Business, Basis of Presentation and Summary of Significant Accounting Policies

12 Months Ended

Jun. 26, 2011

Business, Basis of Presentation and Summary of Significant Accounting Policies [Abstract]

Business, Basis of Presentation and Summary of Significant Accounting Policies

1. Business, Basis of Presentation and Summary of Significant Accounting Policies

Business

International Rectifier Corporation (“IR” or the “Company”) designs, manufactures and markets power management semiconductors. Power management semiconductors address the core challenges of power management, power performance and power conservation, by increasing system efficiency, allowing more compact end-products, improving features on electronic devices, and prolonging battery life.

The Company’s products include power metal oxide semiconductor field effect transistors (“MOSFETs”), high voltage analog and mixed signal integrated circuits (“HVICs”), low voltage analog and mixed signal integrated circuits (“LVICs”), digital integrated circuits (“ICs”), radiation-resistant (“RAD-Hard”) power MOSFETs, insulated gate bipolar transistors (“IGBTs”), high reliability DC-DC converters, digital controllers and automotive products packages.

Basis of Presentation and Consolidation

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of the Company and its subsidiaries, which are located in North America, Europe, and Asia. Intercompany balances and transactions have been eliminated in consolidation.

Reclassification

The Company has reclassified net settlement of restricted stock units from cash flow from operating activities to cash flow from financing activities in the consolidated statement of cash flow for the prior year periods to conform to current year presentation. 

Prior period amounts have been adjusted to conform to current year presentation.

Fiscal Year

The Company operates on a 52-53 week fiscal year with the fiscal year ending on the last Sunday in June. Fiscal year 2011 consisted of 52 weeks ending June 26, 2011, fiscal year 2010 consisted of 52 weeks ending June 27, 2010 and fiscal year 2009 consisted of 52 weeks ending June 28, 2009.  Fiscal quarters consist of 13 weeks ending on the last Sunday of the calendar quarter.

Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting period. Actual results may differ from those estimates.

Subsequent Events

The Company evaluates events subsequent to the end of the fiscal year through the date the financial statements are filed with the Securities and Exchange Commission for recognition or disclosure in the consolidated financial statements.  Events that provide additional evidence about material conditions that existed at the date of the balance sheet are evaluated for recognition in the consolidated financial statements.  Events that provide evidence about conditions that did not exist at the date of the balance sheet but occurred after the balance sheet date are evaluated for disclosure in the notes to the consolidated financial statements.

Revenue Recognition and Allowances

Revenue is recognized when there is persuasive evidence of an arrangement, the price to the buyer is fixed or determinable, collection is reasonably assured, and delivery or performance of service has occurred. The Company recognizes revenue upon shipment or upon delivery, depending on specific contractual terms and/or shipping terms with the customer. If title transfer and risk of loss are addressed explicitly in a customer contract or by reference to the standard terms and conditions, those stated terms determine whether the recognition of revenue on product sales to that customer shall be upon either shipment or delivery. If the contract is silent and lacks reference to the Company's standard terms and conditions, and barring other contrary information, transfer of title and risk of loss will follow the historical shipping terms for that customer. If revenue is to be recognized upon delivery, such delivery date is tracked through information provided by the third party shipping company used by the Company to deliver the product to the customer.

Generally, the Company recognizes revenue on sales to distributors using the "sell in" method (i.e. when product is sold to the distributor) rather than the "sell through" method (i.e. when the product is sold by the distributor to the end user). Certain distributors and other customers have limited rights of return (including stock rotation rights) and/or are entitled to price protection, where a rebate credit may be provided to the customer if the Company lowers its price on products held in the distributor's inventory. Additionally, in certain limited cases, the Company may pre-approve a credit to a distributor to facilitate a particular sale by the distributor to an end customer. The Company estimates and establishes allowances for expected future product returns at the time of sale.  The Company records a reduction in revenue for estimated future product returns and future credits to be issued to the customer in the period in which revenues are recognized, and for future credits to be issued in relation to price protection at the time the Company makes changes to its distributor price book. The estimate of future returns and credits is based on historical sales returns, analysis of credit memo data, and other factors known at the time of revenue recognition. The Company monitors product returns and potential price adjustments on an ongoing basis.

The Company also maintains consignment inventory arrangements with certain of its customers. Pursuant to these arrangements, the Company delivers products to a customer or a designated third party warehouse based upon the customer's projected needs, but does not recognize revenue unless and until the customer reports that it has removed the product from the warehouse to incorporate into its end products, assuming all the other revenue recognition criteria are met.

The Company recognizes royalty revenue in accordance with agreed upon terms when performance obligations are satisfied, the amount is fixed or determinable, and collectability is reasonably assured. The amount of royalties recognized is often calculated based on the licensees' periodic reporting to the Company. Any upfront payments are recognized as revenue only if there is no continuing performance obligation when the license commences and collectability is reasonably assured. Otherwise, revenue is amortized over the life of the license or according to performance obligations outlined in the license agreement.

If the Company’s customers’ contracts contain substantive acceptance provisions the Company recognizes revenue in accordance with the specific contract acceptance provisions in these circumstances.

