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, integrated power modules, 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

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 2013 consisted of 53 weeks ending June 30, 2013, fiscal year 2012 consisted of 52 weeks ending June 24, 2012 and fiscal year 2011 consisted of 52 weeks ending June 26, 2011. Fiscal quarters consist of 13 weeks ending on the last Sunday of the calendar quarter, except for the last fiscal quarter of 14 weeks in fiscal years that have 53 weeks.

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 purchase order, 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 both the contract and purchase order are silent with respect to shipping terms and lack reference to the Company's standard terms and conditions, 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 and credits 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 lowers the selling price of its products. 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, credits, 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 or third party reports that it has removed the product from the warehouse to incorporate into the customer's 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 30, 2013, June 24, 2012, and June 26, 2011 was $8.2 million, $8.9 million, and $8.2 million, respectively.

Advertising Costs

Advertising costs are expensed as incurred and are included in selling, general and administrative expense ("SG&A"). Advertising expense for the fiscal years ended June 30, 2013, June 24, 2012, and June 26, 2011 was $4.2 million, $4.0 million and $4.2 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, was comprised of the following (in thousands):



	Fiscal Year Ended
	June 30, 2013			June 24, 2012			June 26, 2011
Interest income	$	(405	)	$	(842	)	$	(10,679	)
Interest expense	462			509			565
Interest expense (income), net	$	57		$	(333	)	$	(10,114	)

No interest was capitalized for the fiscal years ended June 30, 2013, June 24, 2012 and June 26, 2011.

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 to prior taxable periods 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 30, 2013, U.S. income taxes have not been provided on approximately $123.4 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 income (loss) 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 2013, 2012, and 2011, the Company’s participating securities include certain 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 were comprised of the following (in thousands):



	Fiscal Year Ended
	June 30, 2013			June 24, 2012			June 26, 2011
Trade accounts receivable	$	28,419		$	28,504		$	(31,475	)
Inventories	40,880			(64,929		)	(86,517		)
Prepaid expenses and other receivables	5,773			(5,757		)	(518		)
Accounts payable	9,745			(30,088		)	19,714
Accrued salaries, wages and commissions	(907		)	(9,952		)	12,788
Deferred compensation	(498		)	1,388			1,335
Accrued income taxes	(3,868		)	998			(2,042		)
Other accrued expenses	(14,498		)	(3,625		)	5,980
Changes in operating assets and liabilities	$	65,046		$	(83,461	)	$	(80,735	)

Supplemental disclosures of cash flow information (in thousands):



	Fiscal Year Ended
	June 30, 2013		June 24, 2012		June 26, 2011
Cash paid during the year for:
Interest	$	462	$	511	$	562
Income taxes	6,998		13,810		6,897
Non-cash investing activities:
Liabilities accrued for property, plant and equipment purchases	$	4,815	$	11,137	$	21,087

Fair Value Measurements

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.

The financial assets and liabilities which are measured and recorded at fair value on a recurring basis are included within the following items on the Company’s consolidated balance sheet as of June 30, 2013 and June 24, 2012 (in thousands):



	As of June 30, 2013
Assets and Liabilities:	Total			Level 1			Level 2			Level 3
Short-term investments	$	11,056		$	6,004		$	5,052		$	—
Prepaid expenses and other receivables	19			—			19			—
Other assets	29,725			26,837			—			2,888
Other long-term liabilities	(8,326		)	(8,326		)	—			—
Total	$	32,474		$	24,515		$	5,071		$	2,888
Fair value as a percentage of total	100.0		%	75.5		%	15.6		%	8.9		%
Level 3 as a percentage of total assets										0.2		%



	As of June 24, 2012
Assets and Liabilities:	Total			Level 1			Level 2			Level 3
Cash and cash equivalents	$	9,997		$	—		$	9,997		$	—
Short-term investments	63,872			33,058			30,814			—
Prepaid expenses and other receivables	622			—			622			—
Long-term investments	15,054			10,001			5,053			—
Other assets	27,358			24,439			85			2,834
Other long-term liabilities	(8,139		)	(8,139		)	—			—
Total	$	108,764		$	59,359		$	46,571		$	2,834
Fair value as a percentage of total	100.0		%	54.6		%	42.8		%	2.6		%
Level 3 as a percentage of total assets										0.2		%

The fair value of investments, derivatives, and other assets and liabilities are disclosed in Notes 2, 3, 4, and 6, respectively. Cash and cash equivalents included $10.0 million of commercial paper as of June 24, 2012. There were no cash and cash equivalents measured at fair value on a recurring basis as of June 30, 2013.

