Western Digital 2006 Annual Report Download - page 59

Warranty
The Company records an accrual for estimated warranty costs as products are sold. Warranty covers costs of repair or
replacement of the hard drive over the warranty period, which ranges from one to five years and is recorded in the
accompanying balance sheet as current or long-term based upon when the expenditure is expected to occur. The Company
has comprehensive processes with which to estimate accruals for warranty, which include specific detail on hard drives in
the field by product type, historical field return rates and costs to repair. Return rate and repair cost estimates are reviewed
quarterly and updated to reflect the impact of current results on prior expectations. Although the Company believes that
it has the continued ability to reasonably estimate warranty reserves, 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 it was identified.
Advertising Expense
Advertising costs are expensed as incurred. Selling, general and administrative expenses of the Company include
advertising costs of $1.4 million, $1.5 million and $1.5 million in 2006, 2005 and 2004, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which provides that deferred tax assets
and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of the assets
and liabilities and expected benefits of utilizing net operating loss (“NOL”) carryforwards. The Company records a
valuation allowance where it is more likely than not that the deferred tax assets will not be realized. Each period the
Company evaluates the need for a valuation allowance for the deferred tax assets and adjusts the valuation allowance so
that the Company records net deferred tax assets only to the extent that it has concluded it is more likely than not that
these deferred tax assets will be realized.
The Company records estimated liabilities for tax uncertainties. To the extent a tax position does not meet a probable level
of certainty, a liability is established based on the best estimate of the amount that will not be sustained. However, the actual
liability in any such contingency may be materially different from the estimates, which could result in the need to record
additional tax liabilities or potentially adjust previously recorded tax liabilities.
Per Share Information
The Company computes basic income per share using the net income and the weighted average number of common
shares outstanding during the period. Diluted income per share is computed using the net income and the weighted
average number of common shares and potentially dilutive common shares outstanding during the period. Potentially
dilutive common shares include outstanding employee stock options, employee stock purchase plan shares and restricted
stock awards. The following table illustrates the computation of basic and diluted income per common share (in millions,
except per share data):
June 30,
2006
July 1,
2005
July 2,
2004
Years Ended
(as adjusted) (as adjusted)
Net income........................................ $394.6 $196.0 $149.8
Weighted average shares outstanding:
Basic .......................................... 215.0 207.6 205.7
Employee stock options and other ...................... 8.6 9.3 11.0
Diluted......................................... 223.6 216.9 216.7
Income per share:
Basic .......................................... $ 1.84 $ .94 $ .73
Diluted......................................... $ 1.76 $ .90 $ .69
Antidilutive common share equivalents excluded* ............ 1.9 6.0 6.0
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WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)