Product Warranties

Our standard warranty provides that if our systems do not function to published specifications, we will repair or replace the defective component or system without charge generally for a period of approximately three years. We generally extend to our customers the warranties provided to us by our suppliers, and accordingly, the majority of our warranty obligations to customers are typically intended to be covered by corresponding supplier warranties. For warranty costs not covered by our suppliers, we provide for estimated warranty costs in the period the revenue is recognized. Estimated liabilities for product warranties are included in accrued expenses.

During 2009, we discovered a quality issue associated with certain power supply devices provided by a long-term component supplier, which resulted in a higher than expected level of power supply failures to us and our customers. A significant customer of ours was impacted by this issue, and provided us with an estimation of the additional costs it would incur related to the customer’s internal overhead costs, in addition to third-party direct costs. A final settlement with this material customer was reached during the second quarter of 2012. The estimated remaining liability is approximately $0.2 million as of March 31, 2013, which relates to costs for extension of warranty coverage on these units. While our estimated liability relating to failed power supply units is subject to some uncertainty until final settlement, based on our current expectation of sales volumes with this material customer, we do not believe the incurrence of an additional loss is either probable or reasonably possible at this time.

Our component supplier continued to re-work and distribute to our customer the affected population of power supplies at no cost to us. During 2011, as the claims from our customer became clearer, we commenced negotiations with our component supplier for fair and reasonable costs that we have and are likely to incur through the warranty period associated with this component failure. Pursuant to the final settlement agreement, the supplier agreed to cash consideration of $1.2 million, of which we received $1.1 million subsequent to the signing of the settlement agreement, with the remaining $0.1 million to be received in one remaining installment during 2013. Additionally, our supplier committed to product rebates and/or price concessions on product orders for a period of 39 months from the execution of the settlement agreement, in return for our agreement to release our supplier from all obligations relating to the power supply failures known by us to date. This agreement is not subject to any required future purchases.

In addition, we have commenced discussions with our General Liability and Errors and Omissions Insurance and underwriters and will continue to pursue our rights to cover any damages we incur and that are not reimbursed by our supplier. The insurance company has issued a reservation of rights letter to us and at this time, it is not possible to estimate to what extent the residual amounts, if any, we will be covered by our carrier. As of March 31, 2013 we have not assumed or recorded any insurance reimbursement.

Our warranty accrual and cost activity is as follows (in thousands):



	Three Months Ended
	March 31,
	2012			2013
Balance, beginning of period	$	6,871		$	4,455
Charges to operations	368			118
Deductions for payments made	(309		)	(1,021		)
Changes in estimates	—			(809		)
Balance, end of period	$	6,930		$	2,743

During the first quarter of 2013, we were able to negotiate more favorable rates with a third-party service provider. Accordingly, we adjusted our warranty accrual by $0.8 million to reflect this change.