Western Digital 2011 Annual Report Download - page 59

Download and view the complete annual report

Please find page 59 of the 2011 Western Digital annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 100

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100

The Company did not record any impairments to long-lived assets during 2011 or 2010. The Company recorded
impairments to certain long-lived assets during 2009. See Note 13.
Revenue and Accounts Receivable
Revenue is recognized when the title and risk of loss have passed to the customer, there is persuasive evidence of an
arrangement, delivery has occurred, or services have been rendered, the sales price is fixed or determinable and
collectability is reasonably assured. The Company establishes provisions against revenue and cost of revenue for estimated
sales returns in the same period that the related revenue is recognized based on existing product return notifications. If
actual sales returns exceed expectations, an increase in the sales return accrual would be required, which could materially
affect operating results.
In accordance with standard industry practice, the Company provides distributors and retailers (collectively referred
to as “resellers”) with limited price protection for inventories held by resellers at the time of published list price
reductions, and the Company provides resellers and OEMs with other sales incentive programs. At the time the Company
recognizes revenue to resellers and OEMs, a reduction of revenue is recorded for estimated price protection until the
resellers sell such inventory to their customers and the Company also records a reduction of revenue for the other
programs in effect. The Company bases these adjustments on several factors including anticipated price decreases during
the reseller holding period, reseller’s sell-through and inventory levels, estimated amounts to be reimbursed to qualifying
customers, historical pricing information and customer claim processing. If customer demand for hard drives or market
conditions differ from the Company’s expectations, the Company’s operating results could be materially affected. The
Company also has programs under which it reimburses qualified distributors and retailers for certain marketing
expenditures, which are recorded as a reduction of revenue. Sales incentive and marketing programs are recorded as a
reduction of revenue.
The Company records an allowance for doubtful accounts by analyzing specific customer accounts and assessing the
risk of loss based on insolvency, disputes or other collection issues. In addition, the Company routinely analyzes the
different receivable aging categories and establishes reserves based on a combination of past due receivables and expected
future losses based primarily on its historical levels of bad debt losses. If the financial condition of a significant customer
deteriorates resulting in its inability to pay its accounts when due, or if the Company’s overall loss history changes
significantly, an adjustment in the Company’s allowance for doubtful accounts would be required, which could
materially affect operating results.
The Company establishes provisions against revenue and cost of revenue for sales returns in the same period that the
related revenue is recognized. These provisions are based on existing product return notifications. If actual sales returns
exceed expectations, an increase in the sales return accrual would be required, which could materially affect operating
results.
Warranty
The Company records an accrual for estimated warranty costs when revenue is recognized. The Company generally
warrants its products for a period of one to five years. The 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. A statistical warranty tracking model is used to help prepare estimates and assist the
Company in exercising judgment in determining the underlying estimates. The 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. Management’s 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 warranty estimates. Management reviews the
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
53
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)