THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Policies)

12 Months Ended

Dec. 31, 2013

THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of presentation

Principles of presentation

The consolidated financial statements include the Company’s accounts as well as those of its wholly owned subsidiaries after the elimination of all significant intercompany balances and transactions.

On July 1, 2013, the Company completed its acquisition of a privately held company, IPtronics A/S (“IPtronics”), and on August 15, 2013, the Company completed its acquisition of a privately held company, Kotura, Inc. (“Kotura”). The consolidated financial statements include the results of operations of IPtronics and Kotura commencing as of the their respective acquisition dates.

In February 2011, the Company completed its acquisition of Voltaire Ltd. (“Voltaire”), an Israeli-based public company. The consolidated financial statements include the results of operations of Voltaire commencing as of the acquisition date.

Certain prior year amounts have been reclassified to conform to 2013 presentation. These changes and reclassifications did not impact net or comprehensive income.

Revision to Prior Period Financial Statements

Revision to Prior Period Financial Statements

Subsequent to the filing of the Company’s 2013 Form 10-K on February 28, 2014, the Company identified and corrected an error in accounting for liabilities for charitable contributions. The error had accumulated over a number of years, resulting in a $0.6 million and $1.7 million cumulative overstatement of the liability as of December 31, 2013 and 2012, respectively. The Company also identified and corrected an overstatement of liabilities in the amount of $0.7 million related to certain purchase orders as of December 31, 2013.

The Company also identified and corrected additional errors in warranty and distributor price adjustment reserves and the purchase price allocation for its acquisitions of Kotura and IPtronics. The error related to distributor price adjustments resulted in a cumulative understatement of the sales reserve of $0.9 million and $0.5 million as of December 31, 2013 and 2012, respectively. The error for the warranty reserve resulted in a $0.6 million and $0.1 million cumulative overstatement of the warranty reserve as of December 31, 2013 and 2012, respectively. The error for the purchase price allocation for the acquisitions of Kotura and IPtronics, resulted in a $0.4 million increase in the value of acquired inventory, a $0.1 million decrease in the value of intangible assets, and a $0.4 million decrease in the value of goodwill as of December 31, 2013. 

The Company identified and corrected classification errors in its balance-sheets for fiscal years 2013 and 2012. These corrections impacted accounts receivables, inventory, property and equipment, accrued liabilities, warranty, deferred revenue, short-term and long-term capital lease liabilities and long-term liabilities.

The Company identified and corrected classification errors in the presentation of the net deferred tax assets included within Note 12 to these consolidated financial statements. The Company incorrectly netted certain deferred tax liabilities against the valuation allowance. There was no change to net deferred tax assets disclosed in Note 12 of the balance sheet as a result of the error. This error also required the revision of the financial statement schedule appearing under Item 15(a)(2) to reflect the change in the income tax valuation allowance for each period presented.

The Company evaluated these errors and determined that the impact of the errors was not material to its results of operations, financial position or cash flows in previously issued interim and annual financial statements. The Company has retrospectively revised financial information including the related footnotes, for all prior periods presented to reflect this correction.

The correction of these errors increased net income by $0.4 million and $0.6 million in fiscal years 2011 and 2012, respectively; and increased the net loss by $0.5 million for fiscal year 2013. The impact of these revisions for periods presented within this annual report on Form 10K/A is shown in the tables below:

	Year Ended December 31, 2013
	As reported			Adjustments			As revised
	(in thousands, except per share data)
Statement of operations:
Total revenues	$	390,859		$	(423	)	$	390,436
Cost of revenues	135,239			$	(957	)	134,282
Gross profit	255,620			534			256,154
Operating expenses:
Research and development	168,721			661			169,382
Sales and marketing	70,318			226			70,544
General and administrative	36,918			128			37,046
Total operating expenses	275,957			1,015			276,972
Loss from operations	(20,337		)	(481		)	(20,818		)
Loss before taxes on income	(19,109		)	(481		)	(19,590		)
Net loss	(22,861		)	(481		)	(23,342		)
Net loss per share — basic	(0.53		)	(0.01		)	(0.54		)
Net loss per share — diluted	(0.53		)	(0.01		)	(0.54		)

