Seagate 2007 Annual Report Download - page 76

Table of Contents
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
—
Seagate Technology (
“
Seagate,
”
or
“
the Company
”
)
designs, manufactures and markets rigid disc drives. Hard
disc drives, which are commonly referred to as disc drives or hard drives, are used as the primary medium for storing electronic data in systems
ranging from desktop and notebook computers, and consumer electronics devices to data centers delivering electronic data 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 a wide variety of devices such as digital video recorders (DVRs), gaming devices and other consumer electronic devices that require
storage. The Company sells its disc drives primarily to major original equipment manufacturers (OEMs), distributors and retailers. The Company
also sells its branded storage solutions under both the Seagate and 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, accounting for income taxes, 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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