Western Digital 2014 Annual Report Download - page 54

Revenue and Accounts Receivable
In accordance with standard industry practice, we provide 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 we provide resellers and OEMs with other sales incentive programs. At the time we recognize revenue to resellers
and OEMs, we record a reduction of revenue for estimated price protection until the resellers sell such inventory to
their customers and we also record a reduction of revenue for the other programs in effect. We base these adjustments
on several factors including anticipated price decreases during the reseller holding period, resellers’ 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 differs from our expectations, our
operating results could be materially affected. We also have programs under which we reimburse qualified distrib-
utors and retailers for certain marketing expenditures, which are recorded as a reduction of revenue. These amounts
generally vary according to several factors including industry conditions, seasonal demand, competitor actions, chan-
nel mix and overall availability of product. Generally, total sales incentive and marketing programs range from 7% to
11% of gross revenues per quarter. For 2014, sales incentive and marketing programs were 8% of gross revenues.
Changes in future customer demand and market conditions may require us to adjust our incentive programs as a per-
centage of gross revenue from the current range. Adjustments to revenues due to changes in accruals for these pro-
grams related to revenues reported in prior periods have averaged 0.7% of quarterly gross revenue since the first
quarter of fiscal 2012. Customer sales incentive and marketing programs are recorded as a reduction of revenue.
We record 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, we routinely analyze the different receivable
aging categories and establish reserves based on a combination of past due receivables and expected future losses based
primarily on our 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 our overall loss history changes significantly, an adjust-
ment in our allowance for doubtful accounts would be required, which could materially affect operating results.
We establish provisions against revenue and cost of revenue for sales returns in the same period that the related
revenue is recognized. We base these provisions 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
We record an accrual for estimated warranty costs when revenue is recognized. We generally warrant our prod-
ucts for a period of one to five years. Our warranty provision considers estimated product failure rates and trends,
estimated replacement costs, estimated repair costs which include scrap costs, and estimated costs for customer com-
pensatory 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 profit 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.
Inventories
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 (“FIFO”) 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
48