The Company determines at the end of a reporting period whether a given financial asset or liability is valued using Level 1, 2, or 3 inputs. During the fiscal years ended June 30, 2013, June 24, 2012, and 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), those valued using significant other observable inputs (Level 2), and those valued using significant unobservable inputs (Level 3).

As of June 30, 2013, the Company’s investments recorded at fair value using Level 2 inputs included corporate debt securities and U.S. government agency obligations. The above assets and liabilities recorded at fair value using Level 2 inputs 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 records its foreign currency forward contracts at fair value 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 30, 2013, and June 24, 2012 (in thousands):



	Level 3
	Assets
	Derivatives
Beginning balance at June 24, 2012	$	2,834
Total gains (realized or unrealized) included in other expense	54
Ending balance at June 30, 2013	$	2,888



	Level 3
	Liabilities			Assets
	Contingent Consideration			Derivatives		Investments			Total
Beginning balance at June 26, 2011	$	400		$	2,773	$	781		$	3,554
Total gains or (losses) (realized or unrealized):
Included in earnings	(400		)	61		18			79
Included in other comprehensive income	—			—		(190		)	(190		)
Purchases, maturities, and sales:
Maturities/prepayments	—			—		(78		)	(78		)
Sales	—			—		(531		)	(531		)
Ending balance at June 24, 2012	$	—		$	2,834	$	—		$	2,834

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 (the “Put Option”) and a liability for an acquisition-related contingent consideration arrangement. Level 3 inputs have also been used in prior years to value investment securities that included certain asset-backed securities for which there was decreased observability of market pricing for these investments.

The Company accounts for the Put Option as a derivative instrument not designated as an accounting hedge. The fair value was determined by an independent valuation firm using a binomial option pricing model based on the income approach. The model uses inputs such as exercise price, fair market value of the underlying common stock, expected life (years), expected volatility, risk-free rate equivalent, and dividend yield. The expected life is the remaining life of the Put Option. Expected volatility is based on historical volatility of the underlying common stock as well as consideration of the volatilities of public companies deemed comparable. As of June 30, 2013, the Company determined that significant changes in the above assumptions would not materially affect the fair value of the Put Option. Additionally, the model materially relies on the assumption that the issuer of the Put Option will uphold its financial obligation up to its common equity value should the Company exercise the Company’s right to put the associated number of common shares back to the issuer at a fixed price in local currency.

The acquisition-related contingent consideration arrangement requires the Company to pay additional consideration to the shareholders of the seller of that business based on a percentage of cumulative pro forma earnings, net of cumulative losses. The fair value of the contingent consideration was estimated using a probability weighted discounted cash flow model. The key assumptions in applying the income approach are a discount rate of 46 percent and estimated cash flows from operations. During the fiscal year ended June 24, 2012, the Company reversed the $0.4 million of previously recorded acquisition-related contingent consideration liability as it determined that the acquired assets and personnel would probably not achieve the minimum level of financial operating results in order to receive any such consideration. As of June 30, 2013, the Company still does not believe it likely that the minimum level will be achieved.

Non-Recurring Fair Value Measurements

For the fiscal year ended June 30, 2013, the Company measured at fair value, on a non-recurring basis, the carrying values of certain equipment in its research and development group, its Newport, Wales, Mexico and other manufacturing facilities, and a subcontractor facility located in Southeast Asia, due to the non-use of that equipment. The Company determined that the carrying values of those assets of $11.8 million exceeded their estimated fair values of $5.9 million. The fair values were determined using the market approach, which considered the estimated fair value of the equipment using significant unobservable inputs (Level 3) obtained from third party equipment brokerage firms. Consequently, during the fiscal year ended June 30, 2013, the Company recorded an impairment charge of $5.9 million, which represents the excess of the carrying values of the assets over the fair values, less the estimated cost to sell.

In fiscal year 2012, as a result of decreased customer demand resulting in changes in manufacturing strategy, the Company measured at fair value on a non-recurring basis, the carrying values of its plant assets and machinery and equipment relating to its El Segundo, California fabrication facility and determined those assets exceeded their expected undiscounted cash flows. As a result, the Company wrote the related assets down to their estimated fair value. The fair value was determined using the market approach which considered the estimated fair value of the plant assets and machinery and equipment using significant unobservable inputs (level 3) obtained from the perspective of a market participant. Consequently, the Company recorded an impairment charge of $2.5 million, which represents the excess of the carrying values of the assets over the fair values, less the estimated cost to sell.

