Summary of Significant Accounting Policies (Policies)

12 Months Ended

Sep. 30, 2012

Summary of Significant Accounting Policies

Statement of Presentation and Principles of Consolidation

• Statement of Presentation and Principles of Consolidation

        The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the Unites States of America ("U.S. GAAP"). References in this report to a particular fiscal year are to the twelve months ended September 30 of that year.

        The accompanying consolidated financial statements include the accounts of Rochester Medical Corporation and its wholly owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.

Cash Equivalents

• Cash Equivalents

        The Company considers all highly liquid investments with a remaining maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents includes balances in foreign accounts totaling $7.7 million and $7.0 million at September 30, 2012 and 2011 respectively. The Company maintains its cash in bank deposit accounts which, at times, may exceed the insurance limits of the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts.

Marketable Securities

• Marketable Securities

        As of September 30, 2012, the Company has $6.8 million invested in high quality, investment grade debt securities, primarily consisting of $6.3 million invested in U.S. treasury bills and $.5 million invested in CDs. At September 30, 2011, the Company's marketable securities included $26.2 million invested in high quality, investment grade debt securities, consisting of $16.5 million invested in U.S. treasury bills, $3.2 million invested in a mutual fund and $6.5 million invested in CDs. The Company reported an unrealized loss from the mutual fund of $.5 million at September 30, 2011. The mutual fund was liquidated in 2012 and a loss of $.1 million was realized.

        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:

	Cost		Unrealized Gain/(Loss)			Fair Value
September 30, 2012	$	6,777,874	$	1,821		$	6,779,695
September 30, 2011	$	26,641,059	$	(458,751	)	$	26,182,308

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

        Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value of financial assets and liabilities that are re-measured and reported 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.

        The Company has determined that the values given to its marketable securities are appropriate and are measured using Level 1 inputs.

Fair Value of Financial Instruments

• Fair Value of Financial Instruments

        The carrying amounts of all financial instruments, including cash, accounts receivable, accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments. The carrying amount of the Company's long-term debt at September 30, 2011 approximated fair value based on rates offered to the Company for debt.

Concentration of Credit

• Concentration of Credit

        The Company manufactures and sells its products to a full range of companies in the medical industry on a worldwide basis. There is a concentration of sales to larger medical wholesalers and distributors. The Company performs periodic credit evaluations of its customers' financial condition. The Company requires irrevocable letters of credit on sales to certain foreign customers. Receivables generally are due within 30 to 60 days.

Accounts Receivable

• Accounts Receivable

        The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support its receivables. The Company maintains an allowance for doubtful accounts for potential credit losses. Uncollectible accounts are written-off against the allowance when it is deemed that a customer account is uncollectible. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowances by considering a number of factors, including the length of time accounts receivables are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Accounts receivable balances written off have been within management's expectations.

Inventories

• Inventories

        Inventories, consisting of material, labor and manufacturing overhead, are stated at the lower of cost (first-in, first-out method) or market.

Property, Plant and Equipment

• Property, Plant and Equipment

        Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is based on estimated useful lives of 4-10 years for equipment and fixtures and 25-35 years for buildings computed using the straight-line method. Additions and improvements that extend the lives of the assets are capitalized while expenditures for repairs and maintenance are expensed as incurred.

Intangible Assets

• Intangible Assets

        Intangible assets consist primarily of purchased trademarks, a supply agreement and customer relationships, and are amortized using the straight-line method, as appropriate, over their estimated useful lives, ranging from 5 to 20 years. The Company reviews these intangible assets for impairment as changes in circumstance or the occurrence of triggering events suggest the remaining value may not be recoverable. No impairment loss on intangible assets was recognized in the fiscal years ended September 30, 2012, 2011 and 2010.

Goodwill

• Goodwill

        The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired as prescribed by ASC 350, Intangibles — Goodwill and Other. Under ASC 350, goodwill and intangibles with indefinite useful lives are not amortized. Goodwill is also not amortizable for tax purposes. ASC 350 also requires, at a minimum, an annual assessment of the carrying value of goodwill and other intangibles with indefinite useful lives. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. The Company has $4.3 million of goodwill carrying value as of September 30, 2012 resulting from its acquisition in the U.K. of Rochester Medical Limited in 2006 and $4.8 million of goodwill carrying value resulting from its acquisition in the Netherlands of Laprolan B.V. in 2011. The Company tests annually for impairment of the asset, currently on June 1st of each fiscal year for the goodwill associated with the Company's 2006 U.K. acquisition and for the goodwill related to the 2011 Netherlands acquisition, or more frequently if the occurrence of triggering events and circumstances indicate that the asset might be impaired. The Company applies a fair value based impairment test on an annual basis and on an interim basis if certain triggering events or circumstances indicate that an impairment loss may have occurred by comparing the fair value of discounted cash flows for each reporting unit to its carrying value. The Company performed its most recent annual impairment testing of the goodwill at June 1, 2012, and concluded that the goodwill was not impaired. In the third quarter of fiscal 2012, the Company did decrease the previously reported goodwill balance and deferred tax liabilities as of September 30, 2011 by $669,000 to record a deferred tax asset related to Laprolan that existed as of the acquisition date and which impacted purchase accounting and was treated as a correction of an immaterial error. No impairment loss on goodwill was recognized in the fiscal years ended September 30, 2012, 2011 and 2010. The goodwill and intangible assets related to the Rochester Medical Limited and Laprolan B.V. acquisitions are accounted for in British pounds and euros, respectively. The decrease in value of goodwill as of September 30, 2012 compared to September 30, 2011 is due to the decrease in foreign currency exchange rates in the United Kingdom and the Eurozone.

