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.

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 2014 consisted of 52 weeks ending June 29, 2014, fiscal year 2013 consisted of 53 weeks ending June 30, 2013 and fiscal year 2012 consisted of 52 weeks ending June 24, 2012. 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 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. 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, and 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. Sales taxes and other taxes directly imposed on revenue‑producing transactions are excluded from revenue.

Shipping Costs

Outbound customer shipping costs are expensed as incurred and are included in selling, general and administrative ("SG&A") expense. The expense for outbound customer shipments for the fiscal years ended June 29, 2014, June 30, 2013, and June 24, 2012 was $8.3 million, $8.2 million, and $8.9 million, respectively.

Advertising Costs

Advertising costs are expensed as incurred and are included in SG&A expense. Advertising expense for the fiscal years ended June 29, 2014, June 30, 2013, and June 24, 2012 was $3.9 million, $4.2 million and $4.0 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 Expense (Income), Net

Interest (income) expense, net, was comprised of the following (in thousands):



	Fiscal Year Ended
	June 29, 2014			June 30, 2013			June 24, 2012
Interest income	$	(427	)	$	(405	)	$	(842	)
Interest expense	451			462			509
Interest expense (income), net	$	24		$	57		$	(333	)

No interest was capitalized for the fiscal years ended June 29, 2014, June 30, 2013 and June 24, 2012.

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.

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 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.

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 29, 2014 and June 30, 2013 (in thousands):



	As of June 29, 2014
Assets and Liabilities:	Total			Level 1			Level 2		Level 3
Short-term investments	$	20,114		$	20,114		$	—	$	—
Prepaid expenses and other current assets	19			—			19		—
Other assets	20,461			19,010			—		1,451
Other long-term liabilities	(9,844		)	(9,844		)	—		—
Total	$	30,750		$	29,280		$	19	$	1,451



	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 current assets	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

The fair value of investments, derivative financial instruments, and other assets and liabilities are disclosed in Notes 2, 3 and 9, respectively. There were no cash and cash equivalents measured at fair value on a recurring basis as of either June 29, 2014 or 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 29, 2014, June 30, 2013, and June 24, 2012, 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 29, 2014, the Company held foreign currency forward contracts recorded at fair value using Level 2 inputs, for which fair value was measured based on readily observable market parameters for all substantial terms of the derivatives. There were no other assets or liabilities measured using Level 2 inputs.

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 29, 2014, and June 30, 2013 (in thousands):



	Level 3
	Assets
	Derivatives
Beginning balance at June 30, 2013	$	2,888
Total losses (realized or unrealized) included in other expense, net	(1,437		)
Ending balance at June 29, 2014	$	1,451



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

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, the financial assets or liabilities 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 a non-transferable put option on a strategic investment (the “Put Option”).

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 29, 2014, 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.

Non-Recurring Fair Value Measurements

During the fiscal year ended June 29, 2014, the Company recorded de minimis other-than-temporary impairments on financial assets required to be measured at fair value on a non-recurring basis.

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 represented 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 represented the excess of the carrying values of the assets over the fair values, less the estimated cost to sell.

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. The amount of other-than-temporary impairment recognized through earnings is disclosed in Note 2.

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.

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 market returns on the investment portfolio.

Cash, restricted cash, cash equivalents and investments as of June 29, 2014 and June 30, 2013 are summarized as follows (in thousands):



	June 29, 2014		June 30, 2013
Cash and cash equivalents	$	588,922	$	443,490
Short-term investments	20,114		11,056
Restricted cash	1,374		1,349
Total cash, restricted cash, cash equivalents and investments	$	610,410	$	455,895

Restricted cash consisted of $0.6 million in a short-term deposit account with a bank as collateral for travel card transactions at both June 29, 2014 and June 30, 2013, and $0.7 million held with another bank as collateral for an outstanding letter of credit at both June 29, 2014 and June 30, 2013.

Inventories

Inventories are stated at the lower of cost or market using the first-in first-out method. 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 as of June 29, 2014 and June 30, 2013 were comprised of the following (in thousands):



	June 29, 2014		June 30, 2013
Raw materials	$	47,997	$	58,471
Work-in-process	103,034		97,158
Finished goods	78,980		76,686
Total inventories	$	230,011	$	232,315

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 29, 2014, June 30, 2013 and June 24, 2012 was $87.2 million, $90.9 million and $83.7 million, respectively.

Property, plant and equipment as of June 29, 2014 and June 30, 2013 were comprised of the following (in thousands):



	June 29, 2014			June 30, 2013			Range of Useful Life
Building and improvements	$	178,683		$	167,746		3 ‑ 40
Equipment	1,181,738			1,123,457			3 ‑ 15
Less: accumulated depreciation and amortization	(1,021,912		)	(946,023		)
	338,509			345,180
Land	14,840			14,435
Construction-in-progress	38,416			63,723
Total property, plant and equipment	$	391,765		$	423,338

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 29, 2014 and June 30, 2013, the Company did not have any material capital leases included in property, plant and equipment.

Repairs and maintenance costs are charged to expense as incurred. In the fiscal years ended June 29, 2014, June 30, 2013 and June 24, 2012, repairs and maintenance expenses were $50.3 million, $47.9 million and $54.4 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.