For the fiscal year ended June 26, 2011, the Company measured at fair value, on a non-recurring basis, 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 patents and patent rights, as well as 25 million shares of preferred stock, from another privately held domestic company as described in Note 2 using significant unobservable inputs or Level 3 inputs.

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 expense, net. Realized gains or losses on the sale of securities are included in interest income, 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, net. 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 achieving moderate returns on the investment portfolio.

Cash, restricted cash, cash equivalents and investments are summarized as follows (in thousands):



	June 30, 2013		June 24, 2012
Cash and cash equivalents	$	443,490	$	305,423
Short-term investments	11,056		63,872
Restricted cash	1,349		1,535
Long-term investments	—		15,054
Total cash, restricted cash, cash equivalents and investments	$	455,895	$	385,884

Restricted cash consisted of $0.7 million and $0.9 million in a short-term deposit account with a bank as collateral for an outstanding letter of credit at June 30, 2013 and June 24, 2012, respectively, and approximately $0.6 million and $0.6 million with another bank at June 30, 2013 and June 24, 2012, 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 were comprised of the following (in thousands):



	June 30, 2013		June 24, 2012
Raw materials	$	58,471	$	64,112
Work-in-process	97,158		121,190
Finished goods	76,686		109,400
Total inventories	$	232,315	$	294,702

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 or cost of goods sold, depending on how the equipment was used. Depreciation is provided using the straight-line method based on the estimated useful lives of the assets, ranging from three to forty years. Depreciation and amortization expense for the fiscal years ended June 30, 2013, June 24, 2012 and June 26, 2011 was $90.9 million, $83.7 million and $75.3 million, respectively.

Property, plant and equipment were comprised of the following (in thousands):



	June 30, 2013			June 24, 2012			Range of Useful Life
Building and improvements	$	167,746		$	171,481		3 ‑ 40
Equipment	1,123,457			1,128,982			3 ‑ 15
Less: accumulated depreciation and amortization	(946,023		)	(909,067		)
	345,180			391,396
Land	14,435			14,660
Construction-in-progress	63,723			55,059
Total property, plant and equipment	$	423,338		$	461,115

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. As of June 30, 2013 and June 24, 2012, the Company did not have material capital leases included in property, plant and equipment.

Disposition of Property

During fiscal year 2012, the Company completed the sale of the site of a previous manufacturing research and development facility located in Oxted, England. The Company received cash of approximately $5.6 million as purchase price in respect of such transaction. Since the site had a carrying value of $0.1 million previously recorded in property, plant, and equipment, net, almost the entire proceeds, net of $0.1 million of transaction costs, were recorded as a gain of $5.4 million on disposition of property in the condensed consolidated statement of operations for the fiscal year ended 2012.

Repairs and maintenance costs are charged to expense as incurred. In the fiscal years ended June 30, 2013, June 24, 2012 and June 26, 2011, repairs and maintenance expenses were $47.9 million, $54.4 million and $50.1 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.

For the fiscal year ended June 30, 2013, the Company measured at fair value, on a non-recurring basis, the carrying values of certain equipment in its research and development group, its Newport, Wales, Mexico and other manufacturing facilities, and a subcontractor facility located in Southeast Asia, due to the non-use of that equipment. Consequently, during the fiscal year ended June 30, 2013, the Company recorded an impairment charge of $5.9 million, which represents the excess of the carrying values of the assets over the fair values, less the estimated cost to sell. For additional information regarding this asset impairment charge, see Non-Recurring Fair Value Measurements above within this Note 1.

In the fiscal year 2012, as a result of decreased customer demand resulting in changes in manufacturing strategy, the Company determined that the carrying values of its plant assets and machinery and equipment relating to its El Segundo, California fabrication facility exceeded their expected undiscounted cash flows, and as a result, impaired the related assets down to their estimated fair value. The fair value was determined using the market approach which considered the estimated fair value of the plant assets and machinery and equipment from the perspective of a market participant. Consequently, the Company recorded an impairment charge of $2.5 million, which represents the excess of the carrying values of the assets over the fair values, less the estimated cost to sell. In addition to the above asset impairment charge, the Company wrote-down $1.9 million of inventory held in its El Segundo California fabrication facility which it determined would not be consumed as a result of its change in manufacturing strategy. The asset impairment and inventory write-downs were related to the ESP segment and recorded in cost of sales in the consolidated statement of operations during fiscal year 2012.