Sales and other taxes directly imposed on revenue-producing transactions are reported on a net (excluded from revenue) basis.

Shipping Costs

Outbound customer shipping costs are expensed as incurred and are included in selling, general and administrative expense. The expense for outbound customer shipments for the fiscal years ended June 26, 2011, June 27, 2010, and June 28, 2009 was $8.2 million, $6.8 million, and $6.0 million, respectively.

Advertising Costs

Advertising costs are expensed as incurred and are included in selling, general and administrative expense. Advertising expense for the fiscal years ended June 26, 2011, June 27, 2010, and June 28, 2009 was $2.8 million, $3.0 million and $3.0 million, respectively.

Research and Development Costs

Research and development (“R&D”) costs, including salaries, departmental general overhead, and allocated expenses, are expensed as incurred.

Environmental Costs

The Company accrues for costs associated with environmental remediation obligations when such losses are probable and reasonably estimable and adjusts its estimates as new facts and circumstances come to its attention. Costs incurred to investigate and remediate contaminated sites are expensed when these costs are identified and estimable and are not discounted to their present value.

Interest (Income) Expense, Net

Interest (income) expense, net, for the fiscal years ended June 26, 2011, June 27, 2010, and June 28, 2009 was as follows (in thousands):

	Fiscal Year Ended
	June 26, 2011			June 27, 2010			June 28, 2009
Interest income	$	(10,679	)	$	(11,748	)	$	(13,033	)
Interest expense		565			527			1,339
Interest income, net	$	(10,114	)	$	(11,221	)	$	(11,694	)

No interest was capitalized for the fiscal years ended June 26, 2011, June 27, 2010 and June 28, 2009.

Income Taxes

Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted rates in effect during the year in which the differences are expected to reverse. This process requires estimating both the Company’s geographic mix of taxable income, and its current tax exposures in each jurisdiction where it operates. These estimates involve complex issues, require extended periods of time to resolve, and require the Company to make judgments, such as anticipating the positions that it will take on tax returns prior to actually preparing the returns and the outcomes of disputes with tax authorities.  The Company is also required to measure and record deferred tax assets and liabilities and estimate the period of time over which the deferred tax assets will be realized. Realization of deferred tax assets is dependent upon generating sufficient taxable income, carryback of losses offsetting deferred tax liabilities, and the availability of tax planning strategies. Valuation allowances are established for the deferred tax assets that the Company believes do not meet the “more likely than not” criteria. Judgments regarding future taxable income may be revised due to changes in market conditions, tax laws, or other factors. If the Company’s assumptions and estimates change in the future, the valuation allowances established may be increased, resulting in increased income tax expense. Conversely, if the Company is ultimately able to use all or a portion of the deferred tax assets for which a valuation allowance has been established, the related portion of the valuation allowance will be released to reduce income tax expense or goodwill, credit other comprehensive income, or credit additional paid-in capital, as applicable. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities recorded in the Company’s tax provision. The Company recognizes any interest and penalties associated with income taxes in income tax expense.

As of June 26, 2011, U.S. income taxes have not been provided on approximately $79.1 million of undistributed earnings of foreign subsidiaries since those earnings are considered to be invested indefinitely. Determination of the amount of unrecognized deferred tax liabilities for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable.  

The Company recognizes certain tax liabilities for anticipated tax audit findings in the United States and other tax jurisdictions based on its estimate of whether, and the extent to which additional taxes would be due. If the audit findings result in actual taxes owed more or less than what the Company had anticipated, its income tax expense would be increased or decreased, accordingly, in the period of the determination.

Net Income (Loss) per Common Share

Net income (loss) per common share—basic is computed using the two-class method with net income (loss) available to common stockholders (the numerator) divided by the weighted average number of common shares outstanding (the denominator) during the period. In general, the computation of net (loss) income per common share—diluted is similar to the computation of net income per common share—basic except that the denominator is increased to include the number of additional common shares that would have been outstanding upon the exercise of stock options and vesting of restricted stock units using the treasury stock method.  Under the treasury stock method, the Company reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options assumed to be exercised and restricted stock units vested, and related unrecognized compensation.

Net income available to common stockholders is determined using the two-class method which requires that net income be allocated between the weighted average common shares outstanding and the weighted average participating securities outstanding for the period.  For fiscal years 2011, 2010, and 2009, the Company’s participating securities are the unvested, outstanding restricted stock units (“RSUs”) that have the right to receive dividend equivalents.  For periods with net losses, participating securities are anti-dilutive and are not allocated net losses.

