Seagate 2006 Annual Report Download - page 64

Table of Contents
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations — Seagate Technology (“Seagate, or the Company”) designs, manufactures and markets
rigid disc drives. Rigid disc drives, which are commonly referred to as disc drives, are used as the primary medium
for storing electronic information in systems ranging from desktop and notebook computers and consumer
electronics devices to data centers delivering information over corporate networks and the Internet. The Company
produces a broad range of disc drive products addressing enterprise applications, where its products are primarily
used in enterprise servers, mainframes and workstations; desktop applications, where its products are used in desktop
computers; mobile computing applications, where its products are used in notebook computers; and consumer
electronics applications, where its products are used in digital video recorders, digital music players and gaming
devices. The Company sells its disc drives primarily to major original equipment manufacturers (OEMs), distributors
and retailers. The Company also provides data storage services through EVault, Inc. (“EVault”), which it acquired in
fiscal year 2007. The Company also sells storage products containing its disc drives under the Seagate Technology
(“Seagate”) and Maxtor Corporation (“Maxtor”) brands.
Critical Accounting Policies and Use of Estimates — The preparation of financial statements in accordance
with U.S. generally accepted accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the Company’s Consolidated Financial Statements and accompanying notes. Actual
results could differ materially from those estimates. The methods, estimates and judgments the Company uses in
applying its most critical accounting policies have a significant impact on the results the Company reports in its
consolidated financial statements. The SEC has defined the most critical accounting policies as the ones that are most
important to the portrayal of the Company’s financial condition and operating results, and require the Company to
make its 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, the Company’s 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, these policies are discussed further, as well as the estimates and
judgments involved. The Company also has other key accounting policies and accounting estimates relating to
uncollectible customer accounts, valuation of inventory, valuation of share-based payments (see Note 3) and
acquisition related restructuring (see Note 10). The Company believes that these other accounting policies and
accounting estimates either do not generally require it 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 the Company’s reported results of operations
for a given period.
The Company establishes 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 the Company or other agreed upon rebate programs. The Company
provides for these obligations at the time that revenue is recorded based on estimated requirements. The Company
estimates 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. The Company’s estimates reflect contractual
arrangements but also the Company’s judgment relating to variables such as customer claim rates and attainment of
program goals, and inventory and sell-through levels reported by the Company’s distribution customers. During
periods in which the Company’s distributors’ inventories of its products are at higher than historical levels, the
Company’s sales programs estimates are subject to a greater degree of subjectivity and the potential for actual results
to vary is accordingly higher. Currently, the Company’s distributors’ inventories are within the historical range.
Significant actual variations in any of the factors upon which the Company bases its contra-revenue estimates could
have a material effect on the Company’s operating results. In addition, the Company’s failure to accurately predict
the level of future sales returns by its distribution customers could have a material impact on the Company’
s financial
condition and results of operations.
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1.
Summary of Significant Accounting Policies