TiVo 2009 Annual Report Download - page 58

Table of Contents
Valuation of Inventory. We value inventory at the lower of cost or market with cost determined on the first-in, first-out method. We base write-downs
of inventories upon current facts and circumstances and determine net realizable value on an aggregate pool basis (DVR type). We perform a detailed
assessment of excess and obsolete inventory and purchase commitments at each balance sheet date, which includes a review of, among other factors, demand
requirements and market conditions. Based on this analysis, we record adjustments, when appropriate, to reflect inventory of finished products and materials
on hand at lower of cost or market and to reserve for products or materials which are not forecasted to be used. We also record accruals for charges that
represent management's estimate of our exposure to the contract manufacturer for excess non-cancelable purchase commitments. Although we make every
effort to ensure the accuracy of our forecasts of product demand and pricing assumptions, any significant unanticipated changes in demand, pricing, or
technological developments would significantly impact the value of our inventory and our reported operating results. If we find that our estimates are too
optimistic and determine that our inventory needs to be written down, we will be required to recognize such costs in our cost of revenue at the time of such
determination. Conversely, if we find our estimates are too pessimistic and/or circumstances beyond our control change and we subsequently sell product that
has previously been written down, our gross margin in the period of sale will be favorably impacted. For example, in the quarter ended July 31, 2007, we
anticipated demand would be lower than the previously expected sales of standard definition DVRs and this change in our sales forecast resulted in an
impairment of $7.5 million in raw materials and finished goods inventory and we reserved an additional $3.7 million for excess non-cancelable purchase
commitments. In the subsequent six months ended January 31, 2008, we consumed $4.8 million of this previously impaired inventory. In the fiscal years
ended January 31, 2009 and 2010, we consumed $4.9 million and $1.5 million of such previously impaired inventory, due to better than expected sales of our
standard definition DVR. As of January 31, 2010, the Company maintained a $2.2 million inventory reserve as a result of inventory impairment charges.
Valuation of Stock-Based Compensation. The fair value of our restricted stock awards was calculated based on the fair market value of our stock at the
grant date. We use the Black Scholes option pricing model to determine the fair value of our stock options and ESPP awards which requires input of highly
subjective assumptions, including expected stock price volatility and the estimated life of each award and interest rates.
The expected volatility is based on a combination of historical volatility of our common stock and implied volatility in market traded options on our
common stock. The expected life of stock options granted prior to December 31, 2007 was based on the simplified calculation of expected life. The expected
life of stock options granted after January 1, 2008 is based on historical employee exercise patterns associated with prior similar option grants. The interest
rate is based on the average of U.S. Treasury yield curve on investments with lives approximating the term during the fiscal quarter an option is granted. The
majority of our share-based awards granted in fiscal year 2010 have been in restricted stock units, whose valuation does not require input of these highly
subjective assumptions, including expected stock price volatility and the estimated life of each award and interest rates and thus the valuation is less
judgmental.
54