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Summary of Significant Accounting Policies and Significant Judgments and Estimates
 9 Months Ended
Jun. 25, 2011
Summary of Significant Accounting Policies and Significant Judgments and Estimates [Abstract]  
Summary of Significant Accounting Policies and Significant Judgments and Estimates
NOTE 1. Summary of Significant Accounting Policies and Significant Judgments and Estimates
Basis of Presentation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods.
On an ongoing basis, management evaluates its estimates and judgments, including but not limited to those related to revenue recognition, receivable reserves, inventory reserves, income taxes and stock-based compensation. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The accounting policies that management believes are most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition
Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and we have determined that collection of the fee is probable. Title to the product generally passes upon shipment of the product, as the products are shipped FOB shipping point, except for certain foreign shipments where title passes upon entry of the product into the first port in the buyer’s country. If the product requires installation to be performed by TCC, all revenue related to the product is deferred and recognized upon the completion of the installation. The Company provides for a warranty reserve at the time the product revenue is recognized.
The Company performs funded research and development and technology development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in the fee depending on how actual costs compare with a budget. Revenue from reimbursement contracts is recognized as services are performed. On fixed-price contracts that are expected to exceed one year in duration, revenue is recognized pursuant to the percentage of completion method based upon the proportion of actual costs incurred to the total estimated costs for the contract. In each type of contract, the Company receives periodic progress payments or payments upon reaching interim milestones. All payments to TCC for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. When current estimates of total contract revenue and costs for commercial product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development projects are recognized as funded research and development expenses.
Cost of product revenue includes material, labor and overhead. Costs incurred in connection with funded research and development are included in cost of sales.
Inventory
The Company values inventory at the lower of actual cost to purchase and/or manufacture or the current estimated market value of the inventory. A review is periodically performed of inventory quantities on hand and the Company records a provision for excess and/or obsolete inventory based primarily on the estimated forecast of product demand, as well as historical usage. Due to the custom and specific nature of certain products, demand and usage for these products and materials can fluctuate significantly. A significant decrease in demand for these products could result in a short-term increase in the cost of inventory purchases and an increase in excess inventory quantities on hand. In addition, the Company’s industry is characterized by rapid technological change, frequent new product development and rapid product obsolescence, any of which could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated or unfavorable changes in demand or technological developments could have a significant negative impact on the value of inventory and would reduce our reported operating results.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on a specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting in any impairment of their ability to make payments, additional allowances may be required, which would reduce our net income.
Accounting for Income Taxes
The Company accounts for income taxes using the asset/liability method. Under the asset/liability method, deferred income taxes are recognized at current income tax rates to reflect the tax effect of temporary differences between the consolidated financial reporting basis and tax basis of assets and liabilities. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
Uncertain tax positions must meet a recognition threshold of more-likely-than-not in order for those tax positions to be recognized in the financial statements. For the three and nine months ended June 25, 2011 and June 26, 2010, the Company had no uncertain tax positions or unrecognized tax benefits. The Company expects no material changes to unrecognized tax positions within the next twelve months.
The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as a component of its income tax provision. As of and for the three and nine month periods ended June 25, 2011 and June 26, 2010, the Company had no interest or tax penalties.
Share-Based Compensation
Share-based compensation cost is measured at the grant date based on the calculated fair value of the award. The expense is recognized over the employee’s requisite service period, generally the vesting period of the award. The related excess tax benefit received upon exercise of stock options, if any, is reflected in the Company’s statement of cash flows as a financing activity rather than an operating activity.
The Company had the following stock option plans outstanding as of June 25, 2011: the Technical Communications Corporation 2010 Equity Incentive Plan (as amended and restated), the Technical Communications Corporation 2001 Stock Option Plan and the Technical Communications Corporation 2005 Non-Statutory Stock Option Plan. There are an aggregate 750,000 shares authorized under these plans, of which 272,253 and 115,288 were outstanding at June 25, 2011 and September 25, 2010, respectively. Vesting periods are at the discretion of the Board of Directors and typically range between zero and five years. Options under these plans are granted with an exercise price equal to at least the fair market value at time of grant and have a term of five or ten years from the date of grant. As of June 25, 2011, there were no shares available for new option grants under the 2001 Stock Option Plan, there were 41,559 shares available for grant under the 2005 Non-Statutory Stock Option Plan and there were 43,335 shares available for grant under the 2010 Equity Incentive Plan.
The Company selected the Black-Scholes option pricing model as the method for determining the estimated fair value of its stock awards. The Black-Scholes method of valuation requires several assumptions: (1) the expected term of the stock award, (2) the expected future stock price volatility over the expected term, (3) risk-free interest rate and (4) dividend yield. The expected term represents the expected period of time the Company believes the options will be outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the price of the Company’s common stock and the risk free interest rate is based on the U.S. Treasury Note rate. Dividend yield is based on the recurring regular dividend rate declared by the Company. The Company began paying quarterly dividends during fiscal 2010 and effective for the second quarter of fiscal 2011 is utilizing a dividend yield of 4%. The Company utilizes a forfeiture rate based on an analysis of its actual experience. The forfeiture rate is not material to the calculation of share-based compensation.
The fair value of options at date of grant was estimated with the following assumptions (unaudited):
                 
