Income Taxes

12 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

8. Income Taxes

The Company accounts for income taxes under the asset and liability method prescribed in accounting guidance. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the period in which related temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in this assessment. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.

Income taxes in the accompanying consolidated statements of operations for the fiscal years ended September 30 are as follows (in thousands):

	2011			2010			2009
Current provision (benefit):
Federal	$	2,706		$	(331	)	$	12,257
State and foreign		212			277			1,362
Total current provision (benefit)		2,918			(54	)		13,619
Deferred (benefit) provision :
Federal		(9,983	)		1,019			7,483
State		(1,097	)		(535	)		872
Total deferred (benefit) provision		(11,080	)		484			8,355
Total (benefit) provision	$	(8,162	)	$	430		$	21,974

The reconciliation of the difference between amounts calculated at the statutory federal tax rate for the fiscal years ended September 30 and the Company’s effective tax rate is as follows (in thousands):

	2011			2010			2009
Amount at statutory federal income tax rate	$	(9,334	)	$	(7,231	)	$	20,833
Change because of the following items:
State taxes		(2,033	)		(209	)		1,206
Stock-based compensation		—			276			416
Valuation allowance		1,521			2,780			—
Goodwill impairment		1,978			4,834			—
Other		(294	)		(20	)		(481	)
Income tax (benefit) provision	$	(8,162	)	$	430		$	21,974

The components of deferred income taxes consisted of the following as of September 30 and result from differences in the recognition of transactions for income tax and financial reporting purposes (in thousands):

	2011			2010
Depreciable assets	$	3,918		$	(5,795	)
Deferred revenue		1,606			1,666
Accruals and reserves		1,257			780
Stock options		7,469			5,947
Impaired investments		6,151			6,130
Unrealized losses (gains) on investments		96			(563	)
Other		1,686			1,211
Valuation allowance		(8,044	)		(6,523	)
Total deferred tax assets		14,139			2,853
Less current deferred tax assets		(1,444	)		(247	)
Noncurrent deferred tax assets	$	12,695		$	2,606

In fiscal 2011 and 2010, the Company recorded valuation allowances of $1.5 million and $3.1 million, respectively, related to deferred tax assets. The fiscal 2011 valuation allowance relates to state deferred tax assets associated with Pharmaceuticals asset impairment charges and state net operating losses based on the uncertainty regarding the realization of certain state deferred tax assets. The fiscal 2010 valuation allowance primarily relates to deferred tax assets associated with potential capital losses created by the impairment of the Company’s investments in Nexeon and two additional medical technology companies (see Note 2 for further information). The fiscal 2010 valuation allowances were recorded because the Company does not currently foresee future capital gains within the allowable carryforward and carryback periods to offset these capital losses when they were recognized. As such, no tax benefit has been recorded in the consolidated statements of operations.

Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for accounting purposes pursuant to accounting guidance. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2011			2010			2009
Beginning of fiscal year	$	1,948		$	2,042		$	1,540
Increases in tax positions for prior years		3			—			280
Decreases in tax positions for prior years		(85	)		(104	)		(7	)
Increases in tax positions for current year		55			92			260
Settlements with taxing authorities		(53	)		—			—
Lapse of the statute of limitations		(304	)		(82	)		(31	)
End of fiscal year	$	1,564		$	1,948		$	2,042

The total amount of unrecognized tax benefits including interest and penalties that, if recognized, would affect the effective tax rate as of September 30, 2011, 2010 and 2009, respectively, are $1.6 million, $1.9 million and $2.0 million. Currently, the Company does not expect the liability for unrecognized tax benefits to change significantly in the next 12 months with the above balances classified on the consolidated balance sheets in other long-term liabilities. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. As of September 30, 2011, 2010 and 2009, a gross balance of $0.8 million, $0.7 million and $0.6 million, respectively, has been accrued related to the unrecognized tax benefits balance for interest and penalties.

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 (“IRS”) commenced an examination of the Company’s U.S. income tax return for fiscal 2010 in the first quarter of fiscal 2012. The IRS 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 2007 and 2008 remain subject to examination by federal tax authorities. Tax returns for state and local jurisdictions for fiscal years 2003 through 2010 remain subject to examination by state and local tax authorities.