Seagate 2006 Annual Report Download - page 55

Table of Contents
Off-Balance Sheet Arrangements
As of June 29, 2007, we did not have any material off-balance sheet arrangements (as defined in Item 303(a)(4)
(ii) of Regulation S-K).
Critical Accounting Policies
The methods, estimates and judgments we use in applying our most critical accounting policies have a
significant impact on the results we report in our consolidated financial statements. The SEC has defined the most
critical accounting policies as the ones that are most important to the portrayal of our financial condition and
operating results, and require us to make our most difficult and subjective judgments, often as a result of the need to
make estimates of matters that are highly uncertain at the time of estimation. Based on this definition, our most
critical policies include: establishment of sales program accruals, establishment of warranty accruals, valuation of
deferred tax assets as well as the valuation of intangibles and goodwill. Below, we discuss these policies further, as
well as the estimates and judgments involved. We also have other key accounting policies and accounting estimates
relating to uncollectible customer accounts, valuation of inventory, valuation of share-based payments and
acquisition related restructuring. We believe that these other accounting policies and accounting estimates either do
not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that
they would have a material impact on our reported results of operations for a given period.
Establishment of Sales Program Accruals. We establish certain distributor and OEM sales programs aimed at
increasing customer demand. For the distribution channel, these programs typically involve rebates related to a
distributor’
s level of sales, order size, advertising or point of sale activity and price protection adjustments. For OEM
sales, rebates are typically based on an OEM customer’s volume of purchases from Seagate or other agreed upon
rebate programs. We provide for these obligations at the time that revenue is recorded based on estimated
requirements. We estimate these contra-revenue rebates and adjustments based on various factors, including price
reductions during the period reported, estimated future price erosion, customer orders, distributor sell-through and
inventory levels, program participation, customer claim submittals and sales returns. Our estimates reflect contractual
arrangements but also our judgment relating to variables such as customer claim rates and attainment of program
goals, and inventory and sell-through levels reported by our distribution customers.
While we believe we have sufficient experience and knowledge of the market and customer buying patterns to
reasonably estimate such rebates and adjustments, actual market conditions or customer behavior could differ from
our expectations. As a result, actual payments under these programs, which may spread over several months after the
related sale, may vary from the amount accrued. Accordingly, revenues and margins in the period in which the
adjustment occurs may be affected. For example, if the pricing environment is more favorable than we anticipated, as
it was in the quarter ended December 2006, accruals for forward price protection may be higher than needed.
Conversely, in the more severely price-competitive second half of fiscal year 2007, utilization of special price
adjustments was higher than expected. In addition, during periods in which our distributors’ inventories of our
products are at higher than historical levels, our contra-revenue estimates are subject to a greater degree of
subjectivity and the potential for actual results to vary is accordingly higher. Currently, our distributors’ inventories
are within the historical range.
Significant actual variations in any of the factors upon which we base our contra-revenue estimates could have a
material effect on our operating results. Since fiscal year 2005, total sales programs have ranged from 5% to 9% of
gross revenues. Due to the competitive pricing environment in our industry, sales programs as a percentage of gross
revenue may increase from the current range. If such rebates and incentives trend upwards, revenues and margins
will be reduced. Adjustments to revenues due to under or over accruals for sales programs related to revenues
reported in prior periods have averaged 0.3% of quarterly gross revenue throughout fiscal years 2006 and 2007.
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(2)
Includes total future minimum rent expense under non-cancelable leases for both occupied and abandoned
facilities (rent expense is shown net of sublease income).
(3)
Purchase obligations are defined as contractual obligations for purchase of goods or services, which are
enforceable and legally binding on us, and that specify all significant terms.