3.	Discontinued Operations

Beginning in the first quarter of fiscal 2012, the results of operations, cash flows, assets and liabilities of SurModics Pharmaceuticals, which were previously reported as the Pharmaceuticals 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. 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 years ended September 30 (in thousands):


	2013			2012			2011
Total revenue	$	—		$	5,297		$	15,109

Income (loss) from discontinued operations	$	1,136		$	2,309		$	(43,197	)
Income tax (provision) benefit		(548	)		(1,133	)		13,766

Income (loss) from discontinued operations, net of income taxes	$	588		$	1,176		$	(29,431	)

Loss on sale of discontinued operations	$	—		$	(1,691	)	$	—
Income tax benefit		—			617			—

Loss on sale of discontinued operations, net of income taxes	$	—		$	(1,074	)	$	—

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


	2013		2012
Accounts receivable, net	$	—	$	283
Other current assets		46		600

Current assets of discontinued operations		46		883

Total assets of discontinued operations	$	46	$	883

Other current liabilities payable	$	139	$	1,640

Current liabilities of discontinued operations		139		1,640

Total liabilities of discontinued operations	$	139	$	1,640

As part of the Pharma Sale, the Company recorded a loss on the sale in 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, net of income taxes” in the consolidated statements of operations.

In the fourth quarter of fiscal 2011, the Company recognized asset impairment charges totaling $28.1 million (fixed assets of $23.3 million and intangibles of $4.8 million), associated with its Pharmaceuticals segment. The Company recorded a $23.3 million asset impairment charge associated with writing down its facilities in Alabama to fair value based on the current valuation of the Company’s SurModics Pharmaceuticals assets relative to their carrying value (the entire $23.3 million related to Buildings and improvements). The Company recorded a $4.8 million asset impairment charge associated with writing down its SurModics Pharmaceuticals intangibles to fair value based on the current valuation of such 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.

The Company recognized goodwill of $5.7 million in fiscal 2011 associated with milestone events and recorded a corresponding goodwill impairment charge of $5.7 million in fiscal 2011 associated with its SurModics Pharmaceuticals reporting unit as the operations of this reporting unit had not improved at the time the $5.7 million milestone was achieved resulting in a concurrent goodwill impairment. The Company had previously impaired all of its goodwill, $13.8 million, associated with the SurModics Pharmaceuticals reporting unit in fiscal 2010 based on a significant decline in the estimated fair value of the Company’s SurModics Pharmaceuticals reporting unit, which resulted from a slowdown in business activity which was most pronounced in the fourth quarter of fiscal 2010, higher operating costs with the cGMP manufacturing facility, and a significant decrease in the Company’s stock price during fiscal 2010.

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 September 30, 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 $1.3 million before taxes in of fiscal 2013 related to this settlement.

On April 17, 2013, the Company entered into a termination agreement with the State of Alabama which resulted in the Company terminating its requirement to repay the $0.2 million retained liability related to creation of jobs in Alabama. The Company recorded a gain in discontinued operations of $0.2 million before taxes in fiscal 2013 related to this termination agreement.

The assets and liabilities of discontinued operations as of September 30, 2013 are based on accruals associated with the Southern Research Institute (“SRI”) litigation matter and a related deferred tax asset balance. See Note 11 for further discussion of the SRI litigation matter.