Discontinued Operations

3 Months Ended

Dec. 31, 2012

Discontinued Operations

3. Discontinued Operations

Beginning in the first quarter of fiscal 2012, the results of operations, cash flows, assets and liabilities of SurModics Pharmaceuticals, Inc. (“SurModics Pharmaceuticals”), which were previously reported in the Pharmaceuticals segment as a separate operating segment, are classified as 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 majority of liabilities associated with SurModics Pharmaceuticals 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. 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 for a period of five years, in connection with SurModics Pharmaceuticals, including 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. (“PR Pharma”). SurModics retained responsibility for 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.

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 benefit), which was principally related to transaction closing costs. The loss is included in “Loss on sale of discontinued operations” in the condensed consolidated statements of income.

There was no statement of income impact associated with discontinued operations for the three months ended December 31, 2012. The following is a summary of the operating results of SurModics Pharmaceuticals from discontinued operations for the three months ended December 31, 2011 (in thousands):

	Three Months Ended
	December 31,
	2011
Total revenue	$	5,311
Income from discontinued operations	$	2,530
Income tax provision		(925	)
Income from discontinued operations, net of income taxes	$	1,605
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, 2012 and September 30, 2012 were as follows (in thousands):

	December 31,		September 30,
	2012		2012
Accounts receivable, net	$	209	$	283
Other current assets		600		600
Current assets of discontinued operations		809		883
Total assets of discontinued operations	$	809	$	883
Other current liabilities payable	$	1,640	$	1,640
Current liabilities of discontinued operations		1,640		1,640
Total liabilities of discontinued operations	$	1,640	$	1,640

The assets and liabilities of discontinued operations as of December 31, 2012 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. On January 29, 2013, the Company entered into a settlement agreement with the city of Birmingham, Alabama to pay $325,000 in settlement of $1.5 million of the $1.7 million retained liability. The Company expects to record a gain in discontinued operations of $1.2 million before taxes in the second quarter of fiscal 2013 related to the settlement. See Note 14 for further discussion of the Alabama jobs commitment liability.