Summary of Significant Accounting Policies (Policies)

12 Months Ended

Sep. 30, 2012

Summary of Significant Accounting Policies [Abstract]

The company

The Company

Geospace Technologies Corporation (“Geospace”), formerly known as OYO Geospace Corporation, designs and manufactures instruments and equipment used in the acquisition and processing of seismic data as well as in the characterization and monitoring of producing oil and gas reservoirs. Geospace and its subsidiaries are referred to collectively as the “Company”. The Company also manufactures and distributes thermal imaging equipment and dry thermal film products to a variety of markets including the screenprint, point of sale, signage and textile markets.

As of September 30, 2012 and 2011, OYO Corporation U.S.A. (“OYO USA”) owned 0% and 20.3%, respectively, of Geospace’s common stock. OYO USA is a wholly owned subsidiary of OYO Corporation, a Japanese corporation (“OYO Japan”). In February 2012, OYO USA sold their remaining ownership stake in Geospace and, subsequently, Geospace is no longer affiliated with OYO USA or OYO Japan. Effective October 1, 2012, the Company’s name was changed from OYO Geospace Corporation to Geospace Technologies Corporation.

The significant accounting policies followed by the Company are summarized below.

Basis of Presentation

Basis of Presentation

The accompanying financial statements present the consolidated financial position, results of operations and cash flows of the Company in accordance with U.S. generally accepted accounting principles. All intercompany balances and transactions have been eliminated.

Reclassifications

Reclassifications

Certain amounts previously presented in the consolidated financial statements may have been reclassified to conform to the current year presentation. Such reclassifications had no effect on net income, stockholders’ equity or cash flows.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company considers many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. The Company continually evaluates its estimates, including those related to bad debt reserves, inventory obsolescence reserves, self-insurance reserves, product warranty reserves, long-lived assets, intangible assets and deferred income tax assets. The Company bases its estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original or remaining maturity at the time of purchase of three months or less to be cash equivalents.

Short-term Investments

Short-term Investments

The Company classifies its short-term investments consisting of corporate bonds, government bonds and other such similar investments as available-for-sale securities. Available-for-sale securities are carried at fair market value with net unrealized holding gains and losses reported each period as a component of comprehensive income in stockholders’ equity. The Company’s short-term investments have contractual maturities ranging from October 2012 to May 2015. See note 2 for additional information.

Concentrations of Credit Risk

Concentrations of Credit Risk

The Company maintains its cash in bank deposit accounts that, at times, exceed federally insured limits. Management of the Company believes that the financial strength of the financial institutions holding such deposits minimizes the credit risk of such deposits.

The Company sells products to customers throughout the United States and various foreign countries. The Company’s normal credit terms for trade receivables are 30 days. In certain situations, credit terms may be extended to 60 days or longer. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for its trade receivables. Additionally, the Company provides long-term financing in the form of promissory notes when competitive conditions require such financing. In such cases, the Company may require collateral. Allowances are recognized for potential credit losses. At September 30, 2012, the Company had one customer comprising 17.7% of the Company’s trade accounts receivable. At September 30, 2011, the Company had two customers comprising 15.5% and 13.3%, respectively, of the Company’s trade accounts receivable. The Company had two customers comprising 60.4% and 39.6% of its notes receivable balance at September 30, 2012. The Company had one customer comprising 88.3% of its notes receivable balance at September 30, 2011. One customer comprised 17.7% of the Company’s revenues during fiscal year 2012. Two customers comprised 20.2% and 11.1% of the Company’s revenues during fiscal year 2011. One customer comprised 13.2% of the Company’s revenues during fiscal year 2010.

The Company has a subsidiary located in the Russian Federation. Therefore, the Company’s financial results may be affected by factors such as changes in foreign currency exchange rates, weak economic conditions or changes in political climate within the Russian Federation. The Company’s consolidated balance sheet at September 30, 2012 and 2011 reflected approximately $6.3 million and $6.4 million, respectively, of net working capital related to this subsidiary. This subsidiary receives a substantial portion of its revenues and pays its expenses primarily in rubles. During the fiscal years ended September 30, 2012 and 2011, this subsidiary received approximately $4.1 million and $5.2 million, respectively, of its revenues in U.S. dollars as a result of intercompany sales to the Company’s subsidiary located in the United States. To the extent that transactions of this subsidiary are settled in rubles, a devaluation of the ruble versus the United States dollar could reduce any contribution from this subsidiary to its consolidated results of operations as reported in U.S. dollars. The Company does not hedge the market risk with respect to its operations in the Russian Federation; therefore, such risk is a general and unpredictable risk of future disruptions in the valuation of rubles versus U.S. dollars to the extent such disruptions result in any reduced valuation of the subsidiary’s net working capital or future contributions to its consolidated results of operations.

