the Company determined
that goodwill related to the SurModics Pharmaceuticals, Inc. (SurModics Pharma) reporting unit was
fully impaired, and a non-cash goodwill impairment charge totaling $13.8 million was recognized in
the fourth quarter of fiscal 2010
In the first quarter of fiscal 2011, two milestones were achieved associated with the July
2007 acquisition of SurModics Pharma and $5.7 million of additional purchase price was recorded as
an increase to goodwill. There had been no substantial changes in operating results for SurModics
Pharma in the first quarter of fiscal 2011, and as such the Company concluded the goodwill
associated with the milestone events was fully impaired, and a $5.7 million non-cash goodwill
impairment charge was recognized in the three months ended December 31, 2010.
The remaining $8.0 million of goodwill at June 30, 2011 is related to the In Vitro
Diagnostics reporting unit. The goodwill was not impaired based on the outcome of the fiscal 2010
annual impairment test, and there have been no events or circumstances that have occurred in fiscal
2011 to indicate that the goodwill may be impaired.
|
Basis of Presentation
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9 Months Ended |
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Jun. 30, 2011
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|
Basis of Presentation [Abstract] | Â |
Basis of Presentation |
(1) Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of
America (“GAAP”) and reflect all adjustments, consisting solely of normal recurring adjustments,
needed to fairly present the financial results for the periods presented. These financial
statements include some amounts that are based on management’s best estimates and judgments. These
estimates may be adjusted as more information becomes available, and any adjustment could be
significant. The impact of any change in estimates is included in the determination of earnings in
the period in which the change in estimate is identified. The results of operations for the
three-month and nine-month periods ended June 30, 2011 are not necessarily indicative of the
results that may be expected for the entire 2011 fiscal year.
In accordance with the rules and regulations of the United States Securities and Exchange
Commission, the Company has omitted footnote disclosures that would substantially duplicate the
disclosures contained in the audited financial statements of the Company. These unaudited condensed
consolidated financial statements should be read together with the audited consolidated financial
statements for the year ended September 30, 2010, and footnotes thereto included in the Company’s
Form 10-K as filed with the United States Securities and Exchange Commission on December 14, 2010.
Subsequent events have been evaluated through the date the financial statements were issued.
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Investments
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Investments [Abstract] | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments |
(4) Investments
Investments consist principally of U.S. government and government agency obligations and
mortgage-backed securities and are classified as available-for-sale or held-to-maturity at June 30,
2011 and September 30, 2010. Available-for-sale investments are reported at fair value with
unrealized gains and losses net of tax excluded from operations and reported as a separate
component of stockholders’ equity, except for other-than-temporary impairments, which are reported
as a charge to current operations. A loss would be recognized when there is an other-than-temporary
impairment in the fair value of any individual security classified as available-for-sale with the
associated net unrealized loss reclassified out of accumulated other comprehensive income with a
corresponding adjustment to other income (loss). This adjustment results in a new cost basis for
the investment. Investments that management has the intent and ability to hold to maturity are
classified as held-to-maturity and reported at amortized cost. If there is an other-than-temporary
impairment in the fair value of any individual security classified as held-to-maturity, the Company
will write down the security to fair value with a corresponding adjustment to other income (loss).
Interest on debt securities, including amortization of premiums and accretion of discounts, is
included in other income (loss). Realized gains and losses from the sales of debt securities, which
are included in other income (loss), are determined using the specific identification method.
The original cost, unrealized holding gains and losses, and fair value of available-for-sale
investments as of June 30, 2011 and September 30, 2010 were as follows (in thousands):
The original cost and fair value of investments by contractual maturity at June 30, 2011 were
as follows (in thousands):
The following table summarizes sales of available-for-sale securities for the three-month and
nine-month periods ended June 30, 2011(in thousands):
At June 30, 2011, the amortized cost and fair market value of held-to-maturity debt securities
was $3.1 million. Investments in securities designated as held-to-maturity consist of tax-exempt
municipal bonds with maturity dates of less than one year as of June 30, 2011. At September 30,
2010, the amortized cost and fair market value of held-to-maturity debt securities were $4.1
million and $4.3 million, respectively.