Goodwill, Acquisition‑Related and Other Intangible Assets

The Company classifies the difference between the consideration transferred and the fair value of any controlling 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 2 to 15 years for those acquisition‑related intangible assets subject to amortization.

The Company evaluates the carrying value of long-lived assets, including goodwill and other intangible assets annually during the fourth quarter of each fiscal year and more frequently if it believes indicators of impairment exist and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. 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. Each of the Company’s operating segments represent individual reporting units for purposes of assessing impairment of goodwill. 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. During fiscal years 2013, 2012, and 2011, the discount rates the Company utilized for determining discounted cash flows were 14.5 percent , 14.0 percent, and 14.0 percent, respectively, 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 2013 and 2011 indicated that the fair value of the reporting units was more than their carrying value indicating no impairment.

In the fourth quarter of fiscal year 2012, after completing the first step in the goodwill impairment analysis, the Company concluded that goodwill in the Enterprise Power ("EP") segment was impaired. Several factors led to a reduction in forecasted EP segment cash flows, including, among others, deteriorating market conditions, business trends and projected product mix, causing lower than expected performance. As the estimated fair value was less than the net book value, the Company performed the second step of the impairment test, and as a result of the step two analysis, recorded a goodwill impairment charge of $69.4 million relating to the EP segment in fiscal year 2012.

At June 30, 2013 and June 24, 2012, acquisition‑related intangible assets included the following (in thousands):



		June 30, 2013
	Amortization Periods (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Completed technology	4 - 12	$	52,045	$	(39,163	)	$	12,882
Customer lists	5 - 12	10,430		(7,313		)	3,117
Intellectual property and other	2 - 15	16,763		(10,839		)	5,924
Total acquisition‑related intangible assets		$	79,238	$	(57,315	)	$	21,923



		June 24, 2012
	Amortization Periods (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Completed technology	4 - 12	$	52,045	$	(34,556	)	$	17,489
Customer lists	5 - 12	10,430		(6,463		)	3,967
Intellectual property and other	2 - 15	16,763		(9,643		)	7,120
Total acquisition‑related intangible assets		$	79,238	$	(50,662	)	$	28,576

As of June 30, 2013, the following table represents the total estimated amortization of intangible assets for the five succeeding fiscal years (in thousands):



			Fiscal Year
	Total		2014		2015		2016		2017		2018		2019 and thereafter
Estimated Amortization Expense	$	21,923	$	6,420	$	6,220	$	4,681	$	1,463	$	897	$	2,242

The carrying amount of goodwill by reportable segment was as follows (in thousands):



Business Segments:	June 30, 2013		June 24, 2012
Energy Saving Products	$	33,190	$	33,190
HiRel	18,959		18,959
Total goodwill	$	52,149	$	52,149

As of June 30, 2013, $11.3 million of goodwill is deductible for income tax purposes of which $3.0 million, $3.0 million, and $3.0 million was deducted in the fiscal years ended June 30, 2013, June 24, 2012, and June 26, 2011, respectively.

The changes in the carrying amount of goodwill for the fiscal years ended June 30, 2013, June 24, 2012, and June 26, 2011 were as follows (in thousands):



Balance, June 26, 2011	$	121,570
Impairment	69,421
Balance, June 24, 2012	52,149
Impairment	—
Balance, June 30, 2013	$	52,149

Other Accrued Expenses

Other accrued expenses were comprised of the following as of (in thousands):



	June 30, 2013		June 24, 2012
Sales returns	$	33,902	$	32,185
Accrued accounting and legal costs	8,108		10,192
Deferred revenue	9,678		13,634
Accrued warranty	1,992		2,190
Accrued utilities	2,516		2,625
Accrued repurchase obligation	4,759		3,240
Accrued sales and other taxes	3,053		1,862
Accrued subcontractor costs	1,307		3,386
Accrued rent	4,858		4,381
Other	8,241		9,469
Total other accrued expenses	$	78,414	$	83,164

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 30, 2013, June 24, 2012, and June 26, 2011, which is included in other accrued liabilities in the schedule above (in thousands):



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
Accruals for warranties issued during the year	3,722
Changes in estimates related to pre-existing warranties	(1,135		)
Warranty claim settlements	(3,854		)
Accrued warranty, June 24, 2012	2,190
Accruals for warranties issued during the year	2,019
Changes in estimates related to pre-existing warranties	144
Warranty claim settlements	(2,361		)
Accrued warranty, June 30, 2013	$	1,992