Inventories

Inventories

The Company records a write-down of its inventories when the cost basis of any manufactured product, including any estimated future costs to complete the manufacturing process, exceeds its net realizable value. Inventories are stated at the lower of cost or market value. Cost is determined on the first-in, first-out method, except that the Company’s subsidiary in the Russian Federation uses an average cost method to value its inventories.

Property, Plant and Equipment and Rental Equipment

Property, Plant and Equipment and Rental Equipment

Property, plant and equipment and rental equipment are stated at cost. Depreciation expense is calculated using the straight-line method over the following estimated useful lives:

	Years
Rental equipment		3-10
Property, plant and equipment:
Machinery and equipment		3-15
Buildings and building improvements		10-50
Other		5-10

Expenditures for renewals and betterments are capitalized. Repairs and maintenance expenditures are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts and any gain or loss thereon is reflected in the statement of operations.

Patents

Patents

Patents are amortized over the legal life of the patent or the estimated useful life of the patent, whichever is shorter. Patent amortization expense was approximately $0.2 million during each of fiscal years 2012, 2011 and 2010. Patent amortization expense is estimated to be approximately $80,000 for the fiscal year ending September 30, 2013.

Impairment of Long-lived Assets

Impairment of Long-lived Assets

The Company’s long-lived assets are reviewed for impairment whenever an event or change in circumstances indicates the carrying amount of an asset or group of assets may not be recoverable. The impairment review, if necessary, includes a comparison of expected future cash flows (undiscounted and without interest charges) to be generated by an asset group with the associated carrying value of the related assets. If the carrying value of the asset group exceeds the expected future cash flows, an impairment loss is recognized to the extent that the carrying value of the asset group exceeds its fair value.

Goodwill

Goodwill

For the fiscal year ended September 30, 2012, the Company follows simplified procedures for analyzing goodwill impairment. The guidance on the testing of goodwill for impairment provides the option to first assess qualitative factors to determine if the annual two-step test of goodwill for impairment must be performed. If, based on the qualitative assessment of events or circumstances, an entity determines it is more likely than not that the goodwill fair value is more than its carrying amount then it is not necessary to perform the two-step impairment test. However, if an entity concludes otherwise, then the two-step impairment test must be performed to identify potential impairment and to measure the amount of goodwill impairment, if any. The Company determined that it is more likely than not that the fair value of its goodwill was more than its carrying amount and the two-step process was not necessary for the fiscal year ended September 30, 2012.

Revenue Recognition

Revenue Recognition

The Company primarily derives revenue from the sale and short-term rental under operating leases, of products. The Company’s products are produced in a standard manufacturing operation. The Company recognizes revenue from product sales when (i) title passes to the customer, (ii) the customer assumes risks and rewards of ownership, (iii) the product sales price has been determined, (iv) collectability of the sales price is reasonably assured, and (v) product delivery occurs as directed by our customer. The Company’s products are generally sold without any customer acceptance provisions and our standard terms of sale do not allow customers to return products for credit. The Company recognizes rental revenues as earned over the rental period. Rentals of the Company’s equipment generally range from daily rentals to rental periods of up to six months or longer. Service revenues are recognized when services are rendered and are generally priced on a per day rate. Except for certain of the Company’s reservoir characterization products, our products are generally sold without any customer acceptance provisions and the Company’s standard terms of sale do not allow customers to return products for credit.

The Company expects to utilize the percentage-of-completion method (the “POC Method”) to recognize revenues and costs on future contracts having the following characteristics:

• the contract requires significant custom designs for customer specific applications;

• the product design requires significant engineering efforts;

• the contract requires the customer to make progress payments during the contract term, and;

• the contract requires at least 90-days of engineering and manufacturing effort.

The POC Method will require the Company’s senior management to make estimates, at least quarterly, of the (i) total costs of the contract, (ii) manufacturing progress against the contract and (iii) the estimated cost to complete the contract. These estimates will impact the amount of revenue and gross profit the Company will recognize for each reporting period. Significant estimates that may affect future cost to complete a contract include the cost and availability of raw materials and component parts, engineering services, manufacturing equipment, labor, manufacturing capacity, factory productivity, contract penalties and disputes, product warranties and other contingent factors. The cumulative impact of periodic revisions to the future cost to complete a contract will be reflected in the period in which these changes become known, including, to the extent required, the recognition of losses at the time such losses are known and estimable on contracts in progress. Due to the various estimates inherent in the POC Method, actual results could differ from those estimates.