Statements of Cash Flows

Components of the changes of operating assets and liabilities for the fiscal years ended June 26, 2011, June 27, 2010 and June 28, 2009 were comprised of the following (in thousands):

	Fiscal Year Ended
	June 26, 2011			June 27, 2010			June 28, 2009
Trade accounts receivable	$	(31,475	)	$	(59,013	)	$	4,112
Inventories		(86,517	)		(18,259	)		11,785
Prepaid expenses and other receivables		(518	)		(949	)		12,860
Accounts payable		19,714			30,486			(15,078	)
Accrued salaries, wages and commissions		12,788			10,393			(9,927	)
Deferred compensation		1,335			403			(1,117	)
Accrued income taxes		(2,042	)		(26,378	)		(21,638	)
Other accrued expenses		5,980			(37,417	)		13,717
Changes in operating assets and liabilities	$	(80,735	)	$	(100,734	)	$	(5,286	)

Supplemental disclosures of cash flow information (in thousands):

	Fiscal Year Ended
	June 26, 2011		June 27, 2010			June 28, 2009
Cash paid (received) during the year for:
Interest	$	562	$	541		$	725
Income taxes		6,897		(20,172	)		7,791
Non-cash investing activities:
Increase (decrease) in liabilities accrued for property, plant and equipment purchases	$	16,054		2,320			1,059

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels (with Level 3 being the lowest) defined as follows:

·   Level 1—Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

·   Level 2—Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.

·   Level 3—Inputs include management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument's valuation.

 Financial assets and liabilities measured and recorded at fair value on a recurring basis in the Company’s consolidated balance sheet as of June 26, 2011 (in thousands):

Assets and Liabilities:	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	15,996		$	—		$	15,996		$	—
Short-term investments		185,541			70,292			115,249			—
Long-term investments		13,325			9,530			3,014			781
Other assets		33,004			30,231			—			2,773
Other accrued expenses		(309	)		—			(309	)		—
Other long-term liabilities		(8,038	)		(7,638	)		—			(400	)
Total	$	239,519		$	102,415		$	133,950		$	3,154
Fair value as a percentage of total		100.0	%		42.8	%		55.9	%		1.3	%
Level 3 as a percentage of total assets											0.2	%

Financial assets and liabilities measured and recorded at fair value on a recurring basis in the Company’s consolidated balance sheet as of June 27, 2010 (in thousands):

Assets and Liabilities:	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	27,113		$	—		$	27,113		$	—
Short-term investments		309,384			226,390			82,994			—
Long-term investments		43,751			6,600			13,818			23,333
Prepaid expenses and other receivables		226			—			226			—
Other assets		27,487			25,508			(146	)		2,125
Other long-term liabilities		(6,022	)		(6,022	)		—			—
Total	$	401,939		$	252,476		$	124,005		$	25,458
Fair value as a percentage of total		100.0	%		62.8	%		30.9	%		6.3	%
Level 3 as a percentage of total assets											1.8	%

The fair value of investments, derivatives, and other assets and liabilities are disclosed in Notes 2, 4, 5, and 7, respectively.  Cash and cash equivalents included $16.0 million of commercial paper as of June 26, 2011 and $26.6 million of commercial paper and $0.6 million of corporate notes as of June 27, 2010.

For the fiscal year ended June 26, 2011, the Company measured at fair value the assets and liabilities acquired in (i) the acquisition of CHiL Semiconductor Corporation, (ii) the acquisition of tangible personal and intellectual property of a privately held domestic corporation and (iii) the purchase of intellectual property, including patent and patent rights, as well as 25.0 million shares of preferred stock, from another privately held domestic company as described in Note 2 on a nonrecurring basis using significant unobservable inputs or Level 3 inputs.

As of June 27, 2010, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis.

For the fiscal year ended June 26, 2011, for each class of assets and liabilities, there were no transfers between those valued using quoted prices in active markets for identical assets (Level 1) and those valued using significant other observable inputs (Level 2).  The Company determines at the end of each reporting period whether a given financial asset or liability is valued using Level 1, Level 2 or Level 3 inputs.

As of June 26, 2011, the Company’s investments fair valued using Level 2 inputs included commercial paper, corporate debt securities and U.S. government agency obligations.  These assets and liabilities were valued primarily using an independent valuation firm based on the market approach using various inputs such as trade data, broker/dealer quotes, observable market prices for similar securities and other available data.  The Company also fair values its foreign currency forward contracts using Level 2 inputs based on readily observable market parameters for all substantial terms of derivatives.

Level 3 Valuations

The following tables provide a reconciliation of the beginning and ending balance of items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the fiscal year ended June 26, 2011 (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Liabilities		Assets
	Contingent Consideration		Derivatives		Investments			Total
Beginning balance at June 27, 2010	$	―	$	2,121	$	23,337		$	25,458
Total gains or (losses) (realized or unrealized):
Included in earnings		―		652		7,949			8,601
Included in other comprehensive income		―		—		(5,026	)		(5,026	)
Purchases, maturities, and sales:
Purchases/additions		400		―		1,500			1,500
Maturities/prepayments		―		―		(3,737	)		(3,737	)
Sales		―		―		(21,738	)		(21,738	)
Transfers into level 3		―		―		―			―
Transfers out of level 3		—		—		(1,504	)		(1,504	)
Ending balance at June 26, 2011	$	400	$	2,773	$	781		$	3,554

At the beginning of the second quarter of fiscal year 2011, equity investments in a private domestic company were transferred out of Level 3 securities.  These equity investments, after their initial valuation, have been accounted for on the cost method as they do not have readily determinable fair values.

