Annual report pursuant to Section 13 and 15(d)

Note 13. Commitments and Contingencies

 v2.3.0.11
Note 13. Commitments and Contingencies
 12 Months Ended
Jun. 30, 2011
Commitments and Contingencies [Abstract]  
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
Factoring. KLA-Tencor has agreements with financial institutions to sell certain of its trade receivables and promissory notes from customers without recourse. The Company does not believe it is at risk for any material losses as a result of these agreements. In addition, from time to time the Company will discount, without recourse, letters of credit (“LCs”) received from customers in payment for goods.
The following table shows total receivables sold under factoring agreements, proceeds from sales of LCs and related discounting fees paid for the fiscal years ended June 30, 2011 and 2010:
 
Year ended June 30,
(In thousands)
2011
 
2010
Receivables sold under factoring agreements
$
313,578

 
$
107,666

Proceeds from sales of LCs
$
140,534

 
$
37,226

Discounting fees paid on sales of LCs(1)
$
213

 
$
189


__________________  
(1)
Discounting fees include bank fees and interest expense and were recorded in interest income and other, net.
Facilities. KLA-Tencor leases certain of its facilities under arrangements that are accounted for as operating leases. Rent expense was $8.5 million, $11.1 million and $12.3 million for the fiscal years ended June 30, 2011, 2010 and 2009, respectively.
The following is a schedule of expected operating lease payments: 
Year ending June 30,
Amount
(In thousands)
2012
$
7,992

2013
6,001

2014
3,889

2015
2,106

2016
1,869

2017 and thereafter
3,130

Total minimum lease payments
$
24,987


Purchase Commitments. KLA-Tencor maintains certain open inventory purchase commitments with its suppliers to ensure a smooth and continuous supply for key components. The Company's liability under these purchase commitments is generally restricted to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary among different suppliers. The Company’s open inventory purchase commitments were approximately $352 million as of June 30, 2011 and are primarily due within the next 12 months. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation penalties.
Guarantees. KLA-Tencor provides standard warranty coverage on its systems for 40 hours per week for twelve months, providing labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost as a charge to costs of revenues when revenue is recognized. The estimated warranty cost is based on historical product performance and field expenses. Utilizing actual service records, the Company calculates the average service hours and parts expense per system and applies the actual labor and overhead rates to determine the estimated warranty charge. The Company updates these estimated charges on a quarterly basis. The actual product performance and/or field expense profiles may differ, and in those cases the Company adjusts its warranty accruals accordingly.
The following table provides the changes in the product warranty accrual for the fiscal years ended June 30, 2011 and 2010:
 
Year ended June 30,
(In thousands)
2011
 
2010
Beginning balance
$
21,109

 
$
18,213

Accruals for warranties issued during the period
46,565

 
24,164

Changes in liability related to pre-existing warranties
(928
)
 
(2,401
)
Settlements made during the period
(25,218
)
 
(18,867
)
Ending balance
$
41,528

 
$
21,109


The Company maintains guarantee arrangements available through various financial institutions for up to $20.4 million, of which $17.9 million had been issued as of June 30, 2011 primarily to fund guarantees to customs authorities for VAT and other operating requirements of the Company's subsidiaries in Europe and Asia.
KLA-Tencor is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which the Company customarily agrees to hold the other party harmless against losses arising from, or provides customers with other remedies to protect against, bodily injury or damage to personal property caused by the Company's products, non-compliance with the Company's product performance specifications, infringement by the Company's products of third-party intellectual property rights and a breach of warranties, representations and covenants related to such matters as title to assets sold, validity of certain intellectual property rights, non-infringement of third-party rights, and certain income tax-related matters. In each of these circumstances, payment by the Company is typically subject to the other party making a claim to and cooperating with the Company pursuant to the procedures specified in the particular contract. This usually allows the Company to challenge the other party’s claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, the Company's obligations under these agreements may be limited in terms of amounts, activity (typically at the Company's option to replace or correct the products or terminate the agreement with a refund to the other party), and duration. In some instances, the Company may have recourse against third parties and/or insurance covering certain payments made by the Company.
Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees with respect to certain litigation matters and investigations that arise in connection with their service to the Company. These obligations arise under the terms of its certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on its business, financial condition, results of operations or cash flows.