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 consideration. 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.

Goodwill, Acquisition‑Related and Other Intangible Assets

The Company classifies the difference between the consideration transferred and the fair value of the net tangible and intangible 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 represents an individual reporting unit 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 2014, 2013, and 2012, the discount rates the Company utilized for determining discounted cash flows were 14.1 percent, 14.5 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 the reporting units’ estimated fair value by reconciling the aggregate reporting units’ fair values with the Company's 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 could have a significant impact on either the fair value of the reporting unit or the amount of any resulting goodwill impairment charge.

The Company’s annual evaluation during fiscal years 2014 and 2013 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.

As of June 29, 2014 and June 30, 2013, acquisition‑related intangible assets included the following (in thousands):



		June 29, 2014
	Amortization Periods (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Completed technology	4 - 12	$	52,045	$	(43,771	)	$	8,274
Customer lists	5 - 12	10,430		(8,163		)	2,267
Intellectual property and other	2 - 15	16,763		(11,801		)	4,962
Total acquisition‑related intangible assets		$	79,238	$	(63,735	)	$	15,503



		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

Based on identified intangible assets that are subject to amortization as of June 29, 2014, the Company expects future amortization expense for each period to be as follows (in thousands):



			Fiscal Year
	Total		2015		2016		2017		2018		2019		2020 and thereafter
Estimated Amortization Expense	$	15,503	$	6,220	$	4,681	$	1,463	$	897	$	897	$	1,345

The carrying amount of goodwill by reportable segment as of June 29, 2014 and June 30, 2013 was as follows (in thousands):



Business Segments:	June 29, 2014		June 30, 2013
Energy Saving Products	$	33,190	$	33,190
HiRel	18,959		18,959
Total goodwill	$	52,149	$	52,149

Income tax deductions related to goodwill were $3.0 million for each of the fiscal years ended June 29, 2014, June 30, 2013, and June 24, 2012. As of June 29, 2014, $8.3 million of goodwill remains deductible for income tax purposes.

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 29, 2014, June 30, 2013, and June 24, 2012, which is included in other accrued expenses as detailed in Note 6 (in thousands):



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
Accruals for warranties issued during the year	2,495
Changes in estimates related to pre-existing warranties	(184		)
Warranty claim settlements	(2,685		)
Accrued warranty, June 29, 2014	$	1,618

Derivative Financial Instruments

The Company’s primary objectives for holding derivative financial instruments ("derivatives") are to hedge non-functional currency risks. The Company’s accounting policies for derivatives 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 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 as a component of other expense, net. As of June 29, 2014 and June 30, 2013, the Company had no derivatives designated as accounting hedges. As such, all gains and losses on derivatives for the years ended June 29, 2014 and June 30, 2013 were recognized in earnings as a component of other expense, net.

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.

Stock‑Based Compensation

The Company grants Restricted Stock Units ("RSU’s") with three types of vesting schedules: (i) service-based, (ii) performance-based or (iii) market-based (see Note 9). 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 upon achieving 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 periodic 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 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 periodic 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 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.

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. During the fiscal year ended June 29, 2014, the Company repurchased approximately 0.5 million shares for approximately $12.6 million. As of June 29, 2014, the Company had purchased approximately 6.7 million shares for approximately $125.8 million under the program. As of June 29, 2014, the Company had not cancelled the repurchased shares of common stock, and as such, they are reflected as treasury stock in the June 29, 2014 and June 30, 2013 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 typically major financial institutions with investment grade credit ratings and a publicly traded foreign company. This credit risk is generally limited to the 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 institutions 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 29, 2014 and June 30, 2013 were $0.4 million and $0.9 million, respectively.

Loss Contingencies

The Company is subject to various claims and litigation arising in the ordinary course of business. Because of the nature and inherent uncertainties of litigation and claims, the outcomes of these matters are subject to significant uncertainty. The Company accrues for these matters if it is probable that an asset has been impaired or a liability has been incurred and if the amount of the loss can be reasonably estimated. The Company discloses loss contingencies if it is at least reasonably possible that a material loss has been incurred.

Adoption of 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 not 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 tests performed for fiscal years beginning after September 15, 2012 (early adoption permitted). The adoption of this update did not have a material impact on the Company's 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 adoption of this update did not have a material impact on the Company's financial statements, and additional disclosure pursuant to this update is presented in Note 8.

Recent Accounting Standards

In July 2013, the FASB issued ASC update No. 2013-11, "Income Taxes (Topic 740), Presentation of an Unrecognized

Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" (ASU 2013-11). Under the amendments in this update, an unrecognized tax benefit, or a portion of an unrecognized tax benefit,

should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a

similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax

loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle

any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the

unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred

tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax

asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The

amendments in this update are effective for fiscal years and interim periods within those years beginning after December 15,

2013. The Company does not believe that adoption of this update will have a material impact on its financial statements.

In May 2014, the FASB issued ASC updated No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09). Under the amendments in this update, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update are effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early adoption is not permitted. The new standard is required to be applied either retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of applying the update recognized at the date of initial application. The Company has not yet selected a transition method, and has not determined the impact that the new standard will have on its consolidated financial statements.