	Year Ended December 31, 2012
	As reported		Adjustments			As revised
	(in thousands, except per share data)
Statement of operations:
Total revenues	$	500,799	$	(524	)	$	500,275
Cost of revenues	$	157,936	$	(200	)	157,736
Gross profit	342,863		(324		)	342,539
Operating expenses:
Research and development	138,946		(636		)	138,310
Sales and marketing	61,068		(174		)	60,894
General and administrative	24,541		(85		)	24,456
Total operating expenses	224,555		(895		)	223,660
Income from operations	118,308		571			118,879
Income before taxes on income	119,567		571			120,138
Net income	111,380		571			111,951
Net income per share — basic	2.70		0.01			2.71
Net income per share — diluted	2.54		0.01			2.55

	Year Ended December 31, 2011
	As reported		Adjustments			As revised
	(in thousands, except per share data)
Statement of operations:
Cost of revenues	$	92,015	$	(27	)	$	91,988
Gross profit	167,236		27			167,263
Operating expenses:
Research and development	92,508		(225		)	92,283
Sales and marketing	40,366		(72		)	40,294
General and administrative	21,769		(33		)	21,736
Total operating expenses	154,643		(330		)	154,313
Income from operations	12,593		357			12,950
Income before taxes on income	13,352		357			13,709
Net income	9,977		357			10,334
Net income per share — basic	0.28		0.01			0.29
Net income per share — diluted	0.26		0.01			0.27

	December 31, 2013
	As reported		Adjustments			As revised
	(in thousands)
Balance sheet:
Accounts receivable, net	$	70,566	$	(1,086	)	$	69,480
Inventories	35,963		507			36,470
Total current assets	450,802		(579		)	450,223
Property and equipment, net	70,815		1,100			71,915
Intangible assets, net	54,362		(113		)	54,249
Goodwill	199,558		(362		)	199,196
Total assets	806,780		46			806,826
Accrued liabilities	52,588		(1,577		)	51,011
Deferred revenue, current	15,849		(139		)	15,710
Capital lease liabilities, current	1,245		132			1,377
Total current liabilities	99,646		(1,584		)	98,062
Other long-term liabilities	17,091		799			17,890
Total liabilities	140,800		(785		)	140,015
Retained earnings	113,610		831			114,441
Total shareholders’ equity	665,980		831			666,811
Total liabilities and shareholders’ equity	806,780		46			806,826

	December 31, 2012
	As reported		Adjustments			As revised
	(in thousands)
Balance sheet:
Accounts receivable, net	$	58,516	$	(1,716	)	$	56,800
Total current assets	540,326		(1,716		)	538,610
Total assets	771,046		(1,716		)	769,330
Accrued liabilities	57,879		(2,183		)	55,696
Deferred revenue, current	12,018		(1,192		)	10,826
Total current liabilities	108,581		(3,375		)	105,206
Other long-term liabilities	11,635		347			11,982
Total liabilities	143,238		(3,028		)	140,210
Retained earnings	136,471		1,312			137,783
Total shareholders’ equity	627,808		1,312			629,120
Total liabilities and shareholders’ equity	771,046		(1,716		)	769,330

	Year Ended December 31, 2013
	As reported			Adjustments			As revised
	(in thousands)
Statement of comprehensive loss:
Net loss	$	(22,861	)	$	(481	)	$	(23,342	)
Total comprehensive loss, net of tax	(24,265		)	(481		)	(24,746		)

	Year Ended December 31, 2012
	As reported		Adjustments		As revised
	(in thousands)
Statement of comprehensive income:
Net income	$	111,380	$	571	$	111,951
Total comprehensive income, net of tax	115,338		571		115,909

	Year Ended December 31, 2011
	As reported		Adjustments		As revised
	(in thousands)
Statement of comprehensive income:
Net income	$	9,977	$	357	$	10,334
Total comprehensive income, net of tax	7,859		357		8,216

	Year Ended December 31, 2013
	As reported			Adjustments			As revised
	(in thousands)
Cash flow statement:
Net loss	$	(22,861	)	$	(481	)	$	(23,342	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	35,886			(240		)	35,646
Accounts receivable	(8,870		)	(630		)	(9,500		)
Inventories	9,264			208			9,472
Accrued liabilities and other liabilities	1,599			1,011			2,610
Net cash provided by operating activities	52,002			(132		)	51,870
Principal payments on capital lease obligations	(1,243		)	132			(1,111		)
Cash flows from financing activities	16,056			132			16,188
Unpaid property and equipment	2,226			1,100			3,326

