3Ware 2005 Annual Report Download - page 25

Over the last several years, we have undertaken significant restructuring activities in an effort to reduce
operating costs. In addition, in an effort to diversify our customer base and markets that we serve, we have also
made several acquisitions. In September 2003 and January 2004, we purchased assets and licensed intellectual
property associated with IBM’s PowerPRS Switch Fabric product line, or the PRS Business, for approximately
$51 million in cash to complement our existing communications products portfolio. In October 2003, we
completed the acquisition of all outstanding shares of JNI Corporation, a provider of Fibre Channel hardware and
software products that are critical elements of storage networks, for approximately $196.4 million in cash. In
April 2004, we completed the acquisition of 3ware, Inc., a provider of high-performance, high-capacity SATA
storage solutions, for a purchase price of approximately $145 million in cash. In May 2004 and December 2004,
we acquired intellectual property and a portfolio of assets associated with IBM’s 400 series of embedded
PowerPC®standard products, or the Embedded Products Business, for approximately $232 million in cash. The
PowerPC 400 series product line targets Internet, communication, data storage, consumer and imaging
applications.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles generally accepted in the
United States requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the
reporting period. We regularly evaluate our estimates and assumptions related to inventory valuation and
warranty liabilities, which affects our cost of sales and gross margin; the valuation of purchased intangibles and
goodwill, which affects our amortization and impairments of goodwill and other intangibles; the valuation of
restructuring liabilities, which affects the amount and timing of restructuring charges; and the valuation of
deferred income taxes, which affects our income tax expense and benefit. We also have other key accounting
policies, such as our policies for revenue recognition, including the deferral of a portion of revenues on sales to
distributors, and allowance for bad debts. The methods, estimates and judgments we use in applying these most
critical accounting policies have a significant impact on the results we report in our financial statements. We base
our estimates and assumptions on historical experience and on various other factors that we believe 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. The actual results experienced by
us may differ materially and adversely from management’s estimates. To the extent there are material differences
between our estimates and the actual results, our future results of operations will be affected.
We believe the following critical accounting policies require us to make significant judgments and estimates
in the preparation of our consolidated financial statements.
Inventory Valuation and Warranty Liabilities
Our policy is to value inventories at the lower of cost or market on a part-by-part basis. This policy requires
us to make estimates regarding the market value of our inventories, including an assessment of excess or obsolete
inventories. We determine excess and obsolete inventories based on an estimate of the future demand for our
products within a specified time horizon, generally 12 months. The estimates we use for future demand are also
used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If
our demand forecast is greater than our actual demand we may be required to take additional excess inventory
charges, which would decrease gross margin and net operating results in the future. Our products typically carry
a one to three year warranty. We establish reserves for estimated product warranty costs at the time revenue is
recognized. Although we engage in extensive product quality programs and processes, our warranty obligation is
affected by product failure rates, use of materials and service delivery costs incurred in correcting any product
failure. Should actual product failure rates, use of materials or service delivery costs differ from our estimates,
additional warranty reserves could be required, which could reduce our gross margins.
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