ROCM Rochester Medical Corp. (MM)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013

OR

FOR THE TRANSITION PERIOD FROM                  to                  

Commission File Number:  0-18933

(507) 533-9600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o  No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

12,337,143 Common Shares as of May 8, 2013.

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ROCHESTER MEDICAL CORPORATION

Report on Form 10-Q

For quarter ended

March 31, 2013

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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The accompanying notes are an integral part of these condensed consolidated financial statements

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ROCHESTER MEDICAL CORPORATION

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Note C — Stock Based Compensation

Equity-Based Awards

On January 28, 2010, the Company’s shareholders approved the Rochester Medical Corporation 2010 Stock Incentive Plan. As of that same date, no new awards were allowed to be granted under the Company’s 1991 Stock Option Plan or the 2001 Stock Incentive Plan. The 2010 Stock Incentive Plan authorizes the issuance of up to 1,000,000 shares of common stock pursuant to grants of incentive stock options, non-incentive stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance awards, stock awards, and other stock-based awards. Per the terms of the 2010 Stock Incentive Plan, awards may be granted with a term no longer than ten years. The vesting schedule and other terms of the awards granted under the 2010 Stock Incentive Plan will be determined by the Compensation Committee of the Board of Directors at the time of the grant. As of March 31, 2013, there were 197,218 shares that remain available for issuance under the 2010 Stock Incentive Plan.

Restricted stock

The fair value of restricted stock awards is calculated using the Company’s stock price as of the associated grant date, and the expense is accrued ratably over the vesting period of the award.

Compensation expense associated with restricted stock awards for the six months ended March 31, 2013 and 2012, totaled $176,000 and $90,000, respectively. For the three months ended March 31, 2013 and 2012, compensation expense associated with restricted stock awards totaled $105,000 and $62,000, respectively. At March 31, 2013, unamortized compensation cost of restricted stock awards totaled $985,000. The unamortized cost is expected to be recognized over a weighted-average period of 2.2 years as of March 31, 2013.

A summary of restricted stock-based award activity under the Plans as of March 31, 2013 and 2012, and changes during the six months then ended is presented below:

Restricted stock units

During the second quarter of fiscal 2013, the Company issued 116,314 restricted stock units (RSUs) to its executive management team. The fair value of the RSUs was calculated using the Company’s stock price, $11.68 per unit, at the date of grant. The RSUs include a performance-based vesting trigger measured at the end of fiscal 2014. The Company

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has not recognized any compensation expense associated with the RSUs for the six months ended March 31, 2013 as at this preliminary time period it is too early to estimate with any certainty that the performance based trigger will be met.

During the second quarter of fiscal 2012, the Company issued 135,491 RSUs to its executive management team. The fair value of the RSUs was calculated using the Company’s stock price, $7.86 per unit, at the date of grant. The RSUs include a performance-based vesting trigger measured at the end of fiscal 2013. The Company has not recognized any compensation expense associated with the RSUs as it is unlikely the required performance metrics will be achieved.

Stock options

The Company accounts for stock option-based compensation by estimating the fair value of options granted using a Black-Scholes option valuation model. The Company recognizes the expense for grants of stock options on a straight-line basis in the statement of operations as operating expense based on their fair value over the requisite service period.

No stock options were granted in the three and six months ended March 31, 2013 or 2012.

A summary of option-based activity under the Plans as of March 31, 2013 and 2012, and changes during the six month periods then ended are presented below:

The Company recorded compensation expense related to stock options of $208,000 and $474,000 for the six months ended March 31, 2013 and 2012, respectively. The Company recorded compensation expense related to stock options of $76,000 and $186,000 for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, there was $246,000 of total unrecognized compensation cost related to unvested stock options. The unamortized cost is expected to be recognized over a weighted-average period of 1.3 years as of March 31, 2013.

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The Company issues new shares as settlement for stock options exercised. Cash received from option exercises for the six months ended March 31, 2013 and 2012 was $808,000 and $113,000, respectively. The intrinsic value of shares exercised was $1,153,000 and $220,000, for the six months ended March 31, 2013 and 2012, respectively.

Note D — Marketable Securities

As of March 31, 2013, the Company had $6.5 million invested in high quality, investment grade U.S. treasury bills. At September 30, 2012, the Company’s marketable securities included $6.8 million invested in high quality, investment grade debt securities, consisting of $6.3 million invested in U.S. treasury bills and $0.5 million invested in CDs. The Company is reporting an unrealized gain of $550 related to the treasury bills investment as of March 31, 2013; the unrealized gain was $1,821 at September 30, 2012.