	Year Ended December 31, 2012
	As reported			Adjustments			As revised
	(in thousands)
Cash flow statement:
Net income	$	111,380		$	571		$	111,951
Adjustments to reconcile net loss to net cash provided by operating activities:
Accounts receivable	(10,301		)	1,716			(8,585		)
Accrued liabilities and other liabilities	51,259			(2,287		)	48,972

	Year Ended December 31, 2011
	As reported		Adjustments			As revised
	(in thousands)
Cash flow statement:
Net income	$	9,977	$	357		$	10,334
Adjustments to reconcile net loss to net cash provided by operating activities:
Accrued liabilities and other liabilities	18,645		(357		)	18,288

Risks and uncertainties

Risks and uncertainties

The Company is subject to all of the risks inherent in a company which operates in the dynamic and competitive semiconductor industry. Significant changes in any of the following areas could have a materially adverse impact on the Company’s financial position and results of operations; unpredictable volume or timing of customer orders; ordered product mix; the sales outlook and purchasing patterns of the Company’s customers based on consumer demands and general economic conditions; loss of one or more of the Company’s customers; decreases in the average selling prices of products or increases in the average cost of finished goods; the availability, pricing and timeliness of delivery of components used in the Company’s products; reliance on a limited number of subcontractors to manufacture, assemble, package and production test the Company’s products; the Company’s ability to successfully develop, introduce and sell new or enhanced products in a timely manner; product obsolescence and the Company’s ability to manage product transitions; the timing of announcements or introductions of new products by the Company’s competitors, and the Company’s ability to successfully integrate acquired businesses.

Use of estimates

Use of estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses in the reporting periods. The Company regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, sales returns and allowances, investment valuation, warranty reserves, inventory reserves, share-based compensation expense, long-term asset valuations, goodwill and purchased intangible asset valuation, hedge effectiveness, deferred income tax asset valuation, uncertain tax positions, litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results that the Company experiences may differ materially and adversely from the Company’s original estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Cash and cash equivalents

Cash and cash equivalents

The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market funds, U.S. government agency discount notes, foreign government bonds, corporate bonds and commercial paper.

Short-term investments

Short-term investments

The Company’s short-term investments are classified as available-for-sale securities and are reported at fair value. Unrealized gains or losses are recorded in shareholders’ equity and included in other comprehensive income (“OCI”). The Company views its available-for-sale portfolio as available for use in its current operations. Accordingly, the Company has classified all investments in available for sale securities with readily available markets as short-term, even though the stated maturity date may be one year or more beyond the current balance sheet date, because of the intent and ability to sell these securities prior to maturity to meet liquidity needs or as part of a risk management program.

Restricted cash and deposits

Restricted cash and deposits

The Company maintains certain cash amounts restricted as to withdrawal or use. It maintained a balance of $0.6 million at December 31, 2012, that represented tenants’ security deposits restricted due to the tenancy agreements, and $2.6 million at December 31, 2012, that represented security deposits restricted due to foreign exchange management agreements with two banks.

The Company also maintains certain cash amounts classified as other long-term assets which are restricted as to withdrawal or use over long term. The Company maintained a balance of long-term restricted cash in amount of $3.5 million and $3.4 million at December 31, 2013 and December 31, 2012, respectively.

Fair value of financial instruments

Fair value of financial instruments

The Company’s financial instruments consist of cash equivalents, short-term investments and foreign currency derivative contracts. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. The Company believes that the carrying amounts of the financial instruments approximate their respective fair values. The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the issuer; and whether it is more likely than not that the Company will be required to sell the security prior to any anticipated recovery in fair value. When there is no readily available market data, fair value estimates may be made by the Company, which may not necessarily represent the amounts that could be realized in a current or future sale of these assets.

Derivatives

Derivatives

The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company enters into derivative contracts designated as cash flow hedges. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated OCI, and subsequently reclassified into earnings when the hedged exposure affects earnings.

