Fair Value Measurements

12 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

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 (see Note 2 for further information). The fair market value of this investment is based on the quoted price of OctoPlus shares as traded on the 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. government agency securities, government agency and municipal securities and certain asset-backed 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.

The Company’s Level 3 assets include certain asset-backed and mortgage-backed securities. The fair market values of these investments were determined by broker pricing where not all significant inputs were observable.

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 assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 (in thousands):

	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value as of September 30, 2011
Assets:
Cash equivalents	$	—	$	8,419	$	—	$	8,419
Available-for-sale debt securities:
U.S. government and government agency obligations		—		30,604		—		30,604
Mortgage-backed securities		—		3,933		15		3,948
Municipal bonds		—		3,614		—		3,614
Asset-backed securities		—		1,278		9		1,287
Corporate bonds		—		2,497		—		2,497
Other assets		1,190		—		—		1,190
Total assets measured at fair value	$	1,190	$	50,345	$	24	$	51,559

The consolidated balance sheets include held-to-maturity investments totaling $3.0 million as of September 30, 2011. Held-to-maturity investments are carried at amortized cost.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 (in thousands):

	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value as of September 30, 2010
Assets:
Cash equivalents	$	—	$	10,128	$	—	$	10,128
Available-for-sale debt securities:
U.S. government and government agency 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

Changes in Level 3 Instruments Measured at Fair Value on a Recurring Basis

The following tables provide a reconciliation of fiscal 2011 and 2010 financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands). Transfers of instruments into and out of Level 3 are based on beginning of year values.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Year Ended September 30, 2011 Available-for-Sale Debt Securities
	U.S.  Government Obligations			Mortgage- Backed  Securities			Asset- Backed  Securities			Total
Balance at September 30, 2010	$	704		$	69		$	—		$	773
Transfers into Level 3		—			17			14			31
Transfers out of Level 3		(695	)		(68	)		—			(763	)
Total realized and unrealized gains (losses):
Included in other comprehensive (loss) income		19			(3	)		(3	)		13
Purchases, issuances, sales and settlements, net		(28	)		—			(2	)		(30	)
Balance at September 30, 2011	$	—		$	15		$	9		$	24

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) For the Year Ended September 30, 2010 Available-for-Sale Debt Securities
	U.S.  Government Obligations			Mortgage- Backed  Securities			Total
Balance at September 30, 2009	$	1,130		$	73		$	1,203
Transfers into Level 3		—			148			148
Transfers out of Level 3		(36	)		(145	)		(181	)
Total realized and unrealized gains (losses):
Included in other comprehensive (loss) income		(33	)		3			(30	)
Purchases, issuances, sales and settlements, net		(357	)		(10	)		(367	)
Balance at September 30, 2010	$	704		$	69		$	773

As of September 30, 2011, marketable securities measured at fair value using Level 3 inputs comprised less than $50,000 and included one asset-backed security and one mortgage-backed security within the Company’s available-for-sale investment portfolio. These securities were measured using observable market data and Level 3 inputs as a result of the lack of market activity and liquidity. The fair value of these securities was based on the Company’s assessment of the underlying collateral and the creditworthiness of the issuer of the securities.

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 investees’ 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.

In the fourth quarter of fiscal 2011, the Company recognized asset impairment charges totaling $17.9 million. The Company wrote down long-lived assets (fixed assets of $14.8 million and intangibles of $3.1 million), associated with its Pharmaceuticals segment, based on the current valuation of the assets relative to their carrying value. The Company had been exploring strategic alternatives for the Pharmaceuticals segment, including a potential sale. The assets of the Pharmaceuticals segment did not qualify as held-for-sale as of September 30, 2011, because the Company had not committed to a plan to sell at that time. However, the Company’s assessment of options available as of September 30, 2011 resulted in a probability-weighted value of expected future cash flows below the carrying value, which required the Company to determine the fair value of the long-lived assets of the Pharmaceuticals segment using the probability-weighted value of the expected future cash flows. Subsequently, on November 1, 2011, the Company announced that it entered into a definitive agreement to sell substantially all of its Pharmaceuticals assets for $30.0 million and the sale closed on November 17, 2011. See Note 1 for further information regarding the sale of SurModics Pharmaceuticals.

The Company wrote down three investments totaling $7.9 million in the year ended September 30, 2010, as the investments were deemed to be other-than-temporarily impaired. A pending round of financing at a substantially lower valuation at one of the private companies resulted in impairment loss of $2.4 million. Another company sold off assets in light of current market conditions and this action resulted in impairment loss of $0.2 million. In addition, an impairment loss of $5.3 million was recognized related to a third company, which continues to face operational and financing difficulties and potential rounds of financing at lower valuations. Management utilized Level 3 inputs which included information about pending financings as well as market input to determine the fair value of these investments.

The Company also recognized long-lived asset impairment charges totaling $4.9 million in fiscal 2010. Fair value measurements used in the impairment reviews of property and equipment and intangible assets are Level 3 measurements that require management judgment. The Company recorded a $1.9 million asset impairment charge associated with writing down one of its facilities in Alabama to fair value based on a decision to sell the facility, which decision was reversed later in fiscal 2010. The $2.1 million carrying value of this facility was based on a real estate market appraisal obtained during the Company’s negotiations.

The Company also recorded a $1.3 million asset impairment charge in fiscal 2010 associated with certain long-lived assets where no ongoing business is expected in the foreseeable future based on current market conditions. Furthermore, a $1.3 million asset impairment charge associated with certain fixed asset costs located in Minnesota and a $0.4 million asset impairment charge associated with prototypes and other equipment related to a development project for which no ongoing business was expected in the foreseeable future in light of market conditions were also recognized. The assets associated with these charges had limited remaining value and as such were written down to zero value.

See Note 2 for additional information related to these impairments