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Inventories
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Inventories [Abstract] | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventories |
(5) Inventories
Inventories are principally stated at the lower of cost or market using the specific
identification method and include direct labor, materials and overhead. Inventories consisted of
the following components (in thousands):
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Income Taxes
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Jun. 30, 2011
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Income Taxes [Abstract] | Â |
Income Taxes |
(13) Income Taxes
The Company recorded an income tax benefit of $0.1 million for the three-month period ended
June 30, 2011 and an income tax expense of $1.1 million for the three-month period ended June 30,
2010, representing tax rates of negative 2.0% and positive 603.3%, respectively. The Company
recorded income tax provisions of $0.6 million and $2.0 million for the nine-month periods ended
June 30, 2011 and 2010, respectively, representing tax rates of 79.3% and 77.7%, respectively. The
difference between the U.S. federal statutory tax rate of 35% and the Company’s tax rate for fiscal
2011 three- and nine-month periods ended June 30, 2011, reflected the non-deductible goodwill
impairment. For the fiscal 2010 three- and nine-month periods ended June 30, 2010, the difference
between the U.S. federal statutory tax rate of 35% and the Company’s tax rate, reflected the
non-deductible impairment loss on investments, state income taxes and other permanent items.
The total amount of unrecognized tax benefits including interest and penalties that, if
recognized, would affect the effective tax rate as of June 30, 2011 and September 30, 2010,
respectively, are $1.7 million and $1.9 million. Currently, the Company does not expect the
liability for unrecognized tax benefits to change significantly in the next twelve months. Interest
and penalties related to the unrecognized tax benefits are recorded in income tax expense.
The Company files income tax returns, including returns for its subsidiaries, in the United
States (U.S.) federal jurisdiction and in various state jurisdictions. Uncertain tax positions are
related to tax years that remain subject to examination. The Internal Revenue Service completed an
examination of the Company’s U.S. income tax return for fiscal 2009 and a payment was made in the
third quarter of fiscal 2011 associated with timing adjustments. U.S. income tax returns for fiscal years
ended September 30, 2007, 2008 and 2010 remain subject to examination by federal tax authorities.
Tax returns for state and local jurisdictions for fiscal years ended September 30, 2003 through
2010 remain subject to examination by state and local tax authorities.
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Other Assets
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Other Assets |
(6) Other Assets
Other assets consist principally of strategic investments as follows (in thousands):
The Company accounts for most of its strategic investments under the cost method. The Company
accounts for its investment in OctoPlus N.V. (OctoPlus) common stock, whose shares are traded on
the Euronext Amsterdam Stock Exchange, as an available-for-sale investment. Available-for-sale
investments are reported at fair value with unrealized gains and losses reported as a separate
component of stockholders’ equity, except for other-than-temporary impairments, which are reported
as a charge to current operations, recorded in the other income (loss) section of the condensed
consolidated statements of operations. The cost basis in the Company’s investment in OctoPlus is
$1.7 million.
The Company recognized revenue of less than $0.1 million and $1.3 million for the three-month
periods ended June 30, 2011 and 2010, respectively, and recognized revenue of $0.1 million and $1.5
million for the nine-month periods ended June 30, 2011 and 2010, respectively, from activity with
companies in which it had a strategic investment.
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Key Accounting Policies
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Key Accounting Policies [Abstract] | Â | ||||||||||||||||||||||||||||||||||||||
Key Accounting Policies |
(2) Key Accounting Policies
Revenue recognition
Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of
an arrangement exists; (2) shipment has occurred or delivery has occurred if the terms specify
destination; (3) the sales price is fixed or determinable; and (4) collectability is reasonably
assured. When there are additional performance requirements, revenue is recognized when all such
requirements have been satisfied. Under revenue arrangements with multiple deliverables, the
Company recognizes each separable deliverable as it is earned.
The Company’s revenue is derived from three primary sources: (1) royalties and license fees
from licensing its proprietary drug delivery and surface modification technologies to customers;
(2) the sale of polymers and reagent chemicals, stabilization products, antigens, substrates and
microarray slides to the diagnostics and biomedical research industries; and (3) research and
development fees generated on customer projects.
Royalties and licenses fees. The Company licenses technology to third parties and collects
royalties. Royalty revenue is generated when a customer sells products incorporating the Company’s
licensed technologies. Royalty revenue is recognized as licensees’ report it to the Company, and
payment is typically submitted concurrently with the report. For stand-alone license agreements,
up-front license fees are recognized over the term of the related licensing agreement. Minimum
royalty fees are recognized in the period earned.
Revenue related to a performance milestone is recognized upon the achievement of the
milestone, as defined in the respective agreements and provided the following conditions have been
met:
If these conditions have not been met, the milestone payment is deferred and recognized over
the term of the agreement.