The Company uses derivative instruments primarily to manage exposures to foreign currency. The Company enters into derivative contracts to manage its exposure to changes in the exchange rate of the NIS against the U.S. dollar. The Company’s primary objective in entering these arrangements is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. The program is not designated for trading or speculative purposes. The Company’s derivative contracts expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risk by limiting its counterparties to major financial institutions and by spreading the risk across a number of major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.

The Company uses derivative contracts designated as cash flow hedges to hedge a substantial portion of forecasted operating expenses in NIS. The gain or loss on the effective portion of a cash flow hedge is initially reported as a component of OCI and subsequently reclassified into operating expenses in the same period in which the hedged operating expenses are recognized, or reclassified into other income, net, if the hedged transaction becomes probable of not occurring. Any gain or loss after a hedge is de-designated because it is no longer probable of occurring or related to an ineffective portion of a hedge, as well as any amount excluded from the Company’s hedge effectiveness, is recognized as other income, net immediately.

Concentration of credit risk

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short-term investments and accounts receivable. Cash equivalents and short-term investments balances are maintained with high quality financial institutions, the composition and maturities of which are regularly monitored by management. The Company’s accounts receivable are derived from revenue earned from customers located in North America, Europe and Asia. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable. The Company reviews its allowance for doubtful accounts quarterly by assessing individual accounts receivable over a specific aging and amount, and all other balances based on historical collection experience and an economic risk assessment. If the Company determines that a specific customer is unable to meet its financial obligations to the Company, the Company provides an allowance for credit losses to reduce the receivable to the amount management reasonably believes will be collected.

The following table summarizes the revenues from customers (including original equipment manufacturers) in excess of 10% of the total revenues:

	Year Ended December 31,
	2013		2012		2011
IBM	17	%	19	%	17	%
Hewlett-Packard	13	%	20	%	19	%

The following table summarizes accounts receivable balances in excess of 10% of total accounts receivable:

	December 31, 2013		December 31, 2012
IBM	11	%	22	%
Hewlett Packard	12	%	*

* Less than 10%

Inventory

Inventory

Inventory includes finished goods, work-in-process and raw materials. Inventory is stated at the lower of cost (principally standard cost which approximates actual cost on a first-in, first-out basis) or market value. Reserves for potentially excess and obsolete inventory are made based on management’s analysis of inventory levels, future sales forecasts and market conditions. Once established, the original cost of the Company’s inventory less the related inventory reserve represents the new cost basis of such products.

Property and equipment

Property and equipment

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization is generally calculated using the straight-line method over the estimated useful lives of the related assets, which is three to five years for computers, software license rights and other electronic equipment, and seven to fifteen years for office furniture and equipment. Leasehold improvements and assets acquired under capital leases are amortized on a straight-line basis over the term of the lease, or the useful lives of the assets, whichever is shorter. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in the results of operations in the period realized.

The Company incurs costs for the fabrication of masks used by its contract manufacturers to manufacture wafers that incorporate its products. The Company capitalizes the costs of fabrication masks that are reasonably expected to be used during production manufacturing. These amounts are included within property and equipment and are generally depreciated over a period of 12 months to cost of revenue. If it does not reasonably expect to use the fabrication mask during production manufacturing, it expenses the related mask costs to research and development in the period in which the costs are incurred.

Business combinations

Business combinations

The Company accounts for business combinations using the acquisition method of accounting. The Company determines the recognition of intangible assets based on the following criteria: (i) the intangible asset arises from contractual or other rights; or (ii) the intangible asset is separable or divisible from the acquired entity and capable of being sold, transferred, licensed, returned or exchanged. The Company allocates the purchase price of business combinations to the tangible assets, liabilities and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The process of estimating the fair values requires significant estimates, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer contracts, customer lists and distribution agreements, acquired developed technologies, expected costs to develop IPR&D into commercially viable products, estimated cash flows from projects when completed and discount rates. The Company estimates fair value based upon assumptions that are believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.

