Seagate 2006 Annual Report Download - page 65

Table of Contents
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company estimates product warranty costs at the time revenue is recognized. The Company generally
warrants its products for a period of one to five years. The Company’s warranty provision considers estimated
product failure rates and trends (including the timing of product returns during the warranty periods), estimated
repair or replacement costs and estimated costs for customer compensatory claims related to product quality issues, if
any. The Company uses a statistical model to help with its estimates and the Company exercises considerable
judgment in determining the underlying estimates. Should actual experience in any future period differ significantly
from its estimates, or should the rate of future product technological advancements fail to keep pace with the past, the
Company’s future results of operations could be materially affected. The Company’s judgment is subject to a greater
degree of subjectivity with respect to newly introduced products and legacy Maxtor-designed products because of
limited experience with those products upon which to base its warranty estimates. The Company continually
introduces new products and has recently begun a shift to disc drive products that utilize perpendicular recording
technology. The actual results with regard to warranty expenditures could have a material adverse effect on the
Company’
s results of operations if the actual rate of unit failure, the cost to repair a unit, or the actual cost required to
satisfy customer compensatory claims are greater than that which the Company has used in estimating the warranty
expense accrual. The Company also exercises judgment in estimating its ability to sell certain repaired disc drives.
To the extent such sales fall below the Company’s forecast, warranty cost will be adversely impacted.
The Company’s recording of deferred tax assets each period depends primarily on the Company’s ability to
generate current and future taxable income in the United States and certain foreign jurisdictions. Each period, the
Company evaluates the need for a valuation allowance for its deferred tax assets and adjusts the valuation allowance
so that net deferred tax assets are recorded only to the extent the Company concludes it is more likely than not that
these deferred tax assets will be realized. With the Company’s acquisition of Maxtor, the realizability of
U.S. deferred tax assets was determined on a consolidated return basis. As a result, Maxtor’s deferred tax assets that
were determined to be realizable were recorded as a reduction of goodwill and Seagate deferred tax assets that were
determined to be no longer realizable were written off with a charge to income tax expense at the date of acquisition.
In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Statement (“SFAS”)
No. 141,
Business Combinations (“SFAS No. 141”), the purchase price of an acquired company is allocated between
tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated
fair values, with the residual of the purchase price recorded as goodwill. The Company engages third-party appraisal
firms to assist management in determining the fair values of certain assets acquired and liabilities assumed. Such
valuations require management to make significant judgments, estimates and assumptions, especially with respect to
intangible assets. Management makes estimates of fair value based upon assumptions it believes to be reasonable.
These estimates are based on historical experience and information obtained from the management of the acquired
companies, and are inherently uncertain. Critical estimates in valuing certain of the intangible assets include but are
not limited to: future expected cash flows from existing technology, customer relationships, trade names, and other
intangible assets; the acquired company’s brand awareness and market position, as well as assumptions about the
period of time the acquired brand will continue to be used in the combined company’s product portfolio; and
discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such
assumptions, estimates or actual results.
The Company is required to periodically evaluate the carrying values of its intangible assets for impairment. If
any of the Company’s intangible assets are determined to be impaired, the Company may have to write down the
impaired asset and its earnings would be adversely impacted in the period that occurs.
At June 29, 2007, the Company’s goodwill totaled approximately $2.3 billion and its identifiable other
intangible assets totaled $188 million. In accordance with the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets
(“SFAS No. 142”), the Company assesses the impairment of goodwill at least annually, or more
often if warranted by events or changes in circumstances indicating that the carrying value may exceed its fair value.
This assessment may require the projection and discounting of cash flows, an analysis of the Company’s market
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