The following tables provide a reconciliation of the beginning and ending balance of items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the fiscal year ended June 27, 2010 (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Derivatives		Investments			Total
Beginning balance at June 28, 2009	$	—	$	40,834		$	40,834
Total gains or losses (realized or unrealized):
Included in earnings		—		5,084			5,084
Included in other comprehensive income		—		2,351			2,351
Purchases, issuance, and settlements:
Purchases/additions		2,121		—			2,121
Maturities		—		—			—
Sales		—		(24,932	)		(24,932	)
Transfers into Level 3		—		—			—
Transfers out of level 3		—		—			—
Ending balance at June  27, 2010	$	2,121	$	23,337		$	25,458

When at least one significant valuation model assumption or input used to measure the fair value of financial assets or liabilities is unobservable in the market, they are deemed to be measured using Level 3 inputs.  These Level 3 inputs may include pricing models, discounted cash flow methodologies or similar techniques where at least one significant model assumption or input is unobservable. The Company uses Level 3 inputs to value financial assets that include a non-transferable put option on a strategic investment and a liability for an acquisition-related contingent consideration arrangement. Level 3 inputs are also used to value investment securities that include certain mortgage-backed securities and asset-backed securities for which there is a decreased observability of market pricing for these investments. At June 26, 2011, these securities were valued primarily using an independent valuation firm or broker pricing models that incorporate transaction details such as maturity, timing and the amount of future cash flows, as well as assumptions about liquidity and credit valuation adjustments of marketplace participants at June 26, 2011.

Gains and losses attributable to financial assets whose fair value is determined by using Level 3 inputs and included in earnings consist of mark-to-market adjustments for derivatives and other-than-temporary impairments on investments.  These gains and losses are included in other (income) expense, net.  Realized gains or losses on the sale of securities are included in interest (income)/expense, net.

Other-Than-Temporary Impairments of Investments

The Company evaluates securities for other-than-temporary impairment on a quarterly basis.  Impairment is evaluated considering numerous factors, and their relative significance varies depending on the situation.  Factors considered include the length of time and extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer of the securities, the Company’s intent to sell, or whether it is more likely than not that it will be required to sell, the investment before anticipated recovery in fair value.  If, based upon the analysis, it is determined that the impairment is other-than-temporary, the security is written down to fair value, and a loss is recognized through earnings as a component of other (income)/expense, net.

Cash, Restricted Cash, Cash Equivalents, and Investments

The Company classifies all highly liquid investments purchased with original or remaining maturities of ninety days or less at the date of purchase to be cash equivalents. The cost of these investments approximates their fair value. The Company invests excess cash in marketable securities consisting of available-for-sale fixed income securities, as well as strategic investments in the common stock and preferred stock of publicly traded foreign companies.  Unrealized gains and losses on these investments are included in other comprehensive income, a separate component of stockholders’ equity, net of any related tax effect. Realized gains and losses are included in other expense. Declines in value of these investments judged by management to be other-than-temporary, if any, are included in other expense, net.

Investments in non-marketable securities are carried at cost as the Company does not exert significant influence over any of its investments. The Company evaluates the carrying value of its investments for impairment on a periodic basis.

Marketable and non-marketable equity securities are classified as long-term assets in the Company’s consolidated balance sheet.

The Company manages its total portfolio to encompass a diversified pool of investment-grade securities. The Company’s investment policy is to manage its total cash and investments balances to preserve principal and maintain liquidity while maximizing the returns on the investment portfolio.

Cash, restricted cash, cash equivalents and investments as of June 26, 2011 and June 27, 2010 are summarized as follows (in thousands):

	June 26, 2011		June 27, 2010
Cash and cash equivalents	$	298,731	$	229,789
Short-term investments		185,541		309,384
Restricted cash		2,071		3,666
Long-term investments		13,325		43,751
Total cash, restricted cash, cash equivalents and investments	$	499,668	$	586,590

Restricted cash of $1.0 million at June 27, 2010 was maintained to secure the Company’s remaining indemnity obligations, if any, pursuant to the terms of the of the sale of the Company’s former Power Control Systems business (“PCS Business”) to Vishay Intertechnology, Inc. (“Vishay”) (the “Divestiture”). The restricted cash was held by Union Bank of California, as escrow agent. The escrow account was closed in fiscal year 2011. See Note 3, “Gain on Divestiture”.

In addition, the Company had $1.6 and $2.4 million in a short-term deposit account with Bank of America as collateral for an outstanding letter of credit at June 26, 2011 and June 27, 2010, respectively, and approximately $0.5 million and $0.3 million with Citibank at June 26, 2011 and June 27, 2010, respectively, as collateral for travel card transactions.

Inventories

Inventories are stated at the lower of cost (generally first-in, first-out) or market. Inventories are reviewed for excess or obsolescence based upon demand forecasts for a specific time horizon and reserves are established accordingly. Manufacturing costs deemed to be abnormal, such as idle facility expense, excessive spoilage, double freight and re-handling costs are charged as cost of sales in the period incurred.