Other Long-Term Liabilities

Other long-term liabilities were comprised of the following (in thousands):



	June 30, 2013		June 24, 2012
Income taxes payable	$	12,344	$	19,543
Divested entities’ tax obligations	876		1,918
Deferred compensation	9,903		10,147
Other	1,407		4,192
Total other long-term liabilities	$	24,530	$	35,800

At June 30, 2013, the Company had $1.2 million of accrued asset retirement obligations, of which $0.7 million is included in “Other” in the table above with the remainder in other accrued expenses, related to future obligations for the closure of certain owned manufacturing facilities. Depreciation and accretion expense were de minimis for fiscal years 2013 and 2012, respectively.

Derivative Financial Instruments

The Company’s primary objectives for holding derivative financial instruments are to hedge non-functional currency risks. 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 30, 2013 and June 24, 2012, the Company had no derivative instruments designated as accounting hedges. As such, all gains and losses on derivatives for the years ended June 30, 2013 and June 24, 2012 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

The components of accumulated other comprehensive loss were as follows (in thousands):



	June 30, 2013			June 24, 2012			June 26, 2011
Foreign currency translation adjustments	$	(22,267	)	$	(18,499	)	$	(7,904	)
Net unrealized gains (losses) on available-for-sale securities	464			(755		)	5,290
Accumulated other comprehensive loss	$	(21,803	)	$	(19,254	)	$	(2,614	)

Stock‑Based Compensation

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. 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.

The fair value of market-based RSU’s is estimated by an independent valuation firm using the Monte Carlo Simulation method which takes into account multiple input variables that determine the probability of satisfying the market conditions stipulated in the award. This method requires the input of assumptions, including the expected volatility of the Company’s common stock, and a risk-free interest rate. Compensation expense related to awards that are expected to vest with a market-based condition is recognized on a straight-line basis regardless of whether the market condition is satisfied, provided that the requisite service has been achieved. The amount of expense attributed to market-based RSUs is based on the estimated forfeiture rate, which is updated according to the Company’s actual forfeiture rates. The financial statements include amounts that are based on the Company’s best estimates and judgments.

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 are 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.

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 the historical volatility of its common stock to estimate expected volatility. The Company believes that historical volatility is a better indicator of expected volatility than implied volatility because a sequential period of historical data at least equal to the expected term of options and stock awards is available, and there is currently no indication that future volatility is likely to differ from historical volatility.

Business Combinations

The Company 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

The Company’s stock repurchase program authorizes it to repurchase up to $150.0 million of shares of the Company's outstanding common stock. 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 30, 2013, the Company repurchased approximately 0.3 million shares for approximately $5.2 million. To date the Company has purchased approximately 6.2 million shares for approximately $113.2 million under the program. As of June 30, 2013, the Company had not cancelled the repurchased shares of common stock, and as such, they are reflected as treasury stock in the June 30, 2013 and June 24, 2012 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 derivative transactions are major financial institutions with investment grade credit ratings and a publicly traded foreign company. 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 for the financial institution to be minimal, and the publicly traded foreign company to be more significant.

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 trade 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 30, 2013 and June 24, 2012 were $0.9 million and $2.1 million, respectively.

Adoption of Recent Accounting Standards

In June 2011, the FASB issued ASC update No. 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income” (“ASC 2011-05”). 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 alternatives, a 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. A company is also required to present on 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 adoption of this update did not have a material impact on the Company’s financial statements, and the statement of comprehensive income was presented as a separate statement following the consolidated statements of operations.

Recent Accounting Standards

In July 2012, the FASB issued ASC update No. 2012-02, “Intangibles-Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment” (“ASC 2012-02”). Under the amendments in this update, a company has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If after assessing the qualitative factors, a company determines it does not meet the more-likely-than-not threshold, a company is required to perform the quantitative impairment test by calculating the fair value of an indefinite-lived intangible asset and comparing the fair value with the carrying amount of the asset. The amendments in this update are effective for annual and interim impairment test performed for fiscal years beginning after September 15, 2012 (early adoption permitted). The Company does not believe that adoption of this update will have a material impact on its financial statements.

In February 2013, the FASB issued ASC update No. 2013-02, “Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASC 2013-02). The objectives of this update require companies to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, a company is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. The amendments in this update are effective for fiscal years and interim periods within those years beginning after December 15, 2012. The Company does not believe that adoption of this update will have a material impact on its financial statements.