WARRANTY OBLIGATIONS

The Company’s warranty activities during the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Balance, at beginning of period	$	26,777		$	11,412		$	21,338		$	8,738
Accruals for warranties issued during the period	1,392			2,515			4,802			6,571
Changes in estimates	3,823			2,896			8,537			2,539
Settlements	(2,626		)	(1,330		)	(5,311		)	(2,355		)
Balance, at end of period	$	29,366		$	15,493		$	29,366		$	15,493
Current portion included in accrued liabilities							$	8,434		$	3,589
Long-term portion							$	20,932		$	11,904

Included within warranty expense in the three and nine months ended September 30, 2013 were net changes in estimates of $3.8 million and $8.5 million, respectively. During the three and nine months ended September 30, 2013, the Company experienced actual failures of its second generation microinverters that exceeded its then current failure rate estimate. Based on continuing analysis of field performance data and diagnostic root-cause failure analysis performed on returned units, the Company concluded that it was necessary to increase the estimated failure rates for its second generation product and recorded additional warranty expense of $7.3 million and $15.9 million for the three and nine months ended September 30, 2013, respectively. In addition, the Company recorded a reduction to warranty expense of $3.1 million for the three and nine months ended September 30, 2013 related to a decrease in the expected failure rate of the Company's third generation product. During the third quarter of 2013, the Company concluded that there was sufficient historical data of actual field performance of previously sold third generation products to support a lower estimated failure rate. Further decreases to warranty expense were $0.4 million and $0.1 million of net decreases in estimated replacement costs for the three and nine months ended September 30, 2013, respectively. In addition, for the nine months ended September 30, 2013, the Company updated its estimated claim rates for all product generations resulting in a decrease to warranty expense of $4.2 million. The revision to estimated claim rates was based on the Company’s observed historical end user behavior and assumptions with respect to expected customer behavior over the warranty term (15 years for first and second generation products, up to 25 years for third and fourth generation products).

Included within warranty expense in the three and nine months ended September 30, 2012 were net changes in estimates of $2.9 million and $2.5 million, respectively. During the three and nine months ended September 30, 2012, the Company experienced actual failures of its second generation microinverters that exceeded its then current failure rate estimate. Based on continuing analysis of field performance data and diagnostic root-cause failure analysis performed on returned units, the Company concluded that it was necessary to increase the estimated failure rates for its second generation product and recorded additional warranty expense of $4.8 million and $4.4 million for the three and nine months ended September 30, 2012, respectively. In addition, the Company recorded a reduction to warranty expense of $1.9 million for the three and nine months ended September 30, 2012. During the third quarter of 2012, the Company updated the estimated per unit shipping cost for replacement units delivered to customers and reduced warranty expense to reflect a revision in its business practice. Prior to the third quarter of 2012, the Company’s business practice was to expedite shipment of all replacement units to customers to fulfill warranty claims. These shipping costs are included in the Company’s estimate of total per unit replacement cost. Beginning in the third quarter of 2012, the Company revised its business practice to utilize non-expedited shipping terms for future replacement units, resulting in the reduction in estimated future replacement costs.

If actual failure rates, claim rates or replacement costs differ from the Company’s estimates in future periods, changes to these estimates would be required, resulting in increases or decreases to the Company’s warranty obligations. Such increases or decreases could be material.