Marketable securities are classified as available for sale and are carried at fair value, with unrealized gains or losses included as a separate component of shareholders’ equity. The cost and fair value of available-for-sale securities were as follows:

Gains and losses recognized are recorded in Other income (expense) , in the consolidated statements of operations.  Gains and losses from the sale of investments are calculated based on the specific identification method.

The Company applies the accounting standards set forth in Accounting Standards Codification (ASC) 820, Fair Value Measurement , for financial assets and liabilities that are re-measured and reported at fair value at each reporting period. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires that fair value measurements be classified and disclosed using one of the following three categories:

Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2. Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

Level 3. Inputs that are unobservable for the asset or liability and that are significant to the fair value of the assets or liabilities.

Following is a summary of the valuation techniques for assets and liabilities recorded in the consolidated condensed balance sheets at fair value on a recurring basis:

CD’s: CD investments are classified using Level 1 inputs, and fair values are determined by reference to similar financial instruments for which quoted market prices are available on the active market.

U.S. treasury bills: U.S. treasury bills are classified using Level 1 inputs, and fair values are determined by reference to quoted market prices for U.S. treasury bills on the active market.

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Note F — Income Taxes

On a quarterly basis, the Company evaluates the realizability of its deferred tax assets and assesses the requirements for a valuation allowance. As of March 31, 2013 and September 30, 2012, the Company has a valuation allowance of $216,000, of which $42,000 is related to Minnesota R&D credit carryovers and $174,000 pertains to U.S. federal capital loss carryovers as the Company believes it is more likely than not that the deferred tax asset will not be utilized in future years. For the three and six months ended March 31, 2013, the Company had an effective worldwide income tax rate of approximately 30% and 29%, respectively. The effective tax rate on worldwide income may fluctuate depending upon inter-company eliminations, profitability of foreign operations, and any discrete items.

The Company adopted accounting provisions that now form part of ASC 740,  Income Taxes , and which clarify the accounting for uncertainty in tax positions recognized in the financial statements.  These provisions create a single model to address uncertainty in tax positions and clarify the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  As of March 31, 2013, the Company has recognized approximately $48,000 for unrecognized tax benefits. If the Company were to prevail on all unrecognized tax benefits recorded at March 31, 2013, the total gross unrecognized tax benefit of approximately $48,000 would benefit the Company’s effective tax rate.

It is the Company’s practice to recognize penalties and/or interest pertaining to income tax matters in income tax expense.  As of March 31, 2013, the Company did not have a material amount of accrued interest or penalties related to unrecognized tax benefits.

The Company is subject to income tax examinations from time to time in the U.S. federal jurisdiction, as well as in the United Kingdom, the Netherlands and various state jurisdictions.

Note G — Goodwill and Other Intangible Assets

The Company has $4,047,000 of goodwill carrying value as of March 31, 2013 resulting from its acquisition in the UK of Rochester Medical Limited in 2006 and $4,738,000 of goodwill carrying value resulting from its acquisition in the Netherlands of Rochester Medical B.V. in 2011. The increase in value of goodwill as of March 31, 2013 compared to September 30, 2012 is entirely related to the change in foreign currency exchange rates in the United Kingdom and the Eurozone.

The Company reviews goodwill for impairment annually or at any time events or circumstances indicate that the carrying value may not be fully recoverable. Under our accounting policy, an annual review is performed in our third fiscal quarter of each year, or more frequently if indicators of potential impairment exist.

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Intangible assets were as follows:

(1) Europe sales exclude sales in the U.K. and the Netherlands.

(2) The Company made revisions to the fiscal 2012 financial statement to properly report shipping and handling fees and related costs.  See Note K — Revisions.

Long-lived tangible assets of the Company are located in the United States, United Kingdom and the Netherlands as follows:

Note I — Line of Credit

The Company has a credit facility with RBC Wealth Management (“RBC”). The credit facility consists of a revolving line of credit of up to $5,000,000 with interest accruing monthly at a variable rate of 1.375% as of March 31, 2013.  The borrowings, of which all are available under this credit facility, are limited to the value of eligible assets held with RBC.  As of March 31, 2013 and September 30, 2012, the Company had no outstanding balance under the revolving line of credit.

