Western Digital 2001 Annual Report Download - page 49

WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Warranty
The Company records an accrual for estimated warranty costs when revenue is recognized. Warranty
covers cost of repair or replacement of the hard drive and the warranty periods range from 1 to 3 years for all
hard drives, except enterprise drives, which had a warranty period of 5 years. The Company has comprehen-
sive processes with which to estimate accruals for warranty, which include speciÑc detail on hard drives in the
Ñeld by product type, historical Ñeld return rates and costs to repair. Although the Company believes that it
has the continued ability to reasonably estimate warranty reserves, unforeseeable changes in factors used to
estimate the accrual for warranty could occur. These unforeseeable changes could cause a material change in
the Company's warranty accrual estimate. Such a change would be recorded in the period in which the change
was identiÑed.
The Company transitioned from thin-Ñlm to magnetoresistive head technology in its desktop product line
during 1998. Due to the expiration of the warranty period for the thin-Ñlm products during 2001 and to the
discontinuance of its SCSI drive product line during 2000, warranty accruals decreased signiÑcantly from 2000
to 2001.
Advertising Expense
Advertising costs are expensed as incurred. Selling, general and administrative expenses of the Company
include advertising costs of $14.3, $9.0 and $7.4 million in 1999, 2000 and 2001, respectively.
Income Taxes
The Company accounts for income taxes using the liability method under Statement of Financial
Accounting Standards No. 109, ""Accounting for Income Taxes'' (""SFAS 109''). This method generally
provides that deferred tax assets and liabilities be recognized for temporary diÅerences between the Ñnancial
reporting basis and the tax basis of the Company's assets and liabilities and expected beneÑts of utilizing net
operating loss (""NOL'') carryforwards. The Company records a valuation allowance for certain temporary
diÅerences for which it is more likely than not that it will not receive future tax beneÑts. The impact on
deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary
diÅerences are expected to be settled and reÖected in the consolidated Ñnancial statements in the period of
enactment (See Note 5).
Per Share Information
The Company computes basic loss per share using the net loss and the weighted average number of
common shares outstanding during the period. Dilutive loss per share is computed using the net loss and the
weighted average number of common shares and dilutive potential common shares outstanding during the
period. Dilutive common shares include outstanding employee stock options, employee stock purchase plan
shares and common shares issuable upon conversion of the convertible debentures. The eÅects of these items
were not included in the computation of diluted loss per share for each period presented as their eÅect would
have been anti-dilutive.
As of July 3, 1999, June 30, 2000 and June 29, 2001, 17.8 million, 20.9 million shares and 23.3 million
shares, respectively, relating to the possible exercise of outstanding stock options were not included in the
computation of diluted loss per share. Also, for the same periods, an additional 19.4 million, 8.4 million and
4.0 million shares, respectively, issuable upon conversion of the Debentures were excluded from the
computation of diluted loss per share. The eÅects of these items were not included in the computation of
diluted loss per share as their eÅect would have been anti-dilutive.
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