Goodwill and intangible assets

Goodwill and intangible assets

Goodwill represents the excess of the cost of acquired businesses over the fair market value of their identifiable net assets. The Company conducts a goodwill impairment qualitative assessment during the fourth quarter of each fiscal year or more frequently if facts and circumstances indicate that goodwill may be impaired. The goodwill impairment qualitative assessment requires the Company to perform an assessment to determine if it is more likely than not that the fair value of the business is less than its carrying amount. The qualitative assessment considers various factors, including the macroeconomic environment, industry and market specific conditions, market capitalization, stock price, financial performance, earnings multiples, budgeted-to-actual revenue performance from prior year, gross margin and cash flow from operating activities and issues or events specific to the business. If adverse qualitative trends are identified that could negatively impact the fair value of the business, the Company performs a “two step” goodwill impairment test. “Step one” of the goodwill impairment test requires the Company to estimate the fair value of the reporting units. “Step two” of the test is only performed if a potential impairment exists in “step one” and involves determining the difference between the fair value of the reporting unit’s net assets other than goodwill to the fair value of the reporting unit. If the difference is less than the net book value of goodwill, an impairment exists and is recorded. As of December 31, 2013, the Company’s assessment of goodwill impairment indicated that goodwill was not impaired.

Intangible assets primarily represent acquired intangible assets including developed technology, customer relationships and IPR&D. The Company amortizes its intangible assets over their useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used, or, if that pattern cannot be reliably determined, using a straight-line amortization method. The Company capitalizes IPR&D projects acquired as part of a business combination as intangible assets with indefinite lives.  On completion of each project, IPR&D assets are reclassified to developed technology and amortized over their estimated useful lives. If any of the IPR&D projects are abandoned, the Company would impair the related IPR&D asset.

Indefinite-live intangible assets are tested for impairment annually or more frequently when indicators of impairment exist. The Company first assesses qualitative factors to determine if it is more likely than not that an indefinite-lived intangible asset is impaired and whether it is necessary to perform a quantitative impairment test. The qualitative assessment considers various factors, including reductions in demand, the abandonment of IPR&D projects or significant economic slowdowns in the semiconductor industry and macroeconomic environment. If adverse qualitative trends are identified that could negatively impact the fair value of the asset, then quantitative impairment tests are performed to compare the carrying value of the asset to its undiscounted expected future cash flows. If this test indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted market prices or (ii) discounted expected future cash flows utilizing an appropriate discount rate. Impairment is based on the excess of the carrying amount over the fair value of those assets. As of December 31, 2013, the Company’s assessment of intangibles indicated that indefinite-lived intangible assets were not impaired.  Intangible assets with finite lives are tested for impairment in accordance with our policy for long-lived assets as described below.

Investments

Investments

The Company has equity investments in privately-held companies. These investments are recorded at cost reduced by any impairment write-downs because the Company does not have the ability to exercise significant influence over the operating and financial policies of the company. The investments are included in other long-term assets on the accompanying balance sheets. The Company monitors the investments and if facts and circumstances indicate an investment may be impaired, then it conducts an impairment test of its investment. To determine if the investment is recoverable, it reviews the privately-held company’s revenue and earnings trends relative to pre-defined milestones and overall business prospects, the general market conditions in its industry and other factors related to its ability to remain in business, such as liquidity and receipt of additional funding.

Impairment of long-lived assets

Impairment of long-lived assets

Long-lived assets include equipment, furniture and fixtures and finite-lived intangible assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) from the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets would be written down to their estimated fair values. The Company reviews for possible impairment on a regular basis.

Revenue recognition

Revenue recognition

The Company recognizes revenue from the sales of products when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the price is fixed or determinable; and (4) collection is reasonably assured. The Company uses a binding purchase order or a signed agreement as evidence of an arrangement. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer. The Company’s standard arrangement with its customers typically includes freight-on-board shipping point, no right of return and no customer acceptance provisions. The customer’s obligation to pay and the payment terms are set at the time of shipment and are not dependent on the subsequent resale of the product. The Company determines whether collectability is probable on a customer-by-customer basis. When assessing the probability of collection, the Company considers the number of years the customer has been in business and the history of the Company’s collections. Customers are subject to a credit review process that evaluates the customers’ financial positions and ultimately their ability to pay. If it is determined at the outset of an arrangement that collection is not probable, no product is shipped and no revenue is recognized unless cash is received in advance.

The Company maintains inventory, or hub arrangements with certain 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 product revenue unless and until the customer reports it has removed the Company’s product from the warehouse to be incorporated into its end products.