Long-Lived Assets

• Long-Lived Assets

        The Company reviews its long-lived assets for impairment as prescribed by ASC 360, Property, Plant, and Equipment, whenever events or changes in circumstances indicate that its carrying value of long-lived assets may not be recoverable. Long-lived assets are considered not recoverable when the carrying amount of a long-lived asset (asset group) exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). If it is determined that a long-lived asset (asset group) is not recoverable, an impairment loss is recorded equal to the excess of the carrying amount of the long-lived asset (asset group) over the long-lived asset's (asset group's) fair value. Fair value is the amount at which the long-lived asset (asset group) could be bought or sold in a current transaction between a willing buyer and seller, other than in a forced or liquidation sale. No impairment loss on long-lived assets was recognized in the fiscal years ended September 30, 2012, 2011 and 2010.

Foreign Currency Translation

• Foreign Currency Translation

        The financial statements of the Company's non-U.S. subsidiaries are translated into U.S. dollars in accordance with ASC 830, Foreign Currency Matters. Under ASC 830, if the assets and liabilities of the Company are recorded in certain non-U.S. functional currencies other than the U.S. dollar, they are translated at current rates of exchange. Revenue and expense items are translated at the average exchange rates. The resulting translation adjustments are recorded directly into accumulated other comprehensive income (loss).

Patents

• Patents

        Capitalized costs include costs incurred in connection with making patent applications for the Company's products and are amortized on a straight-line basis over eight years. The Company periodically reviews its patents for impairment. Any adjustment from the analysis is charged to operations.

Revenue Recognition

• Revenue Recognition

        The Company has standard contract terms with all non-Group Purchase Organization customers, which include its independent distributors, of FOB shipping point; as such, sales are recognized upon shipment. Group Purchase Organization customers have terms of FOB destination per the agreement and thus sales are recognized upon delivery of goods to the customer. Revenue is recognized when title and risk of ownership have passed, the price to the buyer is fixed and determinable and recoverability is reasonably assured. For all Group Purchase Organization customer orders shipped within the last five working days of a quarter, the Company monitors the shipping tracking number for such shipments to verify receipt by the customer. If the Company is able to verify receipt by the customer by the end of the month, the sale is recognized in that month. Payment terms for all customers range from prepayment to 60 days. Customers cannot return unsold products unless the Company has authorized such return for warranty claims.

        The Company warrants that the products it sells to its customers will conform to the description and specifications furnished by the Company, and that the products will be free from defects in material and workmanship. In the event of a warranty claim, the customer is responsible for shipping the product(s) back to the Company, freight prepaid. If the failure of the product is due to a breach of warranty, the Company may repair or replace the defective product(s) at its option and return the repaired or replaced product(s) to the customer, freight prepaid. This is the limit of the Company's warranty liability, and this warranty is made in lieu of all other written or unwritten express or implied warranties. Historically, due to the nature of use of the Company's products and low replacement cost, the Company's warranty exposure has been immaterial.

        Other than the Company's limited warranty obligation, the Company does not have post-shipment obligations to, or acceptance provisions with, its customers, including its distributors.

Shipping and Handling

• Shipping and Handling

        Shipping and handling billed to customers is recorded as revenue. Shipping and handling costs are recorded as marketing and selling costs. The Company recorded such marketing and selling costs of $1,708,000, $1,690,000 and $1,216,000 for the years ended September 30, 2012, 2011 and 2010, respectively.

Research and Development Costs

• Research and Development Costs

        Research and development costs are charged to operations as incurred. Research and development costs include clinical testing costs, certain salary and related expenses, other labor costs, materials and an allocation of certain overhead expenses.

Income Taxes

• Income Taxes

        Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities. The Company records a valuation allowance to reduce the carrying value of its net deferred tax assets to the amount that is more likely than not to be realized. For fiscal 2012, the Company recorded a valuation allowance of $216,000 of which $42,000 is related to Minnesota R&D credit and $174,000 pertains to U.S. federal capital loss carryovers as the Company believes it is more likely than not that these deferred tax assets will not be utilized in future years. The Company has not recorded a valuation allowance on any other net deferred tax assets because there is sufficient future projected income to sustain that the deferred tax assets will more likely than not be able to be realized.

