Seagate 2009 Annual Report Download - page 66

Table of Contents
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 competitive than we
anticipated, accruals for forward price protection rebates may be inadequate. In periods when pricing is less competitive, accruals for forward
price protection rebates may exceed actual payments. 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 at the low end of 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. For fiscal years 2008 and 2009, total sales programs have ranged from 9% to 12% of gross revenues. In fiscal year 2010, sales
programs dropped to approximately 6% of gross revenue, reflecting a more stable pricing environment resulting from industry-wide supply
constraints during the first half of fiscal year 2010 and a relatively balanced supply and demand environment during the March 2010 quarter.
Adjustments to revenues due to under or over accruals for sales programs related to revenues reported in prior quarterly periods have averaged
0.4% of quarterly gross revenue for fiscal years 2008 through 2010. Any future shifts in the industry supply-demand balance as well as other
factors may result in a more competitive pricing environment and may cause sales programs as a percentage of gross revenue to increase from
the current or historical levels. If such rebates and incentives trend upwards, revenues and margins will be reduced.
Establishment of Warranty Accruals. We estimate probable product warranty costs at the time revenue is recognized. We generally
warrant our products for a period of one to five years. Our 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. We use a statistical model to help with our estimates and we exercise considerable judgment in
determining the underlying estimates. Should actual experience in any future period differ significantly from our estimates, or should the rate of
future product technological advancements fail to keep pace with the past, our future results of operations could be materially affected. Our
judgment is subject to a greater degree of subjectivity with respect to newly introduced products because of limited experience with those
products upon which to base our warranty estimates.
64