Multiple Element Arrangements Excluding Software

For revenue arrangements that contain multiple deliverables, judgment is required to properly identify the accounting units of the transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting period. While changes in the allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect its results of operations. When the Company enters into an arrangement that includes multiple elements, the allocation of value to each element is derived based on management’s best estimate of selling price when vendor specific evidence or third party evidence is unavailable.

Multiple Element Arrangements Including Software

For multiple element arrangements that include a combination of hardware, software and services, such as post-contract customer support, the arrangement consideration is first allocated among the accounting units before revenue recognition criteria are applied. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered elements, the Company defers revenue for the undelivered elements based on their fair value. The fair value for undelivered software elements is based on vendor specific evidence. If the undelivered elements are essential to the functionality of the delivered elements, no revenue is recognized. The revenues from fixed-price support or maintenance contracts, including extended warranty contracts and software post-contract customer support agreements are recognized ratably over the contract period and the costs associated with these contracts are recognized as incurred.

Distributor Revenue

A portion of the Company’s sales are made to distributors under agreements which contain a limited right to return unsold product and price protection provisions. The Company recognizes revenue from these distributors based on the sell-through method using inventory and point of sale information provided by the distributor. Additionally, the Company maintains accruals and allowances for price protection and cooperative marketing programs. The Company classifies the costs of these programs based on the identifiable benefit received as either a reduction of revenue, a cost of revenues or an operating expense.

Deferred Revenue and Income

The Company defers revenue and income when advance payments are received from customers before performance obligations have been completed and/or services have been performed.

Shipping and Handling

Costs incurred for shipping and handling expenses to customers are recorded as cost of revenues. To the extent these amounts are billed to the customer in a sales transaction, the Company records the shipping and handling fees as revenue.

Product warranty

Product warranty

The Company typically offers a limited warranty for its products for periods up to three years. The Company accrues for estimated returns of defective products at the time revenue is recognized based on historical activity. The determination of these accruals requires the Company to make estimates of the frequency and extent of warranty activity and estimated future costs to either replace or repair the products under warranty. If the actual warranty activity and/or repair and replacement costs differ significantly from these estimates, adjustments to record additional cost of revenues may be required in future periods. Changes in the Company’s liability for product warranty during the years ended December 31, 2013 and 2012 are as follows:

	December 31,
	2013			2012
	(In thousands)
Balance, beginning of the period	$	4,318		$	1,097
New warranties issued during the period	8,584			5,290
Reversal of warranty reserves	—			(535		)
Settlements during the period	(9,269		)	(1,534		)
Balance, end of the period	$	3,633		$	4,318
Less: long term portion of product warranty liability	(424		)	(348		)
Current portion of product warranty liability	$	3,209		$	3,970

Research and development

Research and development

Costs incurred in research and development are charged to operations as incurred. The Company expenses all costs for internally developed patents as incurred.

Advertising

Advertising

Costs related to advertising and promotion of products are charged to sales and marketing expense as incurred. Advertising expense was approximately $0.9 million, $1.1 million and $0.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Share-based compensation

Share-based compensation

The Company accounts for share-based compensation expense based on the estimated fair value of the equity awards as of the grant dates. The fair value of RSUs is based on the closing market price of our ordinary shares on the date of grant. The Company estimates the fair value of share option awards using the Black-Scholes option valuation model, which requires the input of subjective assumptions including the expected share price volatility and the calculation of expected term, as well as the fair value of the underlying ordinary share on the date of grant, among other inputs.

The Company bases its estimate of expected volatility on the of historical volatility of the Company shares. The Company calculates the expected term of its option awards using the simplified method as prescribed by the authoritative guidance. The expected term for newly granted awards is approximately 6.25 years.

Share compensation expense is recognized on a straight-line basis over each recipient’s requisite service period, which is generally the vesting period. Share-based compensation expense is recorded net of estimated forfeitures. Forfeitures are estimated at the time of grant and this estimate is revised, if necessary, in subsequent periods. If the actual number of forfeitures differs from the estimate, adjustments may be required to share-based compensation expense in future periods.