        It is the Company's practice to recognize penalties and/or interest to income tax matters in income tax expenses. As of September 30, 2012, 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 in the U.S. federal jurisdiction, as well as in the United Kingdom, the Netherlands and various state jurisdictions.

Advertising Costs

• Advertising Costs

        The Company incurred advertising expenses of $1,353,000, $1,370,000 and $1,600,000 for the years ended September 30, 2012, 2011 and 2010, respectively. All advertising costs are charged to operations as incurred.

Stock-Based Compensation

• Stock-Based Compensation

        Stock-based compensation expense includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, October 1, 2005, based on grant-date fair value estimated in accordance with the accounting provisions that are now part of ASC 718, Compensation-Stock Compensation; and (b) compensation expense for all stock-based compensation awards granted subsequent to October 1, 2005, based on grant-date fair value estimated in accordance with the provisions of ASC 718, recognized utilizing the accelerated expense attribution method for awards with graded vesting. The Company recorded approximately $983,000, $1,496,000 and $1,481,000 ($639,000, $969,000 and $959,000 net of tax) of related stock-based compensation expense for the years ended September 30, 2012, 2011 and 2010, respectively.

Net Income (Loss) Per Share

• Net Income (Loss) Per Share

        Net income (loss) per common share is calculated in accordance with ASC 260, Earnings Per Share. The Company's basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period, increased to include dilutive potential common shares issuable upon the exercise of stock options that were outstanding during the period. For periods of net loss, diluted net loss per common share equals basic net loss per common share because common stock equivalents are not included in periods where there is a loss, as they are antidilutive. A reconciliation of the numerator and denominator in the basic and diluted net income (loss) per share calculation is as follows:

	Year Ended September 30,
	2012		2011			2010
Numerator:
Net income (loss)	$	2,050,484	$	(1,315,304	)	$	(253,535	)
Denominator:
Denominator for basic net income per common share — weighted average shares outstanding		12,032,113		12,217,900			12,181,549
Effect of dilutive stock options		307,387		—			—
Denominator for diluted net income per common share — weighted average shares outstanding		12,339,500		12,217,900			12,181,549

        For the years ended September 30, 2011 and 2010, diluted net loss per common share equals basic net loss per common share because common stock equivalents are not included in periods where there is a net loss, as they are antidilutive. No shares were considered antidilutive for 2012. Average shares outstanding for diluted net income per share does not include options to purchase 64,645 and 706,845 shares of common stock for the fiscal years 2011 and 2010, respectively, as their effect would have been antidilutive.

Business Segment

• Business Segment

        The Company conducts its business within one business segment which is defined as developing, manufacturing and marketing urinary continence and urinary drainage care products.

Comprehensive Income (Loss)

• Comprehensive Income (Loss)

        The Company computes comprehensive income (loss) in accordance with ASC 220, Comprehensive Income. ASC 220 establishes standards for the reporting and display of comprehensive income (loss) and its components in financial statements. Other comprehensive income (loss), as defined, includes all changes in equity during a period from non-owner sources, such as unrealized gains and losses on available-for-sale securities and foreign currency translation. Total accumulated other comprehensive loss as of fiscal year-end 2012 and 2011 was as follows:

	2012			2011
Unrealized gain (loss) on available-for-sale securities, net of tax	$	1,821		$	(204,884	)
Cumulative foreign currency translation		(3,924,191	)		(3,910,993	)
Accumulated other comprehensive loss	$	(3,922,370	)	$	(4,115,877	)

Legal Proceedings

• Legal Proceedings

        The Company is not subject to any pending or threatened litigation other than routine litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on its financial condition, results of operations or cash flows.

Reclassification and Revisions

• Reclassifications and Revisions

        The Company reclassified certain expenses from Marketing and Selling to General and Administrative in the fiscal 2011 financial statements to conform to the current year presentation. The Company also made revisions to the fiscal 2011 and 2010 financial statements to properly report shipping and handling fees and related costs. The reclassification and revisions are shown below but they had no impact on amounts previously reported for income (loss) from operations, income (loss) before income taxes, and net income (loss).

	As Previously Reported		Reclassification			Revision			As Reported
2011
Net Sales	$	52,918,875	$	—		$	453,823		$	53,372,698
Cost of Goods Sold		26,821,427		—			(97,481	)		26,723,946
Marketing and Selling		18,966,887		(703,746	)		551,304			18,814,445
General and Administrative		7,799,210		703,746			—			8,502,956
2010
Net Sales		41,442,680		—			105,108			41,547,788
Cost of Goods Sold		21,739,014		—			(229,888	)		21,509,126
Marketing and Selling	$	11,868,737	$	—		$	334,996		$	12,203,733

New Accounting Pronouncements

• New 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 will be effective for the Company's fiscal quarter beginning October 1, 2012 with retrospective application required. As these standards impact presentation requirements only, the adoption of this guidance will not have an impact on the Company's 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 tests performed for fiscal years beginning after December 15, 2011 (the Company's fiscal 2013). This standards update is not expected to have a material impact on the Company's financial statements.