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Note J — Share Repurchase Program

On March 3, 2009, the Company announced its intention to repurchase some of its outstanding common shares pursuant to its previously authorized share repurchase program. Up to 2,000,000 shares may be repurchased from time to time on the open market, or pursuant to negotiated or block transactions, in accordance with applicable Securities and Exchange Commission regulations. During the three months ended March 31, 2013 and March 31, 2012 the Company did not repurchase any shares.  During the six months ended March 31, 2013 the Company did not repurchase any shares and during the six months ended March 31, 2012 the Company repurchased 150,900 shares of common shares at an average prices of $7.21 for cash consideration of approximately $1,089,000. As of March 31, 2013, there remained 1,278,947 shares that may be purchased under the program.

Note K — Revisions

The Company made certain revisions to previously reported shipping and handling fees and related costs to properly conform to the Fiscal 2013 presentation.  The impact of the revisions for the three and six months ended March 31, 2012 is shown below.  These revisions had no impact on amounts previously reported for income from operations, income before income taxes and net income.

Note L — Recently Issued Accounting Standards

Recently Adopted Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, “ Presentation of Comprehensive Income ” which requires comprehensive income to be reported in either a single statement or in two consecutive statements reporting net income and other comprehensive income. The amendment does not change what items are reported in other comprehensive income. Additionally, in December 2011, the FASB issued ASU No. 2011-12, “ Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which indefinitely defers the requirement in ASU No. 2011-05 to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. During the deferral period, the existing requirements in U.S. GAAP for the presentation of reclassification adjustments must continue to be followed. These standards were effective for our fiscal quarter beginning October 1, 2012 with retrospective application required. As these standards impacted presentation requirements only, the adoption of this guidance did not have an impact on our results of operations or financial position.

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment” that is intended to simplify how entities test goodwill for impairment. This ASU permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350, “ Intangibles — Goodwill and Other .” This update is effective for annual and interim goodwill impairment

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tests performed for fiscal years beginning after December 15, 2011 (the Company’s fiscal 2013). The Company adopted ASU No. 2011-08 and it did not have a material impact on its Company’s condensed consolidated financial statements.

Pronouncements Issued But Not Yet Adopted

In February 2013, the FASB issued ASU No. 2013-02, “ Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ”, to improve the reporting of reclassification adjustments out of accumulated other comprehensive income.  The amendment was issued in response to ASU 2011-05 and  requires disclosure of the amount, if significant, reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, a cross reference to the related footnote for additional information would be provided.  The standard allows the flexibility to present the information either in the notes or parenthetically on the face of the financial statements provided that all of the required information is presented in a single location.  The standard is effective prospectively for public entities for fiscal years, and interim periods with those years, beginning after December 15, 2012.  This standard will be effective for our fiscal year 2014 first quarter beginning October 1, 2013.  As the standard impacts presentation requirements only, the adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2013, the FASB issued ASU 2013-05, “ Foreign Currency Matters (Topic 830):  Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”.   This ASU provides updated guidance to clarify the applicable guidance for parent company’s accounting for the release of the cumulative translation adjustment into net income upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity.  This guidance is effective for fiscal periods beginning after December 15, 2013, and is to be applied prospectively to derecognition events occurring after the effective date, which is for our fiscal year 2014 first quarter beginning October 1, 2013.  The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

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As part of our three year strategic business plan through 2013, we increased the level of investment in our sales and marketing programs in fiscal 2011 to support our direct sales growth in the U.S. and Europe through the addition of several members to our sales team. Increasing our percentage of direct sales versus private label sales over time will have a positive impact on our gross margin. Direct sales accounted for 79% of total sales for the quarter ended March 31, 2013, compared to 77% for the quarter ended March 31, 2012. Home care direct sales accounted for 91% and 90% of total direct sales for the quarters ended March 31, 2013 and 2012, respectively. Direct sales accounted for 81% of total sales for the six months ended March 31, 2013, compared to 80% for the six months ended March 31, 2012. Home care direct sales accounted for 90% and 89% of total direct sales for the six months ended March 31, 2013 and 2012, respectively.