Inventories at June 26, 2011 and June 27, 2010, were comprised of the following (in thousands):

	June 26, 2011		June 27, 2010
Raw materials	$	63,298	$	40,805
Work-in-process		110,956		77,233
Finished goods		75,920		52,130
Total inventories	$	250,174	$	170,168

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Any gain or loss on retirement or disposition is included in operating expenses. Depreciation is provided using the straight-line method based on the estimated useful lives of the assets, ranging from three to 40 years. Depreciation and amortization expense for the fiscal years ended June 26, 2011, June 27, 2010 and June 28, 2009 was $75.3 million, $68.4 million and $63.8 million, respectively. Property, plant and equipment at June 26, 2011 and June 27, 2010 was comprised of the following (in thousands):

	June 26, 2011			June 27, 2010			Range of Useful Life
Building and improvements	$	176,838		$	177,713			3 - 40
Equipment		1,039,097			937,548			3 - 15
Less: accumulated depreciation and amortization		(887,798	)		(817,397	)
		328,137			297,864
Land		15,894			15,679
Construction-in-progress		100,728			34,202
Total property, plant and equipment	$	444,759		$	347,745

Amortization of improvements to leased premises is recorded using the straight-line method over the shorter of the remaining term of the lease or estimated useful lives of the improvements. Capital leases included in property, plant and equipment were not material at June 26, 2011 and June 27, 2010.

Repairs and maintenance costs are charged to expense as incurred. In the fiscal years ended June 26, 2011, June 27, 2010 and June 28, 2009, repairs and maintenance expenses were $50.1 million, $51.0 million and $31.9 million, respectively.

The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Such events and circumstances include, but are not limited to:

• A significant change in business strategy or in the extent or manner for which the asset is being used or in its physical condition;

• A significant negative change in the business climate, industry conditions, economic conditions or market value of an asset; and

• Current period operating losses or negative cash flow combined with a history of similar losses or a forecast that indicates continuing losses associated with the use of an asset.

The Company evaluates the recoverability of long-lived assets based on the expected undiscounted cash flows for their asset group.

Goodwill and Acquisition-Related Intangible Assets

The Company classifies the difference between the consideration transferred and the fair value of any noncontrolling interest in the acquiree and the fair value of net assets acquired at the date of acquisition as goodwill. The Company classifies intangible assets apart from goodwill if the assets have contractual or other legal rights, or if the assets can be separated and sold, transferred, licensed, rented or exchanged. Depending on the nature of the assets acquired, the amortization period may range from two to 15 years for those acquisition-related intangible assets subject to amortization.

The Company evaluates the carrying value of long-lived assets, including goodwill, on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Goodwill and Other Intangible Assets

The Company evaluates the carrying value of the goodwill and other intangible assets annually during the fourth quarter of each fiscal year and more frequently if it believes indicators of impairment exist. In evaluating goodwill, a two-step goodwill impairment test is applied to each reporting unit. The Company identifies reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. In the first step of the impairment test, the Company estimates the fair value of the reporting unit. If the fair value of the reporting unit is less than the carrying value of the reporting unit, the Company performs the second step which compares the implied fair value of goodwill with the carrying amount of goodwill and writes down the carrying amount of the goodwill to the implied fair value.

The fair value of the Company’s reporting units is determined using the income approach, which estimates fair value of its reporting units based on a discounted cash flow approach.  The discount rate the Company utilized for determining discounted cash flows was 14% based upon its assessment of the risks associated with the projected cash flows and market based estimates of capital costs. In completing the goodwill impairment analysis, the Company tests the appropriateness of reporting units estimated fair value by reconciling the aggregate reporting units fair values with its market capitalization.

The determination of the fair value of the reporting units requires the Company to make significant estimates and assumptions.  These estimates and assumptions include estimates of future revenues and expense growth rates, capital expenditures and the depreciation and amortization, changes in working capital, discount rates, and the selection of appropriate control premiums.  Due to the inherent uncertainty involved in making these estimates, actual future results related to assumed variables could differ from these estimates. Changes in assumptions regarding future results or other underlying assumptions would have a significant impact on either the fair value of the reporting unit or the amount of the goodwill impairment charge.

The Company’s annual evaluation during fiscal years 2011 and 2010 indicated that the fair value of the reporting units was more than their carrying value indicating no impairment.  However, during the third quarter of fiscal year 2009 the Company concluded that events and changes in circumstances, including performance against business plan and the outlook for the business and industry, warranted an interim impairment analysis of goodwill.  Based on the results of this interim goodwill impairment analysis the Company concluded that the Automotive Products and Intellectual Property segments carrying value exceeded their fair value.  As a result the Company recorded a goodwill impairment charge of $23.9 million, $20.1 million of which related to the Intellectual Property segment and $3.8 million related to the Automotive Products segment, during the third quarter of fiscal year 2009.

As discussed in Note 2, “Business Acquisitions”, as a result of two acquisitions in fiscal year 2011, the Company recorded acquisition-related intangible assets of $28.8 million and goodwill of $46.6 million. Goodwill recognized from these acquisitions was assigned to the Company’s Enterprise Power business segment.

