Discontinued Operations

6 Months Ended

Mar. 31, 2013

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, 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. Substantially all of these obligations were settled in the second quarter of fiscal 2013 and the remainder was settled in April 2013. 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.

The following is a summary of the operating results of SurModics Pharmaceuticals discontinued operations for the three and six months ended March 31, 2013 and 2012 (in thousands):

	Three months ended						Six months ended
	March 31,						March 31,
	2013			2012			2013			2012
Total revenue	$	—		$	—		$	—		$	5,311
Income (loss) from discontinued operations	$	1,015		$	(221	)	$	1,015		$	2,309
Income tax provision		(333	)		(123	)		(333	)		(1,048	)
Income (loss) from discontinued operations, net of income taxes	$	682		$	(344	)	$	682		$	1,261
Income (loss) on sale of discontinued operations	$	—		$	26		$	—		$	(1,634	)
Income tax benefit		—			95			—			701
Income (loss) on sale of discontinued operations, net of income taxes	$	—		$	121		$	—		$	(933	)

The major classes of assets and liabilities of discontinued operations as of March 31, 2013 and September 30, 2012 were as follows (in thousands):

	March 31,		September 30,
	2013		2012
Accounts receivable, net	$	—	$	283
Other current assets		129		600
Current assets of discontinued operations		129		883
Total assets of discontinued operations	$	129	$	883
Other current liabilities payable	$	271	$	1,640
Current liabilities of discontinued operations		271		1,640
Total liabilities of discontinued operations	$	271	$	1,640

As part of the Pharma Sale, the Company recorded a loss on the sale in the first six months of fiscal 2012 of $1.6 million ($0.9 million net of income tax benefit), which was principally related to transaction closing costs. The loss is included in “Income (loss) on sale of discontinued operations” in the condensed consolidated statements of income.

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 that existed at December 31, 2012, associated with financial incentives SurModics Pharmaceuticals received from various Alabama governmental authorities related to creation of jobs in Alabama. The Company paid the $325,000 and recorded a gain in discontinued operations of $1.2 million before taxes in the second quarter of fiscal 2013 related to this settlement.

The assets and liabilities of discontinued operations as of March 31, 2013 are mainly associated with deferred tax assets and the remaining $0.2 million retained liability with the State of Alabama related to creation of jobs in Alabama. On April 17, 2013, the Company and the State of Alabama entered into a termination agreement which did not require the Company to repay the $0.2 million retained liability. The Company expects to record a gain in discontinued operations of $0.2 million before taxes in the third quarter of fiscal 2013 related to this termination. See Note 15 for further discussion of the Alabama jobs commitment liability.