Western Digital 2006 Annual Report Download - page 46

Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers,
vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses
arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement
claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain
of our officers that will require us, among other things, to indemnify them against certain liabilities that may arise by
reason of their status or service as directors or officers. We maintain director and officer insurance, which may cover
certain liabilities arising from our obligation to indemnify our directors and officers in certain circumstances.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the
limited history of prior indemnification claims and the unique facts and circumstances involved in each particular
agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not
incurred material costs as a result of obligations under these agreements.
Stock Repurchase Program
Our Board of Directors has authorized us to repurchase $250 million of our common stock in open market
transactions. The term of the program is a five-year period from November 17, 2005 to November 17, 2010. We expect
stock repurchases to be funded principally by operating cash flows. During 2006, we repurchased 3.5 million shares of
common stock at a total cost of $54 million. During 2005, we repurchased 4.8 million shares of common stock at a total
cost of $45 million. Since the inception of the program and through November 10, 2006, we have repurchased
10.2 million shares for a total cost of $115 million (including commissions). We may continue to repurchase our stock as
we deem appropriate and market conditions allow.
We believe our current cash, cash equivalents and short-term investments will be sufficient to meet our working
capital needs through the foreseeable future. Additionally, there can be no assurance that our Senior Credit Facility will
continue to remain available. Also, our ability to sustain our working capital position is dependent upon a number of
factors that we discuss in Item 1A of this Annual Report on Form 10-K. We currently anticipate that we will continue to
utilize our liquidity and cash flows to improve the efficiency and capability of its existing hard drive and head
manufacturing operations.
Critical Accounting Policies
We have prepared the accompanying consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. The preparation of the financial statements requires the use of
judgment and estimates that affect the reported amounts of revenues, expenses, assets, liabilities and shareholders’ equity.
We have adopted accounting policies and practices that are generally accepted in the industry in which we operate. We
believe the following are our most critical accounting policies that affect significant areas and involve judgment and
estimates made by us. If these estimates differ significantly from actual results, the impact to the consolidated financial
statements may be material.
Revenue and Accounts Receivable
In accordance with standard industry practice, we have agreements with resellers that provide limited price
protection for inventories held by resellers at the time of published list price reductions and other incentive programs. In
accordance with current accounting standards, we recognize revenue upon delivery to OEMs and resellers and record a
reduction to revenue for estimated price protection and other programs in effect until the resellers sell such inventory to
their customers. We base these adjustments on anticipated price decreases during the reseller holding period, estimated
amounts to be reimbursed to qualifying customers, as well as historical pricing information. If end-market demand for
hard drives declines significantly, we may have to increase sell-through incentive payments to resellers, resulting in an
increase in our allowances, which could adversely impact operating results.
We record an allowance for doubtful accounts by analyzing specific customer accounts and assessing the risk of loss
based on insolvency, disputes or other collection issues. In addition, we routinely analyze the different receivable aging
categories and establish reserves based on a combination of past due receivables and expected future losses based primarily
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