    Three and Nine Months Ended  
    June 25, 2011     June 26, 2010  
    (unaudited)     (unaudited)  
Assumptions:
               
Option life
  5 to 6.5 years   5 years  
Risk-free interest rate
  1.27% to 2.4%     2.44 %
Stock volatility
  70% to 73%     77 %
Dividend yield
  0% to 4.0%     -0-  
There were 160,165 options, with a weighted average fair value of $5.46, granted during the nine months ended June 25, 2011 and 14,000 options granted during the nine months ended June 26, 2010. There were 14,000 options, with a weighted average fair value of $4.35, granted during the three months ended June 25, 2011 and no options granted during the three months ended June 26, 2010.
The following table summarizes share-based compensation costs included in the Company’s condensed consolidated income statements for the three and nine months ended June 25, 2011 and June 26, 2010 (unaudited):
                                 
    June 25, 2011     June 26, 2010  
    3 months     9 months     3 months     9 months  
 
                               
Cost of sales
  $ 4,303     $ 15,767     $ 739     $ 4,226  
Selling, general and administrative expenses
    75,649       113,470       1,562       67,365  
Product development expenses
    37,434       125,473       14,748       45,027  
 
                       
Total share-based compensation expense before taxes
  $ 117,386     $ 254,710     $ 17,049     $ 116,618  
 
                       
As of June 25, 2011 and June 26, 2010, there was $744,639 and $134,892, respectively, of unrecognized compensation costs related to options granted. The unrecognized compensation cost will be recognized as the options vest. The weighted average period over which the compensation cost is expected to be recognized is 4.06 years.
The following table summarizes stock option activity during the first nine months of fiscal 2011 (unaudited):
                     
    Options Outstanding
    Number of     Weighted Average     Weighted Average
    Shares     Exercise Price     Contractual Life
 
                   
Outstanding at September 25, 2010
    115,288     $ 5.23     7.14 years
Grants
    160,165       11.37      
Exercises
    (1,200 )     4.25      
Cancellations
    (2,000 )     5.00      
 
                 
 
                   
Outstanding at June 25, 2011
    272,253     $ 8.84     8.03 years
 
                 
Information related to the stock options vested and expected to vest as of June 25, 2011 is as follows (unaudited):
                                         
            Weighted-Average                     Exercisable  
            Remaining     Weighted     Exercisable     Weighted-  
Range of   Number of     Contractual     Average     Number of     Average  
Exercise Prices   Shares     Life (years)     Exercise Price     Shares     Exercise Price  
$0.01 - $1.00
    600       1.88     $ 0.99       600     $ 0.99  
$2.01 - $3.00
    15,288       4.20     $ 3.00       15,288     $ 3.00  
$3.01 - $4.00
    26,400       5.10     $ 3.69       19,000     $ 3.75  
$4.01 - $5.00
    20,400       7.56     $ 4.76       14,700     $ 4.83  
$5.01 - $10.00
    60,900       7.84     $ 7.46       47,900     $ 7.76  
$10.01 - $15.00
    148,665       9.11     $ 11.52       —       —  
 
                                   
 
                                       
 
    272,253       8.03     $ 8.84       97,488     $ 5.75  
 
                                   
The aggregate intrinsic value of the Company’s “in-the-money” outstanding and exercisable options as of June 25, 2011 and June 26, 2010 was $256,799 and $580,689, respectively. Unvested common stock options are subject to the risk of forfeiture until the fulfillment of specified conditions.