Most of the Company’s products do not require installation assistance or sophisticated instruction. The Company offers a standard product warranty, which obligates it to repair or replace equipment with manufacturing defects. The Company maintains a reserve for future warranty costs based on historical experience or, in the absence of historical experience, management estimates.

The Company records bill and hold arrangements consistent with guidance around bill and hold arrangements. As of September 30, 2012 and 2011, the Company had no sales under bill and hold arrangements.

Deferred Revenue

Deferred Revenue

The Company records deferred revenue when funds are received prior to the recognition of the associated revenue.

Research and Development Costs

Research and Development Costs

The Company expenses research and development costs as incurred. Research and development costs include salaries, employee benefit costs, department supplies, direct project costs and other related costs.

Product Warranties

Product Warranties

The Company offers a standard product warranty obligating it to repair or replace products with manufacturing defects. The Company maintains a reserve for future warranty costs based on historical experience or, in the absence of historical product experience, management’s estimates. Changes in the warranty reserve are contained in the following table (in thousands):

Balance at October 1, 2010	$	1,378
Accruals for warranties issued during the year		2,675
Settlements made (in cash or in kind) during the year		(1,930	)
Balance at September 30, 2011		2,123
Accruals for warranties issued during the year		1,354
Settlements made (in cash or in kind) during the year		(1,169	)
Balance at September 30, 2012	$	2,308

Stock-Based Compensation

Stock-Based Compensation

The Company expenses the grant date fair value of equity awards over the requisite service period. The Company uses the Black-Scholes model to value its new stock option grants. The share-based payment framework also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation. In addition, the share-based payment framework requires the Company to reflect the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash inflow. The Company recorded stock-based compensation expense of $0.8 million, $0.7 million and $0.4 million for the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

There were no stock options granted during fiscal years 2012 and 2011 and 126,000 stock options were granted during fiscal year 2010. The fair value of options granted during the fiscal year ended September 30, 2010 was estimated using the Black-Scholes option-pricing model using the following data:

Dividend yield rate	0	%
Risk-free interest rate	2.4	%
Expected volatility	56.6	%
Expected option term	6.25 years

The computation of expected volatility was based on the historical volatility. Historical volatility was calculated from historical data for the time approximately equal to the expected term of the option award starting from the date of grant. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve in effect at the time of grant for the period corresponding with the expected life of the option. The expected term of options granted is derived from the vesting period and historical information and represents the period of time that options granted are expected to be outstanding.

Foreign Currency Gains and Losses

Foreign Currency Gains and Losses

The assets and liabilities of the Company’s foreign subsidiaries have been translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations have been translated using the average exchange rates during the year. Resulting translation adjustments have been recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Foreign currency transaction gains and losses are included in the statement of operations as they occur.

Shipping and Handling Costs

Shipping and Handling Costs

Amounts billed to a customer in a sales transaction related to reimbursable shipping and handling costs are included in revenues and the associated costs incurred by the Company for reimbursable shipping and handling expenses are reported in cost of sales. The Company had shipping and handling expenses of $1.0 million, $0.7 million and $0.7 million for each of the fiscal years ended September 30, 2012, 2011 and 2010, respectively.

Income Taxes

Income Taxes

Income taxes are presented in accordance with FASB guidance for accounting for income taxes. The estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carrybacks and carryforwards are recorded. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company periodically reviews the recoverability of tax assets recorded on the balance sheet and provides valuation allowances if it is more likely than not that such assets will not be realized.

Subsequent Events

Subsequent Events

In November 2012, the Company purchased a new facility located at 6410 Langfield Road in Houston, Texas (the “Langfield Facility”). The Langfield Facility includes a 30,000 square foot building located on 3.4 acres of land and the cost was approximately $2.5 million. In December 2012, the Company purchased a new facility in Bogota, Colombia (the “Bogota Facility”). The Bogota Facility includes a 19,000 warehouse and office building with a purchase price of approximately $1.6 million. The purchase of the Bogota Facility is in connection with the Company’s continued expansion into Colombia and the South American market during fiscal year 2013. The Company may acquire additional properties as needed to facilitate its increased business.