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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 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 judg-
ment 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 esti-
mates, 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 val-
ue. 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
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 FIFO 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
When we become aware of a claim or potential claim, we assess the likelihood of any loss or exposure. We dis-
close information regarding each material claim where the likelihood of a loss contingency is probable or reasonably
possible. If a loss contingency is probable and the amount of the loss can be reasonably estimated, we record an accrual
for the loss. In such cases, there may be an exposure to potential loss in excess of the amount accrued. Where a loss is
not probable but is reasonably possible, or where a loss in excess of the amount accrued is reasonably possible, we dis-
close an estimate of the amount of the loss or range of possible losses for the claim if a reasonable estimate can be
made, unless the amount of such reasonably possible losses is not material to our financial position, results of oper-
ations or cash flows. The ability to predict the ultimate outcome of such matters involves judgments, estimates and
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