Product sales. Product sales to third parties are recognized at the time of shipment, provided
that an order has been received, the price is fixed or determinable, collectability of the
resulting receivable is reasonably assured and returns can be reasonably estimated. The Company’s
sales terms provide no right of return outside of the standard warranty policy. Payment terms are
generally set at 30- 45 days.
Research and development. The Company performs third party research and development
activities, which are typically provided on a time and materials basis. Generally, revenue for
research and development is recorded as performance progresses under the applicable contract.
Arrangements with multiple deliverables. In October 2009, the Financial Accounting Standards
Board (FASB) amended the accounting standards for multiple deliverable revenue arrangements to:
The Company enters into license and development arrangements that may consist of multiple
deliverables that could include license to SurModics technology, research and development
activities, manufacturing services, and product sales based on the needs of its customers. For
example, a customer may enter into an arrangement to obtain a license to SurModics intellectual
property which would also include research and development activities, and supply of products
manufactured by SurModics. For these services provided, SurModics could receive upfront license
fees upon signing of a contract and granting the license, fees for research and development
activities as such activities are performed, milestone payments contingent upon advancement of the
product through development and clinical stages to successful commercialization, fees for
manufacturing services and supply of product, and royalty payments based on customer sales of
product incorporating SurModics’ technology.
Under the accounting guidance, the Company is still required to evaluate each deliverable in a
multiple element arrangement for separability. The Company is then required to allocate revenue to
each separate deliverable using a hierarchy of VSOE, TPE, or ESP. In many instances, the Company is
not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may
be a result of the Company infrequently selling each element separately or having a limited history
with multiple element arrangements. When VSOE cannot be established, the Company attempts to
establish selling price of each element based on TPE. TPE is determined based on competitor prices
for similar deliverables when sold separately.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses ESP
in its allocation of arrangement consideration. The objective of ESP is to determine the price at
which the Company would transact a sale if the product or service were sold on a stand-alone basis.
ESP is generally used for highly customized offerings.
The Company determines ESP for undelivered elements by considering multiple factors including,
but not limited to, market conditions, competitive landscape and past pricing arrangements with
similar features. The determination of ESP is made through consultation with the Company’s
management, taking into consideration the marketing strategies for each business unit.
Valuation of long-lived assets
Accounting guidance requires the Company to periodically evaluate whether events and circumstances
have occurred that may affect the estimated useful life or the recoverability of the remaining balance of
long-lived assets, such as property and equipment and intangibles with finite lives. If such events or circumstances were to
indicate that the carrying amount of these assets may not be recoverable, the Company would estimate
the future cash flows expected to result from the use of the assets and their eventual disposition. If the sum
of the expected future cash flows (undiscounted and without interest charges)
were less than the carrying amount of the assets, the Company would recognize an impairment charge
to reduce such assets to their fair value.
New accounting pronouncements
In May 2011, the FASB issued changes to conform existing guidance regarding fair value
measurement and disclosure between GAAP and International Financial Reporting Standards. These
changes both clarify the FASB’s intent about the application of existing fair value measurement and
disclosure requirements and amend certain principles or requirements for measuring fair value or
for disclosing information about fair value measurements. The clarifying changes relate to the
application of the highest and best use and valuation premise concepts, measuring the fair value of
an instrument classified in a reporting entity’s shareholders’ equity, and disclosure of
quantitative information about unobservable inputs used for Level 3 fair value measurements. The
amendments relate to measuring the fair value of financial instruments that are managed within a
portfolio; application of premiums and discounts in a fair value measurement; and additional
disclosures concerning the valuation processes used and sensitivity of the fair value measurement
to changes in unobservable inputs for those items categorized as Level 3, a reporting entity’s use
of a nonfinancial asset in a way that differs from the asset’s highest and best use, and the
categorization by level in the fair value hierarchy for items required to be measured at fair value
for disclosure purposes only. These changes become effective for SurModics on January 1, 2012.
Management is currently evaluating the potential impact of these changes on the condensed
consolidated financial statements.
In June 2011, the FASB issued changes to the presentation of comprehensive income. These
changes give an entity the option to present the total of comprehensive income, the components of
net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements; the option to
present
components of other comprehensive income as part of the statement of changes in stockholders’
equity was eliminated. The items that must be reported in other comprehensive income or when an
item of other comprehensive income must be reclassified to net income
were not changed.
Additionally, no changes were made to the calculation and presentation of earnings per share. These
changes become effective for SurModics on October 1, 2012. Management is currently evaluating these
changes to determine which option will be chosen for the presentation of comprehensive income.
