Western Digital 2010 Annual Report Download - page 52

Warranty
We record an accrual for estimated warranty costs when 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, estimated
repair or replacement costs and estimated costs for customer compensatory claims related to product quality issues, if any.
We use a statistical warranty tracking model to help prepare our estimates and assist us in exercising judgment in
determining the underlying estimates. Our statistical tracking model captures specific detail on hard drive reliability,
such as factory test data, historical field return rates, and costs to repair by product type. Our judgment is subject to a
greater degree of subjectivity with respect to newly introduced products because of limited field experience with those
products upon which to base our warranty estimates. We review our warranty accrual quarterly for products shipped in
prior periods and which are still under warranty. Any changes in the estimates underlying the accrual may result in
adjustments that impact current period gross margin and income. Such changes are generally a result of differences
between forecasted and actual return rate experience and costs to repair. If actual product return trends, costs to repair
returned products or costs of customer compensatory claims differ significantly from our estimates, our future results of
operations could be materially affected. For a summary of historical changes in estimates related to pre-existing warranty
provisions, refer to Part II, Item 8, Note 4 in the Notes to the Consolidated Financial Statements included in this Annual
Report on Form 10-K.
Inventory
We value inventories at the lower of cost (first-in, first-out and weighted average methods) or net realizable value.
We use the first-in, first-out method to value the cost of the majority of our inventories, while we use the weighted-
average method to value precious metal inventories. Weighted-average cost is calculated based upon the cost of precious
metals at the time they are received by us. We have determined that it is not practicable to assign specific costs to
individual units of precious metals and, as such, we relieve our precious metals inventory based on the weighted-average
cost of the inventory at the time the inventory is used in production. The weighted average method of valuing precious
metals does not materially differ from a first-in, first-out method. We record inventory write-downs for the valuation of
inventory at the lower of cost or net realizable value by analyzing market conditions and estimates of future sales prices as
compared to inventory costs and inventory balances.
We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing estimated
demand, inventory on hand, sales levels and other information, and reduce inventory balances to net realizable value for
excess and obsolete inventory based on this analysis. Unanticipated changes in technology or customer demand could
result in a decrease in demand for one or more of our products, which may require a write down of inventory that could
materially affect operating results.
Litigation and Other Contingencies
We disclose material contingencies deemed to be reasonably possible and accrue loss contingencies when, in
consultation with our legal advisors, we conclude that a loss is probable and reasonably estimable. The ability to predict
the ultimate outcome of such matters involves judgments, estimates and inherent uncertainties. The actual outcome of
such matters could differ materially from management’s estimates. Refer to Part II, Item 8, Note 5 in the Notes to
Consolidated Financial Statements, included in this Annual Report on Form 10-K.
Income Taxes
We account for income taxes under the asset and liability method, which provides that deferred tax assets and
liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of our assets and
liabilities and expected benefits of utilizing net operating loss (“NOL”) and tax credit carryforwards. We record a
valuation allowance when it is more likely than not that the deferred tax assets will not be realized. Each quarter we
evaluate the need for a valuation allowance for our deferred tax assets and we adjust the valuation allowance so that we
record net deferred tax assets only to the extent that we conclude it is more likely than not that these deferred tax assets
will be realized.
We recognize liabilities for uncertain tax positions based on a two-step process. To the extent a tax position does not
meet a more-likely-than-not level of certainty, no benefit is recognized in the financial statements. If a position meets the
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