Commitments and Contingencies - Note 7

12 Months Ended

Dec. 31, 2011

Commitments and Contingencies [Abstract]

Commitments and Contingencies Disclosure

7. COMMITMENTS AND CONTINGENCIES

Product Warranty Disclosure

Warranty

The warranty offered by us on our system sales is generally 12 months, except where previous customer agreements state otherwise, and excludes certain consumable maintenance items. A provision for the estimated cost of warranty, based on historical costs, is recorded as cost of sales when the revenue is recognized. Our warranty obligations require us to repair or replace defective products or parts during the warranty period at no cost to the customer. The actual system performance and/or field warranty expense profiles may differ from historical experience, and in those cases, we adjust our warranty accruals accordingly.

The following table summarizes changes in the product warranty accrual for the years ended December 31, 2011, 2010 and 2009:

	Year Ended December 31,
	2011	2010	2009
	(thousands)
Balance at the beginning of the year	$ 2,539	$ 1,310	$ 4,381
Accrual for warranties issued during the year	3,577	3,599	1,273
Changes in liability related to pre-existing warranties	566	(166)	(1,834)
Settlements made during the year	(3,263)	(2,204)	(2,510)
Balance at the end of the year	$ 3,419	$ 2,539	$ 1,310

Operating Lease Disclosure

Operating Leases

We hold various operating leases related to our facilities and equipment worldwide. Our minimum annual rental commitments with respect to our operating leases were as follows as of December 31, 2011:

	Operating
Year	Lease Payments
	(thousands)
2012	$   3,943
2013	3,545
2014	3,302
2015	3,088
2016	1,884
Thereafter	2,291
	$ 18,053

Rent expense was $5.0 million, $4.6 million and $4.2 million in 2011, 2010 and 2009, respectively. We recorded sublease income related to our Exton, Pennsylvania facility of $0.6 million, $1.1 million and $1.5 million in 2011, 2010 and 2009, respectively.

In 2005, we entered into a new lease agreement for our existing corporate headquarters building in Fremont, California. The lease is for a period of 10 years, which commenced on May 31, 2007, and has an initial annual base rent cost of approximately $1.4 million, with annual increases of approximately 3.5 percent. We are also responsible for an additional minimum lease payment at the end of the lease term of approximately $1.5 million, subject to adjustment, under a restoration cost obligation provision, which is being recognized on a straight-line basis over the lease term. To secure this obligation, we provided the landlord a standby letter of credit of $1.5 million.

We continue to lease one building previously used to house the administrative functions related to wet surface preparation products in Exton, Pennsylvania. The original lease for the administrative building was scheduled to expire on March 31, 2019, with a current rental cost of approximately $0.9 million annually. In December 2011, we reached a final settlement with the landlord, which includes exiting from the lease arrangement in July 2015. The final settlement also reduces our total future lease obligations from $9.6 million to $3.8 million, which includes $1.0 million in lease termination and other fees. Of the $3.8 million in future lease commitments, we expect to pay out $1.7 million in 2012 and the remaining balance on a declining basis through July 2015. We continue to sublease a portion of the Exton facility, cancelable by our subtenant anytime after December 31, 2012. The sublease income under the current sublease agreement was $0.6 million as of December 31, 2011. In determining facilities lease loss liability, various assumptions were made, including the time period over which the buildings will be vacant, expected sublease terms and expected sublease rates. At December 31, 2011 and 2010, we had an accrued liability balance of $2.3 million and $0.9 million, respectively, related to this facility. Adjustments to this accrual will be made in future periods, if events and circumstances change.

Guarantor Obligations Disclosure

Guarantees

In the ordinary course of business, our bank provides standby letters of credit or other guarantee instruments on behalf of us to certain parties as required. The standby letters of credit are secured by certificates of deposit, which are classified as restricted cash in the accompanying consolidated balance sheets. We have never recorded any liability in connection with these guarantee arrangements beyond what is required to appropriately account for the underlying transaction being guaranteed. We do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under such guarantee arrangements. As of December 31, 2011, the maximum potential amount that we could be required to pay was $1.9 million, the total amount of outstanding standby letters of credit, which were secured by $1.9 million in money market collateral accounts.