In September 2009, the FemSoft Insert was approved for inclusion in Part IX of the UK Drug Tariff as a prescription product that is reimbursable under the National Healthcare System, commencing in 2010. In November 2009, the Centers for Medicare & Medicaid Services (CMS) issued a specific reimbursement code which covers our FemSoft Insert .  The current Medicare fee schedule amount is based on price data that is closest to a 1986/1987 base period and is significantly lower than the current retail price for the FemSoft Insert.  Although we believe that the reimbursement fee is unreasonably low, we continue to believe the availability of National Healthcare System and Medicare reimbursement will help this unique device become an economically accessible and often preferred solution for incontinent women in the United Kingdom and in the United States.

The Patient Protection and Affordable Care Act and Health Care and Educational Reconciliation Act of 2010 were enacted into law in March 2010. Certain provisions of the law will not be effective for a number of years and there are many programs and requirements for which the details have not yet been fully established or consequences not fully understood, and it is unclear what the full impact will be from the legislation. The law does levy a 2.3% excise tax on certain U.S. medical device sales beginning January 1, 2013, the beginning of our second quarter.  Our products that qualify under this regulation include our Foley catheters, intermittent catheters and our Femsoft Insert .  For the quarter ended March 31, 2013 we paid approximately $60,000 for this tax.  The law also focuses on a number of Medicare provisions aimed at improving quality and decreasing costs. It is uncertain at this point what negative unintended consequences these provisions will have on patient access to our products. We cannot predict what healthcare programs and regulations will be ultimately implemented at the federal or state level, or the effect of any future legislation or regulation. However, any changes that lower reimbursements for our products could adversely affect our business and results of operations.

The following discussion pertains to our results of operations and financial position for the quarters ended March 31, 2013 and 2012 and the six month period then ended.  Results of the periods are not necessarily indicative of the results to be expected for the complete year. For the second quarters ended March 31, 2013 and 2012, we reported net income of $0.10 and $0.05 per diluted share respectively. Income from operations was $1,773,000 for the quarter ended March 31, 2013 compared to $834,000 for the quarter ended March 31, 2012, while net income was $1,199,000 for the quarter ended March 31, 2013 compared to $603,000 for the quarter ended March 31, 2012. For the six months ended March 31, 2013 and 2012, we reported net income of $0.18 and $0.04 per diluted share respectively. Income from operations was $3,151,000 for the six months ended March 31, 2013 compared to $814,000 for the six months ended March 31, 2012, while net income was $2,211,000 for the six months ended March 31, 2013 compared to $527,000 for the six months ended March 31, 2012.

As of March 31, 2013, we had $16.3 million in cash and cash equivalents and $6.5 million invested in marketable securities. The marketable securities consist of $6.5 million invested in U.S. treasury bills. Our investments in marketable securities are subject to interest rate risk and the value thereof could be adversely affected due to movements in interest rates. Our investment choices, however, are conservative and are intended to reduce the risk of loss or any material impact on our financial condition. We are currently reporting an unrealized gain of $550 related to the marketable securities as a result of the recent fluctuations in the credit markets impacting the current market value.

Critical Accounting Policies and Estimates

We have adopted various accounting policies in preparing the consolidated financial statements in accordance with U.S. generally accepted accounting principles. Our significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (2012 Annual Report on Form 10-K).

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Preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to adopt various accounting policies and to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions, including those related to accounts receivable allowance for doubtful accounts; inventory reserves; other intangible assets and goodwill; income taxes; and stock-based compensation. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses.  Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K.

Inventories

Inventories, consisting of material, labor and manufacturing overhead, are stated at the lower of cost (first-in, first-out method) or market. Our policy is to establish an excess and obsolete reserve for our products in excess of the expected demand for such products. If actual future demand or market conditions differ from those projected by us, additional inventory valuation adjustments may be required. Our judgments related to future demand and market conditions include the following: (i) current sales data and historical return rates, (ii) competitive pricing pressures, (iii) new product introductions, (iv) product expiration dates, and (v) component and packaging obsolescence. We regularly compare inventory quantities on hand against historical usage or forecasts related to specific items in order to evaluate obsolescence and excessive quantities. In assessing historical usage, we also qualitatively assess business trends to evaluate the reasonableness of using historical information as an estimate of future usage. These valuation adjustments would be included in cost of goods sold.

The following table sets forth, for the periods indicated, net sales information by market category (acute care and home care), marketing method (private label and direct sales) and distribution channel (domestic and international markets) (all dollar amounts below are in thousands):

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