In addition, on July 30, 2010, the Company acquired certain intellectual property, including patent and patent rights, as well as 25.0 million shares of preferred stock, from a privately held domestic company for a total of $9.0 million. Of the $9.0 million, $7.5 million was allocated to the intellectual property and $1.5 million was allocated to the preferred stock. The allocation was based upon the estimated fair value of the intellectual property and preferred stock as of the acquisition date. The estimated fair values of the acquired patents and patent rights were determined based upon discounted after-tax cash flows adjusted for the probabilities of successful development and commercialization of the related technology. The $7.5 million allocated to the patents and patent rights will be amortized on a straight-line basis over the estimated life of the patents of 11 years. At June 26, 2011 and June 27, 2010, acquisition-related intangible assets included the following (in thousands):

	Amortization		June 26, 2011
	Periods (Years)		Gross Carrying Amount		Accumulated Amortization			Net
Completed technology		4 - 12	$	52,045	$	(28,560	)	$	23,485
Customer lists		5 - 12		10,430		(5,455	)		4,975
Intellectual property and other		2 - 15		16,763		(8,278	)		8,485
Total acquisition-related intangible assets			$	79,238	$	(42,293	)	$	36,945
	Amortization		June 27, 2010
	Periods (Years)		Gross Carrying Amount		Accumulated Amortization			Net
Completed technology		4 - 12	$	29,679	$	(23,379	)	$	6,300
Customer lists		5 - 12		5,330		(4,858	)		472
Intellectual property and other		5 - 15		7,963		(7,289	)		674
Total acquisition-related intangible assets			$	42,972	$	(35,526	)	$	7,446

As of June 26, 2011, the following table represents the total estimated amortization of intangible assets for the next five succeeding fiscal years (in thousands):

Fiscal Year	Estimated Amortization Expense
2012	$	8,308
2013		6,708
2014		6,420
2015		6,220
2016		4,681
2017 and thereafter		4,608
Total	$	36,945

The carrying amount of goodwill by ongoing segment as of June 26, 2011 and June 27, 2010 was as follows (in thousands):

Business Segments:	June 26, 2011		June 27, 2010
Power Management Devices	$	—	$	—
Energy Saving Products		33,190		33,190
HiRel		18,959		18,959
Enterprise Power		69,421		22,806
Automotive Products		—		—
Intellectual Property		—		—
Total goodwill	$	121,570	$	74,955

As of June 26, 2011, $17.2 million of goodwill is deductible for income tax purposes of which $3.0 million was deducted in the fiscal years ended June 26, 2011, June 27, 2010, and June 28, 2009, respectively.

The changes in the carrying amount of goodwill for the fiscal years ended June 26, 2011 and June 27, 2010 were as follows (in thousands):

Balance, June 28, 2009	$	74,955
Impairment		—
Balance, June 27, 2010		74,955
Additions due to acquisitions		46,615
Balance, June 26, 2011	$	121,570

Other Accrued Expenses

Other accrued expenses at June 26, 2011 and June 27, 2010 were comprised of the following (in thousands):

	June 26, 2011		June 27, 2010
Sales returns	$	34,112	$	27,306
Accrued accounting and legal costs		9,943		10,855
Deferred revenue		16,329		10,200
Accrued employee benefits		3,733		3,422
Accrued divestiture liability		—		295
Accrued warranty		3,457		2,293
Accrued utilities		1,840		1,483
Accrued repurchase obligation		3,099		3,518
Accrued sales and other taxes		2,829		2,329
Accrued enterprise resource planning system costs		8,110		176
Severance liability		214		4,249
Other		13,736		9,133
Total other accrued expenses	$	97,402	$	75,259

Warranty

The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under the terms of its warranty agreements. The specific warranty terms and conditions vary depending upon product sold and the country in which the Company does business. In general, for standard products, the Company will replace defective parts not meeting the Company’s published specifications at no cost to the customers. Factors that affect the liability include historical and anticipated failure rates of products sold, and cost per claim to satisfy the warranty obligation. If actual results differ from the estimates, the Company revises its estimated warranty liability to reflect such changes.

The following table details the changes in the Company’s warranty reserve for the fiscal years ended June 26, 2011, June 27, 2010, and June 28, 2009, which is included in other accrued liabilities in the schedule above (in thousands):

Accrued warranty, June 29, 2008	$	2,672
Accruals for warranties issued during the year		3,574
Changes in estimates related to pre-existing warranties		1,024
Warranty claim settlements		(5,503	)
Accrued warranty, June 28, 2009		1,767
Accruals for warranties issued during the year		4,000
Changes in estimates related to pre-existing warranties		(1,324	)
Warranty claim settlements		(2,150	)
Accrued warranty, June 27, 2010		2,293
Accruals for warranties issued during the year		5,005
Changes in estimates related to pre-existing warranties		(1,228	)
Warranty claim settlements		(2,613	)
Accrued warranty, June 26, 2011	$	3,457

Other Long-Term Liabilities

Other long-term liabilities at June 26, 2011 and June 27, 2010 were comprised of the following (in thousands):

	June 26, 2011		June 27, 2010
Income taxes payable	$	17,092	$	18,825
Divested entities’ tax obligations		3,985		5,523
Deferred compensation		9,324		7,357
Other		5,098		2,799
Total other long-term liabilities	$	35,499	$	34,504

At June 26, 2011, the Company had $2.0 million of accrued asset retirement obligations, of which $1.8 million is included in “Other” in the table above with the remainder in other accrued expenses, related to future obligations to remove leasehold improvements and obligations for the closure of certain owned and leased manufacturing facilities. Depreciation and accretion expense was $0.1 million and $0.6 million for fiscal years 2011 and 2010, respectively.  Of these charges, in fiscal year 2011, $0.1 million was recorded in selling, general and administrative expense, and in fiscal year 2010, $0.3 million and $0.3 million were recorded in cost of sales and selling, general and administrative expense, respectively.