We are a party to a variety of agreements, pursuant to which we may be obligated to indemnify other parties with respect to certain matters. Typically, these obligations arise in the context of contracts under which we may agree to hold other parties harmless against losses arising from a breach of representations or with respect to certain intellectual property, operations or tax-related matters. Our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have defenses to asserted claims and/or recourse against third parties for payments made by us. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material effect on our financial position, results of operations or cash flows. We believe if it were to incur a loss in any of these matters, such loss would not have a material effect on its financial position, results of operations or cash flows.

In connection with our acquisition of Vortek Industries, Ltd (Vortek) in 2004, we became party to an agreement between Vortek and the Canadian Minister of Industry (the Minister) relating to an investment in Vortek by Technology Partnerships Canada. Under the agreement, as amended, we, or Vortek (renamed Mattson Technology, Canada, Inc. or MTC) agreed to various covenants, including (i) payment by us of a royalty to the Minister of 1.4 percent of revenues from certain Flash RTP products, up to a total of CAD 14,269,290 (approximately $14.0 million based on the applicable exchange rate as of December 31, 2011), (ii) MTC maintaining a specified average workforce of employees in Canada through October 27, 2009, (iii) investment of a certain amount by October 27, 2009 and certain other covenants concerning manufacturing obligations. Under the provisions of this agreement, if we, or MTC, did not materially satisfy its obligations pursuant to the covenants, the Minister could have demanded payment of liquidated damages in the amount of CAD 14,269,290 less any royalties paid by MTC or us to the Minister. As of December 31, 2009, we were no longer subject to covenants (ii) and (iii), as discussed above; but are still subject to covenant (i), relating to the payment of royalty on revenues from certain Flash RTP products until 2020. However, if MTC is dissolved, files for bankruptcy or does not materially comply with certain other terms and conditions of the contract prior to its expiration on December 31, 2020, we could be subject to liquidated damages in the amount of CAD 14,269,290 less any royalties paid by MTC or us to the Minister.

We indemnify our directors and certain employees as permitted by law, and have entered into indemnification agreements with our directors and certain senior officers. We have not recorded a liability associated with these indemnification arrangements as we historically have not incurred any material costs associated with such indemnification arrangements. Costs associated with such indemnification arrangements may be mitigated, in whole or only in part, by insurance coverage that we maintain.

Government Agencies

As an exporter, we must comply with various laws and regulations relating to the export of products and technology from the U.S. and other countries having jurisdiction over our operations. In the U.S. these laws include the International Traffic in Arms Regulations (ITAR) administered by the State Department's Directorate of Defense Trade Controls, the Export Administration Regulations (EAR) administered by the Bureau of Industry and Security ("BIS"), and trade sanctions against embargoed countries and destinations administered by the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC). The EAR governs products, parts, technology and software which present military or weapons proliferation concerns, so-called "dual use" items, and ITAR governs military items listed on the United States Munitions List. Prior to shipping certain items, we must obtain an export license or verify that license exemptions are available. In addition, we must comply with certain requirements related to documentation, record keeping, plant visits and hiring of foreign nationals.

In 2008, we self-disclosed to BIS certain inadvertent EAR violations, and are currently working with BIS to resolve these. As of December 31, 2011, we have accrued an amount to reflect what management believes to be the minimum estimated liability. We believe this accrual to be immaterial. We are unable to estimate the extent of any higher fines or penalties or other potential losses that may be incurred with respect to this matter, though we could face substantial civil fines or other penalties, which could have a material adverse effect on us.

Litigation Disclosure

Litigation

In the ordinary course of business, we are subject to claims and litigation, including claims that we infringe third party patents, trademarks and other intellectual property rights. Although we believe that it is unlikely that any current claims or actions will have a material adverse impact on our operating results or its financial position, given the uncertainty of litigation, we cannot be certain of this. The defense of claims or actions against us, even if not meritorious, could result in the expenditure of significant financial and managerial resources.

We record a legal liability when we believe it is both probable that a liability has been incurred, and the amount can be reasonably estimated. We monitor developments in our legal matters that could affect the estimate we have previously accrued. Significant judgment is required to determine both probability and the estimated amount.