Other than the change in presentation, management has determined these changes will not have an
impact on the condensed consolidated financial statements.
No other new accounting pronouncement issued or effective has had, or is expected to have, a
material impact on the Company’s consolidated financial statements.
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Restructuring Charges
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Restructuring Charges [Abstract] | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring Charges |
(11) Restructuring Charges
The Company recorded total restructuring charges of approximately $1.2 million in connection
with the reorganization announced in October 2010. The charges for fiscal 2011 have been presented
separately as restructuring charges in the condensed consolidated statements of operations. These
pre-tax charges consisted of $1.2 million of severance pay and benefit expenses and $0.1 million of
facility-related costs. The restructuring was expected to result in approximately $3.0 to $3.5
million in annualized cost savings. Cash payments associated with the fiscal 2011 restructuring
charges totaled $1.1 million as of June 30, 2011, leaving a balance of $0.1 million. There were also
payments of $0.9 million associated with facility-related costs in the period related to the fiscal
2009 and 2010 restructuring events. The remaining balance for all restructuring charges is expected
to be paid within the next 30 months. The current portion totaling $0.3 million is recorded as a
current liability within other accrued liabilities and the long-term portion totaling $0.1 million
is recorded as a long-term liability within other long-term liabilities within the condensed
consolidated balance sheets.
The following table summarizes the restructuring accrual activity for the nine-month period
ended June 30, 2011 (in thousands):
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Commitments and Contingencies
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9 Months Ended |
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Commitments and Contingencies [Abstract] | Â |
Commitments and Contingencies |
(15) Commitments and Contingencies
Litigation. From time to time, the Company has been, and may become, involved in various legal
actions involving its operations, products and technologies, including intellectual property and
employment disputes. The outcomes of these legal actions are not within the Company’s complete
control and may not be known for prolonged periods of time. In some actions, the claimants seek
damages, as well as other relief, including injunctions barring the sale of products that are the
subject of the lawsuit, which, if granted, could require significant expenditures or result in lost
revenues. The Company records a liability in the consolidated financial statements for these
actions when a loss is known or considered probable and the amount can be reasonably estimated. If
the reasonable estimate of a known or probable loss is a range, and no amount within the range is a
better estimate, the minimum amount
of the range is accrued. If a loss is possible but not known or probable, and can be
reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant
judgment is required to estimate the amount and timing of a loss to be recorded.
InnoRx, Inc. In January 2005, the Company entered into a merger agreement whereby SurModics
acquired all of the assets of InnoRx, Inc. (InnoRx), an early stage company developing drug
delivery devices and therapies for the ophthalmology market. SurModics will be required to issue up
to approximately 480,059 additional shares of its common stock to the stockholders of InnoRx upon
the successful completion of the remaining development and commercial milestones involving InnoRx
technology acquired in the transaction.
SurModics Pharmaceuticals, Inc. In July 2007, the Company acquired 100% of the capital stock
of SurModics Pharmaceuticals, Inc. (SurModics Pharma) a drug delivery company that provides
proprietary polymer-based technologies to companies developing pharmaceutical products. The sellers
of SurModics Pharma are still eligible to receive up to $2.9 million in additional consideration
based on successful achievement of specified project milestones through calendar 2011.
PR Pharmaceuticals, Inc. In November 2008, the Company’s subsidiary SurModics Pharma
acquired certain contracts and assets of PR Pharmaceuticals, to enhance its portfolio of drug
delivery technologies for the pharmaceutical and biotechnology industries. The sellers of PR
Pharmaceuticals are still eligible to receive up to $3.0 million in additional consideration based
on successful achievement of specified milestones for successful patent issuances and product
development.
Alabama Jobs Commitment. In April 2008, the Company purchased a 286,000 square foot
office and warehouse facility to support cGMP needs of customers and the anticipated growth of the
SurModics Pharma business. At the same time, SurModics Pharma entered into an agreement with
various governmental authorities to obtain financial incentives associated with creation of jobs in
Alabama. Some of the governmental agencies have recapture rights in connection with the financial
incentives if a specific number of full-time employees are not hired by June 2012, with an
extension to June 2013 if circumstances or events occur that are beyond the control of SurModics
Pharma or could not have been reasonably anticipated by SurModics
Pharma (“Permitted Extension”). As of June 30, 2011,
SurModics Pharma has received $1.7 million in connection with the agreement, and the Company has
recorded the payment in other long-term liabilities as the Company
believes the Permitted Extension is applicable.
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