Derivative Financial Instruments

The Company’s primary objectives for holding derivative financial instruments are to hedge non-functional currency risks. The Company’s derivative instruments are recorded at fair value and are included in other long-term assets and other accrued liabilities. The Company’s accounting policies for derivative financial instruments are based on the criteria for designation of a hedging transaction as an accounting hedge, either as cash flow or fair value hedges. A cash flow hedge refers to the hedge of the exposure to variability in the cash flows of an asset or a liability, or of a forecasted transaction. A fair value hedge refers to the hedge of the exposure to changes in fair value of an asset or a liability, or of an unrecognized firm commitment. The criteria for designating a derivative as a hedge include the instrument’s effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument to its underlying transaction. Gains and losses from derivatives designated as fair value accounting hedges generally offset changes in the values of the hedged assets or liabilities over the life of the hedge. The Company recognizes gains and losses on derivatives that are not currently designated as hedges for accounting purposes in earnings in other (income) expense, net. As of June 26, 2011 and June 27, 2010, the Company had no derivative instruments designated as accounting hedges.  As such, all gains and losses on derivatives for the years ended June 26, 2011 and June 27, 2010 were recognized in earnings.

Foreign Currency Translation

In most cases, the functional currency of a foreign operation is deemed to be the local country’s currency. Assets and liabilities of operations outside the United States are translated into U.S. reporting currency using current exchange rates. Revenues and expenses denominated in foreign functional currencies are translated at the average exchange rates during the period. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income within stockholders’ equity.

Accumulated Other Comprehensive (Loss) Income

The components of accumulated other comprehensive (loss) income as of June 26, 2011, June 27, 2010, and June 28, 2009 were as follows (in thousands):

	June 26, 2011			June 27, 2010			June 28, 2009
Foreign currency translation adjustments	$	(7,904	)	$	(15,680	)		(637	)
Net unrealized gains on foreign currency forward contracts		—			—			1,565
Net unrealized gains on available-for-sale securities		5,290			5,452			4,707
Accumulated other comprehensive (loss) income	$	(2,614	)	$	(10,228	)	$	5,635

Change in Accounting Estimate

Effective December 27, 2010, the Company changed its depreciation method for certain fabrication equipment from the units-of-production method to the straight-line method.  The Company considers this change of depreciation method a change in accounting estimate affected by a change in accounting principle.  This change in estimate is accounted for prospectively as of the beginning of the third quarter of fiscal year 2011.  While the Company believes the units-of-production method, as a function of usage, reasonably reflects the matching of costs and revenues, it requires considerable effort to monitor and track the usage of certain fabrication equipment consistently across all fabrication facilities.  The Company believes the straight-line method of depreciation represents a better estimate of the use of the equipment over its productive life and better reflects the pattern of economic consumption.  Additionally, the Company believes the revised practice is consistent with the predominant industry practice.

The effects of the change described above to net income and net income per share was immaterial for the fiscal year ended June 26, 2011.

Stock-Based Compensation

The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense attributed to awards is based on the estimated forfeiture rate, which is updated based on the Company’s actual forfeiture rates. This option pricing model requires the input of subjective assumptions, including the expected volatility of the Company’s common stock, pre-vesting forfeiture rate and an option’s expected life. The financial statements include amounts that are based on the Company’s best estimates and judgments.

Prior to fiscal year 2011, the Company used the “simplified” method to estimate the expected term for share option grants as the Company did not have enough historical experience to provide a reasonable estimate.  Currently, the Company estimates the expected term of options using historical exercise and forfeiture data. The Company believes that this historical data is the best estimate of the expected life of a new option, and that generally all groups of the Company’s employees exhibit similar exercise behavior.  The Company uses market implied volatility of options to estimate expected volatility.  The Company believes implied volatility is a better indicator of expected volatility because it considers option trader’s forecast of future stock price volatility.

The Company grants RSU’s with three types of vesting schedules: (i) service-based, (ii) performance-based or (iii) market-based. The fair value for service-based and performance-based RSU’s is determined using the fair value of the Company’s common stock on the date of grant. The fair value of market-based RSU’s is estimated using the Monte Carlo Simulation method which takes into account the probability that the market conditions of these awards will be achieved.

Compensation expense for awards with service-based conditions is amortized over the requisite service period of the award on a straight-line basis. Compensation expense for awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the date the applicable condition is expected to be met. If the performance condition is not considered probable of being achieved, no expense is recognized until such time as the performance condition is considered probable of being met, if ever.  Compensation expense for RSU awards with market-based condition is recognized over the service period using the straight-line method. Compensation expense related to awards with a market-based condition is recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided.

