Discontinued Operations

3 Months Ended

Dec. 31, 2011

Discontinued Operations [Abstract]

Discontinued Operations

3. Discontinued Operations

On November 1, 2011, the Company entered into a definitive agreement (the “Purchase Agreement”) to sell substantially all of the assets of its wholly-owned subsidiary, SurModics Pharmaceuticals to Evonik Degussa Corporation (“Evonik”). Under the terms of the Purchase Agreement, the entire portfolio of products and services of SurModics Pharmaceuticals, including the Company’s Current Good Manufacturing Practices (“cGMP”) development and manufacturing facility located in Birmingham, Alabama, were sold. The Company retained all accounts receivable and the vast majority of liabilities associated with the SurModics Pharmaceuticals business incurred prior to closing. The sale (the “Pharma Sale”) closed on November 17, 2011. The total consideration received from the Pharma Sale was $30.0 million in cash. Of the total consideration, $3.275 million was placed in an escrow account at closing for any inventory shortfall and the payment of certain contingent consideration obligations related to the Company’s acquisition of SurModics Pharmaceuticals in July 2007. The Company did not have any inventory shortfall and received $350,000 of the escrow funds in December 2011, leaving an escrow balance of $2.9 million which is included in prepaid and other assets on the condensed consolidated balance sheet as of December 31, 2011. As explained in Note 17, the contingent consideration obligations related to the Company’s acquisition of SurModics Pharmaceuticals lapsed in the first quarter of fiscal 2012. As a result, the remaining $2.9 million of escrow funds were received in January 2012.

As part of the Pharma Sale, the Company recorded a loss on the sale in the first quarter of fiscal 2012 of $1.7 million ($1.1 million net of income tax benefits), including transaction costs of $1.8 million. The loss is included in “Loss on sale of discontinued operations” in the condensed consolidated statements of operations.

In the fourth quarter of fiscal 2011, the Company recognized asset impairment charges totaling $28.1 million. The Company wrote down long-lived assets (fixed assets of $23.3 million and intangibles of $4.8 million), associated with its Pharmaceuticals segment, based on the 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.

As part of the Pharma Sale, SurModics agreed not to compete in the restricted business (as defined in the Purchase Agreement) for a period of five years and to indemnify Evonik against specified losses in connection with the SurModics Pharmaceuticals business, including, for a period of five years, certain contingent consideration obligations related to the acquisition by SurModics Pharmaceuticals of the portfolio of intellectual property and drug delivery projects from PR Pharmaceuticals, Inc. SurModics also retained responsibility for certain obligations of the SurModics Pharmaceuticals business, including contingent consideration obligations of $2.9 million related to its acquisition of SurModics Pharmaceuticals (which obligations lapsed in the first quarter of fiscal 2012) and repayment obligations related to an agreement with various governmental authorities associated with creation of jobs in Alabama. The foregoing summary of the Purchase Agreement is qualified in its entirety by reference to the full text of the Purchase Agreement, which is attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on November 7, 2011. Refer to the Purchase Agreement for more details on the Pharma Sale.

All results of operations, cash flows, assets and liabilities of SurModics Pharmaceuticals for all periods presented are classified as discontinued operations, and the condensed consolidated financial statements, including the notes, have been reclassified to reflect such segregation for all periods presented. Prior to reclassification, the discontinued operations were reported in the Pharmaceuticals segment as a separate operating segment. The summary of operating results from discontinued operations is as follows (in thousands):

	Three Months Ended December 31,
	2011			2010
Total revenue	$	5,311		$	2,673
Income (loss) from discontinued operations	$	2,530		$	(9,704	)
Income tax (provision) benefit		(925	)		673
Income (loss) from discontinued operations, net of income taxes	$	1,605		$	(9,031	)
Loss on sale of discontinued operations	$	(1,661	)	$	—
Income tax benefit		607			—
Loss on sale of discontinued operations, net of income taxes	$	(1,054	)	$	—

The major classes of assets and liabilities of discontinued operations as of December 31, 2011 and September 30, 2011 were as follows (in thousands):

	December 31, 2011		September 30, 2011
Accounts receivable, net	$	1,863	$	3,309
Inventories		—		969
Other current assets		1,254		1,705
Current assets of discontinued operations		3,117		5,983
Property and equipment, net		—		24,911
Intangible assets , net		—		3,683
Other assets, net		—		3,917
Total assets of discontinued operations	$	3,117	$	38,494
Accounts payable	$	25	$	849
Accrued liabilities – compensation		225		1,522
Deferred revenue		—		550
Other current liabilities		1,734		2,428
Current liabilities of discontinued operations		1,984		5,349
Deferred revenue, less current portion		—		3,371
Other long-term liabilities		—		120
Total liabilities of discontinued operations	$	1,984	$	8,840

The assets and liabilities of discontinued operations as of December 31, 2011 are mainly associated with accounts receivable not purchased by Evonik, deferred tax assets and a retained liability of $1.7 million associated with financial incentives SurModics Pharmaceuticals received from various Alabama governmental authorities related to creation of jobs in Alabama. See also Note 17 for further discussion of the Alabama jobs commitment liability.