Comprehensive income (loss)

Comprehensive income (loss)

Accumulated other comprehensive income (loss), net of tax on the consolidated balance sheets at December 31, 2013 and 2012, represents the accumulated unrealized gains (losses) on available-for-sale securities, and the accumulated unrealized gains (losses) related to derivative instruments accounted for as cash flow hedges. The amount of income tax expense allocated to unrealized gain on available-for-sale securities and derivative instruments was not material at December 31, 2013 and 2012.

Foreign currency translation

Foreign currency translation

The Company uses the U.S. dollar as its functional currency. Foreign currency assets and liabilities are remeasured into U.S. dollars at the end-of-period exchange rates except for non-monetary assets and liabilities, which are remeasured at historical exchange rates. Revenue and expenses are remeasured each day at the exchange rate in effect on the day the transaction occurred, except for those expenses related to balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency transactions are included in the Consolidated Statements of Operations as part of “Other income (loss), net.”

Net income per share

Net income per share

Basic and diluted net income per share are computed by dividing the net income for the period by the weighted average number of ordinary shares outstanding during the period. The calculation of diluted net income per share excludes potential ordinary shares if the effect is anti-dilutive. Potential ordinary shares are comprised of incremental ordinary shares issuable upon the exercise of share options.

The following table sets forth the computation of basic and diluted net income per share for the periods indicated:

	Year Ended December 31,
	2013			2012		2011
	(In thousands, except per share data)
Net income (loss)	$	(23,342	)	$	111,951	$	10,334
Basic and diluted shares:
Weighted average ordinary shares outstanding used to compute basic net income (loss) per share	43,421			41,308		36,263
Dilutive effect of employee share option and purchase plan	—			2,593		2,299
Shares used to compute diluted net income (loss) per share	43,421			43,901		38,562
Net income (loss) per share — basic	$	(0.54	)	$	2.71	$	0.29
Net income (loss) per share — diluted	$	(0.54	)	$	2.55	$	0.27

The Company excluded 0.8 million, 0.3 million and 0.5 million outstanding shares for the years ended December 31, 2013, 2012 and 2011, respectively, from the computation of diluted net income per share because including them would have had an anti-dilutive effect.

Segment reporting

Segment reporting

The Company has one reportable segment: the development, manufacturing, marketing and sales of interconnect products.

Income taxes

Income taxes

To prepare the Company’s consolidated financial statements, the Company estimates its income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company’s actual tax exposure together with assessing temporary differences resulting from the differing treatment of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company’s consolidated balance sheet.

The Company must also make judgments regarding the realizability of deferred tax assets. The carrying value of the Company’s net deferred tax assets is based on its belief that it is more likely than not that the Company will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets. A valuation allowance has been established for deferred tax assets which the Company does not believe meet the “more likely than not” criteria. The Company’s judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If the Company’s assumptions and consequently its estimates change in the future, the valuation allowances it has established may be increased or decreased, resulting in a respective increase or decrease in income tax expense. The Company’s effective tax rate is highly dependent upon the geographic distribution of its worldwide earnings or losses, the tax regulations and tax holidays in each geographic region, the availability of tax credits and carryforwards, and the effectiveness of its tax planning strategies.

Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of income as income tax expense.

Recent accounting pronouncements

Recent accounting pronouncements

Effective January 1, 2013, the Company adopted the authoritative guidance, issued by the Financial Accounting Standards Board (“FASB”) in February 2013, related to reclassifications out of accumulated other comprehensive income (“OCI”). Under this guidance, an entity is required to report, in one place, information about reclassifications out of accumulated OCI and changes in its accumulated OCI balances. For significant items reclassified out of accumulated OCI to net income in their entirety in the same reporting period, reporting is required about the effect of the reclassifications on the respective line items in the statement where net income is presented. For items that are not reclassified to net income in their entirety in the same reporting period, a cross reference to other disclosures currently required under GAAP is required in the notes to the financial statements. The Company elected to present the information in the notes to the Company’s consolidated financial statements. The adoption of this guidance had no impact on the Company’s consolidated financial statements other than the additional required disclosures.

In July 2013, the FASB issued authoritative guidance which requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. This guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date; however, retrospective application is permitted. The Company will provide the required disclosures beginning in the first quarter of fiscal year 2014 and does not expect the adoption of this guidance to have a significant impact on its consolidated results of operations and financial condition.