Business Combinations

The Company currently uses the acquisition method to account for business combinations.  The acquisition method requires the Company to identify the acquirer, determine the acquisition date, recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, and recognize and measure goodwill or a gain from a bargain purchase.  The Company must also determine whether a transaction is a business combination by evaluating if the assets acquired and liabilities assumed constitute a business.  A business consists of inputs and processes applied to those inputs that have the ability to create outputs.  If the assets acquired are not a business, the Company shall account for the transaction or other event as an asset acquisition.

Stock Repurchase Program

On October 27, 2008, the Company announced that its Board of Directors authorized a stock repurchase program of up to $100.0 million. On July 20, 2010, the Company announced that its Board of Directors had authorized an increase in the limit of the stock repurchase program by $50.0 million, thereby increasing the total authorization for the plan to $150.0 million.  Stock repurchases under this program may be made in the open market or through privately negotiated transactions. The timing and actual number of shares repurchased depend on market conditions and other factors. The stock repurchase program may be suspended at any time without prior notice. The Company has used and plans to continue to use existing cash to fund the repurchases. All of the shares repurchased by the Company through the program were purchased in open market transactions. For the fiscal year ended June 26, 2011, the Company repurchased approximately 1.4 million shares for approximately $32.6 million, and to date the Company has purchased approximately 4.6 million shares for approximately $81.2 million under the program. As of June 26, 2011, the Company had not cancelled the repurchased shares of common stock, and as such, they are reflected as treasury stock in the June 26, 2011 and June 27, 2010 consolidated balance sheets.

Concentration of Risk

The Company is subject to concentrations of credit risk in its investments, derivatives and trade accounts receivable.  The Company maintains cash, cash equivalents, and other securities with high credit quality financial institutions based upon the Company’s analysis of that financial institution’s relative credit standing.  The Company’s investment policy is designed to limit exposure to any one institution.  The Company also is exposed to credit-related losses in the event of non-performance by counterparties to derivative instruments.  The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings.  However, this does not eliminate the Company’s exposure to credit risk with these institutions.  This credit risk is generally limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted.  The Company considers the risk of counterparty default to be minimal.

The Company sells its products to distributors and original equipment manufacturers involved in a variety of industries including computing, consumer, communications, automotive and industrial.  The Company has adopted credit policies and standards to accommodate industry growth and inherent risk.  The Company performs continuing credit evaluations of its customers’ financial condition and requires collateral as deemed necessary.  Reserves are provided for estimated amounts of accounts receivable that may not be collected.  The Company maintains allowances for doubtful accounts and pricing disputes. These allowances as of fiscal years ended June 26, 2011 and June 27, 2010 were $2.4 million and $3.7 million, respectively.

Adoption of Recent Accounting Standards in the Fiscal Year Ended June 26, 2011

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) update No. 2009-13, “Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force.”  This amendment establishes a selling price hierarchy for determining the selling price of a deliverable.  The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available.  The amendments also replace the term “fair value” in the revenue allocation guidance with “selling price” to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant.  In addition, the amendments eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.  The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price.  The Company adopted ASC update No. 2009-13 as of the beginning of fiscal year 2011, and the adoption did not have a material impact on the Company’s financial statements.

Recent Accounting Standards

In December 2010, the FASB issued ASC update No. 2010-28, “Intangibles-Goodwill and Other (Topic 350), When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, a consensus of the FASB Emerging Issues Task Force.”  This amendment modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists.  The qualitative factors that an entity should consider when evaluating whether it is more likely than not that a goodwill impairment exists are consistent with the existing guidance for determining whether an impairment exists between annual tests.  The Company does not believe that adoption of this update will have a material impact on its financial statements.  This update is effective for fiscal periods beginning after December 15, 2010.

In December 2010, the FASB issued ASC update No. 2010-29, “Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations, a consensus of the FASB Emerging Issues Task Force.”  This amendment clarifies the periods for which pro forma financial information is presented.  The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period.  The Company does not believe that adoption of this update will have a material impact on its financial statements.  This update is effective for fiscal periods beginning after December 15, 2010.

In May 2011, the FASB issued ASC update No. 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”.  The amendments in this update result in common fair value measurement and disclosure requirements in US generally accepted accounting principles ("U.S. GAAP") and International Financial Reporting Standards ("IFRS").  Consequently, the amendments converge the fair value measurement guidance in U.S. GAAP and IFRS.  Some of the amendments clarify the application of existing fair value measurement requirements, while other amendments change a particular principle in ASC 820. The amendments in this update that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements include the following:  1) measuring the fair value of financial instruments that are managed within a portfolio, 2) application of premiums and discounts in a fair value measurement, and 3) additional disclosures about fair value measurements.  The amendments in this update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011.  The Company does not believe that adoption of this update will have a material impact on its financial statements.

In June 2011, the FASB issued ASC update No. 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income”.  The FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this update.  The amendments require that all non-owner changes in stockholder’s equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, the Company is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and total for other comprehensive income, along with a total for comprehensive income.  The entity is also required to present of the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of comprehensive income are presented.  The amendments in this update should be applied retrospectively, and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.