Product Warranties

Our standard warranty provides that if our systems do not function to published specifications, we will repair or replace the defective component, system or firmware 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. There can be no assurance that our suppliers will continue to provide such warranties to us in the future or that our warranty obligations to our customers will be covered by corresponding warranties from our suppliers, the absence of which could have a material effect on our financial statements. Estimated liabilities for product warranties are included in accrued expenses.

In October 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. In the second and third quarters of 2011, a material customer provided us with a framework estimating the potential claims precipitated by the power supply failures. A final settlement with this material customer was reached during the second quarter of 2012. The terms of the agreement required an immediate payment of $2.0 million, and future price concessions and rebates based on sales volumes. As of December 31, 2014, less than $0.1 million in liability related to this settlement remains outstanding.

During the second quarter of 2011, based on the advice of legal counsel, we established that our component supplier is contractually obligated to reimburse us for fair and reasonable costs we incur with our customers associated with these power supply failures. We continued to negotiate this settlement with our supplier and during the second quarter of 2012, the supplier signed a final settlement agreement providing for additional reimbursements above what was recognized as of September 30, 2011. Pursuant to the settlement, the supplier agreed to cash consideration of $1.2 million, which was fully received as of December 31, 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.

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 December 31, 2014 we recorded $0.1 million for reimbursement to be received from our insurance carrier.

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



	December 31,
	2012			2013			2014
Balance, beginning of year	$	6,871		$	4,455		$	2,965
Charges to operations	2,116			1,350			1,770
Deductions for payments made	(4,532		)	(2,840		)	(1,372		)
Balance, end of year	$	4,455		$	2,965		$	3,363

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. In addition, the decrease in deductions for payments made during year ended December 31, 2014 as compared to the year ended December 31, 2013 relates primarily to price concessions and rebates based on sales volumes issued in 2013 to a material customer related to a quality issue associated with certain power supply devices.