Adaptec 2007 Annual Report Download - page 72

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Table of Contents
PMC has a two-tier distribution network, distinguishing between major and minor distributors. The Company currently has one major distributor for which it
recognizes revenue on a sell-through basis, utilizing information provided by the distributor. This distributor maintains significantly higher levels of inventory
than minor distributors and is given business terms to return a portion of inventory and receive credits for changes in selling prices to end customers, the
magnitude of which is not known at the time goods are shipped to this distributor. PMC personnel are often involved in the sales from this distributor to end
customers and the Company may utilize inventory at the major distributor to satisfy product demand by other customers.
PMC recognizes revenues from minor distributors at the time of shipment. These distributors are also given business terms to return a portion of inventory and
receive credits for changes in selling prices to end customers. At the time of shipment, product prices are fixed and determinable and the amount of future returns
and pricing allowances to be granted in the future can be reasonably estimated and accrued.
The Company has consignment inventory which is held at the customer’s premises. PMC recognizes revenue on these goods when the customer uses them in
production, as that is when title passes to the customer. These sales from consignment inventory are subject to the same warranty terms that are applied to direct
sales.
PMC product sales are subject to warranty claims against regular mechanical or electrical failure. PMC maintains accruals for potential returns based on its
historical experience.
Research and development expenses. The Company expenses research and development (R&D) costs as incurred. R&D costs include payroll and related costs,
materials, services and design tools used in product development, depreciation, and other overhead costs including facilities and computer equipment costs.
Intellectual property (IP) purchased from third parties is capitalized and amortized over the expected useful life of the IP. For the years ended December 30,
2007, December 31, 2006 and 2005, research and development expenses were $159.1 million, $158.7 million, and $118.7 million.
Product warranties. The Company provides a limited warranty on most of its standard products and accrues for the expected cost at the time of shipment. The
Company estimates its warranty costs based on historical failure rates and related repair or replacement costs. The following table summarizes the activity related
to the product warranty liability during fiscal 2007, 2006 and 2005:
(in thousands)
December 30,
2007
December 31,
2006
December 31,
2005
Beginning balance $ 4,331 $ 3,997 $ 3,492
Accrual for new warranties issued 2,098 1,541 1,398
Reduction for payments (584) (759) (207)
Adjustments related to changes in estimate of warranty accrual 394 (448) (686)
Ending balance $ 6,239 $ 4,331 $ 3,997
66
Source: PMC SIERRA INC, 10-K, February 22, 2008